Opinion of the European Central Bank at the request of the Swedish Ministry of Finance concerning a legislative proposal for the implementation in Sweden of Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (CON/99/09)
Date: 1999-08-26
Institutions: European Central Bank
Subjects: Sweden, central bank, financial supervision, national law, payment system

OPINION OF THE EUROPEAN CENTRAL BANK

at the request of the Swedish Ministry of Finance concerning a legislative proposal for the

implementation in Sweden of Directive 98/26/EC of the European Parliament and of the

Council of 19 May 1998 on settlement finality in payment and securities settlement systems

(CON/99/09)

1. 

On  19 July 1999  the  European  Central  Bank  (ECB)  received  a  request  from  the  Swedish

Ministry  of  Finance  for  comments  from  the  ECB  concerning  a  legislative  proposal  entitled

“Promemoria om Finalitydirektivets införlivande med svensk rätt” (the “legislative proposal”).

The intention in respect of the legislative proposal is to implement in the Swedish legal system

Directive  98/26/EC  of  the  European  Parliament  and  of  the  Council  of  19 May 1998  on

settlement finality in payment and securities settlement systems (the “Finality Directive” or the

“Directive”). The legislative proposal contains a proposed new draft law on settlement systems

(the  “draft  law”)  and  certain  proposed  amendments  to  existing  Swedish  legislation  (the

“legislative  amendments”),  as  well  as  an  explanatory  memorandum  concerning  the  Finality

Directive  and  the  suggested  additions  and  amendments  to  Swedish  law  (the  “explanatory

memorandum”).

2. 

Since the purpose of the legislative proposal is the implementation of the Finality Directive, the

Swedish authorities were not legally obliged to consult the ECB under Article 1.2 of Council

Decision  98/415/EC  of  29 June 1998.  The  ECB,  however,  seeks  to  promote  proactively  a

harmonised EU-wide implementation of the Finality Directive in the legislation of the Member

States  in  order  to  foster  maximum  transparency  and  legal  certainty  for  the  closely  connected

payment  and  securities  settlement  systems  and  to  ensure  a  level  playing-field  throughout  the

European Union. Therefore, the ECB very much welcomes the opportunity to give its opinion

with regard to the legislative proposal, considering that it addresses matters pertaining directly

to  the  core  fields  of  competence  of  the  European  System  of  Central  Banks  (ESCB).  In

particular, the draft law is closely related to the basic task of the ESCB to promote the smooth

operation  of  payment  systems,  as  set  out  in  Article  105  (2),  fourth  indent,  of  the  Treaty

establishing  the  European  Community,  as  amended  (the  “Treaty”),  and  Article  3.1,  fourth

indent,  of  the  Statute  of  the  European  System  of  Central  Banks  and  of  the  European  Central

Bank (the “Statute of the ESCB” or the “Statute”). In view thereof, and as a general remark, it

may  be  useful  for  the  consulting  authority  to  consider  the  implications  of  the  legislative

proposal  from  the  perspective  of  future  Swedish  participation  in  the  third  stage  of  Economic

and Monetary Union (EMU). Accordingly, the Governing Council of the ECB has adopted this

ECB Opinion in accordance with Article 17.5, first sentence, of the Rules of Procedure of the

European Central Bank.

3. 

The  legislative  proposal  indicates  the  Swedish  systems  which  will  fall  within  the  scope  of

application of the draft law pursuant to Articles 2 (a) and 10 of the Finality Directive (Sections

1-7 of the draft law and Part 5.2 of the explanatory memorandum).

3.1

The  explanatory  memorandum  contains  an  analysis  and  general  description  of  the  settlement

systems that would be eligible for designation as “systems” and a notification to the European

Commission under the draft law. In this respect, the ECB notes the references to the stability of

the financial system (in Section 4, second paragraph, and Section 5, second paragraph, of the

draft  law  and  in  the  explanatory  memorandum)  and  to  systemic  risk  (in  the  explanatory

memorandum). The ECB welcomes the general intention to cover all systems that can be said to

be of importance for the stability of the financial system and the attention paid to systemic risk.

3.2 

In addition, Section 2 of the draft law makes explicit reference to the national real-time gross

settlement  (RTGS)  system  operated  by  Sveriges  Riksbank  (RIX).  Accordingly,  this  Section

clarifies  that  RIX  will  be  notified  to  the  European  Commission  as  a  “system”,  as  defined  in

Article  1  of  the  Finality  Directive,  and  benefit  from  the  provisions  of  the  draft  law  and  the

legislative  amendments.  The  explanatory  memorandum  also  refers  to  the  RTGS  payment

arrangement of the ESCB for EU-wide fund transfers (TARGET). In this connection, it may be

noted that the separate Swedish arrangement within RIX for the settlement of fund transfers in

euro (euro-RIX) is linked with the other national RTGS systems of TARGET outside Sweden

(through the “Interlinking” component). Fund transfers effectuated to and from Sweden through

euro-RIX  and  the  Interlinking  should  also  fall  within  the  scope  of  the  provisions  of  the  draft

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law. Accordingly, the Swedish authorities are encouraged in this respect to clarify the fact that

euro-RIX  forms  an  integral  part  of  TARGET,  which  may  be  explained  when  notification  of

RIX, including euro-RIX, is given to the European Commission.

4. 

The  ECB  notes 

the  proposed 

role  of 

the  Financial  Supervisory  Authority

(“Finansinspektionen”)  under  the  draft  law,  and  would  like  to  make  some  comments.  In  this

connection, Sweden’s present status as a Member State with a derogation under the Treaty is

duly  recognised  (cf.  Article 122  (ex  Article  109k)  of  the  Treaty).  The  exclusion  of  such  a

Member State and its national central bank (NCB) from rights and obligations within the ESCB

is  laid  down  in  Chapter  IX  of  the  Statute  of  the  ESCB.  The  exclusion  covers,  among  other

provisions,  Article  105 (2)  of  the  Treaty  and  Article  3  of  the  Statute  of  the  ESCB  and,

therefore, the basic ESCB task “to promote the smooth operation of payment systems” (Article

105 (2), fourth indent, and Article 3.1, fourth indent). With reference to the general remark (in

item 2 above) concerning the future participation of Sweden in EMU, however, the following

observations are intended to clarify certain general concepts in relation to the ESCB’s conduct

of this basic task. Whereas prudential supervision has as its subject financial institutions (which

may participate in settlement systems as indicated in Section 7 of the draft law), the subject for

payment  systems  oversight  is  the  settlement  systems  themselves.  There  are  several  shared

objectives between the supervisory activity in respect of individual financial institutions and the

oversight of payment systems. For instance, an institution subject to supervision may act as the

operator of a payment system, and supervision and oversight activities will have certain shared

objectives in relation to such an institution, thus calling for co-operation between the authorities

involved. As reflected in the explanatory memorandum, the general focus of payment systems

oversight is the avoidance of systemic risk within or between systems.

4.1 

It is true, as noted in the explanatory memorandum (in Part 5.2.4 on page 56), that the Finality

Directive  does  not  regulate  the  manner  in  which  the  Member  States  may  arrange  their

respective oversight regimes in relation to domestic settlement systems. On the other hand, the

explanatory  memorandum  refers  to  the  many  reports  concerning  the  oversight  of  settlement

systems,  notably  the  reports  by  central  banks  prepared  under  the  auspices  of  the  Bank  for

International  Settlements  (BIS).  In  particular,  the  adoption  of  the  so-called  Lamfalussy

standards for oversight contained in the Report of the Committee on Interbank Netting Schemes

of the Central Bank of the Group of Ten Countries, Basel (1990), provided a framework for the

traditional central bank function of oversight in relation to payment systems.

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4.2 

In addition to the stipulation in the Treaty and the Statute of the ESCB that the promotion of the

smooth operation of payment systems shall be one of “the basic tasks to be carried out through

the ESCB” (item 4 above), and the central bank reports concerning oversight (item 4.1 above),

Article 22 of the Statute may be noted. According to the latter provision, “the ECB may make

regulations, to ensure efficient and sound clearing and payment systems within the Community

and with other countries”.

4.3 

In  Sweden,  Section  2  of  Chapter  1  of  the  amended  Act  on  Sveriges  Riksbank  (“lagen

(1988:1385)  om  Sveriges  Riksbank”)  which,  in  its  revised  version,  entered  into  effect  on

1 January 1999 (the “Riksbank Act”), stipulates that Sveriges Riksbank “shall […] promote a

safe and efficient payment system”. Prior to 1 January 1999 this task was laid down in Section

4  of  the  previous  version  of  the  Riksbank  Act,  as  well  as  in  Article 12  of  Chapter  9  of  the

Constitution Act (“regeringsformen”). The governmental report of 2 October 1997 concerning

the  proposal  for  the  new  Riksbank  Act  (“Lagrådsremiss  –  Riksbankens  ställning”)  states  (on

page  69)  that  the  promotion  of  a  safe  and  efficient  payment  system  “is  a  basic  duty  of  the

Riksbank” and that an “equivalent task applies for the ESCB”. This equivalent ESCB task is the

oversight function.

4.4 

In view of the above, the ECB suggests that the legislative proposal should identify and refer

explicitly to the specific nature of the oversight of payment systems, on the one hand, and the

supervision  of  financial  institutions,  on  the  other  hand.  The  Swedish  Financial  Supervisory

Authority  should  maintain  responsibility  for  the  prudential  supervision  of  the  financial

institutions involved as system operators or participants in relation to systems under the draft

law. Furthermore, the ECB recommends that the role of Sveriges Riksbank as regards oversight

(addressing  the  settlement  systems  as  opposed  to  the  entities  involved)  should  be  explicitly

referred to in the draft law, whereby any oversight activity should be allocated to the Riksbank.

Hence,  the  arrangements  for  oversight  should  make  reference  to  the  basic  task  of  Sveriges

Riksbank to promote the safety and efficiency of payment systems (which corresponds to the

ESCB’s  equivalent  task  as  determined  by  Article  105  (2)  of  the  Treaty  and  Article  3  of  the

Statute of the ESCB). As a consequence, and although the Financial Supervisory Authority may

be  assigned  the  task  of  giving  notification  of  systems  to  the  European  Commission,  the

envisaged approval of systems before notification should, in the ECB’s view, be undertaken by

the Riksbank in co-ordination and co-operation with the Financial Supervisory Authority.

5. 

The definitions of “participants” and “indirect participants” in Article 2 (f)-(g) of the Finality

Directive allow the Member States to accommodate the participation of “indirect participants”

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in systems. While the exclusion of indirect participants is also possible under the Directive, the

inclusion of indirect participants (as defined in the Directive) is an option which, to the extent

that it is followed, would contribute to the objective of avoiding systemic risk in the integrated

financial  markets  of  Europe.  However,  the  legislative  proposal  does  not  include  indirect

participants and the ECB notes that it is stated in the explanatory memorandum (on page 55)

that there is no such need in Sweden at the moment.

6. 

Articles  3  and  5  of  the  Finality  Directive  concern  the  legal  enforceability,  binding  effect  and

irrevocability  of  transfer  orders.  In  this  connection,  it  is  possible  to  distinguish  between  the

legal situation between contractual parties, on the one hand, and in relation to any third party,

including  a  liquidator  in  the  case  of  insolvency,  on  the  other  hand  (cf.  Part 5.3.2  of  the

explanatory memorandum).

6.1  Between  the  parties,  and  from  the  perspective  of  a  sending  (or  receiving)  participant,

irrevocability  means  that  a  sending  participant  cannot  revoke  a  transfer  order,  at  least  not

beyond  the  time  foreseen  in  the  operating  rules  of  a  payment  system.  The  ECB  notes  the

conclusions  of  the  explanatory  memorandum  in  this  respect  (on  page  64)  and  agrees  that,

between the parties in relation to a system, Swedish law already complies with the requirements

of Article 3.1, first paragraph, and Article 5 of the Directive.

6.2  From the perspective of the receiving participant, irrevocability between the parties would not

be sufficient, however, as a means to address systemic risk. The transfer of funds or securities,

or the interest in securities, covered by a transfer order, should be settled through the system to

the benefit of the receiving participant without the possibility for any third party, including in

particular a liquidator, to hinder such settlement. Recital 9 of the Directive states, inter alia, that

“the reduction of  systemic  risk  requires  in  particular  the  finality  of  settlement.”  Such  finality

vis-à-vis third parties shall be ensured by the respective legal system in each Member State and,

in  particular,  in  relation  to  any  disruption  to  a  system  that  could  otherwise  be  caused  by

insolvency proceedings against a participant. Moreover, Article 5 concerning irrevocability also

addresses third parties, including any liquidator. In this respect, the conclusion of the analysis

of the explanatory memorandum (on page 65) that there is no need for specific rules in order to

implement  the  Directive,  may  be  further  considered.  Unless  it  is  already  clear  under  existing

Swedish law, a statutory provision should be added, clarifying that transfer orders are legally

enforceable and binding (Article 3 of the Directive), as well as irrevocable (in accordance with

Article 5 of the Directive), also vis-à-vis a liquidator or any other third party.

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6.3 

In  addition,  Article  7  of  the  Directive  stipulates  that  insolvency  proceedings  shall  not  have

retroactive effect and the ECB notes that Swedish law does not provide for retroactive effects

of  insolvency  proceedings  through  any  so-called  zero-hour  rule.  The  ECB  also  notes  the

reference in the explanatory memorandum to Recital 13 and the interpretation of this provision

(on  pages  38-39  of  the  explanatory  memorandum)  concerning  the  possibility  of  recovery  or

restitution of any transfer order “outside the system”. The ECB would favour  an  approach  in

this  respect  (as  indicated  by  the  reference  to  “fraud  or  technical  error”  in  Recital  13)  which

upholds  the  objective  of  avoiding  any  revocation  of  a  transfer  order  (or  any  unwinding  of

netting) in the system.

7. 

The  ECB  notes  and  appreciates  the  very  thorough  Swedish  analysis  in  relation  to

netting and welcomes the legislative amendment proposed for Section 1 of Chapter 5

of  the  Act  on  trading  with  financial  instruments  (“lagen  (1991:980)  om  handel  med

finansiella instrument”). In particular, the ECB welcomes the stipulation concerning the

validity and effectiveness of multilateral netting, and notes the coverage also of close-

out netting, within systems.

8. 

The ECB notes the proposed Section 12 of the draft law concerning applicable law for systems

and welcomes the clarification that the law governing the system shall also be binding vis-à-vis

a  bankruptcy  estate  (and,  it  is  assumed,  its  liquidator)  and  the  creditors  in  any  insolvency

proceedings. The ECB also notes the reflection in the explanatory memorandum (on page 56)

concerning the risk of “forum shopping” by system operators with a view to applying the most

favourable legal regime to its system, which again highlights the oversight aspect in relation to

systems of which notification has been given under the Directive.

9. 

The ECB also welcomes the legislative amendment to Section 10 of Chapter 8 of the

Swedish  Bankruptcy  Code  (“konkurslagen  (1987:672)”)  in  order  to  allow  for  the

immediate realisation of certain collateral security by the security holder.

10.  The  ECB  shares  the  view  (expressed  on  page  93  of  the  explanatory  memorandum)  that

Article 9.2  of  the  Directive  concerning  the  applicable  law  in  relation  to  dematerialised  or

immobilised securities ought to be given a general application. Accordingly, the ECB welcomes

the  corresponding  proposed  legislative  amendment  of  Section  1  of  Chapter  6  of  the  Act  on

trading with financial instruments.

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11.

The  ECB  confirms  that  it  has  no  objection  to  this  ECB  Opinion  being  made  public  by  the

competent  national  authorities  at  their  discretion.  In  the  light  of  the  importance  to  the

international financial markets of a harmonised implementation of Community law in this field,

the ECB is arranging for this Opinion to be copied to the competent national authorities of the

Member States responsible for implementing the Finality Directive.

Done at Frankfurt am Main on 26 August 1999.

The Vice-President of the ECB

[signed]

Christian Noyer

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