Common Position (EC) No 32/2002 of 5 March 2002 adopted by the Council, acting in accordance with the procedure referred to in Article 251 of the Treaty establishing the European Community, with a view to adopting a Directive of the European Parliament and of the Council on financial collateral arrangements
Date: 2002-03-05
Institutions: Council of the European Union
Subjects: EU Member State, financial control, financial market, financial policy, financial regulation, financial solvency, guarantee

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COMMON POSITION (EC) No 32/2002

adopted by the Council on 5 March 2002

with a view to adopting Directive 2002/. . ./EC of the European Parliament and of the Council
of . . . on financial collateral arrangements

(2002/C 119 E/03)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE
EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community, and in particular Article 95 thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the European Central Bank (2),

Having regard to the opinion of the Economic and Social
Committee (3),

Acting in accordance with the procedure laid down in Article
251 of the Treaty (4),

Whereas:

(1) 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 (5) constituted
a milestone in establishing a sound legal framework for
payment and securities settlement systems.
Implemen-
tation of that Directive has demonstrated the importance
in such systems
of
stemming from the different influence of several
juris-
dictions, and the benefits of common rules in relation
to collateral constituted to such systems.

limiting systemic risk inherent

(2) In its communication of 11 May 1999 to the European
services:
Parliament and to the Council on financial
implementing the
financial markets:
framework for
action plan, the Commission undertook, after consultation
with market experts and national authorities, to work on
further proposals for legislative action on collateral urging
further progress in the field of collateral, beyond Directive
98/26/EC.

(3) A Community regime should be created for the provision
of securities and cash as collateral under both security
interest and title transfer structures including repurchase
agreements (repos). This will contribute to the integration
and cost-efficiency of the financial market as well as to
the stability of the financial system in the Community,
thereby supporting the freedom to provide services and

(1) OJ C 180 E, 26.6.2001, p. 312.
(2) OJ C 196, 12.7.2001, p. 10.
(3) OJ C 48, 21.2.2002, p. 1.
(4) Opinion of the European Parliament of 13 December 2001 (not yet
published in the Official Journal), Council Common Position of 5
March 2002 and Decision of the European Parliament of . . . (not
yet published in the Official Journal).

(5) OJ L 166, 11.6.1998, p. 45.

the free movement of capital
financial
financial collateral arrangements.

in the single market in
services. This Directive focuses on bilateral

the

(4) This Directive is adopted in a European legal context
said Directive
which consists
in particular of
98/26/EC as well as Directive 2001/24/EC of
the
European Parliament and of
the Council of 4 April
2001 on the reorganisation and winding up of credit
institutions (6), Directive 2001/17/EC of
the European
Parliament and of the Council of 19 March 2001 on
the reorganisation and winding-up of insurance under-
takings (7) and Council Regulation (EC) No 1346/2000
of 29 May 2000 on insolvency proceedings (8). This
these
Directive is in line with the general pattern of
previous legal acts and is not opposed to it. Indeed, this
Directive complements these existing legal acts by dealing
with further issues and going beyond them in connection
with particular matters already dealt with by these legal
acts.

(5) In order

financial
to improve the legal certainty of
collateral arrangements, Member States should ensure
that certain provisions of insolvency law do not apply
to such arrangements,
those that would
inhibit the effective realisation of financial collateral or
cast doubt on the validity of current techniques such as
the provision of additional
bilateral close-out netting,
collateral in the form of top-up collateral and substitution
of collateral.

in particular,

the

(6) This Directive does not address rights which any person
may have in respect of assets provided as financial
the
collateral, and which arise otherwise than under
terms of
and
arrangement
otherwise than on the basis of any legal provision or
rule of law arising by reason of the commencement or
continuation of winding-up proceedings or reorganisation
measures, such as restitution arising from mistake, error
or lack of capacity.

collateral

financial

(7) The principle in Directive 98/26/EC, whereby the law
applicable to book entry securities provided as collateral
is the law of the jurisdiction where the relevant register,
account or centralised deposit system is located, should be
extended in order to create legal certainty regarding the
use of such securities held in a cross-border context and
used as
this
Directive.

financial collateral under

the scope of

(6) OJ L 125, 5.5.2001, p. 15.
(7) OJ L 110, 20.4.2001, p. 28.
(8) OJ L 160, 30.6.2000, p. 1.

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financial

(8) The lex rei sitae rule, according to which the applicable
collateral
a
law for determining whether
arrangement
is properly perfected and therefore good
against third parties is the law of the country where the
financial collateral is located, is currently recognised by all
Member States. Without affecting the application of this
Directive to directly-held securities, the location of book
entry securities provided as financial collateral and held
or more
one
through
be
the
If
a valid and
determined.
effective
the
to
collateral
the country in which the relevant
governing law of
account
then the validity against any
competing title or interest and the enforceability of the
collateral should be governed solely by the law of that
country, thus preventing legal uncertainty as a result of
other unforeseen legislation.

collateral-taker has
arrangement

is maintained,

intermediaries

according

should

required under the law of a Member State as conditions
for transferring or creating a security interest on financial
instruments, other than book entry securities, such as
endorsement
instruments to order, or
recording on the issuer's register in the case of registered
instruments, should not be considered as formal acts.

in the case of

(11) Moreover

this Directive should protect only financial
collateral arrangements which can be evidenced. Such
evidence can be given in writing or in any other legally
enforceable manner provided by the law which is
applicable to the financial collateral arrangement.

(9) In order to limit the administrative burdens for parties
using financial collateral under the scope of this Directive,
the only perfection requirement which national law may
impose as respects financial collateral should be that the
financial collateral is delivered, transferred, held, registered
or otherwise designated so as to be in the possession or
under the control of the collateral-taker or of a person
acting on the collateral-taker's behalf while not excluding
collateral
is
allowed to substitute collateral or to withdraw excess
collateral.

the collateral-provider

techniques where

a

financial

the provision of
collateral

(10) For the same reasons, the creation, validity, perfection,
enforceability or admissibility in evidence of a financial
collateral arrangement, or
financial
collateral under
arrangement,
should not be made dependent on the performance of
any formal act such as the execution of any document
in a specific form or in a particular manner, the making
of any filing with an official or public body or registration
in a public register, advertisement
in a newspaper or
journal,
in an official register or publication or in any
the
other matter, notification to a public officer or
provision of evidence in a particular form as to the date
of execution of a document or instrument, the amount of
the relevant financial obligations or any other matter. This
Directive must however provide a balance between
market efficiency and the safety of the parties to the
arrangement and third parties,
inter
alia, the risk of fraud. This balance should be achieved
through the scope of this Directive covering only those
financial collateral arrangements which provide for some
form of dispossession, i.e. the provision of the financial
collateral, and where the provision of
the financial
collateral can be evidenced in writing or in a durable
that
medium,
acts
collateral.

thereby
the
the purpose of

traceability of
this Directive,

thereby avoiding,

ensuring
For

(12) The simplification of

the

limitation

administrative

common monetary

financial collateral
the use of
burdens
of
through
promotes the efficiency of the cross-border operations
of the European Central Bank and the national central
banks of Member States participating in economic and
monetary union, necessary for the implementation of
the
the
Furthermore,
financial collateral
provision of
insolvency law in
arrangements
addition supports
the common
monetary policy, where the participants in the money
liquidity in the
market balance the overall amount of
market among themselves, by cross-border transactions
backed by collateral.

policy.
limited protection of
from some rules of

the wider aspect of

(13) This Directive seeks to protect the validity of financial
collateral arrangements which are based on the transfer
of the full ownership of the financial collateral, such as by
eliminating the
such financial
‘recharacterisation’ of
collateral arrangements (including repurchase agreements)
as security interests.

financial

collateral

arrangements

(14) The enforceability of bilateral close-out netting should be
protected, not only as an enforcement mechanism for title
transfer
including
repurchase agreements but more widely, where close-out
netting forms part of a financial collateral arrangement.
Sound risk management practices commonly used in the
financial market
enabling
participants to manage and reduce their credit exposures
arising from all kinds of financial transactions on a net
basis, where
calculated by
combining the estimated current exposures under all
outstanding transactions with a counterparty, setting off
reciprocal items to produce a single aggregated amount
that is compared with the current value of the collateral.

should be protected by

exposure

credit

the

is

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should be without prejudice
requirements under national

to any
(15) This Directive
restrictions or
law on
bringing into account claims, on obligations to set-off,
or on netting, for example relating to their reciprocity
to
or the fact
when the collateral-taker knew or ought to have known
of the commencement (or of any mandatory legal act
leading to the commencement) of winding-up proceedings
or reorganisation measures in respect of the collateral-
provider.

they have been concluded prior

that

(16) The

sound market practice

favoured by regulators
whereby participants in the financial market use top-up
financial collateral arrangements to manage and limit their
credit risk to each other by mark-to-market calculations
of the current market value of the credit exposure and the
value of the financial collateral and accordingly ask for
top-up financial collateral or
return the surplus of
financial collateral should be protected against certain
automatic avoidance rules. The same applies to the possi-
bility of substituting for assets provided as financial
collateral other assets of the same value. The intention
is merely that the provision of top-up or substitution
financial collateral cannot be questioned on the sole
basis
existed
before that financial collateral was provided, or that the
financial collateral was provided during a prescribed
period. However, this does not prejudice the possibility
of questioning under national law the financial collateral
arrangement and the provision of financial collateral as
part of the initial provision, top-up or substitution of
financial collateral, for example where this has been inten-
tionally done to the detriment of the other creditors (this
covers,
similar
inter alia, actions based on fraud or
avoidance rules which may apply in a prescribed period).

financial obligations

relevant

that

the

(17) This Directive provides for rapid and non-formalistic
enforcement procedures in order to safeguard financial
stability and limit contagion effects in case of a default
of a party to a financial collateral arrangement. However,
this Directive balances the latter objectives with the
protection of the collateral-provider and third parties by
explicitly confirming the possibility for Member States to
legislation an a
keep or
in
posteriori control which the Courts can exercise
relation to the realisation or valuation of
financial
financial
the relevant
collateral and the calculation of
obligations. Such control should allow for the judicial
authorities to verify that the realisation or valuation has
been conducted in a commercially reasonable manner.

introduce in their national

(18) It should be possible to provide cash as collateral under
both title transfer and secured structures respectively
protected by the recognition of netting or by the pledge
of cash collateral. Cash refers only to money which is
represented by a credit to an account, or similar claims
on repayment of money (such as money market deposits),
thus explicitly excluding banknotes.

financial
liquidity in the financial market
‘pledged’

(19) This Directive provides for a right of use in case of
arrangements, which
collateral
security
stemming
increases
reuse
from such reuse of
securities. This
legis-
however should be without prejudice to national
lation about separation of assets and unfair treatment of
creditors.

(20) This Directive does not prejudice the operation and effect
of the contractual terms of financial instruments provided
as financial collateral, such as rights and obligations and
other conditions contained in the terms of issue and any
other rights and obligations and other conditions which
apply
such
instruments.

and holders of

between the

issuers

(21) This Act complies with the fundamental

rights and
follows the principles laid down in particular in the
Charter of fundamental rights of the European Union.

a minimum regime

(22) Since the objective of the proposed action, namely to
create
relating to the use of
financial collateral, cannot be sufficiently achieved by
the Member States and can therefore, by reason of the
scale and effects of
the action be better achieved at
Community level, the Community may adopt measures,
in accordance with the principle of subsidiarity as set out
In accordance with the
in Article 5 of
principle of proportionality, as set out in that Article,
this Directive does not go beyond what is necessary in
order to achieve that objective,

the Treaty.

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Subject matter and scope

collateral

This Directive lays down a Community regime applicable
1.
to
the
financial
requirements set out in paragraphs 2 and 5 and to financial
collateral
in
paragraphs 4 and 5.

in accordance with the conditions

arrangements which

set out

satisfy

The collateral-taker and the collateral-provider must each

2.
belong to one of the following categories:

(a) a public authority (excluding publicly guaranteed under-
takings unless they fall under points (b) to (e)) including:

(i) public sector bodies of Member States charged with or
intervening in the management of public debt, and

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(ii) public sector bodies of Member States authorised to

hold accounts for customers;

(b) a central bank, the European Central Bank, the Bank for
International Settlements, a multilateral development bank
as defined in Article 1(19) of Directive 2000/12/EC of the
European Parliament and of the Council of 20 March 2000
relating to the taking up and pursuit of the business of
credit institution (1), the International Monetary Fund and
the European Investment Bank;

including

98/26/EC,

(d) a central counterparty, settlement agent or clearing house,
(d) and (e) of
as defined respectively in Article 2(c),
institutions
Directive
regulated under national
futures,
options and derivatives markets to the extent not covered
by that Directive, and a person, other than a natural
person, who acts in a trust or representative capacity on
behalf of any one or more persons that includes any bond-
holders or holders of other forms of securitised debt or any
institution as defined in points (a) to (d);

law acting in the

similar

(c) a financial
including:

institution subject

to prudential supervision

(e) a person other than a natural person, including unincor-
porated firms and partnerships, provided that the other
party is an institution as defined in points (a) to (d).

(i) a credit

institution as defined in Article 1(1) of
Directive 2000/12/EC, including the institutions listed
in Article 2(3) of that Directive;

(ii) an investment firm as defined in Article 1(2) of Council
Directive 93/22/EEC of 10 May 1993 on investment
services in the securities field (2),

(iii) a financial

institution as defined in Article 1(5) of

Directive 2000/12/EC;

(iv) an insurance undertaking as defined in Article 1(a) of
Council Directive 92/49/EEC of 18 June 1992 on the
coordination of
laws, regulations and administrative
provisions relating to direct insurance other than life
assurance (3) and a life assurance undertaking as
of Council Directive
defined
92/96/EEC of 10 November 1992 on the coordination
of
regulations and administrative provisions
relating to direct life assurance (4);

in Article

laws,

1(a)

(v) an undertaking for collective investment in transferable
securities (UCITS) as defined in Article 1(2) of Council
Directive 85/611/EEC of 20 December 1985 on the
laws, regulations and administrative
coordination of
provisions
collective
investment in transferable securities (UCITS) (5),

relating to undertakings

for

(vi) a management company as defined in Article 1a(2) of

Directive 85/611/EEC;

(1) OJ L 126, 26.5.2000, p. 1. Directive as amended by Directive

2000/28/EC (OJ L 275, 27.10.2000, p. 37).

(2) OJ L 141, 11.6.1993, p. 27. Directive as last amended by Directive
2000/64/EC of the European Parliament and of the Council (OJ L
290, 17.11.2000, p. 27).

(3) OJ L 228, 11.8.1992, p. 1. Directive as last amended by Directive

2000/64/EC of the European Parliament and of the Council.

(4) OJ L 360, 9.12.1992, p. 1. Directive as last amended by Directive

2000/64/EC of the European Parliament and of the Council.

3. Member States may exclude from the scope of
this
Directive financial collateral arrangements where one of the
parties is a person mentioned in paragraph 2(e).

If they make use of this option Member States shall inform the
Commission which shall
inform the other Member States
thereof.

4. (a) The financial collateral to be provided must consist of

cash or financial instruments;

(b) Member States may exclude from the scope of

this
Directive financial collateral consisting of the collateral-
provider's own shares, shares in affiliated undertakings
within the meaning of the seventh Council Directive
83/349/EEC of 13 June 1983 on consolidated
accounts (6),
undertakings whose
exclusive purpose is to own means of production that
are essential for the collateral-provider's business or to
own real estate.

shares

and

in

This Directive applies to financial collateral once it has
that provision can be evidenced in

5.
been provided and if
writing.

the identification of

The evidencing of the provision of financial collateral must
to
allow for
which it applies. For this purpose,
it is sufficient to prove
that the book entry securities collateral has been credited to,
or forms a credit in, the relevant account and that the cash
in, a
collateral has been credited to, or
designated account.

the financial collateral

forms a credit

(5) OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive
2001/108/EC of the European Parliament and of the Council (OJ L
41, 13.2.2002, p. 35).

(6) OJ L 193, 18.7.1983, p. 1. Directive as last amended by Directive
2001/65/EC of the European Parliament and of the Council (OJ L
283, 27.10.2001, p. 28).

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This Directive applies to financial collateral arrangements if
that arrangement can be evidenced in writing or in a legally
equivalent manner.

(ii) obligations owed to the collateral-taker by a person

other than the collateral-provider; or

Article 2

Definitions

1.

For the purpose of this Directive:

(iii) obligations of a specified class or kind arising from

time to time;

(a)

(b)

(c)

‘financial collateral arrangement’ means a title transfer
financial collateral arrangement or a security financial
collateral arrangement whether or not these are covered
by a master agreement or general terms and conditions;

including repurchase

‘title transfer financial collateral arrangement’ means an
arrangement,
agreements, under
which a collateral-provider transfers full ownership of
financial collateral to a collateral-taker for the purpose of
securing or otherwise
covering the performance of
relevant financial obligations;

(g)

(h)

‘book entry securities collateral’ means financial collateral
provided under a financial collateral arrangement which
consists of
to which is
evidenced by entries in a register or account maintained
by or on behalf of an intermediary;

instruments,

financial

title

in relation to book entry
‘relevant account’ means
securities collateral which is subject to a financial collateral
arrangement, the register or account, which may be main-
in which the entries are
tained by the collateral-taker,
made by which that book entry securities collateral
is
provided to the collateral-taker;

financial

collateral

arrangement’ means

‘security
an
arrangement under which a collateral-provider provides
financial collateral by way of security in favour of, or to,
a collateral-taker, and where the full ownership of the
financial collateral remains with the collateral-provider
when the security right is established;

(i)

‘equivalent collateral’:

(i) in relation to cash, means a payment of the same

amount and in the same currency;

(d)

‘cash’ means money credited to an account
in any
currency, or similar claims for the repayment of money,
such as money market deposits;

(e)

instruments’ means shares in companies and
‘financial
to shares in companies and
other securities equivalent
bonds and other forms of debt instruments if these are
negotiable on the capital market, and any other securities
which are normally dealt in and which give the right to
acquire any such shares, bonds or other securities by
subscription, purchase or exchange or which give rise to
(excluding instruments of payment),
a cash settlement
in collective investment undertakings,
including units
money market
instruments and claims relating to or
rights in or in respect of any of the foregoing;

(f)

‘relevant financial obligations’ means the obligations which
are secured by a financial collateral arrangement and
which give a right to cash settlement and/or delivery of
financial instruments.

Relevant financial obligations may consist of or include:

(i) present or future, actual or contingent or prospective
obligations (including such obligations arising under a
master agreement or similar arrangement);

(j)

(k)

(ii) in relation to financial

the same issuer or debtor,

instruments, means financial
forming
instruments of
part of
the same
the same issue or class and of
nominal amount, currency and description or, where
a financial collateral arrangement provides for the
transfer of other assets following the occurrence of
relating to or affecting any financial
any event
instruments provided as
those
other assets;

financial collateral,

‘winding-up proceedings’ means collective proceedings
involving realisation of the assets and distribution of the
proceeds among the creditors, shareholders or members as
appropriate, which involve any intervention by adminis-
trative or
the
collective proceedings are terminated by a composition
or other analogous measure, whether or not
they are
founded on insolvency or are voluntary or compulsory;

including where

authorities,

judicial

‘reorganisation measures’ means measures which involve
any intervention by administrative or judicial authorities
which are intended to preserve or restore the financial
situation and which affect pre-existing rights of
third
parties,
including but not limited to measures involving
a suspension of payments, suspension of enforcement
measures or reduction of claims;

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(l)

‘enforcement event’ means an event of default or any
similar event as agreed between the parties on the
the terms of a financial
occurrence of which, under
collateral arrangement or by operation of
the
appropriate
collateral-taker
financial collateral or a close-out netting provision comes
into effect;

entitled to realise or

law,

is

(m) ‘right of use’ means the right of the collateral-taker to use
and dispose of
financial collateral provided under a
security financial collateral arrangement as the owner of
it in accordance with the terms of the security financial
collateral arrangement;

(n)

‘close-out netting provision’ means a provision of a
financial collateral arrangement, or of an arrangement of
which a financial collateral arrangement forms part, or, in
the absence of any such provision, any statutory rule by
which, on the occurrence of an enforcement event,
whether through the operation of netting or set-off or
otherwise:

(i) the obligations of the parties are accelerated so as to
be immediately due and expressed as an obligation to
pay an amount representing their estimated current
value, or are terminated and replaced by an obligation
to pay such an amount; and/or

(ii) an account is taken of what is due from each party to
the other in respect of such obligations, and a net sum
equal to the balance of the account is payable by the
party from whom the larger amount is due to the
other party.

2.
References in this Directive to financial collateral being
‘provided’, or to the ‘provision’ of financial collateral, are to the
financial collateral being delivered, transferred, held, registered
or otherwise designated so as to be in the possession or under
the control of the collateral-taker or of a person acting on the
collateral-taker's behalf. Any right of
to
withdraw excess financial collateral in favour of the collateral-
provider shall not prejudice the financial collateral having been
provided to the collateral-taker as mentioned in this Directive.

substitution or

and if that provision can be evidenced in writing and where
the financial collateral arrangement can be evidenced in writing
or in a legally equivalent manner.

Article 4

Enforcement of financial collateral arrangements

1. Member States shall ensure that on the occurrence of an
enforcement event, the collateral-taker shall be able to realise in
the following manners, any financial collateral provided under,
and subject to the terms agreed in, a security financial collateral
arrangement:

(a)

financial
instruments by sale or appropriation and by
setting off their value against, or applying their value in
discharge of, the relevant financial obligations;

(b) cash by setting off the amount against or applying it in

discharge of the relevant financial obligations.

2.

Appropriation is possible only if:

(a) this has been agreed by the parties in the security financial

collateral arrangement; and

(b) the parties have agreed in the security financial collateral
arrangement on the valuation of the financial instruments.

3. Member States which do not allow appropriation on
. . . (*) are not obliged to recognise it.

If they make use of this option, Member States shall inform the
inform the other Member
Commission which in turn shall
States thereof.

4.
The manners of realising the financial collateral referred
to in paragraph 1 shall, subject to the terms agreed in the
security financial collateral arrangement, be without any
requirement to the effect that:

(a) prior notice of the intention to realise must have been

given;

References in this Directive to ‘writing’ include recording

3.
by electronic means and any other durable medium.

(b) the terms of the realisation be approved by any court,

public officer or other person;

Article 3

Formal requirements

(c)

the realisation be conducted by public auction or in any
other prescribed manner; or

(d) any additional time period must have elapsed.

1. Member States shall not require that the creation, validity,
perfection, enforceability or admissibility in evidence of a
financial collateral arrangement or the provision of financial
be
collateral
dependent on the performance of any formal act.

arrangement

collateral

financial

under

a

5. Member States shall ensure that a financial collateral
arrangement can take effect
in accordance with its terms
continuation of
notwithstanding
winding-up proceedings or reorganisation measures in respect
of the collateral-provider or collateral-taker.

commencement or

the

2.
Paragraph 1 is without prejudice to the application of this
Directive to financial collateral only once it has been provided

(*) Date of entry into force of this Directive.

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This Article and Articles 5, 6 and 7 shall be without
6.
prejudice to any requirements under national
law to the
effect that the realisation or valuation of financial collateral
and the calculation of the relevant financial obligations must
be conducted in a commercially reasonable manner.

transfer financial collateral arrangement remains outstanding,
the obligation may be the subject of a close-out netting
provision.

Article 7

Article 5

Recognition of close-out netting provisions

Right of use of financial collateral under security financial
collateral arrangements

1.
If and to the extent that the terms of a security financial
collateral arrangement so provide, Member States shall ensure
that the collateral-taker is entitled to exercise a right of use in
relation to financial collateral provided under the security
financial collateral arrangement.

2. Where a collateral-taker exercises a right of use, he
thereby incurs an obligation to transfer equivalent collateral
to replace the original financial collateral at the latest on the
due date for the performance of the relevant financial obli-
gations covered by the security financial collateral arrangement.

Alternatively, the collateral-taker shall, on the due date for the
performance of the relevant financial obligations, either transfer
equivalent collateral, or, if and to the extent that the terms of a
security financial collateral arrangement so provide, set-off the
value of
in
discharge of the relevant financial obligations.

the equivalent collateral against or apply it

The equivalent collateral transferred in discharge of an
3.
first subparagraph,
obligation as described in paragraph 2,
to the same security financial collateral
shall be subject
agreement
financial collateral was
subject and shall be treated as having been provided under
the security financial collateral arrangement at the same time
as the original financial collateral was first provided.

to which the original

render

the use of

4. Member States shall ensure that
financial
collateral by the collateral-taker according to this Article does
the
not
collateral-taker
collateral
arrangement in relation to the financial collateral transferred
by the collateral-taker in discharge of an obligation as described
in paragraph 2, first subparagraph.

invalid or unenforceable
security
the

the
financial

rights of

under

If an enforcement event occurs while an obligation as
5.
described
remains
outstanding, the obligation may be the subject of a close-out
netting provision.

subparagraph

paragraph

2 first

in

Article 6

Recognition of title transfer financial collateral
arrangements

1. Member States shall ensure that a title transfer financial
collateral arrangement can take effect in accordance with its
terms.

2.
If an enforcement event occurs while any obligation of
the collateral-taker to transfer equivalent collateral under a title

1. Member States shall ensure that a close-out netting
provision can take effect in accordance with its terms:

(a) notwithstanding the commencement or continuation of
winding-up proceedings or
in
respect of the collateral-provider and/or the collateral-taker;
and/or

reorganisation measures

(b) notwithstanding any purported assignment,

judicial or
other attachment or other disposition of or in respect of
such rights.

2. Member States shall ensure that
the operation of a
close-out netting provision may not be subject to any of the
requirements
that are mentioned in Article 4(4), unless
otherwise agreed by the parties.

Article 8

Certain insolvency provisions disapplied

1. Member States shall ensure that a financial collateral
arrangement, as well as the provision of financial collateral
under such arrangement, may not be declared invalid or void
or be reversed on the sole basis that the financial collateral
arrangement has come into existence, or the financial collateral
has been provided:

(a) on the day of

commencement of winding-up
proceedings or reorganisation measures, but prior to the
order or decree making that commencement; or

the

(b) in a prescribed period prior to, and defined by reference to,
the commencement of such proceedings or measures or by
reference to the making of any order or decree or the
taking of any other action or occurrence of any other
event in the course of such proceedings or measures.

2. Member States
shall ensure that where a financial
collateral arrangement or a relevant financial obligation has
come into existence, or financial collateral has been provided
on the day of, but after the moment of the commencement of,
winding-up proceedings or reorganisation measures, it shall be
legally enforceable and binding on third parties
the
collateral-taker can prove that he was not aware, nor should
have been aware, of the commencement of such proceedings
or measures.

if

3. Where a financial collateral arrangement contains:

(a) an obligation to provide financial collateral or additional
financial collateral in order to take account of changes in
the value of the financial collateral or in the amount of the
relevant financial obligations; or

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(b) a right to withdraw financial collateral on providing, by
financial collateral of

way of substitution or exchange,
substantially the same value.

(c) whether a person's title to or interest in such book-entry
securities collateral is overridden by or subordinated to a
competing title or interest, or a good faith acquisition has
occurred;

financial
Member States shall ensure that
collateral,
substitute or
additional
replacement financial collateral under such an obligation or
right shall not be treated as invalid or reversed or declared
void on the sole basis that:

the provision of

collateral or

financial

(d) the

required for
steps
securities
collateral
enforcement event.

the

following

realisation of book-entry
an

the occurrence of

(i) such provision was made on the day of the commencement
of winding-up proceedings or reorganisation measures, but
prior to the order or decree making that commencement or
in a prescribed period prior to, and defined by reference to,
the commencement of winding-up proceedings or reorgani-
sation measures or by reference to the making of any order
or decree or the taking of any other action or occurrence
of any other event in the course of such proceedings or
measures; and/or

(ii) the relevant financial obligations were incurred prior to the
date of the provision of the financial collateral, additional
financial collateral or substitute or replacement financial
collateral.

this
4. Without prejudice to paragraphs 1, 2 and 3,
rules of national
Directive leaves unaffected the general
insolvency law in relation to the voidance of
transactions
entered into during the prescribed period referred to in
paragraph 1(b) and in paragraph 3(i).

Article 9

Conflict of laws

1.
Any question with respect to any of the matters specified
in paragraph 2 arising in relation to book entry securities
collateral shall be governed by the law of
the country in
which the relevant account is maintained. The reference to
the law of a country is a reference to its domestic law, disre-
garding any rule under which,
in deciding the relevant
question, reference should be made to the law of another
country.

2.

The matters referred to in paragraph 1 are:

Article 10

Report by the Commission

Not later than . . . (*), the Commission shall present a report to
the European Parliament and the Council on the application of
this Directive, in particular on the application of Article 1(3),
Article 4(3) and Article 5, accompanied where appropriate by
proposals for its revision.

Article 11

Implementation

Member States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this
Directive by . . . (**) at the latest. They shall forthwith inform
the Commission thereof.

When Member States adopt those provisions, they shall contain
a reference to this Directive or be accompanied by such
reference on the occasion of
their official publication.
Member States shall determine how such reference is to be
made.

Article 12

Entry into force

This Directive shall enter into force on the day of its publi-
cation in the Official Journal of the European Communities.

Article 13

Addressees

(a) the legal nature and proprietary effects of book-entry

This Directive is addressed to the Member States.

securities collateral;

(b) the

requirements

for perfecting a financial

collateral
arrangement
relating to book-entry securities collateral
and the provision of book-entry securities collateral under
such an arrangement, and more generally the completion
of the steps necessary to render such an arrangement and
provision effective against third parties;

Done at . . .

For the European Parliament

The President

For the Council

The President

(*) Four and a half years after the date of entry into force of this

Directive.

(**) Eighteen months after the date of entry into force of this Directive.

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STATEMENT OF THE COUNCIL'S REASONS

I. INTRODUCTION

On 28 March 2001 the Commission sent to the Council a proposal for a Directive of the European
Parliament and of the Council on financial collateral arrangements, based on the Treaty establishing the
European Community, and in particular Article 95 thereof (1). The European Central Bank gave its
opinion on 13 June 2001 (2). The Economic and Social Committee delivered its opinion on 28
November 2001 (3). The European Parliament delivered its opinion on the first reading of
the
proposal on 13 December 2001 (4).

On 5 March 2002, the Council adopted its Common Position pursuant to Article 251 of the Treaty.

II. OBJECTIVE

The aim of the Directive is to create a Community regime for the provision of securities and cash as
collateral under both security interest and title transfer structures,
including repurchase agreements
(repos), in order to increase legal certainty for these arrangements. In order to achieve this objective the
Directive requires Member States to ensure that certain provisions of insolvency law do not apply to
such arrangements; in particular, those that would inhibit the effective realisation of financial collateral
or cast doubt on the validity of current techniques such as bilateral close-out netting, the provision of
additional collateral in the form of top-up collateral and substitution of collateral.

The creation of such a regime will contribute to the integration and cost-efficiency of the financial
market as well as to the stability of the financial system within the Community, an aim which has been
further highlighted by the turbulence in the markets in the autumn of 2001.

The Directive must be seen in the European legal context, comprising, in particular the Directive on
settlement finality in payment and securities settlement systems (Directive 98/26/EC) (5) as well as the
Directives relating to the reorganisation and winding up of credit institutions (2001/24/EC) (6) and
and Regulation (EC) No 1346/2000 on insolvency
insurance undertakings
proceedings (8). The Directive is in line with the general pattern of these previous legal acts, which
it complements and goes beyond on some issues.

(2001/17/EC) (7)

III. ANALYSIS OF THE COMMON POSITION

1. General issues

The Common Position follows the approach of the Commission proposal, with some amendments to
the substance and to the presentation of the text. The main changes to the Commission proposal reflect
the amendments proposed by the European Parliament and concern:

— the persons and institutions covered by the scope of the Directive (Article 1(2)),

— the evidencing of a financial collateral arrangement (Article 1(5)),

— the introduction of the legal technique of ‘appropriation’ (Article 4),

— the conflict of laws provision (Article 9).

The changes to each article of the Commission proposal are explained below.

(1) OJ C 180 E, 26.6.2001, p. 312.
(2) OJ C 196, 12.7.2001, p. 10.
(3) OJ C 48, 21.2.2002, p. 1.
(4) Not yet published in the Official Journal.
(5) OJ L 166, 11.6.1998, p. 45.
(6) OJ L 125, 5.5.2001, p. 15.
(7) OJ L 110, 20.4.2001, p. 28.
(8) OJ L 160, 30.6.2000, p. 1.

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2. Scope (Article 1)

Articles 1 and 2 of the Commission proposal have been merged into a new Article 1 to make it clear
that the Community regime laid down in the Directive covers only the financial collateral arrangements
and the financial collateral included in the scope, which the Article goes on to define. The structure of
Article 1, now incorporating the corresponding Article 2 of the Commission proposal has been
changed as explained below, in order to set out the relevant provisions in a clearer and more structured
manner and to take account of the amendments proposed by the European Parliament. Inter alia, the
new structure takes account of the need for precision expressed in amendment 4 of the European
Parliament, the spirit of which is thus included.

The scope is defined with respect to the parties to the financial collateral arrangements, Article 1(2), (3)
and (5), and with respect to the financial collateral provided under the arrangement, Article 1(4) and
(5).

The scope concerning the persons covered closely reflect the approach proposed by the European
Parliament in amendments 5, 6, 7, 8 and 9. The substance of amendment 5 has been included, albeit
with different wording, in so far as the Common Position stipulates that both the collateral-taker and
the collateral-provider must belong to one of the categories listed in the Directive, with the added
provision in Article 1(2)(e) that if one of the parties is a person other than a natural person, the other
party must belong to one of the categories set out in Article 1(2)(a) to (d). In other words, as long as
one of the parties is an institution of a financial nature as set out in subparagraphs (a) to (d), the other
party can be either an institution of a financial nature as set out in subparagraphs (a) to (d), or any of
the persons set out in subparagraph (e).

Amendments 6, 7, 8 and 9 have all been included with the following changes to the wording:

— in Article 1(2)(a) (amendment 6) it has been made clear that the exclusion of publicly guaranteed

undertakings applies to both categories of institutions covered by the provision;

— the wording of subparagraph (c) relating to financial institutions is as proposed by the European
Parliament in amendment 8, except that the references to a central counterparty, a settlement agent
or a clearing house have been set out in a separate subparagraph (d) since these institutions are not
necessarily financial institutions under prudential supervision. A reference to similar institutions
acting in the futures, options and derivatives markets has also been added,

— subparagraph (e) relating to all legal persons is included as proposed by the European Parliament in
amendment 9, except that the reference to a person other than a natural person acting in trust on
behalf of bondholders has been included in subparagraph (d), which was considered a more
appropriate place.

In order to strike the right balance between the need not to enlarge the scope of the Directive unduly
to the detriment of the other creditors in an insolvency situation on the one hand and, on the other
hand, the need to ensure that the aims of the Directive can be achieved, the Council has found it
necessary to introduce in Article 1(3) an option for Member States to limit the scope of the special
regime laid down by the Directive to financial collateral arrangements where both parties belong to the
institutions of a financial nature set out in Article 1(2)(a) to (d). Since the exercising this option will be
an exception to the general regime laid down in the Directive, a special notification procedure is
provided for in the event of a Member State making use of it.

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Article 1(4) sets out what the financial collateral must consist of. Subparagraph (a) corresponds to the
definition of financial collateral set out in Article 3(g) of the Commission proposal. Subparagraph (b)
has been introduced to make sure that Member States may exclude from the scope certain financial
collateral which, although it might fall under the definition of financial instruments, is directly linked to
the means of production of the collateral-provider.

The first subparagraph of Article 1(5) makes it clear that the Directive does not apply to financial
collateral until it has been provided. Amendment 3 of the European Parliament is included with slightly
modified wording, as is amendment 10 proposed by the European Parliament, which deletes Article
2(5) of the Commission proposal. What is covered by the term ‘provided’ is set out in Article 2(2), see
below.

Paragraph 5 also deals with the question of evidence relating to the provision of financial collateral as
well as the financial collateral arrangement itself, and covers the same issues as those set out in Article
2(3)(a) of the Commission proposal. The provision of the financial collateral must be evidenced in
writing and must allow for the identification of the financial collateral to which it applies. The financial
collateral arrangement must be evidenced in writing or in any other legally enforceable manner
provided for by the law applicable to the financial collateral arrangement,
for example taped
telephone conversations.

These latter requirements relating to evidence must not be confused with the requirement set out in
Article 3 that a financial collateral arrangement or the provision of financial collateral must not be
dependent on the performance of any formal act, see below.

3. Definitions — Article 2 (Article 3 of the Commission proposal)

The definitions in Article 2(1) largely correspond to those proposed by the Commission. The defi-
nitions of the terms ‘collateral-provider’, ‘collateral-taker’ and ‘sale and repurchase agreement’ have been
deleted as unnecessary. The definition of ‘financial collateral’ has been included in the new wording of
Article 1(4)(a). The term ‘securities collateral account’ has been deleted as unnecessary following the
recasting of Article 1, and the term ‘relevant intermediary’ has been deleted since it no longer appears
in the text following the redrafting of Article 9.

A new definition of ‘cash’ has been introduced, covering money credited to an account and claims on
the restitution of money such as money market deposits, but excluding physical notes and coins, which
it was thought unnecessary to include in the scope of the Directive.

Some amendments have been made in order to make the text clearer without changing the essential
thrust of the definitions. In particular:

— the term ‘relevant financial obligations’ has been amended to include the substance of Article 2(6)
of the Commission proposal, which defined what relevant financial obligations could consist of or
include,

— the definition of ‘enforcement event’ has been amended to highlight default as an element that may

trigger the realisation of financial collateral.

Article 2(2) sets out what is meant by financial collateral being provided, and includes amendment 11
proposed by the European Parliament in almost identical wording. It further makes it clear that any
right of substitution and right to withdraw does not prejudice the provision, as such, of the financial
(f) and (g) of the
collateral. The Council finds that this provision replaces Article 2(2)(c), (d), (e),
Commission proposal, which are not maintained in the Common Position.

Article 2(3), which defines the references to ‘writing’, incorporates amendment 12 proposed by the
European Parliament.

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4. Formal acts — Article 3 (Article 4 of the Commission proposal)

The Common Position preserves the thrust of Article 4 of the Commission proposal, and extends it
also to the provision of the financial collateral. It stipulates that Member States shall not require that
the creation, validity, perfection, enforceability or admissibility in evidence of a financial collateral
is
arrangement or the provision of
dependent on the performance of any formal act.

financial collateral under a financial collateral arrangement

Examples of what is meant by a formal act are not set out in the enacting provisions, and Article 4(2)
of the Commission proposal is deleted. Recital 10, which sets out the reasons behind Article 3, does,
however, give some indications, such as the execution of any document in a specific form or in a
particular manner, filing with any official or public body or registration in a public register, adver-
tisement in a newspaper or journal, in an official register or publication or in any other manner,
notification to a public officer or the provision of evidence in a particular form.

In order to avoid confusion between Article 3(1), the provision relating to evidence set out in Article
1(5) and the definition of ‘provided’ in Article 2(2), the Common Position introduces a new Article 3(2)
which makes it clear that paragraph 1 is without prejudice to these provisions.

In this respect it should be noted that the Common Position aims at providing a balance between
market efficiency, which is the reason behind the exclusion of formal acts, and the safety of the parties
inter alia, the risk of fraud. This balance is
to the arrangement and third parties, thereby avoiding,
achieved by the fact that the scope of the Directive only covers those financial collateral arrangements
which provide for some form of dispossession, as set out in Articles 1(5) and 2(2), and where the
provision of the financial collateral can be evidenced in writing or in a durable medium, as set out in
Articles 1(5) and 2(3), ensuring thereby the traceability of that collateral. For the purpose of this
Directive, acts required under the law of a Member State as conditions for transferring or creating a
security interest on financial instruments other than book entry securities, such as endorsement in the
case of instruments to order, or recording on the issuer's register in the case of registered instruments,
are not considered as formal acts.

5. Enforcement — Article 4 (Article 5 of the Commission proposal)

Article 4 of the Common Position maintains the substance of Article 5 of the Commission proposal,
which complements Article 3 by precluding the imposition of formal and procedural requirements on
the enforcement of a financial collateral arrangement and ensures enforcement in event of insolvency
of the collateral-provider or the collateral-taker. The structure is amended to make the text clearer and
in a manner which includes amendments 13 and 14 proposed by the European Parliament.

Article 4(1) follows closely Article 5(1) of the Commission proposal, but the reference to the realisation
requirements is set out in a separate paragraph, Article 4(4), and it states that set-off is recognised as a
manner of realisation.

The Common Position includes the legal technique of appropriation as proposed by the European
Parliament and Article 4(2) incorporates, almost verbatim, amendment 14 proposed by the European
Parliament. However, since this technique is unknown in some Member States and it was feared that its
introduction solely in respect of financial collateral arrangements could give rise to legal uncertainty in
those parts of the Community where it has never been used, the Council has found it necessary to
introduce in Article 4(3) of the Common Position an option which allows Member States where
appropriation is not permitted on the date this Directive enters into force not to recognise this
technique. Since the exercise of this option will be an exception to the general regime laid down in
the Directive, provision is made for a special notification procedure where a Member State makes use
of it.

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Article 4(4) sets out the references to the realisation requirements, which were set out in Article 5(1) of
the Commission proposal and includes amendment 13 proposed by the European Parliament. The
substance of Article 5(2) of the Commission proposal has been moved to Article 7, which concerns
close-out netting. The substance of Article 5(3) of the Commission proposal is set out in Article 4(5) of
the Common Position in a clearer form. The Council deemed it unnecessary to include examples of
what can constitute an enforcement event since the term ‘enforcement event’ is defined in Article 2.

Article 4(6) corresponds to Article 5(5) of the Commission proposal, but is extended to cover the
calculation of the relevant financial obligation.

6. Right of use — Article 5 (Article 6 of the Commission proposal)

Article 5(1) and (2) of the Common Position fully includes amendment 15 proposed by the European
Parliament, in a slightly amended form. Article 5(2) further makes it clear that the collateral-taker may,
if the terms of the security financial collateral arrangement so provide, choose to set off the value of
the equivalent collateral against the relevant financial obligation or apply it in discharge thereof.

Article 5(3) combines the substance of Article 6 2) and (3) of the Commission proposal, in an amended
form which takes account of the new wording of Article 5(1) and (2).

Article 5(4) aims to make it clear that when a collateral-taker exercises the right of reuse he does not
thereby lose his rights to the financial collateral under the financial collateral arrangement.

Article 5(5) maintains Article 6(5) as proposed by the Commission in its original proposal.

7. Title transfer and close-out netting — Articles 6 and 7 (Articles 7 and 8 of the Commission

proposal)

Article 6(1) concerning the recognition of title transfer financial collateral arrangements maintains the
essence of Article 7 of the Commission proposal. The Council has found it useful to add a second
paragraph making it clear that a title transfer arrangement can be terminated by close-out netting if an
enforcement event occurs.

Article 7(1) of the Common Position, on the recognition of close-out netting provisions, combines
Article 8(1) and (2) of the Commission proposal with more specific wording which does not change
the substance of these provisions. Article 7(2) replaces Article 5(2) of the Commission proposal and
ensures that Article 4(4) applies to close-out netting as well, unless the parties have explictly agreed
otherwise.

8. The non-application of certain insolvency provisions — Article 8 (Article 9 of

the

Commission proposal)

Article 8 of the Common Position maintains the substance of Article 9 of the Commission proposal,
but with different wording.

The aim is to protect a financial collateral arrangement, as well as the provision of financial collateral
under such an arrangement, against certain automatic avoidance rules which would render an
arrangement or the provision of collateral void on the sole basis that the collateral was provided on
the day of, but before the commencement of, insolvency proceedings or in a prescribed period prior to
such proceedings. This is set out in Article 8(1) of the Common Position.

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The Common Position introduces a new rule in Article 8(2), not contained in the Commission
proposal, protecting a collateral-taker who has acted in good faith on the day of, but after the
opening of, insolvency procedures.

The second aim of this article is to protect the market practices of ‘top up’, whereby participants in the
financial market use top-up financial collateral arrangements to manage and limit their credit risk to
each other by mark-to-market calculations of the current market value of the credit exposure and the
value of the financial collateral and accordingly ask for top-up financial collateral or return the surplus
of financial collateral, and the market practice of substituting other assets of the same value for assets
provided as financial collateral. Article 8(3) provides that these two practices should be protected
against invalidation on the basis of the sole fact that the collateral was provided on the day of, but
before the commencement of,
insolvency proceedings or in a prescribed period prior to such
proceedings, or on the basis of the sole fact that the relevant financial obligations were incurred
prior to the provision of the top-up or substitute collateral.

this Article does not prejudice the possibility of questioning the financial collateral
However,
arrangement and the provision of financial collateral as part of the initial provision, top-up or substi-
tution of financial collateral, under national law for other reasons, for example where this has been
done intentionally to the detriment of the other creditors (this covers, inter alia, actions based on fraud
or similar avoidance rules which may apply in a prescribed period).

9. Conflict of laws — Article 9 (Article 10 of the Commission proposal)

Article 9 of the Common Position covers the substance of Article 10 of the Commission proposal and
introduces a provision regarding conflict of laws in relation to book entry securities. The Common
Position does not include Article 9(2) of the Commission proposal since the question of conflict of laws
is currently subject to ongoing international discussions in the Hague Conference, which is negotiating
a Convention on the law applicable to certain rights in respect of securities held with an intermediary.
In order not to bind the hands of Member States and the Commission in these discussions it is
preferable simply to establish the place of the relevant intermediary (PRIMA) principle in the Directive,
without going into further details at this stage. The Common Position thus includes amendment 17
proposed by the European Parliament.

The Council takes the view that it is, in principle, desirable that provisions with regard to the applicable
law are in line with the ongoing discussions at the Hague Conference, but taking into account the
importance of the Directive for the EU financial market, the Council nevertheless finds it impossible to
postpone the passing of the Directive until the discussions in the Hague Conference have been
completed. Therefore it must be kept in mind that, when the Conference has been finalised, Article
9 may have to be reviewed in the light of the outcome of the Convention.

The wording of Article 9(1) has been amended slightly to take account of the new structure, and the
wording of Article 9(2) has been changed from that of Article 10(3) of the Commission proposal, to
reflect more closely the current state of negotiations within the framework of the Hague conference.

10. Final provisions — Articles 10, 11, 12 and 13

The Council feels that the new regime introduced by the Directive should be evaluated and has
therefore introduced in Article 10 an obligation for the Commission to present a report on the
application of the Directive three years after the date of implementation. The report should focus,
inter alia, on the use of the option to limit the scope set out in Article 1(3), the option not to introduce
the legal technique of appropriation set out in Article 4(3), and the right of reuse of financial collateral
laid down in Article 5.

Since the new drafting of Article 1(2) renders Articles 11 and 12 of the Commission proposal
redundant, the Common Position incorporates amendments 18 and 19 proposed by the European
Parliament, which delete these two articles.

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Implementation has been set at 18 months after entry into force, which is the minimum period
required in some Member States to implement the new regime laid down by the Directive. The
actual date of implementation will thus depend on the final adoption of the Directive. So, while the
Council shares the concerns of the European Parliament concerning early implementation of the
the Common Position does not include amendment 20 as proposed by the European
Directive,
Parliament.

11. The recitals

The recitals have been adapted to reflect the amendments to the Commission proposal set out above,
and includes amendments 1 and 2 proposed by the European Parliament.

IV. CONCLUSION

The Council considers that all the amendments made to the Commission proposal are fully in line with
the objectives of the Directive. The main changes to the text of the Commission have been made
following the amendments proposed by the European Parliament, almost all of which are included in
the Common Position. While the amendment relating to the date of implementation has not been
introduced as proposed by the European Parliament, it cannot be considered to have been rejected
either, since early adoption of the Directive would entail a date of implementation close to that
proposed by the European Parliament.