Opinion of the European Central Bank of 26 June 2003 at the request of the Austrian Federal Ministry of Justice on a draft Federal law implementing Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (CON/2003/11)
Date: 2003-06-26
Institutions: European Central Bank
Subjects: Austria, financial legislation, financial stability, guarantee, national implementing measure, national law

EN

OPINION OF THE EUROPEAN CENTRAL BANK

of 26 June 2003

at the request of the Austrian Federal Ministry of Justice

on a draft Federal law

implementing Directive 2002/47/EC of the European Parliament and of the Council

of 6 June 2002 on financial collateral arrangements

(CON/2003/11)

1. 

On 6 May 2003 the European Central Bank (ECB) received a request from the Austrian Ministry of

Justice for an opinion on a draft Federal law (the draft law) implementing Directive 2002/47/EC of
the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements1

(the Directive).

2. 

The purpose of the draft law is to implement the Directive in Austria. Consequently, the Austrian

authorities  were  not  legally  obliged  to  consult  the  ECB  under  Article 1(2)  of  Council

Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national
authorities  regarding  draft  legislative  provisions2.  However,  the  ECB  has  an  interest  in  the

harmonised  implementation  of  the  Directive  in  respect  of  the  draft  of  which  the  Council  of  the

European  Union  consulted  the  ECB  and  the  ECB  delivered  its  opinion  on  13  June  2001
(CON/2001/13)3. In the light of the latter opinion, the ECB strongly welcomes the opportunity to

give its opinion on the draft law as it addresses matters directly relevant to the Eurosystem’s core

fields  of  competence  and  as  it  has  an  impact  on  the  efficient  and  safe  use  of  financial  collateral

arrangements  in  European  Union  financial  markets  as  well  as  on  the  Eurosystem’s  collateralised

operations. 

3. 

The  draft  law  introduces  a  new  Federal  law  concerning  financial  collateral  arrangements  in

financial markets (Bundesgesetz über Sicherheiten auf den Finanzmärkten) intended to implement

the Directive. According to the explanatory notes, the draft law will (as provided in the Directive)

only apply to professional financial market participants. The draft law implements the Directive’s

uniform  rules  for  the  provision  of  securities  and  cash  deposits  as  collateral  and  facilitates  the

realisation of such collateral. Furthermore, the draft law is intended to contribute to (i) improved

integration of the European financial markets and (ii) the stability of financial systems. The ECB

1 
2 
3 

OJ L 168, 27.6.2002, p. 43.
OJ L 189, 3.7.1998, p. 42.
OJ C 196, 12.7.2001, p. 10.

                                                     
notes that the draft law is particularly relevant to the Eurosystem as it also applies, in accordance

with the Directive, to the Eurosystem national central banks and to the ECB.

4. 

In a general context, the ECB refers back to its view that the Directive represents a significant and

important effort to advance the efficient and safe use of financial collateral, both at a domestic and

cross-border  level.  The  promotion  of  simple  and  reliable  methods  of  collateralisation  is  of

fundamental interest to the ECB, as well as to the national central banks, as it will help to ensure

the smooth functioning of the Eurosystem’s single monetary policy. This will go beyond what has

already  been  achieved  by  the  implementation  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
systems4 (the Settlement Finality Directive) to establish a sound legal framework for payment and

security  settlement  systems  as  well  as  for  the  central  banks’  operations.  The  Eurosystem’s

involvement  derives from  the  second  indent  of  Article  18.1  of the  Protocol  on the  Statute  of  the

European  System  of  Central  Banks  (ESCB)  and  of  the  ECB,  which  provides  that  in  order  to

achieve  the  objectives  of  the  ESCB  and  to  carry  out  its  tasks,  the  ECB  and  the  national  central

banks  may  conduct  credit  operations  with  credit  institutions  and  other  market  participants,  with

lending being based  only  on  adequate  collateral.  In  this  context,  the  ECB  strongly  welcomes  the

fact that the Austrian authorities  have  prepared the draft law far  in advance  of  the  time  limit  for

implementation laid down in the Directive.

5. 

The ECB notes that according to Section I, § 2(1) of the draft law, it covers (i) public sector bodies,

(ii)  financial  market  authorities  including,  inter  alia,  the  national  central  banks  and  the  ECB,

(iii) financial  institutions  subject  to  prudential  supervision,  (iv)  central  counterparties,  settlement

agents or clearing houses, and (v) legal entities acting in a trust or representative capacity. This is

in line with the Directive. Furthermore, Section I, § 2(2) of the draft law states that it shall apply to

the provision and realisation of financial collateral involving on the one hand, another incorporated

company,  a  partnership  with limited  liability  or an  unincorporated  company,  where  no  firm  with

unlimited  liability  is  a  natural  person,  and  on  the  other  hand  a  financial  market  participant,  as

defined in Section I, § 2(1) of the draft law. Limiting the application of the draft law to the entities

listed in Section I, § 2(2) of the draft law constitute a partial opt-out in the context of Article 1(3) of

the Directive. The ECB would like to stress in this context that it should be ensured that an opt-out,

and  in  particular  a  partial  opt-out,  does  not  create  uncertainty  regarding  the  application  of  the

Directive and of the draft law. The ECB has always acknowledged the need to assess carefully the

extent of any limitations to general insolvency regimes, whereby it is necessary to take into account

various  considerations  ranging  from  legal  certainty,  the  efficiency  of  cross-border  collateral

transactions  and  the  ease  of  collateral  management  to,  in  certain  cases,  supervisory  interests,

especially  potential  reorganisation  measures.  The  ECB  suggests  considering  whether  those

provisions in the  Directive that  do  not  deal  with protection  against the effects  of  insolvency,  but

instead cover substantive law or conflict of law rules, could be made applicable without limitation

4

OJ L 166, 11.6.1998, p. 45.

2

                                                     
to all entities. Establishing different regimes for the creation and use of the same kind of collateral,

depending  on  the  type  of  parties  involved,  implies  evaluating  the  status  of  the  parties  to  an

arrangement and tends to disrupt collateralised transactions. In addition, from the ECB’s point of

view,  all  systems  and  their  participants  protected  by  the  Settlement  Finality  Directive  as  well  as

central counterparties (which are of crucial importance for the efficient functioning of payment and

settlement systems) and all entities with access to the Eurosystem’s credit operations must be able

to benefit from the Directive by its implementation in the Member States. 

6. 

The  ECB  notes  that  the  draft  law  adopts  the  definition  of  ‘financial  instruments’  set  out  in

Article 2(1)(e)  of  the  Directive.  However,  the  ECB  suggests  considering  whether  the  draft  law

could be extended to cover all types of assets eligible for Eurosystem credit operations, including,

inter alia, credit claims in the form of bank loans. This approach would safeguard and promote the

efficient cross-border use of all assets eligible for Eurosystem credit operations and would advance

implementation  of  the  Eurosystem’s  single  monetary  policy.  Moreover,  the  ECB  would  like  to

stress that using undefined legal concepts, such as “claims relating to or rights in or relating to”, as

set  out  in  Section  I,  §  3  No.  5  of  the  draft  law,  should  not  create  uncertainty  regarding  the

application of the draft law to the various proprietary and contractual instruments used in modern

financial markets, e.g. derivatives or sub-participation rights. 

7. 

The ECB welcomes the abolition of formal requirements for financial collateral arrangements. The

ECB  notes  that  Section I,  §  4(1)  of  the  draft  law,  is  fully  consistent  with  Article  3(2)  of  the

Directive.  The  latter  allows  financial  collateral  arrangements  to  be  evidenced  “in  writing  or  in  a

legally  equivalent  manner”.  In  the  opinion  of  the  ECB,  it  is  important  that  national  laws

implementing  the  Directive  should  not  exclude  transactions  under  general  terms  and  conditions,

which  are  not  normally  signed  by  the parties,  or  other  current  market  practices. The  only  reason

requirements of form should continue to exist is to provide the necessary evidence  in  insolvency

situations.

8.  Moreover, the ECB notes that Section I, § 4(3) of the draft law provides for proprietary rights to be

transferred by way of book-entry. Whilst going beyond what the Directive requires (according to

Article 2(1)(g) of the Directive, a proprietary right only needs to be evidenced by book-entry), the

ECB acknowledges that a provision of this kind provides a high degree of certainty as to the exact

point in time when rights are transferred.

9. 

The ECB notes that Section I, § 5 of the draft law permits the realisation of collateral by way of

sale  or  appropriation,  provided  that  the  financial  collateral  arrangement  expressly  allows  such

methods of realisation. This wording is more restrictive than the Directive. In the ECB’s opinion,

Article 4(1) of the Directive is drafted to establish the free realisation of collateral by sale as the

rule, but allowing the parties to limit or exclude such rule. 

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10.  The ECB notes that Section I, § 7 of the draft law grants the right to reuse collateral provided under

a  pledge  arrangement  (“Verfügungsrecht”),  following  closely  the  wording  of  Article  5  of  the

Directive.  Combining  elements  of  pledges  and  full  transfers  of  ownership  could  therefore

potentially improve the liquidity of pledges and make them more efficient. The ECB notes that the

draft law does not seek to amend the Austrian law on pledges and, consequently, the right of reuse

as set out in Section I, § 7 of the draft law appears to create a right sui generis, distinct from both a

pledge  and  a  full  transfer  of  title.  In  order  to  avoid  any  uncertainty  in  this  context,  the  ECB

suggests considering whether the distinction between a pledge and a ‘right of reuse’ is sufficiently

clear, in particular whether a pledge is transformed into a ‘right of reuse’ when a collateral taker

exercises the option to reuse the assets, or whether the assets would be provided under a right sui

generis, which would not constitute a pledge in the first place. 

11.  The ECB welcomes Section I, § 9 of the draft law, which recognises close-out netting provisions in

accordance with Article 7 of the Directive. 

12.  Because sound and efficient risk management  practices  commonly  used  in  the  financial  markets,

including the Eurosystem’s risk control framework, rely on the ability to manage and reduce credit

exposures arising from all kinds of financial transactions on a net basis, limiting market agents to

using  particular  risk  mitigation  techniques  (e.g.  only  close-out  netting)  could  impair  financial

stability. As a consequence, Article 8 of the Directive protects the validity of both substitution of

assets and the provision of top-up collateral from any adverse impact arising after parties conclude

an original agreement on top-up collateral arrangements and an initial security interest is created or

transfer of title takes place. The ECB understands that no limitation on the availability of such risk

mitigation techniques is effective in Austria.

13.  Finally,  the  ECB  notes  that  under  Section  II  of  the  draft  law,  implementing  Article  9  of  the

Directive, the law  applying  to  cross-border  use  of  collateral  in  book-entry  securities  shall  be  the

law of the country in which the securities collateral account is maintained. The ECB would like to

point out in this context that the draft law might be affected by the Hague Convention on the law

applicable to certain rights in relation to securities held with an intermediary (the Convention), the

ratification  of  which  is  currently  being  considered  by  the  Community  and  the  Member  States.

Article 9 of the Directive, and consequently Section II of the draft law are not compatible with the

Convention in so far as the Convention adopts a choice of law approach. The ECB wishes to stress

that  all  parties  involved  in  the  legislative  process  should  investigate  closely  the  Convention’s

potential  impact  on  systemic  stability  and  on  the  treatment  of  collateral  transactions  to  avoid

undermining the current level of protection. This might include, inter alia, limiting the choice of

law  applying  to  proprietary  rights  in  respect  of  securities  held  on  accounts  with  a  systemically

important  system  (in  particular  securities  settlement  systems  evaluated  and  used  by  the

Eurosystem)  to  the  law  governing  that  system,  as  well  as  other  measures  designed  to  safeguard

systemic finality, certainty and transparency.

4

14.  The  ECB  confirms  that  it  has  no  objections  to  the  competent  national  authorities  making  this

opinion publicly available at their discretion. This opinion will be published on the ECB’s website

six months after the date of its adoption.

Done at Frankfurt am Main on 26 June 2003.

The President of the ECB

[signed]

Willem F. DUISENBERG

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