Opinion of the European Central Bank of 16 February 2006 at the request of Lietuvos bankas on a draft law amending the Law on settlement finality in payment and securities settlement systems (CON/2006/5)
Date: 2006-02-16
Institutions: European Central Bank
Subjects: Lithuania, financial solvency, liquidation, national law, payment system

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 16 February 2006  

at the request of Lietuvos bankas 

on a draft law amending the Law on settlement finality in payment and securities settlement 

systems 

(CON/2006/5) 

On 16 November 2005 the European Central Bank (ECB) received a request from Lietuvos bankas for an 

opinion  on  a  draft  law  amending  the  Law  on  settlement  finality  in  payment  and  securities  settlement 

systems (hereinafter the ‘draft law’).  

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  the  fifth  indent  of  Article 2(1)  of  Council 

Decision  98/415/EC  of  29  June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities  regarding  draft  legislative  provisions1,  as  the  draft  law  relates  to  payment  and  settlement 

systems. Although national authorities are not obliged to consult the ECB on draft legislation transposing 

Community directives into national law, under Article 25 of the Statute the ECB may offer advice to and 

be  consulted  by  the  competent  authorities  of  the  Member  States  on  the  scope  and  implementation  of 

Community legislation relating to the stability of the financial system. This legislation includes Directive 

98/26/EC  of  the  European  Parliament  and  of  the  Council  of  19  May  1998  on  settlement  finality  in 
payment  and  securities  settlement  systems2  (hereinafter  the  ‘Settlement  Finality  Directive’).  In 

accordance  with  the  first  sentence  of  Article  17.5  of  the  Rules  of  Procedure  of  the  European  Central 

Bank, the Governing Council has adopted this opinion. 

1  

General remarks  

1.1  The ECB understands that the main objective of the draft law is to extend the scope of the Law on 

settlement  finality  in  payment  and  securities  settlement  systems  (hereinafter  the  ‘SFD  Law’)  in 

order  to  ensure  that  bankruptcy  and/or  suspension  of  operations  of  an  institution  registered  in 

Lithuania do not affect the operation and soundness of a payment or securities settlement system 

governed by the law of a Member State other than Lithuania. The ECB welcomes the initiative of 

Lietuvos bankas in addressing this issue, since it is interested in promoting a harmonised EU-wide 

implementation  of  the  Settlement  Finality  Directive  in  Member  States,  in  order  to  ensure  legal 

1  
2  

OJ L 189, 3.7.1998, p. 42. 
OJ L 166, 11.6.1998, p. 45. 

 
 
 
 
                                                      
certainty  for  payment  and  securities  settlement  systems  and  a  level  playing  field  throughout  the 

Community. 

1.2  As a preliminary remark, the ECB suggests that the SFD Law should refer to ‘systems’ in general 

terms rather than to specific types of systems, to  reflect the fact  that it aims to protect as wide a 

range of systems as possible and to minimise systemic risk. More detailed comments regarding this 

issue are set out in paragraph 2.2.1 of this opinion. 

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Definitions 

2.1 

Insolvency proceedings 

The  ECB  notes  that  Article  2(13)  of  the  SFD  Law  defines  the  suspension  of  operations  as  a 

‘decision by a court or other authorised institution of the Republic of Lithuania or a Member State 

relating  to  the  prohibition  on  a  system  participant  disposing  of  funds  or  securities  held  in  a 

settlement  account  or  the  application  of  temporary  judicial  protective  measures  or  enforcement 

measures  by  the  supervisory  authority  to  a  system  participant  resulting  in  the  suspension  or 

limitation of securities transfer orders and/or payment instructions’. The ECB understands that this 

definition would capture most of the measures resulting in the suspension or limitation of securities 

transfer  orders  and/or  payment  instructions  and  would  be  in  line  with  the  Settlement  Finality 

Directive.  However,  Lietuvos  bankas  may  consider  using  this  opportunity  to  go  beyond  the 

minimum  scope  of  protection  provided  in  the  Settlement  Finality  Directive  and  to  expressly 

provide in the draft law that voluntary winding-ups are also covered by the SFD Law.  

2.2 

Systems protected by the SFD Law 

2.2.1  Article 2(17) of the SFD Law, including the proposed amendments set out in the draft law, limits 

the definition of systems protected by the SFD Law to payment and securities settlement systems. 

Although not strictly required by the Settlement Finality Directive, Lietuvos bankas may consider 

referring to ‘systems’ in the SFD Law in more general terms, i.e. without specifying various types 
of existing or future systems3. In some instances, Member States may see the need to designate a 
clearing system4.  

2.2.2  Article 1 of the draft law amends the definition of ‘system’ and provides, inter alia, that Lithuanian 

law may be chosen as the law governing a system if at least one of the system’s participants has its 

head office in Lithuania. Article 2(17) of the existing SFD Law only refers to an ‘office’ (buveinė) 

of a participant in Lithuania. The new wording to be introduced by the draft law is welcome since it 

more  appropriately  reflects  the  wording  of  the  Settlement  Finality  Directive,  which  requires  that 

the participants may only choose the law of a Member State in which at least one of them has its 

‘head office’.  

3  
4  

See the definition of ‘system’ in Article 2(a) of the Settlement Finality Directive.   
See  the  current  list  of  designated  and  notified  systems  at  http://www.europa.eu.int/comm/internal_market/financial-
markets/settlement/dir-98-26-art10-national_en.htm 

2 

 
 
 
                                                      
2.3 

Institutions 

Article  1  of  the  draft  law  proposes  to  include,  in  the  definition  of  an  ‘institution’,  legal  entities 

which provide funds transfer services. The ECB notes that Article 2(f) of the Settlement Finality 

Directive  defines  a  participant  as  ‘an  institution,  a  central  counterparty,  a  settlement  agent  or  a 

clearing  house’.  Moreover,  Article  2(b)  of  the  Directive  refers  to  undertakings  which  can  be 

regarded as institutions, including undertakings which participate in a supervised system executing 

securities  transfers  and  payments  resulting  from  such  orders.  The  ECB  therefore  notes  that 

Article 1  of  the  draft  law  may  be  considered  as  going  beyond  the  provisions  of  the  Settlement 

Finality Directive and therefore suggests aligning the draft law with Article 2(b) of the Directive. 

2.4 

Securities 

The  ECB  notes  that  the  SFD  Law  defines  ‘securities’  by  reference  to  the  Law  on  the  securities 

market. It is also noted that Article 2(h) of the Settlement Finality Directive defines ‘securities’ as 
all  instruments  referred  to  in  Section  B  of  the  Annex  to  the  Investment  Services  Directive5.  The 
Investment Services Directive will be repealed by the Markets in Financial Instruments Directive6, 

with effect from 30 April 2006. If the current proposal regarding the deadlines for transposition and 

application  of  the  Markets  in  Financial  Instruments  Directive  is  adopted,  this  date  will  be 
postponed7. Under Article 69 of the Markets in Financial Instruments Directive, references to terms 

defined in the Investment Services Directive will henceforth have to be construed as references to 

equivalent terms defined in the Markets in Financial Instruments Directive. Section C of Annex I to 

the Markets in Financial Instruments Directive contains a more detailed list of financial instruments 

than  Section  B  of  the  Annex  to  the  Investment  Services  Directive.  The  ECB  therefore  draws 

Lietuvos bankas’s attention to the fact that the reference to the definition of securities in the SFD 

Law will have to be reviewed in the light of the Markets in Financial Instruments Directive. 

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Law governing the rights and obligations of a participant 

Article 4 of the draft law expressly states that in the event that operations are suspended against a 

participant in a system governed by the law of another Member State, the law of that Member State 

governs  the  participant’s  rights  and  obligations  arising  from  participation  in  that  system.  This 

provision remedies the situation under the existing SFD Law whereby only bankruptcy proceedings 

are mentioned with respect to participation in a system governed by law of another Member State. 

The ECB welcomes this amendment.  

5  
6  

7  

Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ L 141, 11.6.1993, p. 27). 
Article  69  of  Directive  2004/39/EC  of  the  European  Parliament  and  of  the  Council  of  21  April  2004  on  markets  in 
financial  instruments  amending  Council  Directives  85/611/EEC  and  93/6/EEC  and  Directive  2000/12/EC  of  the 
European Parliament and of the Council and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1).  
See Commission of the European Communities, ‘Proposal for a Directive of the European Parliament and of the Council 
amending  Directive  2004/39/EC  on  markets  in  financial  instruments,  as  regards  certain  deadlines’  (COM(2005)  253 
final, 14.6.2005). 

3 

 
 
                                                      
4 

No unwinding of netting or revocation of transfer orders 

4.1  Under Article 3(2) of the Settlement Finality Directive, actions relating to underlying transactions 

may in no way lead to the ‘unwinding of netting’. Furthermore, recital 13 to the Settlement Finality 

Directive  states that, for example, in the event of fraud or technical  error, the Directive does not 

prevent  a  participant  or  a  third  party  from  exercising  any  right  or  claim  resulting  from  the 

underlying  transaction  as  long  as  this  leads  ‘neither  to  the  unwinding  of  netting  nor  to  the 

revocation  of  the  transfer  order  in  the  system’.  In  a  number  of  Member  States,  the  laws 

implementing  the  Settlement  Finality  Directive  expressly  confirm  that  although  the  underlying 

transaction could potentially be challenged in the context of proceedings such as the avoidance of 

transactions, this would only have an impact on the bilateral relationship between the payer and the 

payee, not on the system. 

4.2  Article  7(5)  of  the  SFD  Law  states  that  netting  may  not  be  unwound  if  a  transaction  concluded 

before the initiation of bankruptcy proceedings is recognised as void on the grounds defined by the 

laws regulating the bankruptcy of a system participant. The ECB notes that transactions may also 

be declared void not only under the laws regulating the bankruptcy of a system participant, but also 

under other Lithuanian laws, such as the Law on enterprise restructuring or the Civil Code (which 

refers to actio Pauliana). In addition, transfer orders, including payment orders, should also not be 

subject  to  revocation.  The  ECB  suggests  clarifying  in  the  SFD  Law  that,  if  an  underlying 

transaction is void: (i) netting may not be unwound; (ii) transfer orders, including payment orders, 

may not be revoked; and (iii) this would only affect the bilateral relationship between the payer and 

the payee, not the system. 

5 

Bankruptcy and restructuring laws 

5.1  As  already  mentioned,  Article  7  of  the  Settlement  Finality  Directive  prohibits  any  insolvency 

proceedings  initiated  against  a  participant  from  having  retroactive  effect  on  the  rights  and 

obligations of the participants in a system. The  prerogatives in insolvency proceedings of courts, 

liquidators,  administrators  and  other  officials,  such  as  the  power  to  limit  the  disposition  of  an 

insolvent participant’s property, must therefore be limited in order to ensure the enforceability of 

transfer orders and netting in the system.  

5.2  The ECB notes that certain Lithuanian laws, such as the Law on enterprise bankruptcy and the Law 

on  enterprise  restructuring,  impose  certain  restrictions  on  the  disposition  of  an  insolvent  entity’s 

property  and  entitle  the  administrators  to  terminate  contracts  entered  into  before  proceedings  are 

inititated.  The  ECB  notes  that  the  Law  on  enterprise  bankruptcy  and  the  Law  on  enterprise 

restructuring  are  generally  regarded  as  taking  priority  over  other  laws.  Although  the  Law  on 

enterprise bankruptcy already provides for exemptions from some of its provisions in cases covered 

by the SFD Law, the ECB recommends inserting a general provision in both the Law on enterprise 

4 

 
 
 
bankruptcy and the Law on enterprise restructuring providing that the SFD Law takes priority as 

far as rights and obligations arising from participation in a system are concerned. 

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 16 February 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

5