Opinion of the European Central Bank of 14 November 2006 at the request of Latvijas Banka on a draft regulation on Latvijas Banka’s securities settlement system (CON/2006/52)
Date: 2006-11-14
Institutions: European Central Bank
Subjects: Latvia, central bank, national law, payment system, securities

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 14 November 2006 

at the request of Latvijas Banka 

on a draft regulation on Latvijas Banka’s securities settlement system 

(CON/2006/52) 

Introduction and legal basis 

On 28 September 2006 the European Central Bank (ECB) received a request from Latvijas Banka for an 

opinion  on  a  draft  regulation  on  Latvijas  Banka’s  securities  settlement  system  (hereinafter  the  ‘draft 

regulation’). 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  the  third  and  fifth  indents  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 national provisions1, as the draft regulation relates to a national central 

bank  and  payment  and  settlement  systems.  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.  

Purpose of the draft regulation 

As explained by Latvijas Banka, the main objective of the draft regulation is to optimise the operation of 

the securities settlement system operated by Latvijas Banka (hereinafter the ‘VNS’). The draft regulation 

will replace an existing regulation on the VNS. The ECB also understands that the draft regulation would 

come  into  force  simultaneously  with  the  Regulation  on  the  use  of  Latvijas  Banka’s  monetary  policy 

instruments  since  the  draft  regulation  chiefly  concerns  the  settlement  of  securities  transactions  for 

Latvijas Banka’s monetary policy and intraday credit operations in the VNS. 

2. 

General observations  

2.1  ECB notes that, on adoption of the euro in Latvia, and provided that the VNS will be selected to 

provide securities settlement of central bank credit operations, the VNS will be assessed against the 
Eurosystem standards for the use of EU securities settlement systems in ESCB credit operations2. 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
The standards are available on the ECB’s website at www.ecb.int. 

 
 
 
 
 
                                                 
For that reason, this opinion is without prejudice to a future ECB assessment of the VNS against 

the abovementioned standards.  

2.2  The  ECB  expects  Latvijas  Banka  to  ensure  that  the  VNS  complies  with  the  Latvian  Law  on 

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

3. 

Specific comments 

3.1  According to the explanatory memorandum submitted to the ECB, the main purpose of the VNS is 

securities settlement for Latvijas Banka’s monetary policy and intraday credit operations. Although 

it  can  be  derived  from  Article  2.7  of  the  draft  regulation,  the  clarity  and  transparency  provided 

through the draft regulation could be enhanced by explicitly specifying this main purpose already 

in  the  provision  defining  the  VNS  (Article  1.1),  especially  in  view  of  the  existence  of  another 

securities settlement system operated by the Latvian Central Depository (LCD). 

3.2  According  to  Article  1.2  of  the  draft  regulation,  a  VNS  participant  is  defined  as  a  bank,  the 

Financial  and  Capital  Market  Commission  (hereinafter  the  ‘Commission’)  and  Latvijas  Banka. 

Furthermore, Article 1.3 of the draft regulation defines a bank as a ‘bank or a branch of a foreign 

bank  registered  in  the  Republic  of  Latvia,  as  well  as  a  bank  and  a  branch  of  a  bank  of  another 

Member  State,  entitled  to  deliver  financial  services  in  the  Republic  of  Latvia  and  having  a  cash 

account for settlements in lati with Latvijas Banka’. This is in line also with Article 3 of the Law on 

credit institutions which provides that in Latvia, credit institutions registered in Latvia, branches of 

credit  institutions  of  a  foreign  State,  credit  institutions  registered  in  another  Member  State  or  the 

branches of credit institutions registered in Member States may perform credit institution activities. 

However,  Article  1  of  the  SFD  Law  provides  that  a  credit  institution  registered  in  Latvia  or  a 

Member State of the European Union or the European Economic Area, and a commercial company 

whose head office is located outside the European Economic Area and whose tasks correspond to 

those of credit institutions in Latvia and Member States of the European Union and the European 

Economic Area are eligible to participate in the system. The ECB notes that, according to the SFD 

Law, only entities covered by Article 1(2) may participate in a settlement system. The ECB further 

notes  that,  although  a  branch  of  a  foreign  bank  does  not  have  the  legal  entity  status  in  Latvia,  a 

number of provisions on credit institution insolvency in the Law on credit institutions apply also to 

branches of foreign banks in accordance with Article 6 of the Law on credit institutions. Thus, in 

the absence of an express reference to the foreign bank branches in Article 1(2) of the SFD Law, 

and  considering  the  different  insolvency  proceedings  applicable  to  foreign  bank  branches  and 

banks  established  in  Latvia,  respectively,  the  ECB  advises  Latvijas  Banka  to  carry  out  an 

assessment  as  to  whether  foreign  bank  branches  fall  within  the  scope  of  application  of  the  SFD 

Law. If that is not the case, foreign bank branches should be excluded from the scope of Article 1.3 

of the draft regulation.  

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3.3  Article 2.5 of the draft regulation foresees three different types of accounts: (1) a bank’s securities 

account where Latvijas Banka records securities that are held and used by the bank as collateral in 

transactions  with  Latvijas  Banka;  and  (2)  the  Commission’s  securities  account  where  Latvijas 

Banka records securities of a fund managed by the Commission that are transferred from the LCD; 

and (3) Latvijas Banka’s securities account where Latvijas Banka records securities held by itself. 

The  draft  regulation  on  the  use  of  Latvijas  Banka’s  monetary  policy  instruments,  however,  also 

refers to a collateral account which is defined as a securities account opened for the counterparty in 

the VNS in accordance with the draft regulation where securities are posted as collateral. The ECB 

understands  that  another  Latvijas  Banka’s  Regulation  provides  that  all  securities  registered  on  a 

bank’s  securities  account  are  posted  as  collateral  for  monetary  policy  operations.  However,  the 

ECB  invites  Latvijas  Banka  to  consider  clarifying  this  also  in  the  draft  regulation  now  under 

preparation.  The  ECB  also  notes  that  Article  17(9)  of  the  SFD  Law  requires  the  system  rules  to 

include the procedure for creating and managing collateral security.   

3.4  The  wording  of  Article  2.13  of  the  draft  regulation  on  Latvijas  Bank’s  acceptance  of  security 

transfers and their VNS entry point needs clarification. In particular, it provides that (i) ‘Latvijas 

Banka shall transfer securities in the sequence of receiving securities transfer orders’; and (ii) ‘after 

receiving and examining each securities transfer order, Latvijas Banka shall accept it by conducting 

the respective securities transfer’;  and (iii) ‘a securities transfer order shall be  deemed  entered in 

the VNS from the moment it is accepted, i.e. when Latvijas Banka debits the deliverer’s securities 

account’. The concepts of receipt and acceptance of transfer orders needs further clarification. The 

ECB understands that this aspect of the draft regulation is still under consideration and that Latvijas 

Banka envisages clarifying that reservation of securities in the respective securities account equals 

the entry of transfer orders in the VNS. 

3.5  The  ECB  notes  that  Article  2.1  of  the  draft  regulation  provides  that  the  VNS  will  operate  in 

accordance with Latvian laws and regulations. The ECB also notes that Article 15 of the SFD Law 

provides  that  if  insolvency  proceedings  are  initiated  against  a  system  participant,  the  rights  and 

obligations arising from, or in connection with, that participant’s participation in the system will be 

determined  in  accordance  with  the  law  of  the  country  where  that  system  operates.  Although 

Article 15  of  the  SFD  Law  in  conjunction  with  Article  2.1  of  the  draft  regulation  in  principle 

should ensure that the rights and obligations arising from, or in connection with, participation in the 

VNS will be governed by Latvian law also in the event of opening insolvency proceedings against 

a  participant,  in  the  interests  of  transparency  and  legal  certainty,  and  given  that  Article  8  of  the 
Settlement  Finality  Directive3  (implemented  by  Article  15  of  the  SFD  Law)  is  one  of  the 

Directive’s most important provisions, the ECB suggests clarifying in the draft regulation that all 

rights and obligations arising from participation in the VNS are governed by Latvian law also in the 

event of opening insolvency proceedings against a participant. Furthermore, in view of the need for 

3  

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

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such transparency and legal certainty, the ECB suggests further clarifying paragraphs 10 to 12 of 

Annex 1, which currently appear to designate only the law applicable to the dispute settlement (lex 

fori), without designating the substantive law governing the rights and obligations of parties arising 

from their contractual relationship (lex contractus).   

3.6  On Latvia’s adoption of the euro, and provided that the VNS will be selected to provide securities 

settlement for central bank credit operations, the VNS will need to comply with the operating days 

and  hours  of  the  successor  to  the  TARGET  system.  The  ECB  understands  that  Latvijas  Banka 

intends to introduce such amendments to the draft regulation in a timely manner, thereby ensuring 

compliance with these rules. 

3.7  With  regard  to  the  VNS  operation  in  the  event  of  technical  problems  or  other  contingencies, 

disaster  procedures  for  critical  functions  should  be  in  place  in  the  event  of  a  total  failure  of  the 

telecommunication  networks.  The  business  continuity  arrangements  should  also  provide  for  a 

second  processing  site  which  should  not  depend  on  the  same  critical  infrastructure  components 

used by the primary site, such as telecommunications and electric power. In this regard, the ECB 

has  been  informed  that  Latvijas  Banka  has  adopted  the  requisite  regulations  and  procedures  to 

ensure all necessary business continuity arrangements for Latvijas Banka’s payment and settlement 

systems, including a second processing site, although these regulations and procedures do not form 

part of the draft regulation submitted to the ECB in the present consultation.  

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

Done at Frankfurt am Main, 14 November 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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