Report from the Commission to the European Parliament and the Council Evaluation Report on the Financial Collateral Arrangements Directive (2002/47/EC)
Date: 2006-12-20
Institutions: European Commission
Subjects: EC Directive, application of EU law, contract, credit guarantee, financial legislation, financial solvency, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.12.2006 
COM(2006) 833 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Evaluation report on the Financial Collateral Arrangements Directive (2002/47/EC)  

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Evaluation report on the Financial Collateral Arrangements Directive (2002/47/EC) 

(Text with EEA relevance) 

TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

3.3. 

4. 

Introduction .................................................................................................................. 3 

Method and scope of the evaluation............................................................................. 3 

Implementation and impact of the Directive................................................................ 4 

Relevance of the Directive ........................................................................................... 4 

Effectiveness ................................................................................................................ 5 

Efficiency ..................................................................................................................... 5 

Key issues..................................................................................................................... 6 

4.1. 

Material Scope of the Directive – Credit claims.......................................................... 6 

4.1.1.  New types of collateral................................................................................................. 6 

4.1.2.  Eligibility criteria ......................................................................................................... 6 

4.1.3.  Economic rationale for extending eligible collateral to credit claims.......................... 7 

4.1.4.  Legal issues relating to use of credit claims as collateral ............................................ 8 

4.2. 

Opt-out provisions........................................................................................................ 8 

4.2.1.  Personal scope of the Directive - Article 1(3).............................................................. 8 

4.2.2.  Option to exclude certain shares – Article 1(4) (b)...................................................... 9 

4.2.3.  Appropriation - Article 4(3) ......................................................................................... 9 

4.3. 

4.4. 

4.5. 

5. 

Right of-use - Article 5 .............................................................................................. 10 

Recognition of Close-out Netting Provisions – Article 7 .......................................... 10 

Conflicts of law – Article 9........................................................................................ 11 

Conclusions ................................................................................................................ 11 

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1. 

INTRODUCTION 

The Financial Collateral Arrangements  Directive  2002/47/EC (hereafter only "FCD" or "the 
Directive")  creates  a  uniform  EU  legal  framework  for  the  (cross-border)  use  of  financial 
collateral  and  thus  abolishes  most  of  the  formal  requirements  traditionally  imposed  on 
collateral arrangements. Financial collateral are assets provided by a borrower to a lender to 
minimise the risk of financial loss to the lender in the event of the borrower defaulting on its 
financial obligations to the lender. Collateral is increasingly used in all types of transactions, 
including  capital  markets,  bank  treasury  and  funding,  payment  and  clearing  systems  and 
general bank lending. The collateral provided is most often in the form of cash or securities. 

The  objective  of  the  Directive  was  to  achieve  a  greater  integration  and  cost-efficiency  of 
European financial markets by simplifying the collateral process, improving legal certainty in 
the  use  of  collateral  and  reducing  risks  for  market  participants.  Prior  to  the  Directive,  only 
collateral  provided  to  a  central  bank  or  in  combination  with  participation  in  a  designated 
system enjoyed protection under Article 9 (1) Settlement Finality Directive (SFD)1. A more 
comprehensive approach in the form of the FCD became necessary because divergent national 
rules  applied  to  the  use  of  collateral  were  frequently  impractical  and  often  not  transparent, 
resulting  in  uncertainty  as  to  the  effectiveness  of  collateral  as  a  means  of  protecting  cross-
border transactions.  

Article 10 of the Directive provides that  

"Not later than 27  December  2006,  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." 

This  report  assesses  FCD's  implementation,  its  impact,  and  whether  the  Directive  needs 
amendment2.  

2. 

METHOD AND SCOPE OF THE EVALUATION  

To  prepare  this  report,  the  Commission  asked  the  Member  States,  the  ECB,  and  the  EEA 
States at the beginning of 2006 to reply to a questionnaire regarding the implementation and 
application of the FCD. A less extensive questionnaire was also created for the private sector. 
All  Member  States,  apart  from  Spain,  have  replied.  Also  one  EEA  State  –Norway-  has 
replied.  The  Commission  has  received  27  replies  directly  from  a  broad  spectrum  of  key 
financial  market  players  and  organisations,  including  the  ECB.  Some  Member  States  have 
also annexed replies from the private sector to their own replies. Consequently, this evaluation 
draws on that extensive material. Since that material has been made public, the report does not 
repeat its content unless required. The questionnaires and the replies are published on the DG 

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2 

Dir.  98/26/EC  on  Settlement  finality  in  payment  and  securities  settlement  systems,  OJ  L  166, 
11.06.1998, p.45-50 
This report refrains from commenting on the negotiations for a UNIDROIT Convention on substantive 
rules regarding intermediated securities 

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MARKT Web-site3. Further information about the evaluation procedure is included in annex 
1.  

Given  the  short  history  of  the  FCD,  it  would  be  premature  to  draw  any  conclusions  on  the 
impact of the Directive. Consequently, this report focuses on implementation-related matters 
and short-term results.  

3. 

IMPLEMENTATION AND IMPACT OF THE DIRECTIVE 

The FCD was adopted on 6 June 2002 and implemented by most Member States in the course 
of  2004;  only  two  Member  States4  have  met  the  implementation  deadline  of  27  December 
2003, while nine Member States did not implement the Directive until 2005. Among the EEA 
countries,  Iceland  and  Norway  have  implementing  legislation.  The  Commission  considers 
that,  overall,  Member  States  have  adequately  implemented  the  FCD  and  this  has  also  been 
testified by various contributions from the industry. 

3.1. 

Relevance of the Directive 

The  EU  repo  market,  one  of  the  largest  financial  markets  in  the  world,  has  been  growing 
rapidly  during  the  latest  years  with  a  total  value  of  €  5.883  billion  euro  in  December  2005, 
compared to € 3,788 billion euro in December 2003 and € 1,863 billion euro in June 20015. 
Furthermore, according to Eurosystem6 data, collateral in use in Eurosystem credit operations 
has increased by approximately 33%, from € 650 billion to € 866 billion euro between 2002 
and 2005.  

There is also a growing trend that a counterparty to the Eurosystem in a given Member State 
of the euro area uses collateral originating from another Member State of the euro area. At the 
end of 2005 almost 50% of Eurosystem collateral was used on a cross-border basis, compared 
with only 12% in 1999. This is illustrated in the following chart7. 

3 
4 
5 
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http://europa.eu.int/comm/internal_market/financial-markets/collateral/index_en.htm 
Austria and the UK 
The International Capital Market Association (ICMA) European repo market survey, March 2006. 
I.e. arrangement whereby the ECB and the National Central Banks that have adopted the euro carry out 
the tasks of the European System of Central Banks within the Euro area. 
ECB Monthly Bulletin, May 2006: The Single list in the collateral framework of the Euro system, p. 78 

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Chart 1: Domestic versus cross-border use of collateral 

100%

80%

60%

40%

20%

0%

Cross-
border

Domestic

1999 2000 2001 2002 2003 2004 2005

These  figures  illustrate  that  the  Directive  has  not  been  received  in  a  vacuum,  but  is  of 
significant relevance for today's financial sector. 

3.2. 

Effectiveness 

It  is  too  early  to  fully  assess  whether  the  Directive  has  led  to  greater  integration  and  cost-
efficiency  of  European  financial  markets.  However,  in  general,  respondents8  agree  that  the 
FCD has made it easier to use financial collateral in the European financial market and that it 
has simplified and made considerably more efficient the procedures for doing so. 

The FCD has reduced the legal and administrative burdens of taking and enforcing collateral. 
It  has  simplified  the  procedures  for  the  creation,  perfection,  validity  and  enforceability  of 
financial  collateral  by  providing  that  the  only  formal  requirement  for  its  provision  is  that  it 
must be evidenced in writing or in a legally equivalent manner. It has also improved the legal 
certainty  in  respect  of  certain  techniques  used  in  collateral  transactions.  The  FCD  helps 
market participants, to better manage legal risk, thus contributing to reducing capital charges 
under Basel II.  

European  collateral  programs  have  mushroomed over  the  last  few  years:  for  example,  since 
December 2002, ABN AMRO reports a 240 % increase in the number of financial collateral 
arrangements  with  EU  counterparties  with  a  similar  increase  in  the  use  of  EU  denominated 
assets as collateral9. ABN AMRO considers that (the expected arrival of) the FCD facilitated 
the  conclusion  of  those  agreements  and  this  opinion  is  shared  by  others  as  well10.  The 
Commission subscribes to this opinion. 

3.3. 

Efficiency 

Market  participants  have  incurred  minor  costs  in  changing  their  information  systems,  but  - 
more  importantly  -  the  FCD  has  reduced  the  legal  and  administrative  costs  of  taking  and 

8 

9 
10 

See,  for  instance,  the  replies  from  ISDA  (International  Swaps  and  Derivatives  Association),  EFMLG 
(European Markets Lawyers Group) and ESBG (European Savings Banks Group) 
ABN AMRO Response to Question 5. 
Zentraler Kreditausschuss, Response to Question 3. 

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enforcing  collateral  by  simplifying  the  aforementioned  procedures  relating  to  financial 
collateral and has resulted in collateral opinions being subject to fewer qualifications11. 

4. 

KEY ISSUES  

This Chapter deals with the seven key issues identified in the evaluation exercise. Firstly, it 
considers the question whether additional types of assets used in the financial markets, such as 
credit  claims,  should  enjoy  the  protection  of  the  FCD.  It  then  assesses  the  three  opt-out 
provisions, the right of re-use, the call for an enhanced legal regime for close-out netting, and 
finally the conflict-of-laws rule.  

4.1.  Material Scope of the Directive – Credit claims 

4.1.1.  New types of collateral  

Three  Member  States  -  the  Czech  Republic,  France  and  Sweden  -  include  specific  kinds  of 
receivables,  such  as  credit  or  other  claims,  in  the  list  of  assets  that  may  serve  as  collateral 
under the Directive. They have thus widened the Directive's material scope of application in 
their  jurisdictions.  The  Czech  Republic  has  included  credit  claims  in  the  national 
transposition.  France  includes  also  claims  and  different  forms  of  rights,  provided  they  are 
assignable. Sweden has included money loans in the national transposition. Credit claims are 
also collateralisable in certain other Member States subject to legal conditions. 

In the last few years new types of assets have also become important for collateral operations 
for  financial  market  or  central  bank  purposes.  In  particular,  the  ECB  Governing  Council 
decided  in  2004  to  introduce  credit  claims  as  an  eligible  type  of  collateral  for  Eurosystem 
credit  operations  as  of  1  January  2007.  Consequently,  the  question  has  been  raised  whether 
credit claims for central bank purposes, should enjoy protection under the FCD. 

4.1.2.  Eligibility criteria  

In July 2005, the ECB published the specific eligibility criteria that will apply to those credit 
claims12, which include, inter alia, the following: the place of establishment of the debtor (or 
alternatively the guarantor) is restricted to a euro area member country. The loan agreement 
must be governed by the laws of a euro area member country. The range of eligible debtors is 
restricted to non-financial corporations and public sector entities.  

Thus, as of 1 January 2007, certain credit claims will be eligible as collateral across the euro 
area for the first time. The total actual use of credit claims in all participating Member States 
combined is currently difficult to estimate. Nonetheless, the ECB indicated that for instance 
claims  of  up  to  €  800  billion  euro  extended  to  the  general  government  sector  alone  are 
expected  to  be  eligible  and  could  be  used  by  counterparties  in  the  Eurosystem  credit 
operations.  

11 
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City of London Law Society Financial Law Committee, Response to Question 3. 
For  further  information  please  see  the  ECB  publication  entitled:  “The  implementation  of  monetary 
policy  in  the  Euro  area:  General  documentation  on  Eurosystem  monetary  policy  instruments  and 
procedures”, publication date: 15 September 2006. 

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4.1.3.  Economic rationale for extending eligible collateral to credit claims 

The increased use of collateral is a positive development, since it enables investors to access 
funds and credit institutions to provide lending more efficiently. Extending the FCD's scope 
of eligible collateral to credit claims would further contribute to a level playing field among 
credit  institutions  in  all  Member  States  and  would  stimulate  the  cross-border  use  of  this 
instrument  as  collateral.  If  the  use  of  credit  claims  as  collateral  would  be  facilitated, 
consumers/debtors would also benefit as the use of credit claims as collateral could ultimately 
lead to more intensive competition and better availability of credits. 

As  a  result  of  credit  claims  currently  not  being  eligible  collateral,  a  significant  amount  of 
capital in the form of credit claims lies immobilised in the balance sheets of credit institutions 
in  Europe.  According  to  the  estimate  of  the  ECB  this  amount  exceeds  50  %  of  the  balance 
sheet of credit institutions in the euro area. Extending eligible collateral to credit claims would 
make it possible to mobilise this sizeable capital, thereby putting it to more efficient use in the 
European economy. It would also place European credit institutions at a more equal footing 
with  international  competitors  such  as  from  the  U.S.,  where  credit  claims  traditionally 
represent  a  much  smaller  part  of  the  balance  sheet.  The  different  level  of  securitization  is 
illustrated in the chart below. 

Chart 2: Securitization issuance 

Having a uniform legal framework enhancing the usability of credit claims as collateral would 
also be beneficial for financial market transactions as it would increase the availability of new 
asset  types,  for  instance  in  respect  of  secured  credit  operations.  Furthermore,  extending 
eligible  collateral  to  credit  claims  could  provide  a  useful  complement  to  securitisation. 
Securitisation is an important and valuable instrument, providing investors with another type 
of  lending  instrument  and  enabling  banks  to  raise  funds  more  easily.  Nevertheless,  it  also 
exposes participants to the volatility of the capital markets. Facilitating the usage of collateral 
by extending eligible collateral to credit claims would consequently make it a complement to 
securitisation  for  those  credit  institutions  that  are  not  prepared  to  raise  funds  in  the  capital 
markets. 

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Currently,  there  are  differences  in  the  EU  Member  States  as  regards  the  formalities  and 
techniques available to collateralise credit claims as was the case in relation to securities and 
cash before the advent of the FCD. Extending the scope of the FCD to credit claims  would 
provide a level playing field to all market participants across the EU. 

Finally, making credit claims part of eligible collateral in all Member States may contribute to 
increasing the availability of highly liquid collateral for financial transactions. Credit claims 
used  as  eligible  collateral  for  the  ECB  would  permit  credit  institutions  to  use  highly  liquid 
assets such as government securities that are currently held with the Eurosystem for other uses 
in the European economy.  

In view of the above, the Commission concludes that an amendment of the FCD to include 
credit claims would maximise the economic impact of the ECB Governing Council’s decision 
and be beneficial for financial market participants.  

4.1.4.  Legal issues relating to use of credit claims as collateral  

In  addition  to  Eurosystem  eligibility  requirements,  some  further  legal  issues  need  to  be 
addressed  in  order  to  ensure  that  the  Eurosystem  is  able  to  establish  a  legally  valid  and 
enforceable security interest in credit claims. Such issues relate, for example, to whether the 
debtor  must  be  notified  of  the  collateralisation  of  his  credit  claims,  to  banking  secrecy 
concerning  debtor  information,  and  to  the  elimination  of  potential  restrictions  regarding  the 
mobilisation  and  realisation  of  the  loans.  As  there  is  no  uniform  EU-wide  legal  framework 
regarding credit claims and their use as collateral, these issues are not treated uniformly in the 
different national jurisdictions.  

The  obvious  way  to  deal  with  some  of  these  concerns  would  be  to  extend  the  scope  of  the 
FCD. The Eurosystem is currently exploring the technical issues relating to the use of credit 
claims  as  collateral.  Depending  on  the  progress  of  this  work,  the  Commission  will  consider 
proposing amendments in the course of 2007. 

4.2. 

Opt-out provisions 

4.2.1.  Personal scope of the Directive - Article 1(3) 

During  the  negotiation  of  the  Directive  (as  well  as  in  the  implementation  phase),  much 
attention was paid to the question who should benefit from the protection of the Directive, as 
special  treatment  for  collateral  arrangements  could  be  seen  to  be  contrary  to  the  general 
principle  of  equal  treatment  of  creditors  within  insolvency  proceedings.  Article  1(3)  FCD 
gives  the  Member  States  an  option  to  exclude  arrangements  where  one  of  the  parties  is  a 
person mentioned in Article 1(2) (e). 

Several Member States considered the possibility of applying the full opt out, but ultimately 
only  Austria  decided  to  do  so.  Only  five  Member  States  have  applied  a  partial  opt-out:  the 
Czech  Republic,  Slovenia,  Sweden,  France  and  Germany.  In  the  Czech  Republic  the 
implementing legislation applies the opt-out only to undertakings of a certain size in terms of 
any  two  of  the  following  three  criteria:  assets,  turnover  and  capital.  In  Slovenia,  the 
implementing legislation excludes those legal entities that are not defined as 'large companies' 
under  the  law  on  commercial  companies,  such  as  small  and  medium-sized  undertakings, 
associations and certain civil law legal entities. Swedish legislation limits the possibility to re-
pledge assets to financial agents. France has exercised a partial opt-out for transactions under 

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the  special  regime  that  excludes  essentially  ordinary  companies.  The  German  transposition 
includes  transactions  between  two  corporate  entities,  which  are  defined  as  undertakings 
excluding natural persons, single merchants and partnerships. However, if the collateral giver 
is  an  undertaking,  only  financial  collateral  used  to  secure  specifically  defined  financial 
obligations is covered, thus excluding mainly long-term cash loans involving undertakings. 

Ten  Member  States  (Belgium,  Denmark,  Estonia,  Finland,  France,  Germany,  Italy, 
Luxembourg,  Spain  and  UK)  have  widened  its  personal  scope  of  application  to  cover  also 
entities not mentioned by the Directive.  

Some  energy  industry  representatives  (e.g.  the  European  Federation  of  Energy  Traders 
(EFET) want to expand the FCD to cover also non-regulated entities, such as energy trading 
companies,  in  a  way  that  arrangements  between  such  entities  (including  close  out  netting 
provisions  agreed  within  such  arrangements)  would  also  be  protected.  The  Commission  has 
considered this suggestion, but believes that such an extension would fall outside the intended 
scope of the Directive, which is anchored on the protection of arrangements at least one of the 
parties to which is a public sector body, central bank or financial institution. 

4.2.2.  Option to exclude certain shares – Article 1(4) (b) 

Article  1(4)  (b)  FCD  gives  Member  States  an  option  to  exclude  from  the  scope  of  the 
Directive financial collateral consisting of collateral providers' own shares, shares in affiliated 
undertakings  within  the  meaning  of  the  Seventh  Council  directive  83/349/EEC  of  13  June 
1983 on consolidated accounts, and shares in undertakings whose exclusive purpose is to own 
means  of  production  that  are  essential  for  the  collateral  provider's  business  or  to  own  real 
property. 

Only one Member State - Denmark - has applied a full opt-out pursuant to Article 1(4) (b). A 
partial  opt-out  for  specified  types  of  assets  is  applied  by  Germany,  Ireland  and  Sweden. 
Germany  does  not  consider  the  collateral  provider's  'own  shares'  as  well  as  the  shares  of 
affiliated  undertakings  within  the  meaning  of  the  Directive  83/349/EEC  to  be  'financial 
collateral'  if  such  collateral  provider  or  affiliated  undertaking  is  a  corporate  or  other  person 
falling  under  Article  1(2)(e)  of  the  Directive.  Ireland  excludes  from  the  scope  of  'financial 
collateral' under the Directive shares in companies whose exclusive purpose is either to own 
means  of  production  that  are  essential  for  the  collateral  provider's  business  or  to  own  real 
property. In Sweden, the opt-out extends only to non-listed shares in affiliated undertakings in 
case of bankruptcy.  

Since there is no noticeable effect on the functioning of the internal market, the Commission 
does not want to re-open the debate at the European level and, consequently, will not present 
any proposals to delete either one of the opt-out provisions. 

4.2.3.  Appropriation - Article 4(3) 

Article 4(3) FCD allows certain Member States to opt out of the right of appropriation for the 
collateral  taker.  Appropriation  essentially  means  that  the  collateral  taker  in  an  enforcement 
event may - under certain conditions - keep the assets as its own property instead of selling 
them. However, no Member State has made use of this option. Consequently, all 25 Member 
States  are  now  recognizing  appropriation  for  the  collateral  taker  in  case  of  an  enforcement 
event. Therefore, at the next revision of the FCD, Article 4(3) could be deleted. 

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4.3. 

Right of-use - Article 5 

Article  5.1  FCD  stipulates  that  the  Member  States  should  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,  if  and  to  the  extent  that  the  terms  of  the  arrangement  so 
provide. A 'right of use' means that the collateral taker has the right to dispose of the collateral 
in  favour  of  a  third  party  by  transferring  ownership  or  by  vesting  a  security  interest.  By 
providing the possibility of granting a general right of disposal to collateral takers, the FCD 
enhances the liquidity of the cash and securities markets. 

For  many  Member  States  the  right  of  re-use  was  a  novelty,  but  now  all  Member  States 
provide in their legal systems that the collateral taker is entitled to exercise a right of re-use if 
(and to the extent) provided for under a collateral arrangement. The establishment of the right 
of  use  under  the  Directive  does  not  seem  to  give  rise  to  any  problems,  but  it  remains  to  be 
seen what experience the market will have with the use of this right. Thus, the Commission 
considers that no further action is needed at present. 

4.4. 

Recognition of Close-out Netting Provisions – Article 7 

Close-out netting is an arrangement commonly used in financial markets to settle all agreed 
but  not  yet  due  liabilities  to,  and  claims  on,  a  counterparty  by  one  single  claim/liability. 
Close-out netting is important for the efficiency of financial markets, as it reduces credit risk 
and  enables  financial  institutions  either  to  reduce  their  regulatory  required  capital  and/or  to 
increase their exposure. As a matter of general insolvency law in some Member States, if a 
party  to  a  transaction  becomes  insolvent  its  claims  against  other  parties  can  no  longer  be 
netted  out.It  is,  however,  crucial  for  market  participants  to  be  able  to  rely  on  a  legally 
protected netting mechanism in the event of insolvency of their counterparty.  

The  FCD  acknowledged  this  by  introducing,  in  Article  7,  the  obligation  that  a  close-out 
netting  provision  can  take  effect  according  to  its  terms,  notwithstanding  the  onset  of 
insolvency or other similar proceedings and events and without regard to certain other matters 
that might otherwise affect close-out netting. For many Member States this was yet another 
novelty, and a not lightly taken step away from the principle of equal treatment of insolvency 
creditors. Today,  the  principle of  close-out netting  is  well established in all Member States, 
but it remains to be seen how these netting provisions are applied in practice.  

There  are  also  suggestions  to  improve  the  coherence  of  EU  legislation  on  netting  and  to 
expand  the  material  scope  beyond  the  collateral  arrangements.  The  Commission  is  open  to 
considering  such  suggestions,  but  as  this  Directive  deals  primarily  with  financial  collateral 
and only peripherally with netting as a method to enforce collateral arrangements, it considers 
an  amendment  of  the  Directive  would  not  be  appropriate  to  improve  the  general  EU 
framework for netting. It would seem better to have a single 'over-arching' set of amendments 
to  several  existing  directives  aimed  at  improving  the  consistency  of  the  acquis.  Besides 
Article 7 FCD, other relevant EU financial instruments that contain provisions on netting (and 
set off) include the SFD (Articles 2(k) and 3), the Winding-up Directive13 (Articles 23 and 25) 
and the Regulation on Insolvency proceedings 1346/2000 (EC) (Article 6). However, further 
reflection is needed to see whether such a solution would be feasible. 

13 

Dir. 2001/24/EC on the reorganisation and winding up of credit institutions, OJ L 125, 05.05.2001, p. 
15 – 23. 

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4.5. 

Conflicts of law – Article 9 

The conflict of laws rule in Article 9 FCD aims to determine which law shall govern certain 
proprietary  aspects  regarding  indirectly  held  securities  involving  a  foreign  element,  -  a 
question  that  may  otherwise  give  rise  to  legal  uncertainty.  Article  9  FCD  reflects  the 
prevailing Community rule on conflicts-of-law, which is also found in Article 9 (2) SFD and 
the Article 24 Winding-up Directive, and which is based on the principle of the location of the 
securities  account.  This  rule  differs  from  the  rule  contained  in  The  Hague  Securities 
Convention  of  2002,  which  allows  parties  to  an  account  agreement  a  certain  degree  of 
freedom to select the applicable law for determining proprietary rights in the securities. These 
rules  are  incompatible  and,  if  the  European  Community  would  decide  to  adopt  the 
Convention, the above three Directives would require being adapted accordingly.  

The question whether or not the Community should sign the Convention is discussed in the 
Council  on  the  basis  of  a  Commission  proposal  of  200314.  In  its  legal  assessment15,  the 
Commission services have reiterated their support for the Hague Securities Convention. This 
evaluation  does  not  seek  to  compare  the  two  legal  regimes  or  to  duplicate  this  discussion. 
What both regimes have in common is that they both seek to achieve legal certainty over the 
applicable  law  for  indirectly  held  securities.  The  Commission  is  of  the  opinion  that  there  is 
not  a  sufficient  level  of  legal  certainty  at  present,  neither  at  the  international  level  nor  at 
Community  level.  Therefore,  also  in  the  event  that  the  Council  would  decide  not  to  go 
forward  with  the  Convention,  Article  9  FCD  (as  well  as  Article  9  SFD  and  Article  24 
Winding-up  Directive)  would  still  have  to  be  amended  to  improve  the  situation  within  the 
Community by specifying the exact criteria for determining the relevant location of account. 
The  example  of  the  two  Member  States  (France  and  Portugal),  that  have  developed  such 
criteria, shows that different interpretations are indeed possible.  

5. 

CONCLUSIONS  

Most  Member  States  transposed  the  FCD  provisions  into  their  laws  after  the  deadline  for 
implementation set by the Directive and nine only in the course of 2005. Market experience 
with the use of the Directive is thus relatively recent and it is thus premature to make a final 
assessment  of  the  impact  of  the  Directive.  Yet,  the  overall  impression  is  that  the  FCD  is 
functioning well and has come at the right moment. By removing the administrative burdens 
and  legal  formalities  that  previously  hampered  collateral  procedures  the  FCD  has  made  the 
taking of financial collateral and the enforcement of collateral obligations simpler and more 
efficient.  

Based on its findings, the Commission would propose the following next steps: 

(1) 

Credit  claims:  The  Commission  will  consider  proposing  amendments  to  extend  the 
FCD depending on the progress made in respect to the technical issues relating to the 
use of credit claims as collateral.  

(2) 

Opt-out provisions on the scope: Maintain the opt-out provisions. 

14 

15 

Proposal for a Council Decision concerning the signing of the Hague Convention on the Law applicable 
to certain rights in respect of securities held with an intermediary, COM (2003) 783, dated 15.12.2003. 
Commission  staff  working  document  "Legal  assessment  of  certain  aspects  of  the  Hague  Securities 
Convention", SEC (2006) 910, dated 3.6.2006. 

EN 

11 

   EN 

 
                                                 
(3) 

Opt-out provision on appropriation: Deletion of Article 4(3) at the next revision of the 
FCD. 

(4) 

Right of use: No further action is needed at present. 

(5) 

(6) 

Netting:  The  Commission  will  further  explore  the  possibility  to  improve  the  general 
EU framework for netting. 

Conflicts-of-law  regime:  Amend  Article  9  FCD  (as  well  as  Article  9  (2)  SFD  and 
Article  24  Winding-up  Directive),  either  as  a  consequence  of  a  Council  Decision  to 
sign the Hague Securities Convention or (in case the latter would not occur) in order to 
specify the exact criteria for determining the location of account. 

- - - - - 

EN 

12 

   EN