Opinion of the European Central Bank of 24 February 2011 on amendments to the legislation on settlement finality and on financial collateral arrangements (CON/2011/14)
Date: 2011-02-24
Institutions: European Central Bank
Subjects: Lithuania, financial institution, financial stability, guarantee, money, national law, payment system

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 February 2011 

on amendments to the legislation on settlement finality and on financial collateral arrangements 

(CON/2011/14) 

Introduction and legal basis 

On 11 January 2011, the European Central Bank (ECB) received a request from the Lithuanian Ministry 

of  Finance  for  an  opinion  on  a  draft  law  amending  the  Law  on  settlement  finality  in  payment  and 

securities settlement systems (hereinafter the ‘draft law on settlement finality’) and a draft law amending 

the  Law  on  financial  collateral  arrangements  (hereinafter  the  ‘draft  law  on  financial  collateral 

arrangements’) (both draft laws hereinafter the ‘draft laws’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning  of  the  European  Union  and  the  second,  fifth  and  sixth  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  legislative  provisions1,  as  the  draft  law  contains  provisions  on  means  of 

payment, payment and settlement systems, as well as rules applicable to financial institutions insofar as 

they  materially  influence  the  stability  of  financial  institutions  and  markets.  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 laws 

1.1  The  main  objective  of  the  draft  laws  is  to  transpose  Directive  2009/44/EC  of  the  European 

Parliament and of the Council of 6 May 2009 amending Directive 98/26/EC on settlement finality 

in  payment  and  securities  settlement  systems  and  Directive  2002/47/EC  on  financial  collateral 
arrangements as regards linked systems and credit claims2. 

1.2 

In addition to transposing Directive 2009/44/EC, the draft law on settlement finality provides for 

two  new  types  of  ‘institutions’  which  participate  in  a  system  and  are  responsible  for  performing 

obligations according to transfer orders or payment instructions: (a) payment institutions licensed 

in  Lithuania  or  in  another  Member  State;  and  (b)  electronic  money  institutions  licensed  in 

Lithuania or in another Member State. 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
OJ L 146, 10.6.2009, p. 37. 

 
 
 
 
                                                 
1.3 

In addition to transposing Directive 2009/44/EC, the draft law on financial collateral arrangements 

provides a legal basis for close-out netting arrangements, including their exemption from the scope 

of  application  of  the  general  rules  of  Lithuanian  insolvency  law.  As  noted  in  the  consulting 

authority’s  consultation  letter,  this  should,  inter  alia,  mitigate  the  systemic  risks  inherent  in  the 

operation  of  payment  systems  that  are  subject  to  the  netting  of  payments  by  minimising  the 

disruption to a system caused by insolvency proceedings against any of its participants. 

2.   New system participants: electronic money institutions and payment institutions 

2.1  The draft law on settlement finality does not contain a definition of the term ‘payment institutions’. 

The ECB nevertheless understands that, under Lithuanian law, a payment institution is considered 

to be a ‘financial institution’, but not a ‘credit institution’ since it cannot accept deposits or other 
repayable funds from non-professional market participants3.  

2.2  The  ECB  understands  that  the  term  ‘electronic  money  institutions’,  as  used  in  the  draft  law  on 

settlement  finality,  is  intended  to  have  the  same  meaning  as  the  one  attributed  to  it  by  Directive 

2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking 

up,  pursuit  and  prudential  supervision  of  the  business  of  electronic  money  institutions  amending 
Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC4. On a more general 

note, the ECB stresses that Directive  2009/110/EC should be properly transposed in Lithuania to 

ensure the appropriate regulation and supervision of electronic money institutions. 

2.3  The definition of ‘participant’, for the purposes of Directive 98/26/EC, encompasses ‘institutions’ 

(whether credit institutions, investment firms or public authorities that participate in a system and 

are  responsible  for  discharging  financial  obligations  arising  from  transfer  orders  within  that 
system),  ‘central  counterparties’,  ‘settlement  agents’,  ‘clearing  houses’  or  ‘system  operators’5. 
Neither payment institutions nor electronic money institutions6 qualify as ‘credit institutions’, nor 

as other entities falling within the definition of an ‘institution’ under Directive 98/26/EC. It follows 

that,  for  the  purposes  of  the  draft  law  on  settlement  finality,  neither  payment  institutions  nor 

electronic  money  institutions,  subject  to  further  clarification  as  to  the  meaning  of  the  term 

‘electronic  money  institutions’,  would  be  eligible  to  participate  as  ‘institutions’  in  a  Lithuanian 

‘system’, designated under the draft law on settlement finality. However, they could participate in 

such  designated  Lithuanian  ‘system’  in  other  capacities,  which  are  eligible  for  participation  in 

designated systems, for instance, as operators of payment systems, if they fulfil the respective legal 

and technical requirements.  

2.4 

In order to avoid any risk of confusion, the draft law on settlement finality should make clear that 

payment institutions and electronic money institutions should fulfil the conditions referred to above 

3  
4  
5  
6  

Article 4(5) of the Law on payment institutions (Valstybės žinios, 2009, No 153-6887). 
OJ L 267, 10.10.2009, p. 7; see recital 16. 
Directive 98/26/EC, Article 2.  
See, e.g., Recital 25, Articles 6(2) and 20(1) of Directive 2009/110/EC. 

2 

 
                                                 
so as to qualify as participants in a designated Lithuanian ‘system’. Consequently, the consulting 

authority is invited to review the definition of the term ‘institution’, both in the interests of legal 

certainty and in order to remove the uncertainty surrounding the eligibility of payment institutions 

and electronic money institutions for participation in a designated Lithuanian ‘system’. 

3. 

Use of credit claims as financial collateral in Lietuvos bankas’s credit operations  

The  ECB  understands  that  Lietuvos  bankas  may,  in  the  future,  allow  the  use  of  credit  claims  as  a  new 

type of eligible financial collateral in Lietuvos bankas’s credit operations, including as collateral for the 

provision  of  intraday  credit  in  TARGET2.  The  ECB  expects  to  be  consulted  by  the  relevant  national 

authorities should any such proposal result in draft legislative provisions amending Lithuania’s monetary 

policy legal framework. 

4. 

Legal basis for netting and close-out netting provisions 

4.1  The  ability  to  close  out  on  a  counterparty’s  insolvency  is  of  critical  importance  in  the  financial 

markets.  The  issue  of  the  enforceability  of  close-out  netting  is,  therefore,  not  restricted  to 

individual financial collateral arrangements, but is relevant to all kinds of arrangements aimed at 

reducing credit risk and exposure. 

4.2  The  ECB  welcomes  the  netting  and  close-out  netting  provisions  of  the  draft  law  on  financial 

collateral  arrangements,  especially  as  regards  their  exemption  from  the  scope  of  application  of 

general  rules  of  national  insolvency  law.  The  ECB  nevertheless  underlines  that  the  draft  law  on 

financial collateral arrangements should in no way prioritise financial collateral arrangements that 

include netting and close-out netting provisions over financial collateral arrangements that do not.  

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

Done at Frankfurt am Main, 24 February 2011. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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