CELEX: 51997PC0345
Language: en
Date: 1997-07-04
Title: Amended proposal for a European Parliament and Council Directive on settlement finality and collateral security (to be renamed 'On the limitation of systemic risk in payment and securities settlement systems')

COMMISSION OF THE EUROPEAN COMMUNITIES
                                      Brussels, 04.07.1997
                                      COM(97) 345 final
                                      96/0126 (COD)
                    Amended proposal for a
  EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE
 ON SETTLEMENT FINALITY AND COLLATERAL SECURITY
(TO BE RENAMED: "ON THE LIMITATION OF SYSTEMIC RISK
  IN PAYMENT AND SECURITIES SETTLEMENT SYSTEMS")
  (presented by the Commission pursuant to Article 189 a (2)
                      of the EC-Treaty)
 ---pagebreak---  ---pagebreak---  !,    STAGE REACHED IN THE PROCEDURE
 1. On 30 May 1996, the Commission adopted a proposal for a Directive on Settlement
     finality and Collateral Security.
2. The Council forwarded this text to the Parliament, the Economic and Social Committee
    and the European Monetary Institute, and began to examine the proposal on 20 September
     1996.
3. The Economic and Social Committee unanimously adopted an opinion on the Commission
    proposal on 31 October 1996, in which it recommended that securities settlement systems
    be included in the scope of the proposal.
4 The European Monetary Institute delivered its opinion on 21 November 1996. It welcomed
    the proposal and stressed its crucial importance to the efficient and smooth functioning of
    payment systems; it also recommended that securities settlement systems should be
    included in the scope.
5    The European Parliament welcomed this proposal and adopted the legislative resolution
    embodying iîs opinion on the Commission proposal during its plenary meeting of 9 April
     1997.
6 The amended proposal which is attached herewith has been drafted to take account of the
    outcome of the consultation of these institutions.
2.     C O M M E N T S ON THE AMENDMENTS
The European Parliament proposed 21 amendments to the text of the Commission Proposal.
       1.     Accepted Amendments
               The Commission will include amendments 2, 3, 5, 7, 8, 9, 13, 14, 15, 18, 20 in its
               amended proposal.
               ® Amendments 2 and 3 add a recital. These recitals are useful in view of a better
                   understanding of the background against which this proposal was made.
                  Amendments 5. 7. 8. 9. 14 and 15 can all be accepted, as they aim at bringing
                  securities settlement systems within the scope of this Directive. This inclusion
                  is in line with the recommendations made both by the EMI and by the
                  ECOSOC.
 ---pagebreak---   The European Parliament wishes securities settlement systems to be covered by
  the directive. In order be consistent with that wish, not only should the words
  "or a securities settlement system" be added at the end of Amendment 7. but
  "investment firms as defined in point 2 of Article 1 of Directive 93/22/EEC
  excluding the institutions set out in the list in Article 2(2) points a)-k) thereof 1
  should also be included in the definition of "institution", as securities
  settlement systems typically have investment firms as their participants.
  The Directive covers collateral security provided in connection with monetary
  policy operations. Amendment 13 introduces derivatives within the definition
  of monetary policy operations. Inasfar as central banks carry out operations
  concerning such instruments, they should indeed be included in this Directive.
  As "securities institutions" are not defined in the European Parliament's
  amendments, and as the definition of "institution" in the Commission amended
  proposal also covers "investment firms", which is probably what the European
  Parliament means by "securities institution" in Amendment IS. the
  Commission amended proposal simply refers to "institution" instead of to
  "securities institution". It also replaces "participant" which is defined nowhere,
  with "institution".
  Amendment 18 changes the wording of the original Commission proposal, but
  expresses the same idea and seems therefore acceptable.
  Amendment 20 clarifies the text of paragraph 1. Paragraph 2 of the original
  Commission proposal explicitated a subhypothesis covered by paragraph 1. Its
  deletion can therefore be accepted.
• Furthermore, the Commission could include amendments 1, 4, 10 and 12
  subject to minor modifications.
  In Amendment 1. a new title of the Directive is proposed: "Proposal for a
  European Parliament and Council directive on the treatment of payment
  systems and securities settlement systems in the context of insolvency
  proceedings concerning credit or securities institutions". Although a change in
  title is acceptable, the suggested one implies that the Proposal only aims at
  solving problems relating to insolvency. Therefore, a new title, "Directive on
  the Limitation of Systemic Risk in Payment and Securities Settlement
   Systems", shall be included.
   Amendment 4 is acceptable, except for the mention "and the Euro" besides
   "Ecu". Firstly, the separate mention of "Euro" after the words "operating in any
   currency", suggests the Euro is not a currency. Where it is true that the Ecu is a
   basket and not a currency, this is not true for the Euro. Secondly and more
   importantly, the fact that Ecu and Euro are mentioned in the same legal text,
   suggests that the Ecu and the Euro will co-exist. However, the Ecu will be
   replaced by the Euro, so both will never exist at the same time.
 ---pagebreak---       Amendment 12 aims at including securities settlement systems within the
      Directive. It amends the definition of "third country payment system" by
      deleting the word "payment" so as to read "third country system". However,
      Parliament seems to have overlooked that the definition of "third country
      system" onlr. refers to "payment systems" without mentioning "securities
      seulement systems", which is inconsistent with the Parliaments concern to
      include these securities settlement systems. . The Commission therefore
      completes this amendment -in its amended proposal- in order to include
      securities settlement systems.
   Rejected Amendments
  Amendments 6, 10,11, 16 and 21, and especially 17 and 19 cannot be included in
  tne amended proposal.
 Amendment 6(1) describes in a general way that Member States will have to
 amend their insolvency laws in accordance with this Directive in order to avoid
  disruptions in the case of insolvency of a system participant. Amendment 6 (2)
 contains the obligation for systems to deposit the system agreement with the
 authorities responsible for supervising the institutions which participate in the
 system. Amendment 6 (3) provides for the publication of a notice that an
 agreement has been deposited, that it is open for inspection; it must also indicate
 the participating institutions.
 AUiicugh the idea of a notification procedure expressed in this amendment is in
 line with the current approach taken by the Council, the proposed procedure seems
 unnecessarily cumbersome and bureaucratic. Moreover, in a number of Member
 States, the authority responsible for supervising institutions participating in a
 system is different from the authority which supervises the system, so that the
 authority at which the system agreement should be deposited, should be better
 identified. Therefore, this amendment cannot be included in the amended proposal.
  In Amendment 10. an addition is made to the definition of "payment system". The
  meaning of that addition needs clarifying. It can therefore not be accepted.
 Parliament, in its Amendment 11 , changes the criterion of location (to determine
 whether a system is an EU system covered by the Directive) from the choice of
 lav/ made by the system participants (system located in the Member State the law
of which the system participants have chosen to govern their agreement) to the
place of settlement or book entry. Since the place of settlement can be different
from the place where the correspondent book entry takes place, this amendment
does not seem consistent. Moreover, several book entries can be made for one
same transfer order (e.g. at the clearing house and at the settlement agent), so that
it would be necessary to define which book entry is meant. This amendment can
therefore not be taken up in the Commission amended proposal. However, the text
of the article in the original Commission proposal has been altered in order to take
into account the inclusion of securities settlement systems into the scope of this
Directive,        as      requested      by       the      European        Parliament.
 ---pagebreak--- Article 3 states that netting of transfer orders is enforceable if entered into the
system before the opening of insolvency proceedings. The Commission proposal
stated that the moment of entry into the system was to be determined in the system
agreement. Amendment 16 (1) deletes that statement. The question then arises
when a transfer order can be considered to have entered a system. Parliament does
not provide an answer to that question anywhere, so that this amendment cannot be
included in the Commission's amended proposal. However, the text of the article
in the original Commission proposal has been altered in order to take into account
the inclusion of securities settlement systems into the scope of this Directive, as
requested by the European Parliament.
 Article 3(2) refers to rules on the setting aside of fraudulent contracts which have
 been concludedbefore the opening of insolvency proceedings. The wording in the
 Commission proposal "to enter into a contract" is synonymous of "to conclude a
 contract". It does not refer to the entering cf transfer orders into the system, as
 Parliament's amendment 16(2) stipulates. Moreover, it is unclear what is meant by
 unwinding of "settlement or securities transactions" referred to in the Parliament's
 amendment. This wording seems to imply that it should not be possible to unwind
 payments or securities transactions once they are settled. However, the Directive
 aims at protecting transfer orders against unwinding while they are within the
 system, which is when systemic risk can occur. After settlement, no problem of
 systemic risk exists any more. Therefore, Amendment 16 cannot be included in
 the Commission's amended proposal.
 Amendment 21. which replaces the previous amendment 16 (3). determines the
 moment of opening of insolvency proceedings, which are deemed to be the
 moment when the competent authority notifies the national supervising
 authorities, after which these have to notify the system participants. This
 procedure has been examined in depth in the past (Commission Working Group)
 and has not been retained for reasons of excessive heaviness of the procedure.
 While the Commission proposal contains a prohibition to revoke a transfer order
 after the moment defined by the rules of the system, Parliament's Amendment 17
 prohibits revocation after the moment when insolvency proceedings are opened.
 While the aim of this provision in the Commission's proposal was to protect a
 transfer when it went through the system, which is the situation where systemic
 risk can occur, the provision has a completely different meaning in the
 Parliament's Amendment. It does not seem necessary, to repeat -as it is done in
 Parliament's Amendment- that in case of insolvency, a participants' assets aie
 frozen and that therefore revocation is not possible. Moreover, in Amendment 17.
 the reference to the third party (in particular the client), which was mentioned in
 the Commission proposal, has been deleted. The deletion of the reference to the
 third party (e.g. the client, originator of a transfer order), could mean that -in a
 cross-border system- an institution could be prohibited from revoking its client's
 transfer order once it has entered into a system (under the system agreement or
 under the other Member States' law), whereas the client could validly revoke that
 transfer order as against its institution (under the own Member State's law), \i is
 clear that if this were to happen with a significantly large amount, it could trigger
 systemic risk. Therefore the reference to third parties should be maintained.
 ---pagebreak---   This amendment can therefore not be taken up in the Commission amended
 proposal. However, the text of the article in the original Commission proposal has
 been altered in order to take into account the inclusion of securities settlement
 systems into the scope of this Directive, as requested by the European Parliament.
Amendment 19 aims at deleting Article 6 on the applicable insolvency law in the
event of a participant's insolvency. The deletion of this article runs counter the aim
of this Directive which is to avoid systemic risk, and this for two reasons: a) legal
certainty and b) avoidance of conflicts of law.
a) Legal certainty: In the event insolvency of a system participant, it is essential to
    guarantee legal certainty as to the status of funds or securities in the system.
    The longer there is uncertainty, the longer these funds or securities will be
    unavailable for the other participants in the system. This can erode the liquidity
    base of these participants and hence lead to systemic risk. In order to achieve
    legal certainty, it is vital to know which insolvency law applies in the event of
    the insolvency of a system participant.
b) Avoidance of conflicts of law: It is possible that the insolvency law of one
    Member State conflicts with the contract law of another Member State (as far
    as the exam of the validity of the claim is concerned). Therefore it is essential
    that the insolvency of a system participant be governed by the insolvency law
    of the Member State whose contract law governs the system agreement.
 This amendment can therefore not be taken up in the Commission amended
 proposal. However, the text of the article in the original Commission proposal has
 been altered in order to take into account the inclusion of securities settlement
 systems into the scope of this Directive, as requested by the European Parliament.
 ---pagebreak---                            AMENDED PROPOSAL FOR A EUROPEAN P A R L I A M E N T AND C O U N C I L
       D I R E C T I V E ON THE LIMITATION O F SYSTEMIC R I S K IN P A Y M E N T AND S E C U R I T I E S
       S E T T L E M E N T SYSTEMS
             Original Commission Proposal                        Amended Commission Proposal
                                          (Amendment 1)
                                               Title
  Proposal for a European Parliament and Council       Proposal for a European Parliament and
  Directive on settlement finality and collateral      Council Directive on the Limitation of
  security                                             Systemic Risk in Payment and Securities
                                                       Settlement Systems
                                          (Amendment 2)
                                             Recital 1
\                                                      Whereas laws on the bankruptcy of credit and
                                                       securities institutions have not yet been
                                                       harmonised; whereas a proposal dating back to
                                                       credit institutions (OJ C 356. 31.12.1985. p. 55
                                                       et seq. amended on 8 February 1988) is still
                                                       pending before the Council: whereas the
                                                       agEeemfinl..pf..23 November 1995 of the
                                                       Member States meeting within the Council
                                                       concerning insolvency proceedings explicitly
                                                       exçiufe       insurance    undertakings.          credit
                                                       institutions and investment companies:
                                          (Amendment 3)
                                            Recitai 7a
                                                       Whereas the "Report of the committee on
                                                       interbank netting schemes of the Central Banks
                                                       of the Group of Ten countries" by the Bank for
                                                       International ..Settlements      m      Basle        of
                                                       November        1990. makes the            following
                                                       recommendations, inter alia: "Netting schemes
                                                       should, have a well-founded legal basis under
                                                       all relevant jurisdictions and netting scheme
                                                       participants should have a clear understanding
                                                       of the impact of the particular scheme on each
                                                       of the financial risks affected by the netting
                                                       process":
 ---pagebreak---                                           Amendment 4
                                           Article 1(1)
The provisions of this directive shall apply to:        The provisions of this directive shall apply to:
( 1 ) any Community payment system operating in         (1) any Community payment system or
any currency and the ECU and to collateral             securities settlement system operating in any
security provided in connection with participation     currency, the ECU or in various currencies
in such a system.                                      which the system converts one against another
                                                       and to collateral security provided in
                                                       connection with participation in such a system.
                                          Amendment 5
                                           Article 1(2)
                                                       (2) any Community institution which
(2) any Community institution which participates       participates directly in a third country payment
directly in a third country payment system and to      system or securities settlement system and to
collateral security provided in connection with        collateral security provided in connection with
participation in such a system.                        participation in such a system.
                                        (Amendment 6)
                                            Article la
                                            Rejected
                                         (Amendment 7)
                                            Article 2a
(a) "institution " means any undertaking as defined    (a) "institution" means any undertaking as
in Article 1 of Council Directive 77/780/EEC           defined in Article 1 of Council Directive
including the institutions set out in the list in      77/780/EEC including the institutions set oui
Article 2(2) thereof, which participates directly in   in the list in Article 2(2) thereof, or any
a payment system, and any other undertaking            investment firm as defined in point 2 of Article
which participates directly in a payment system.        1 of Directive 93/22/EEC excluding the
                                                       institutions set out in the list in Article 2(2)
                                                       points aVk) thereof, which participates directly
                                                       in a payment system or a securities settlement
                                                       system, and any other undertaking which
                                                       participates directly in a payment or a
                                                       securities settlement system
 ---pagebreak---                                            (Amendment 8)
                                               Article 2b
  (b) "direct " participation means participation in a (b) "direct" participation means participation
t payment system entailing responsibility for in a payment system or a securities settlement
  settlement.                                              system entailing responsibility for settlement.
                                           (Amendment 9)
                                               Article 2e
  (e) "payment order" means any instruction to             (e) "payment order" means any instruction to
  place at the disposal of a final recipient an amount     place at the disposal of a final recipient an
  of money by means of a book entry on the                 amount of money by means of a book entry on
  accounts of a credit institution or a central bank;      the accounts of a credit institution or a central
                                                           bankr and in the case of securities settlement
                                                           systems, an instruction to an institution to
                                                           transfer the claim to one or more securities by
                                                           means of a book entry in a register or in
                                                           another form:
                                           (Amendment 10)
                                               Article 2h
   (h) "payment system " means any written (h) Unchanged
   agreement between two or more institutions for
   executing payment orders;
                                           (Amendment 11)
                                                Article 2i
   (i) "Community payment system" means a                   (i) "Community payment or securities
   payment system located in a Member State. A              settlement system " means a payment system or
   payment system shall be deemed to be located in          a securities settlement system located in a
   the Member State the law of which has been               Member State. A Community payment or
   chosen by the institutions which participate             securities settlement system shall be deemed to
   directly in that payment system. In the absence of       be located in the Member State the law of
   choice, the payment system shall be deemed to be         which has been chosen by the institutions
   located in the Member State where the settlement        which-participate directly in that system. In the
   takes place;                                            absence of choice, the Community' payment ox
                                                           securities settlement system shall be deemed to
                                                           be located in the Member State where the
                                                           settlement takes place;
 ---pagebreak---                                        (Amendment 12)
                                           Article 2j
(j) "third country payment system" means any (j) "third country system " means any payment
payment system which is not a Community or securities settlement system which is not a
payment system.                                       Community payment or securities settlement
                                                      system.
                                       (Amendment 13)
                                           Article 2k
(k) "monetary policy operation" means an outright     (k) "monetary policy operation" means an
(spot and forward) buying and selling operation in    outright (spot and forward) buying and selling
the financial markets or such an operation under a    operation in the financial markets or such an
repurchase agreement, or lending or borrowing of      operation under a repurchase agreement, or
claims and marketable instruments, whether in         lending or borrowing of claims and marketable
Community or in non-Community currencies or in        instruments, or derivatives from such claims or
precious metals, by a Member State Central Bank       instruments, whether in Community or in non-
or by the future European Central Bank; it also       Community currencies or in precious metals,
means the conduct of credit operations, by a          by a Member State Central Bank or by the
Member State Central Bank or by the future            future European Central Bank; it also means
European Central Bank, with credit institutions or    the conduct of credit operations, by a Member
other market participants, with lending being         State Central Bank or by the future European
based on adequate collateral;                         Central Bank, with credit institutions or other
                                                      market participants, with lending being based
                                                      on adequate collateral;
                                       (Amendment 14)
                                           Article 21
(1) "collateral security" means all assets, provided  (1) "collateral security" means all assets.
for the purpose of securing rights and obligations    provided for the purpose of securing rights and
potentially arising in a payment system or            obligations potentially arising in a payment
provided to Member State Central Banks or to the      system or a securities settlement system or
future European Central Bank in connection with       provided to Member State Central Banks or to
monetary policy operations.                           the future European Central Bank in
                                                      connection with monetary policy operations.
 ---pagebreak---                                       (Amendment 15)
                                         Article 2(la)
                                                     (lal "securities settlement system" means a
                                                     written agreement between institutions with
                                                      rules for the transmission and execution ol
                                                     securities      transactions    between       these
                                                     institutions.
                                   (Amendments 16 and 21)
                                          Article 3
(1) Payment netting is legally enforceable and       (1) Netting is legally enforceable and shall,
shall, even in the event of insolvency proceedings    even in the event of insolvency proceedings
against any institution which participates directly  against any institution which participates
in a payment system, be binding on third parties,    directly in a payment or securities settlement
provided that the payment order was entered into      system, be binding on third parties, provided
the payment system before the opening of             that the order was entered into the payment or
insolvency proceedings. The moment of entrance        securities settlement system before the opening
shall be defined by the rules of that payment         of insolvency proceedings. The moment of
system.                                              entrance shall be defined by the rules of that
                                                     payment or securities settlement system.
(2) Any rule on the setting aside of contracts and (2) Unchanged
transactions entered into before the opening of
insolvency proceedings, shall not lead to the
unwinding of the netting.
                                                      (2a) Rejected
                                      (Amendment 17)
                                          Article 4
(1) A payment order may not be revoked either by      (1) A payment order or an order for a securities
an institution which participates directly in a       transaction may not be revoked either by an
payment system or a third party as against the        institution, which participates directly in a
other direct participants in that payment system      payment or a securities settlement system, or
after the moment defined by the rules of that         by a third party as against the other institutions
payment system. This rule applies notwithstanding     directly participating in that system after the
the opening of insolvency proceedings.                moment defined by the rules of that system.
                                                      This rule applies notwithstanding the opening
                                                      of insolvency proceedings.
                                                                                               10
 ---pagebreak---                                          (Amendment 13)
                                              Article 5
insolvency proceedings shall not have retroactive       Insolvency proceedings shall not have
effects on the rights and obligations of an             retroactive effects on the rights and obligations
institution in connection with direct participation     of an institution in connection with direct
in a Community payment system. Any other rule           participation in a Community payment or
or practice which has a retroactive effect shall be     securities settlement system. Rules which have
.superseded.                                            a retroactive effect shall not apply to
                                                        institutions     involved    in       insolvency
                                                        proceedings-
                                         (Amendment 19)
                                              Article 6
 In the event of insolvency proceedings against an       In the event of insolvency proceedings against
 institution which participates directly in a payment   an institution which participates directly in a
 system, the rights and obligations arising from or      payment system or a securities settlement
 in connection with direct participation in that         system, the rights and obligations arising from
 payment system, shall be determined by the              or in connection with direct participation in
 insolvency law of the country where the payment         that system, shall be determined by the
 system is located.                                      insolvency law of the country where the system
                                                         is located.
                                                                                                  11
 ---pagebreak---                                         (Amendment 20)
                                             Article 7
       lie rights of a pledgee in connection with
                    participant to one or more other
               in a payment system QL the rights of     an institution or of a settlement agent to
  monetary authorities to whom collateral security      collateral security provided to it in connection
  has been pledged in connection with monetary          with the system and
  policy operations, shall not be affected by the
  opening of insolvency proceedings against the         monetary authorities of the EC to collateral
  pledger. The collateral security shall be realised    security provided to them in connection with
  for the satisfaction of rights in connection with     monetary policy operations
  participation in a payment system or with
                                                        shall not be affected by insolvency proceedings
  monetary policy operations with priority over all
                                                        against the institution which provided the
  other creditors.
                                                        collateral security. Such collateral security may
                                                        be realised for the satisfaction of these rights.
  Where a third-country institution constitutes
F
  collateral security in a Member State in
  connection with participation in a Community
  payment system or in connection with monetary
  policy operations, the rights of the pledgee shall
  not be affected by the opening of insolvency
  proceedings against that third-country institution.
                                          Articles 8 to 10
                                            Unchanged.
                                                                                                    12
 ---pagebreak---  ---pagebreak---                                                                   ISSN 0254-1475
                                                           COM(97) 345 final
                                             DOCUMENTS
EN                                                                09   10 08
                                    Catalogue number : CB-CO-97-335-EN-C
                                                             ISBN 92-78-21938-X
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