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Settlement finality in payment and securities settlement systems
The Directive aims to reduce the systemic risk associated with participation in payment and securities settlement systems ("systems"), and in particular the risk linked to the insolvency of a participant in such a system. To this end, it lays down common rules stipulating that:
- transfer orders and netting must be legally enforceable;
- transfer orders may not be revoked once they have been entered into the system;
- the insolvency of a participant may not have retroactive effects;
- the insolvency law applicable is the law of the Member State whose system is involved.
It further stipulates that collateral security provided to a system by a participant may not be affected by the opening of insolvency proceedings against that participant. In this way, the Directive contributes to the efficient and cost-effective operation of cross-border payment and securities settlement arrangements, thereby reinforcing the freedom of movement of capital and the freedom to provide services within the internal market.
The institutions covered are:
- credit institutions;
- investment firms;
- public authorities;
- any undertaking whose head office is outside the Community and whose functions correspond to those of Community credit institutions or investment firms.
Transfer and payment orders
Transfer orders and netting are legally enforceable and binding on third parties, even in the event of insolvency proceedings against a participant, provided that transfer orders were entered into a system before the moment of opening of such insolvency proceedings.
Where, exceptionally, transfer orders are entered into a system after the moment of opening of insolvency proceedings and are carried out on the day of opening of such proceedings, they are binding on third parties only if the settlement agent, the central counterparty or the clearing house can prove that they were not aware, nor should have been aware, of the opening of such proceedings.
The moment of entry of a transfer order into a system is defined by the rules of that system.
A payment order may not be revoked by a direct participant or by a third party as from the moment defined by the rules of the system.
Where the judicial or administrative authority launches insolvency proceedings, they inform the competent authority in the Member State concerned who will then inform the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA).
Insolvency proceedings may not have retroactive effects.
A Member State whose competent judicial or administrative authority has taken a decision regarding the insolvency of a participant in a system must immediately notify the other Member States concerned.
In the event of insolvency proceedings being opened against a participant in a system, the rights and obligations in connection with that participation are determined by the law governing the system in question.
As regards the effects of insolvency on collateral security, the Directive lays down that the rights of a participant in a system, as well as the rights of the central banks of the Member States and of the future European Central Bank, to collateral security provided to them may not be affected by insolvency proceedings against the institution which provided the collateral security.
Where collateral security is provided in the form of securities (including rights in securities), the rights of the relevant participants and of the central banks of the Member States and of the future European Central Bank are determined by the legislation of the Member State where their rights are registered.
Member States must determine the systems and the systems’ operators respectively who come under the scope of this Directive. They then notify ESMA who will publish the information on their website.
Member States must inform the Commission which systems are included in the scope of the Directive. The systems, for their part, must indicate to the Member State whose law is applicable the participants in the system as well as any possible change in the composition of the system. Member States may also impose supervision or authorisation requirements. Furthermore, any person with a legitimate interest may require an institution to inform him of the systems in which it participates and the rules governing their functioning.
The competent authorities cooperate with ESMA and provide it with all the information required for it to be able to achieve its objectives.
|Act||Entry into force||Deadline for transposition in the Member States||Official Journal|
OJ L 166 of 11.6.1998
|Amending act(s)||Entry into force||Deadline for transposition in the Member States||Official Journal|
OJ L 146 of 10.6.2009
OJ L 331 of 15.12.2010
Successive amendments and corrections to Directive 98/26/EC have been incorporated in the basic text. This consolidated version is for reference purpose only.