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Financial collateral arrangements

This Directive introduces a Community framework to reduce credit exposure in financial collateral arrangements. These common rules contribute to the effectiveness and integration of European financial markets, reducing credit losses and thereby stimulating cross-border transactions and competitiveness.

ACT

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements [See amending act(s)].

SUMMARY

This Directive introduces a Community framework for financial collateral. It concerns financial institutions and insolvency proceedings. The financial collateral is made up of:

  • cash;
  • financial instruments;
  • credit claims *.

Bodies concerned

Member States are required to repeal certain national rules in order to improve the legal clarity of collateral arrangements *. However, this Directive does not apply to certain aspects of civil law such as restitution arising from mistake, error or lack of legal capacity. It applies to specific categories such as:

  • public authorities;
  • public sector bodies;
  • a central bank;
  • a financial institution subject to prudential supervision.

This Directive does not prejudice the operation and effect of the contractual terms of financial instruments or credit claims provided as financial collateral. Moreover, the Directive does not affect the rights of Member States to impose rules aimed at ensuring the enforceability of financial collateral contracts on third parties with regard to private claims.

A more secure legal framework for financial collateral

The Directive provides for rapid and non-formalistic enforcement procedures designed in part to limit contagion effects in the event of default by one of the parties to the arrangement. Member States may not make the creation, perfection, validity, enforceability or admissibility of a financial collateral arrangement dependent on the performance of any formal act. In addition, Member States must ensure that the collateral taker is able to realise financial collateral in one of the following manners:

  • if it concerns financial instruments by sale or appropriation and by setting off their value against, or applying their value in discharge of, the relevant financial obligations;
  • if it concerns cash by setting off the amount against or applying it in discharge of the relevant financial obligations;
  • if it concerns a credit claim by sale or appropriation and by setting off their value against, or applying their value in discharge of, the relevant financial obligations.

Appropriation is possible only if this has been agreed in the arrangement. Member States are responsible for ensuring the right of use of financial collateral and for ensuring that a financial collateral arrangement can take effect in accordance with its terms. Member States must recognise the applicable close-out netting provisions, even if the collateral taker or provider is subject to winding-up proceedings or reorganisation measures. Equally, the application of close-out netting provisions may not be blocked by any purported assignment, judicial or other attachment, or other disposition of or in respect of such rights.

The Directive also stipulates that certain insolvency provisions do not apply. Financial collateral arrangements may not be declared invalid or void or be reversed on the sole basis that they have been concluded or that the financial collateral has been provided:

  • on the day of the commencement of winding-up proceedings or reorganisation measures, but prior to the order or decree making that commencement;
  • in a prescribed period prior to, and defined by reference to, the commencement of such proceedings or measures or by reference to the making of any order or decree.

The Directive also lays down provisions applicable in the event of a conflict of laws.

Key terms used in the act
  • Financial collateral arrangement: a collateral arrangement in the form of cash or financial instruments, i.e. a title transfer of ownership or a security financial collateral arrangement.
  • Credit claims: pecuniary claims arising out of an agreement whereby a credit institution grants credit in the form of a loan.

REFERENCES

ActEntry into forceDeadline for transposition in the Member StatesOfficial Journal

Directive 2002/47/EC

27.6.2002

27.12.2003

OJ L 168 of 27.06.2002

Amending act(s)Entry into forceDeadline for transposition in the Member StatesOfficial Journal

Directive 2009/44/EC

30.6.2009

30.12.2010

OJ L 146 of 10.6.2009

RELATED ACTS

Evaluation Report from the Commission to the European Parliament and the Council of 20 December 2006 on the Financial Collateral Arrangements Directive [COM(2006) 833 final – not published in the Official Journal].
This report assesses the application of Directive 2002/47/EC in the Member States. Although it is still too early for a full assessment of whether this Directive has strengthened the integration of the European financial markets, the Commission considers that it has made procedures relating to financial collateral in Europe more effective by reducing legal and administrative constraints.

Last updated: 23.11.2010
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