Brussels, 24 April 2008
Securities markets: Commission proposes amendments to Settlement Finality Directive and Financial Collateral Directive (see MEMO/08/267)
The European Commission has issued a proposal to amend the Settlement Finality Directive and the Financial Collateral Directive to strengthen the protection of settlement systems and financial collateral arrangements.
Internal Market and Services Commissioner McCreevy said: "Ensuring the proper functioning of settlement systems in rapidly evolving markets is indispensable for the stability of financial markets, even more so in times of market turmoil. Following MiFID and the Code of Conduct, we are witnessing an increasing number of requests for cross-border links between post-trade systems. This is a positive development, which I want the Settlement Finality Directive to cover fully. We are also witnessing an increased use of new types of collateral in the marketplace, in particular credit claims. However, the use of credit claims as collateral in cross-border transactions is almost non-existent, as they currently do not enjoy the protection of the Financial Collateral Directive. I would like to remedy this as well."
Directive 98/26/EC on settlement finality in payment and securities settlement systems (SFD) and Directive 2002/47/EC on financial collateral arrangements (FCD) are the two main Community instruments in the area of clearing and settlement and financial collateral. The SFD provides protection to both payment and securities settlement systems in case of default of a participant to those systems and thus seeks to minimise systemic risk, whereas the FCD regulates and facilitates the cross-border use of collateral.
The Commission evaluated the two directives in 2005 and 2006 respectively. Following extensive consultation, the Commission concluded that both directives work well and that Member States, market participants and other stakeholders strongly support them. The Commission therefore does not propose any substantial changes to the two directives; it simply proposes amending them in limited areas in order to bring them in line with regulatory and market developments that have occurred since they were originally drafted and adopted.
The main changes in the proposal concern, firstly, the explicit protection of the SFD as regards night-time settlement and linked systems. Pursuant to Directive 2004/39/EC on markets in financial instruments (MiFID) and the industry-sponsored European 'Code of Conduct for clearing and settlement', systems are expected to become increasingly linked.
Secondly, the proposal seeks to broaden the scope of the protection provided by both directives by including credit claims eligible for the collateralisation of central bank credit operations in order to facilitate their use throughout the Community.
Lastly, this proposal seeks to introduce a number of other simplifications and clarifications to facilitate application of the FCD and SFD.
Whilst the Commission started preparing the proposal in early 2007, i.e. before the onset of the current financial turmoil, the latter provides an additional argument in favour of the proposal: it would strengthen the existing tools for managing such situations. For example, the establishment of a harmonised legal framework for the use of credit claims as collateral in cross-border transactions would enhance market liquidity.
The Commission's proposal is available at: