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Financial collateral arrangements - improving legal clarity

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Financial collateral arrangements - improving legal clarity

SUMMARY OF:

Directive 2002/47/EC - financial collateral arrangements - improving legal clarity

SUMMARY

WHAT DOES THE DIRECTIVE DO?

This Directive aims to create a clear uniform EU legal framework for the use of securities and cash as collateral* in financial transactions.

KEY POINTS

The Directive applies to certain specified categories such as central banks and supervised financial institutions. EU countries may, however, exclude specific categories such as unincorporated firms i.e. that do not have the legal status of a company.

The Directive applies to financial collateral including cash and financial instruments such as shares and bonds. Certain opt-outs are permitted by EU countries such as the collateral provider's own shares.

The Directive sets down minimum formal requirements by EU countries concerning collateral arrangements including, for example, that such arrangements must be evidenced in writing or in a legally equivalent manner.

Enforcement of collateral arrangements by the collateral taker is possible, for example by sale or appropriation of the financial instruments.

The collateral taker has a contractually agreed right to use the financial collateral provided as if he were full owner. If he chooses to exercise this right, he is obliged to transfer back the equivalent amount of collateral.

EU countries must recognise close-out netting* arrangements, even if the collateral taker or provider is subject to insolvency proceedings or reorganisation.

EU countries are blocked from applying their national insolvency rules to financial collateral arrangements in certain cases. Such arrangements may not be declared invalid or void in order, for example, to take account of changes in market value.

WHEN DOES THIS DIRECTIVE APPLY?

From 27 June 2002.

BACKGROUND

European Commission website on financial collateral

KEY TERMS

* Financial collateral is the property (such as securities) provided by a borrower to a lender to minimise the risk of financial loss to the lender if the borrower fails to meet their financial obligations to the lender.

* Close-out netting is a legal mechanism that reduces the risks between 2 counterparties. Upon the default of 1 of the 2 counterparties, all future claims and contractual relations between them become due, calculated, netted and then set off. What finally remains for actual payment can be a small fraction only of the initial gross claim between those 2 parties.

ACT

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements

REFERENCES

Act

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2002/47/EC

27.6.2002

27.12.2003

OJ L 168, 27.06.2002, pp. 43-50

Amending act(s)

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2009/44/EC

30.6.2009

30.12.2010

OJ L 146, 10.6.2009, pp. 37-43

Directive 2014/59/EU

2.7.2014

31.12.2014

OJ L 173, 12.6.2014, pp. 190-348

See consolidated version.

RELATED ACTS

Report from the Commission to the European Parliament and the Council: Evaluation Report on the Financial Collateral Arrangements Directive (2002/47/EC) (COM(2006) 833 final of 20.12.2006)

last update 07.10.2015

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