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
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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.
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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.
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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.
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Enforcement of collateral arrangements by the collateral taker is possible, for example by sale or appropriation of the financial instruments.
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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.
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EU countries must recognise close-out netting* arrangements, even if the collateral taker or provider is subject to insolvency proceedings or reorganisation.
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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.
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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
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Act |
Entry into force |
Deadline for transposition in the Member States |
Official Journal |
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Directive 2002/47/EC |
27.6.2002 |
27.12.2003 |
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Amending act(s) |
Entry into force |
Deadline for transposition in the Member States |
Official Journal |
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Directive 2009/44/EC |
30.6.2009 |
30.12.2010 |
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Directive 2014/59/EU |
2.7.2014 |
31.12.2014 |
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