The European Commission has proposed a Directive that would create a uniform EU legal framework to limit credit risk in financial transactions through the provision of securities and cash as collateral.
Internal Market Commissioner Frits Bolkestein, says: "This eagerly awaited proposal is the first step towards integration of the financial market for collateral in the EU and so tackling a major disincentive to cross-border transactions."
Market operators currently face fifteen different legal regimes for the provision of collateral, complicated potential conflicts between jurisdictions and uncertainties surrounding the law applicable to cross-border transfers of securities, says Bolkestein. "This proposal would determine which law governs cross-border collateral arrangements and make it possible for market participants to conclude such arrangements in the same manner throughout the EU."
The Commission proposes to abolish existing administrative burdens and complexities, creating a clear framework of legal certainty in the field of collateral by:
* ensuring that an effective and simple Community regime exists for the creation of collateral;
* providing limited protection of collateral arrangements from some rules of insolvency law, particularly those that would inhibit the effective liquidation of collateral or cast doubt on the validity of techniques currently used;
* creating legal certainty with regard to cross-border provision of collateral, in the form of book-entry securities, by extending the principles already applied under the Settlement Finality Directive to determine where such securities are located;
* restricting the imposition of onerous formalities on either the creation or the enforcement of collateral arrangements; and
* ensuring effective agreements permitting the collateral taker to re-use the collateral for their own purposes under pledge structures, the classic way of providing collateral.