Summary of Directive 98/26/CE
on Settlement Finality in Payment and Securities
Settlement Systems of 19/5/1998,
published in OJ L 166 of 11/6/1998
Objective
The Settlement Finality Directive adopted in May 1998 is aimed to
reduce the systemic risk associated with participation in payment and
securities settlement systems, and in particular the risk linked to the
insolvency of a participant in such a system. It contributes to the
efficient and cost-effective operation of cross-border payment and
securities settlement arrangements, thereby reinforcing the freedom of
movement of capital and the freedom to provide services within the
internal market.
To this end, it contains provisions regarding
- transfer orders and netting (e.g. legal enforceability of
transfer orders and netting, irrevocability of transfer orders, no
unwinding of netting, etc.)
- insolvency proceedings (e.g. non-retroactivity of insolvency
proceedings, determination of applicable law, etc.)
- collateral security (e.g. insulation from insolvency
proceedings, determination of the law applicable to cross-border
provision of collateral security)
The Directive applies to payment and securities settlement systems as
well as any participant in such a system, and to collateral security
provided in connection with the participation in a system, or operations
of the central banks of the Member States in their functions as central
banks.
The Directive entered into force on 11th December 1999
Contents
Provisions concerning Netting and Transfer Orders
Before carrying out a cross-border credit transfer, institutions must
provide general information on the arrangement of such a transfer:
- Transfer orders and netting are legally enforceable and binding on
third parties, even in the event of insolvency proceedings against a
participant, provided that transfer orders were entered into the system
before the opening of such insolvency proceedings.
- Transfer orders entered into the system after the opening of
insolvency proceedings and carried out on the same day are only legally
enforceable and binding on third parties, if the participants can prove
that they were not aware of the opening of such proceedings.
- Transfer orders may not be revoked once they have been entered into
a system (no "unwinding").
Provisions concerning Insolvency Proceedings
- The Directive defines the moment of the opening of insolvency
proceedings as the moment when the relevant judicial or administrative
authority hands down its decision. The other Member States have to be
notified immediately of such a decision
- The insolvency of a participant may not have retroactive effects
(abolition of "zero hour rules");
- The insolvency law applicable is the law of the Member State where
the system is located.
Provisions concerning Collateral
- Collateral security shall not be affected by insolvency proceedings:
if a participants defaults, the system should be able to settle.
Collateral security provided to a system by a participant is therefore
insulated from insolvency proceedings against that participant.
- Where collateral is provided in the form of securities, the rights
if the relevant participants, the national central banks or the ECB are
determined by the legislation of the Member State where their rights are
registered.
Final Provisions
Member states have to notify to the Commission the payment and
securities settlement systems to be included in the scope of the
Directive.
Further Action
In order to get a clear picture concerning the transposition of the
Settlement Finality Directive in the Member States, the Commission will
launch a study to research the actual situation in spring 2002. This
will allow for an assessment of the implementation of the Directive as
well as for the elaboration of additional proposals - if appropriate -
in this field. The results of this study will be used for the report on
the application of the Directive, to be addressed to the European
Parliament and Council in December 2002.
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