S.I. No. 1/2004 - European Communities (Financial Collateral Arrangements) Regulations 2004
I, CHARLIE McCREEVY, Minister for Finance, in exercise of the powers conferred on me by section 3 of the European Communities Act 1972 , and for the purpose of giving effect to Directive 2002/47/EC of the European Parliament and of the Council, done at Brussels on 6 June 2002, hereby make the following regulations: | ||||||
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PART 1 Preliminary Provisions | ||||||
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Citation and commencement of Regulations | 1. (1) These Regulations may be cited as the European Communities (Financial Collateral Arrangements) Regulations 2004. | |||||
(2) These Regulations come into operation on the day after the date on which notice of their making is published in the Iris Oifigiúil. | ||||||
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Purpose of these Regulations | 2. The purpose of these Regulations is to protect the validity of financial collateral arrangements and of financial collateral and, more particularly, to give effect to Directive 2002/47/EC of the European Parliament and of the Council, done at Brussels on 6 June 2002. | |||||
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Definitions | 3. (1) In these Regulations— | |||||
“book entry securities collateral” means financial collateral provided under a financial collateral arrangement that consists of financial instruments, title to which is evidenced by entries in a register or account kept by or on behalf of an intermediary; | ||||||
“cash” means money credited to an account in any currency, or any claim for the repayment of money, such as money market deposits; | ||||||
“central counterparty” has the meaning given by Article 2(c) of Directive 98/26/EC; | ||||||
“clearing house” has the meaning given by Article 2(e) of Directive 98/26/EC; | ||||||
“close-out netting provision” means— | ||||||
(a) a provision of a financial collateral arrangement, or of an arrangement of which a financial collateral arrangement forms part, or | ||||||
(b) in the absence of such a provision, a provision of financial collateral under an enactment or statutory instrument as a result of which, on the occurrence of an enforcement event (whether through the operation of netting or set-off or otherwise)— | ||||||
(i) the obligations of the parties to the arrangement are accelerated so as to be immediately due and expressed as an obligation to pay an amount representing the current value of the obligations, or | ||||||
(ii) the obligations of the parties to the arrangement are terminated and replaced by an obligation to pay such an amount, or | ||||||
(iii) an account is taken of what is due from each party to the other in respect of those obligations and the party from which the larger amount is due is required to pay to the other party a net amount equal to the balance of the account; | ||||||
“enforcement event”, in relation to a financial collateral arrangement, means a default or any similar event on the occurrence of which, under the arrangement or by operation of law— | ||||||
(a) the collateral taker is entitled to realise or appropriate financial collateral, or | ||||||
(b) a close-out netting provision takes effect; | ||||||
“equivalent collateral” means— | ||||||
(a) in relation to cash, a payment of the same amount and in the same currency, and | ||||||
(b) in relation to a financial instrument, means— | ||||||
(i) another financial instrument of the same issuer or debtor, which forms part of the same issue or class, and is of the same nominal amount, currency and description, as the first-mentioned instrument or | ||||||
(ii) if the financial collateral arrangement provides for the transfer of other assets following the occurrence of an event relating to or affecting a financial instrument provided as financial collateral, those other assets; | ||||||
“financial collateral” means cash or financial instruments provided under a financial collateral arrangement, but does not include shares in a company whose exclusive purpose is— | ||||||
(a) to own means of production that are essential for the collateral provider's business, or | ||||||
(b) to own real property; | ||||||
“financial collateral arrangement” means a title transfer financial collateral arrangement or a security financial collateral arrangement (whether or not covered by a master agreement or by general terms and conditions); | ||||||
“financial instruments” means any of the following: | ||||||
(a) shares in companies; | ||||||
(b) securities equivalent to shares in companies; | ||||||
(c) bonds and other forms of debt instruments if these are negotiable on the capital market; | ||||||
(d) any other securities— | ||||||
(i) that are normally dealt in and give the right to acquire any such shares, bonds or other securities by subscription, purchase or exchange, or | ||||||
(ii) that give rise to a cash settlement (excluding instruments of payment); | ||||||
(e) units in collective investment undertakings; | ||||||
(f) money market instruments; | ||||||
(g) claims relating to, or rights in or in respect of, shares, securities, bonds, instruments of a kind referred to in paragraphs (a) to (d); | ||||||
“member” includes shareholder; | ||||||
“Member State” means a member State of the European Communities; | ||||||
“multilateral development bank” has the meaning given by Article 1(19) of Directive 2000/12/EC (which relates to the taking up and pursuit of the business of credit institutions); | ||||||
“public authority” means any person or body that performs a public function, and includes— | ||||||
(a) a local government body, and | ||||||
(b) a public sector body of a Member State that is charged with responsibility for, or is involved in, the management of public debt, and | ||||||
(c) a public sector body of a Member State that is authorised to hold accounts for customers; | ||||||
“provision of financial collateral” means the financial collateral that is or is to be delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker or of a person acting on the collateral taker's behalf; | ||||||
“relevant account”, in relation to book entry securities collateral that is subject to a financial collateral arrangement, means the register or account (which may be kept by the collateral taker) in which the entries are made and by which that collateral is provided to the collateral taker; | ||||||
“relevant financial obligations” means obligations secured by a financial collateral arrangement that give a right to a cash settlement or the delivery of financial instruments, or both, and includes (but is not limited to)— | ||||||
(a) present and future, and actual, contingent and prospective, obligations (including such obligations arising under a master agreement or similar arrangement), and | ||||||
(b) obligations owed to a collateral taker by a person other than the collateral provider, and | ||||||
(c) obligations of a class or kind specified in the arrangement or, if the arrangement is varied with the agreement of the parties, specified in the arrangement as varied; | ||||||
“reorganisation measure” means a measure involving an intervention by an administrative authority or a judicial authority that— | ||||||
(a) is intended to preserve or restore the financial situation, and | ||||||
(b) affects pre-existing rights of third parties (including but not limited to a measure involving a suspension of payments, suspension of an enforcement measure or a reduction of claims); | ||||||
“right of use”, in relation to a security financial collateral arrangement, means the right of the collateral taker as owner to use and dispose of financial collateral provided under the arrangement in accordance with the arrangement; | ||||||
“security financial collateral arrangement” means an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, but only if the full ownership of the collateral remains with the collateral provider after the security right is established; | ||||||
“settlement agent” has the meaning given by Article 2(d) of Directive 98/26/EC; | ||||||
“supervised financial institution” means a financial institution that is subject to prudential supervision by a regulatory authority established by or under a law of a State, and includes (but is not limited to) the following: | ||||||
(a) a credit institution as defined in Article 1(1) of Directive 2001/12/EC, or an institution listed in Article 2(3) of that Directive; | ||||||
(b) an investment firm as defined in Article 1(2) of Council Directive 93/22/EEC of 10 May 1993 (which deals with investment services relating to securities); | ||||||
(c) a financial institution as defined in Article 1(5) of Directive 2000/12/EC; | ||||||
(d) an insurance undertaking as defined in Article 1(a) of Council Directive 92/49/EEC of 18 June 1992 (which deals with the co-ordination of laws, regulations and administrative provisions relating to direct insurance, other than life assurance); | ||||||
(e) a life assurance undertaking as defined in Article 1(a) of Council Directive 92/96/EEC of 10 November 1992 (which deals with the co-ordination of laws, regulations and administrative provisions relating to direct life assurance); | ||||||
(f) an undertaking for collective investment in transferable securities (UCITS) as defined in Article 1(2) of Council Directive 85/611/EEC of 20 December 1985 (which deals with the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)); | ||||||
(g) a management company as defined in Article 1a(2) of Directive 85/611/EEC; | ||||||
“title transfer financial collateral arrangement” means an arrangement (including a repurchase agreement) under which a collateral provider transfers full ownership of financial collateral to a collateral taker in order to secure or otherwise cover the performance of relevant financial obligations; | ||||||
“winding-up proceedings”, means collective proceedings (whether founded on insolvency or are voluntary or compulsory) involving the intervention of an administrative or judicial authority, taken for the purpose of realising assets and distributing the proceeds among creditors and members, as appropriate, and includes collective proceedings taken for that purpose where the proceedings are terminated by a composition or other similar arrangement; | ||||||
“writing” includes recording by electronic means (such as a computer) or by any other durable medium. | ||||||
(2) A right under a financial collateral arrangement to substitute or withdraw excess financial collateral in favour of the collateral provider does not prejudice the financial collateral that is provided to the collateral taker as men-tioned in these Regulations. | ||||||
(3) If a word or expression used in these Regulations is also used in the Directive and is not defined in paragraph (1), the word or expression has, unless the contrary intention appears, the same meaning in these Regulations as it has in the Directive. | ||||||
(4) In these Regulations, unless the context otherwise requires— | ||||||
(a) a reference to a Regulation is a reference to a Regulation of these Regulations, and | ||||||
(b) a reference to a paragraph or subparagraph is a reference to a paragraph or subparagraph of the provision in which the reference occurs, and | ||||||
(c) a reference to an enactment or statutory instrument is a reference to that enactment or instrument as amended by or under any subsequent enactment or instrument (including these Regulations). | ||||||
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Application of these Regulations | 4. (1) These Regulations apply to a financial collateral arrangement and to financial collateral only if the arrangement and collateral comply with this Regulation. | |||||
(2) The collateral taker and the collateral provider who are the parties to the financial collateral arrangement must each be one of the following: | ||||||
(a) a public authority (excluding a publicly guaranteed undertaking unless it is covered by paragraphs (b) to (f)); | ||||||
(b) a central bank, the European Central Bank, the Bank for International Settlements, a multilateral development bank, the International Monetary Fund or the European Investment Bank; | ||||||
(c) a supervised financial institution; | ||||||
(d) a central counterparty, settlement agent or clearing house, or any similar entity that is operating in the futures, options or derivatives markets in a way not covered by Directive 98/26/EC provided the entity is regulated under the law of the State; | ||||||
(e) a person (other than a natural person) who acts as a trustee, or in a representative capacity, on behalf of— | ||||||
(i) any one or more persons of whom at least one is a bondholder or the holder of any other form of securitised debt, or | ||||||
(ii) any authority, bank, institution or other entity referred to in paragraphs (a) to (d); | ||||||
(f) any other person or group (other than a natural person), but only if the other party to the arrangement is an authority, bank, institution or other entity of a kind specified in paragraphs (a) to (e). | ||||||
(3) For these Regulations to apply to a financial collateral arrangement, there must be evidence in writing of the arrangement. | ||||||
(4) For these Regulations to apply to financial collateral, there must be evidence in writing of the provision of the collateral. The evidence must identify the financial collateral concerned. For that purpose, it is sufficient to prove— | ||||||
(a) that the relevant book entry securities collateral has been credited to, or forms a credit in, the relevant account, and | ||||||
(b) that the relevant cash collateral has been credited to, or forms part of, a designated account. | ||||||
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Formal requirements with respect to financial collateral arrangements and the provision of financial collateral | 5. (1) For the purposes of these Regulations, the creation, validity, perfection, enforceability or admissibility in evidence of a financial collateral arrangement, or the provision of financial collateral under such an arrangement, does not depend on the performance of a formal act. | |||||
(2) Paragraph (1) does not prejudice the application of these Regulations to financial collateral that has been provided so long as that provision is capable of being evidenced in writing and the relevant financial collateral arrangement is also capable of being evidenced in writing. | ||||||
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Parts 2, 3 and 4 not to limit other State laws | 6. Nothing in Parts 2, 3 and 4 limits any requirement imposed by any other written law of the State to the effect that the realisation or valuation of financial collateral and that the calculation of the relevant financial obligations must be conducted in a commercially reasonable manner. | |||||
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PART 2 Enforcement of Financial Collateral Arrangements | ||||||
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Right of collateral taker to enforce security financial collateral arrangement | 7. (1) On the occurrence of an enforcement event relating to a security financial collateral arrangement, the collateral taker under the arrangement has a right to realise financial collateral provided under the arrangement— | |||||
(a) if the collateral is in the form of a financial instrument, by sale or appropriation and by setting off the instrument's value against, or applying that value in discharge of, the relevant financial obligations, and | ||||||
(b) if the collateral is in the form of cash, by setting off the amount of cash against, or applying it, in discharge of the relevant financial obligations. | ||||||
(2) For the purpose of this Regulation, a collateral taker may appropriate a financial instrument only if the relevant security financial collateral arrangement— | ||||||
(a) allows appropriation, and | ||||||
(b) provides for the valuation of the instrument. | ||||||
(3) Financial collateral may, subject to the terms of the relevant security financial collateral arrangement, be realised under this Regulation without the need— | ||||||
(a) to give prior notice of intention to realise the financial collateral, or | ||||||
(b) for the terms of realisation to be approved by a court, public authority or person, or | ||||||
(c) to conduct the realisation by public auction or by any other means by which an insolvent person's assets may be lawfully realised, or | ||||||
(d) for any additional period of time to have elapsed. | ||||||
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Financial collateral arrangement to have effect despite winding-up proceedings or reorganisation measures | 8. A financial collateral arrangement has effect in accordance with its terms despite the commencement or continuation of winding-up proceedings or reorganisation measures in relation to the collateral provider or collateral taker. | |||||
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PART 3 Use of Financial Collateral under Security Financial Collateral Arrangements | ||||||
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Right of collateral taker to use financial collateral if arrangement so provides | 9. (1) If and to the extent that the terms of a security financial collateral arrangement so provide, the collateral taker under the arrangement has a right to use financial collateral provided under the arrangement. | |||||
(2) A collateral taker under a security financial collateral arrangement who exercises such a right is obliged, not later than the due date for the performance of the relevant financial obligations covered by the arrangement, to transfer equivalent collateral to replace the original financial collateral. | ||||||
(3) Instead of complying with paragraph (2), the collateral taker may, on the due date for the performance of the relevant financial obligations, either— | ||||||
(a) transfer equivalent collateral, or | ||||||
(b) if and to the extent that the terms of the arrangement so provide, set off the value of the equivalent collateral against, or apply it in discharge of, the relevant financial obligations. | ||||||
(4) Equivalent collateral transferred in accordance with paragraph (2) or (3) is subject to the same security financial collateral agreement as that to which the original financial collateral was subject and is to be taken to have been provided under the security financial collateral arrangement at the same time as the original financial collateral was first provided. | ||||||
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Use of financial collateral by collateral taker not to render invalid or unenforceable rights of collateral taker | 10. The use of financial collateral by a collateral taker in accordance with Regulation 9 does not render invalid or unenforceable the rights of the collateral taker under the security financial collateral arrangement in relation to the financial collateral transferred by the collateral taker in discharge of an obligation referred to in paragraph (2) of that Regulation. | |||||
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Non compliance with requirement can be subject of close-out netting provision | 11. If an enforcement event occurs when the obligation referred to in Regulation 9(2) has not been complied with, the requirement can be the subject of a close-out netting provision. | |||||
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PART 4 Recognition of Title Transfer Financial Collateral Arrangements and Close-Out Netting Provisions | ||||||
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Recognition of title transfer financial collateral arrangements | 12. (1) A title transfer financial collateral arrangement has effect in accordance with its terms. | |||||
(2) If an enforcement event occurs when an obligation of the collateral taker to transfer equivalent collateral under a title transfer financial collateral arrangement remains out-standing, the obligation can be the subject of a close-out netting provision. | ||||||
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Recognition of close-out netting provisions | 13. (1) A close-out netting provision has effect in accordance with its terms irrespective of whether— | |||||
(a) winding-up proceedings or reorganisation measures have been commenced, or are continuing, in relation to the collateral provider or collateral taker concerned, or | ||||||
(b) rights arising in respect of the relevant financial collateral purport to have been assigned or attached as a result of judicial or other process or any other disposition. | ||||||
(2) The operation of a close-out netting provision can be subject to a requirement to do any of the things referred to in Regulation 7(3)(a) to (d) only if the relevant financial collateral arrangement so provides. | ||||||
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PART 5 Disapplication of Certain Insolvency Provisions | ||||||
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Financial collateral arrangements and financial collateral not to be invalidated or voided | 14. Neither a financial collateral arrangement, nor financial collateral provided under such arrangement, may be invalidated or declared void or be reversed only because the arrangement was created, or the financial collateral was provided— | |||||
(a) on the day on which relevant winding-up proceedings or reorganisation measures were commenced, but before the making of an order of court commencing those proceedings or measures, or | ||||||
(b) during a period before, and defined by reference to, the commencement of those proceedings or measures, or by reference to the making of any court order or the taking of any other action, or the occurrence of any other event, during those proceedings or measures. | ||||||
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Certain financial collateral arrangements, etc. to be enforceable against third parties | 15. Any financial collateral arrangement or relevant financial obligation that has been created, or any financial collateral that has been provided, on the day on which, but after the moment on which, winding-up proceedings or reorganisation measures were commenced, is binding on third parties so long as the collateral taker concerned is able to prove that that collateral taker was not aware, and had no reason to believe, that the proceedings or measures had commenced. | |||||
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Provision of financial collateral not to be invalidated or declared void by certain events | 16. (1) If a financial collateral arrangement contains an obligation to provide financial collateral, or additional financial collateral, in order to take account of changes in the value of the financial collateral, or in the amount of the relevant financial obligations, the provision of financial collateral, or additional, substituted or replacement financial collateral, under such an obligation may not be invalidated or declared void or be reversed only because— | |||||
(a) the provision was made on the day on which winding-up proceedings or reorganisation measures commenced, but before the making of a court order commencing those proceedings or measures, or during a period before, and defined by reference to— | ||||||
(i) the commencement of winding-up proceedings or reorganisation measures, or | ||||||
(ii) the making of a court order, or the taking of any other action, or the occurrence of any other event, during the course of those proceedings or measures, or | ||||||
(b) the relevant financial obligations were incurred before the date on which the financial collateral, or the additional, substituted or replacement financial collateral, was provided. | ||||||
(2) If a financial collateral arrangement contains a right to withdraw financial collateral on providing, by way of substitution or exchange, financial collateral of substantially the same value, the provision of financial collateral, or additional, substituted or replacement financial collateral, under such a right may not be invalidated or declared void or be reversed only because— | ||||||
(a) the provision was made on the day on which winding-up proceedings or reorganisation measures commenced, but before the making of the court order commencing those proceedings or measures, or during a period before, and defined by reference to— | ||||||
(i) the commencement of winding-up proceedings or reorganisation measures, or | ||||||
(ii) the making of a court order, or the taking of any other action, or the occurrence of any other event, during the course of those proceedings or measures, or | ||||||
(b) the relevant financial obligations were incurred before the date on which the financial collateral, additional, substituted or replacement financial collateral, was provided. | ||||||
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How these Regulations relate to general law of State relating to insolvency | 17. Except as provided by this Part, nothing in these Regulations affects the operation of the laws of the State relating to insolvency with respect to the voiding of trans-actions during the period referred to in Regulation 14(b) or 16(1)(a) or (2)(a). | |||||
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PART 6 Supplementary Provision | ||||||
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Conflict of laws | 18. (1) Any question with respect to any of the matters specified in paragraph (2) arising in relation to book entry securities collateral is to be governed by the domestic law of the country in which the relevant account is maintained, irrespective of any law of that country that provides for the law of another country to be referred to in deciding the question. | |||||
(2) The matters referred to in paragraph (1) are as follows: | ||||||
(a) the legal nature and proprietary effects of the book entry securities collateral concerned; | ||||||
(b) the requirements for perfecting a financial collateral arrangement relating to that collateral and the provision of that collateral under such an arrangement and, more generally, the com-pletion of steps necessary to render such an arrangement and provision effective against third parties; | ||||||
(c) whether a person's title to, or interest in, that collateral is overridden by, or subordinated to, a competing title or interest; | ||||||
(d) whether a person has acquired in good faith title to, or an interest in, that collateral; | ||||||
(e) the steps required for the realisation of that collateral following the occurrence of an enforcement event. | ||||||
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EXPLANATORY NOTE. | ||||||
(This note is not part of the Instrument and does not purport to be a legal interpretation.) | ||||||
The purpose of these Regulations is to give effect to Directive 2002/47/EC of 6 June 2002 which deals with financial collateral arrangements and the provision of financial collateral. | ||||||
The aim of the Directive is to create a Community-wide regime for the provision of financial instruments (mainly securities) and cash (not banknotes, but rather money cred-ited to an account) as collateral and where possession or control of the collateral passes to the collateral taker. The regime applies to both title transfer financial collateral arrangements (including repurchase agreements or “repos”) and security financial collateral arrangements. It does not apply to non-financial forms of collateral, such as real estate, plant and machinery, book debts etc. | ||||||
These new arrangements should allow financial collateral to be used more freely and effectively across the Union and contribute to the cost efficiency of the financial market and to the stability of the financial system. To achieve these objectives, the Directive requires Member States to ensure that certain provisions of insolvency law do not apply to the types of financial collateral arrangement that are covered by the Directive; in particular, those that would inhibit the effective realisation of financial collateral or cast doubt on the validity of current techniques, such as bilateral close-out netting, the provision of additional collateral in the form of top-up collateral and the substitution of collateral. |
