Shearman & Sterling LLP | FinReg | EU Launches Review of the Financial Collateral Directive
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  • EU Launches Review of the Financial Collateral Directive

    The European Commission has launched a targeted consultation related to post-trade services, which considers the EU Financial Collateral Directive. The Commission is also consulting on the Settlement Finality Directive, combining the review of these two Directives since they are closely related. The consultations close on May 7, 2021. The FCD establishes a harmonized EU framework for the use of financial collateral to secure transactions. It provides for close-out netting provisions to be enforceable under their terms and ring-fences the operation of financial collateral arrangements should one of the parties become insolvent, creating protections from the usual insolvency laws of a Member State. The FCD consultation does not cover the re-use of financial collateral given under a security financial collateral arrangement by a collateral taker as this issue has recently been addressed in the Securities Financing Transactions Regulation. The consultation focuses on issues relating to the recognition of close-out netting provisions and its impact on SFD systems. The Commission is seeking feedback on, among other things, whether the FCD should be amended to:
    • extend the scope to e-money institutions, payment institutions, central securities depositories;
    • clarify the highly problematic and poorly-defined terms "possession" and "control" in the provisions on provision of cash and financial instruments, as well as other terms such as the provision of dividends, coupon as collateral separately from instrument;
    • clarify how awareness of insolvency proceedings is determined;
    • extend the protection of netting to cover avoidance of pre-insolvency actions;
    • extend the covered collateral to other forms of collateral (e.g. stablecoins, emission allowances); and
    • clarify how the FCD provisions interact with other legislation, such as the Bank Recovery and Resolution Directive and the new CCP Recovery and Resolution Regulation as well as national transposition issues.

    View the consultation on the FCD.

    View details of the SFD consultation.

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