EU Launches Review of the Settlement Finality Directive

The European Commission has launched a targeted consultation related to post-trade services, which considers the EU Settlement Finality Directive. The Commission is also consulting on the Financial Collateral Directive, combining the review of these two Directives since they are closely related. The consultations close on May 7, 2021. The SFD establishes various insolvency carve-outs for designated market infrastructure systems and provides for finality of transactions within such systems. Under the protections currently afforded by the SFD, transfer orders which enter into designated systems within certain deadlines are guaranteed to be finally settled and cannot be unwound at the behest of insolvency officials, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. The SFD essentially excludes "insolvency claw-back" rules, such as those for transactions at an undervalue or trading by insolvent or near-insolvent entities, from applying to holdings in designated systems and modifies the timing of "moratorium" rules which prevent transactions by insolvents. This also gives certainty as regards holdings in central securities depositories and as to the finality of transactions in some clearing and payment systems. Under the SFD, each EU Member State automatically recognizes systems that have been designated by other Member States. However, there is no EU regime for third country systems, a lacuna which has already been fixed by the U.K. in its SFD laws after Brexit. The SFD requires the Commission to review, by June 28, 2021, how Member States apply the SFD to their domestic institutions which participate directly in systems governed by the law of a third country and to collateral security provided in connection with participation in such systems, and to prepare a legislative proposal for amendments, if appropriate. The Commission's consultation focuses on this, but also considers the impact of new developments, seeking feedback on whether the SFD should be extended to:

• EU institutions participating in third-country systems;
• e-money and payment institutions;
• take into account distributed ledger arrangements and other technological developments; and
• afford protection of collateral to clients of participants in an SFD securities settlement system in the event of the insolvency of that participant.

View the consultation on the SFD.

View details of the FCD consultation.

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