Financial collateral arrangements - European Commission report
The Directive on financial collateral arrangements might be extended to include credit claims as eligible collateral.
The European Commission has published a report (20 December 2006) on the Directive which applies to cash and financial instruments (securities) and concluded that the Directive was working well generally. Some countries have already extended the law at a national level to include certain types of receivables. If the UK were to amend its own law to reflect any extension in the Directive, this would provide an alternative for banks to securitisation as a means of getting credit claims off the balance sheet. The Commission suggests this would place EU banks on a more equal footing with US competitors.
The Commission focuses on implementation-related matters and short-term results, given the short history of the Financial Collateral Directive. Key points arising in the report are:
- The EU repo market is one of the largest financial markets in the world and has been growing rapidly since 2001. Collateral in Eurosystem credit operations has increased by 33% between 2002 and 2005.
- The Commission considers if other types of assets should enjoy the protection of the Financial Collateral Directive and concludes that credit claims should, for central bank purposes.
- The Commission does not intend to extend the Directive to cover non-regulated entities such as energy trading companies
- There will not be an amendment to improve the EU framework for netting via the Directive, though the Commission will consider an over-arching set of amendments over appropriate Directives to do this.
- The Commission did decide that legal certainty in cross-border collateral transactions had been improved and the risk in using it reduced.
- Cross-border use of collateral has increased significantly.
- The Commission has, significantly, acknowledged that further clarification of the meaning of “control” or “possession” is needed in relation specifically to the UK’s concept of floating charges.
Financial collateral is an asset (most often in the form of cash or securities) provided by a borrower to a lender to minimize the risk of financial loss to the lender in the event of the borrower defaulting on its financial obligations to the lender. The Czech Republic, France and Sweden already include specific kinds of receivables (including credit claims) in their implementation of the Directive at national level. The Commission decides that amending the Directive to include credit claims would be beneficial for market participants.
Only changes to the Financial Collateral Directive are being proposed by this report: for any changes to become effective in the UK, the UK needs to amend the Financial Collateral Arrangements Regulations (No 2) 2003.
Further reading: Report from the Commission to the Council and the European Parliament – evaluation report on the Financial Collateral Arrangements Directive (2002/47/EC)
