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International Swaps and Derivatives Association, Inc. Collateral and International Law Issues Peter Werner ISDA Europe

International Swaps and Derivatives Association, Inc. Collateral and International Law Issues Peter Werner ISDA Europe. The Collateral Directive: summary. Effective and simple regime for pledge and title transfer Simplifies creation, perfection and enforcement

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International Swaps and Derivatives Association, Inc. Collateral and International Law Issues Peter Werner ISDA Europe

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  1. International Swaps and Derivatives Association, Inc.Collateral and International Law IssuesPeter WernerISDA Europe

  2. The Collateral Directive: summary • Effective and simple regime for pledge and title transfer • Simplifies creation, perfection and enforcement • Confirms validity of right of use (‘rehypothecation’) • Confirms efficacy of title transfer collateral and close-out netting • Some protection in context of insolvency (stay on enforcement, ‘zero hour’ rules, top-up and substitution) • Clarifies conflict of laws rules

  3. EU Collateral Directive • Collateralisation: Important risk management tool to transfer credit risk into legal, operational and market risk • Containment of legal risk by approved netting and collateral opinions as well as documentation (e.g.ISDA)

  4. EU Collateral Directive Urgent need for collateral law reform (2000 ISDA survey) • Uncertainty regarding the enforceability of title transfer collateral in 7 out of 15 EU member states • Uncertainty regarding the vulnerability of the transfer collateral arrangements against third parties in 6 member states • Uncertainty regarding the treatment of top-up collateral as a preference in 5 member states

  5. EU Collateral Directive: evolution • All financial collateral • Pledge and title transfer agreements covered • Both provider and taker must be either a public authority/central bank or a financial institution under prudential supervision or a legal person of a capital base exceeding €100million

  6. EU Collateral Directive: evolution • Limitation of rules on creation and enforcement • Re-use of pledge? • Recognition of substitution/top-up • Recognition of close-out netting • Recognition of the PRIMA approach • Inclusion of collateralised business between corporates?

  7. EU Collateral Directive: issues and results Creation of a pledge or title transfer requires often formal acts, such as • Filing with an official body • Registration in a public register • Official publication • Result: Creation/validity not dependent on a formal act if: • The financial collateral arrangement provides for dispossession, i.e. the provision of the collateral • The provision of collateral must be evidenced inwriting

  8. Effective June 2002 (2000/47/EC) • Implementation required by end-2003 • Broad range of financial institutions • Central banks (incl. ECB, EIB, IMF) • Public authorities • Central counterparty or clearing house • A person other than a natural person, incl. partnerships, provided the other party is one of the above (BUT: Opt-out) The EU Collateral Directive ISDA

  9. Conflict of laws issues • Proprietary issues generally governed by lex rei sitae • Situs of traditional, directly held securities • Situs of securities held indirectly through securities account with intermediary • Problems of a “look-through” approach • The “place of the relevant intermediary approach” (“PRIMA”)

  10. Measures to introduce PRIMA • Settlement Finality Directive, article 9(2) • Collateral Directive, article 9 • Proposed Hague Convention on Indirectly Held Securities

  11. Hague Convention: current position • June 2002 text produced by Drafting Committee • Regional workshops June/July 2002 • Main outstanding issue relates to identification of PRIMA law – • Option A: law specified in custody agreement • Option B: law of state in which securities account is agreed to be maintained • Diplomatic Conference December 2002

  12. Unidroit initiative • Unidroit study group on harmonized substantive rules for the use of securities held with intermediaries as collateral • Scope under discussion: creation, perfection, pre- and post-insolvency enforcement of collateral arrangements • First session 9 to 13 September 2002 • Next official study group meeting Feb/Mar 03

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