EU draft directive on financial collateral arrangements

United Kingdom

The EU is planning to issue a directive which, as it stands at present, will allow for the substitution and sale (re-hypothecation) of shares provided as security, most commonly in the context of securing derivatives and similar financial instruments. The directive has implications in the context of insolvencies for close-out netting and top-up collateral. At present, the directive is intended to apply to large financial institutions (corporates with a capital base in excess of EUR 100 million or whose gross assets exceed EUR 1000 million) and the Central Banks, but at a conference of banks and European Lawyers held at the National Bank of Belgium yesterday (4 October 2001) the Belgian Finance Minister acknowledged the possibility that the draft directive could be amended to apply to all takers and providers of financial collateral, including Small and Medium Enterprises. It was even agreed that further thought should be given to extending the reform beyond financial collateral such as shares to any form of asset taken as security (clearly the practical implications of a power of substitution of security in the context of residential house mortgages had not been thought through). The draft is to be revised in committee on 9 October and the Minister was hopeful that a finalised draft of the directive would be agreed by the EU in December 2001.

For further information, please contact Ruth Pedley by e-mail at or by telephone on +44 (0)20 7367 2098.