Financial Collateral Directive- have your say

For those lucky few with time to spend participating in regulatory consultations, there are another two potentially material ones to be aware of. 12 February 2021, the EC launched two parallel, but linked[1]  consultations on proposed amendments to the Financial Collateral Directive (FCD) and the Settlement Finality Directive (SFD).

The FCD was adopted on 6 June 2002, aiming to partially harmonise national EU laws with respect to financial collateral arrangements, while dis-applying others. The FCD acts to protect collateral takers by enabling the enforceability of close-out netting provisions and ring-fencing collateral in the event of the provider’s insolvency. The FCD’s central role has only been magnified by the introduction of VM and IM under EMIR.

The 29 page consultation covers a broad range of questions including:

• Should the scope of the FCD be broadened to include: payment institutions, e-money institutions, custodians?
• Should the scope of the FCD be widened to include retail/SME entities?
• Is there a need to clarify how “awareness” of pre-insolvency proceedings is determined?
• Should the FCD definition of “financial instruments” include emission allowances and/or crypto-assets? In the case of the latter, how may the concepts of “account” and “book entry” work in a DLT context?
• Are there examples of other legislation whose provisions for interaction are insufficiently clear i.e. Insolvency regulation, Second Chance Directive, BRRD et al.

The SFD aims to reduce systemic risk by mandating the settlement finality of transfer orders entered into a participating payment system. Although, in the context of insolvency, the SFD is antagonistic to the pari passu principle, its systemic utility was judged worthwhile. The SFD has been amended five times since adoption. Article 12a of the Directive requires the Commission to review the SFD by 28 June 2021, with specific regard to whether the SFD should cover transactions by EU participants in a third-country. The consultation exhaustively covers every potential aspect of this question, typically eliciting response on an agree-disagree scale.

The sheer number of industry and regulatory consultations typically acts to confine specific response to only the largest stakeholder institutions. However, the centrality of the FCD and its interaction with the SFD would counsel that attention should be paid to any proposed changes at the earliest possible stage.

Both consultations close on 7 May 2021, responses can only be made via the online portal.

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[1] Aware this doesn’t make sense technically

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