The new post-trading approach that the Greek capital market system adopted following the implementation of the Markets in Financial Instruments Directive (Mifid) has made significant changes. This new approach is of fundamental importance for all market factors constituting the Greek capital markets, as it contributes to the liberalisation of the markets concerned.
In the context of the financial sector, the post trading activities are usually exercised by regulated systems and refer to any such activity under which the finalisation of transactions carried out in financial markets is effected. In practice, within the scope of these systems falls any system that performs clearing, central counterparty (CCP) or settlement activities. From a legal perspective, the referred activities define the processes through which the rights and obligations arising from a relevant transaction are performed between the contracting parties.
The role of the post-trading systems is of utmost importance for the proper functioning and stability of the financial sector. This is because they contribute to the reduction of the systemic risk and other related risks, such as credit risk, settlement risk or market risk. The basic concept connected with the operation of a system of such kind is that the system usually intermediates or interposes itself between the contracting parties and undertakes all needed measures for the efficient and timely finalisation of the transactions.
Although Mifid does not extend its scope of application to the harmonisation of the post-trading systems, it acknowledges, as a key component for the EU integration of the capital markets, the abolishment of any access barriers relating to the referred systems. In this context, a basic parameter of Mifid regulations is the recognition of the so-called "right of access" and "right of choice" to the intermediaries and market operators that execute their business in the area of markets in financial instruments. From an intermediary's perspective, the "right of access" has been defined, under article 34 of Mifid, as the right of an investment firm of an EU Member State to have access to a CCP, clearing and settlement system of another EU Member State for the purposes of finalising or arranging the finalisation of transactions in financial instruments.
Accordingly, an investment firm or a market operator of an EU Member State is entitled, under articles 35 and 46 of Mifid, respectively, to enter into appropriate arrangements with a CCP, clearing and settlement system of another EU Member State with the view to providing for the clearing or settlement of some or all trades concluded by market participants under their systems. As a corollary of this EU post trading liberalisation, Mifid recognises the right of choice, as the right of the members of an EU regulated market to "designate" the system for the settlement of their transactions undertaken on that market provided that the prudential requirements of article 34 are met.
The new post trading regulation, as has been adopted in Greece by Part II of the Law 3606/2007 (articles 72 – 83), takes into account the aforementioned developments as well as the need for the markets' safety and stability. To this end, the provisions of Part II aim at contributing to the efficient and cost effective operation of the Greek post-trading systems. In terms of achieving these goals, the new regulation abolishes the traditional monopolistic post trading approach under which the Greek capital market was operating and, at the same time, introduces the licensing model in the referred post trading sector.
Under the monopolistic approach as supported by the past regulation, competent organisations for the performance of the clearing and settlement of transactions carried out in the Athens Exchange (Athex) markets, the main regulated markets of the Greek capital market system, were exclusively the Greek Central Securities Depository (CSD) and, with regard to derivatives, the Athens Derivatives Exchange Clearing House (ADECH). This approach prohibited the undertaking of post trading activities with regard to the above exchange sector by other post trading operators and organisations.
In view of Mifid regulation and the undertaking of Greek harmonisation initiatives, this model became out of date. It was unable to respond to the business needs of liberalising the access to post-trading systems under the aforementioned Mifid rules and principals. For example, although Mifid permitted to all EU intermediaries and market operators the function of the aforementioned access rights, a market operator registered in Greece was not entitled under this legal model to designate another clearing system for the clearing of the transactions of its markets. It was obligated to cooperate for this purpose with the above regulated organisations (Greek CSD or ADECH). It was apparent that the laws and regulations, supporting the model in question, had to be revised.
Part II introduces a new legal system regarding the post trading environment, which is based on the licensing concept, as known and applicable in most professional areas of the financial sector. According to this model, the operation of a clearing or CCP or settlement system, as well as of a system operator, is subject to prior authorisation by the Hellenic Capital Market Commission (HCMC). This is granted in accordance with the prudential and functional requirements that this Law sets out.
Apart from the above basic changes, the new regulation aims also at eliminating any legal risk associated with the function of the mentioned systems. A new set of rules seeks to ensure the needed degree of compatibility of the Greek post trading legal system with the EU and international standards and guidelines. It also protects the existence of more efficient legal tools in facilitating the appropriate and timely finalisation of the transactions in financial instruments.
Definition of "systems"
The Law defines in a specific manner the post-trading systems for the purpose of achieving clear and transparent regulation. Under the meaning of the Law, the system is defined as a CCP, clearing and settlement system, any respective mechanism having similar characteristics or any combination of the above systems, which is responsible to exercise the activities of finalisation or the arrangement of finalisation of transactions in financial instruments. Finalisation is used as a general term encompassing all critical post trading aspects.
It is also notable that the relevant definitions of the so-called 'Finality Directive'are also applicable in case of the systems under Greek Law.
To this end, a CCP has the meaning in the examined case of an entity which is interposed between the institutions in a system and which acts as the exclusive counterparty of these institutions with regard to their transfer orders.
Novation is a key element for the implementation of the CCP concept. As legal theory stipulates, novation refers to the process through which the original obligation between the buyer and the seller is discharged through the substitution of the CCP as seller to the buyer and buyer to the seller, creating two new contracts. In this context, the organisations providing such services become by novation CCPs to each contract and undertake the credit risk of each counterparty within the frame of their professional activities to mitigate the risks in the markets concerned.
Accordingly, the definitional approach of a clearing system is connected with the meaning of the term 'clearing house', which is as an entity responsible for the calculation of the net positions of institutions, a possible CCP or a possible settlement agent. Therefore, a clearing system is conceived as a system that engages in clearing activities and provides guarantee services against credit risks without acting as a CCP.
The third type of system, referring to the settlement system, is closely connected with the respective definition of the settlement agent. Basing on the relevant definition, the scope of application of such system refers to any entity providing to institutions or a CCP participating in systems, settlement accounts through which transfer orders within such systems are settled and extending credit to those institutions or CCPs for settlement purposes.
Of high importance is the definition of the system operator. This operator, which is subject to certain prudential and operational requirements, is defined under article 74 as the person or persons that manage or operate the activities of a system. Furthermore, market operators have to operate under the institutional type of sociate anonyme of Law 2190/1920, as in force, and are responsible for the compliance of the system with the relevant regulation.
Licensing requirements
A main characteristic of the new legal model is that it adopts the supervisory system of licensing, which covers not only the systems but also the system operators.
Within this framework, article 73 of Law sets out specific requirements, mainly of organisational nature, including among other things those referring to the procedure of issuance and enforceability of the system's rulebook. As a minimum requirement the Law defines that the rulebook has to stipulate the procedures applicable for the relevant post trading functions. It also has to stipulate the rules concerning the access to the system and the relevant obligations of the members of the system against it and the risk management rules for the proper functioning of the system. Finally, the existence of any clearing fund or collateral as a means for covering credit risks is also covered.
The rulebook constitutes a pure contractual agreement of a multilateral nature. However, for legal safety purposes the Law introduces an official procedure under which the rulebook's legitimacy, validity and enforceability is ensured. According to article 73 paragraph 3 of the Law, the rulebook, as well as its amendments, have to be approved by the HCMC as legitimate. It then becomes binding on the system members and all other parties involved in the post trading process from the date on which the relevant HCMC approval decision enters into force. This date is decided by HCMC having regard to the amendments involved.
Recognition of membership
Under article 75 of the Law access to the system entitles credit institutions as well as investment firms that operate legally in Greece to become members. This operation includes local members, members having an establishment in Greece (a branch), as well as remote members. Access to the system is also recognised to foreign systems or system operators acting as remote members to the system concerned.
It is of fundamental importance at this point to elaborate further two issues. The first issue refers to the legal merit of the membership concept in the post-trading environment. The role of the member defines the participating in the clearing or settlement process persons and the persons who undertake the risks in case of default. On the other hand, the central liability for the proper fulfillment of the rights and obligations associated with the transactions under the clearing process lies with the system. Under the Law, the system undertakes centrally the credit risk of its participants either acting as a pure clearing house or as a CCP.
As a corollary of these amendments, the principal-to-principal relationship between the members of securities exchange markets (of Athex), as by definition of law clearers in the post trading process, is not further mandatory but optional. It constitutes an issue that can be handled by the system rulebook and not a statutory requirement. Under the above legal concept and on the condition that the rulebook will provide so, the exchange members will have the right to 'give up' the post-trading functions to other clearing members, in terms of minimising their post-trading costs.
In light of the above, the new legal environment contributes to the modernisation of the Greek capital market system, as it takes into account the recent trend in the financial sector; credit exposures to be undertaken only by professionals specialising in the post trading area.
The second issue refers to the legal recognition of foreign systems and system operators as remote members of a Greek system. The said provisions permit the establishment of links and other similar cooperative arrangements between domestic and other foreign post-trading systems. From this point of view, the new concept is in line with the EU initiative of establishing an internal single market, as it facilitates cross border activities in this sector. It is also notable that the Law requires any specifications regarding such kind of arrangements to be defined by the system's rulebook.
In practice, this kind of provision will be rather useful for clearing organisations acting on a cross-border basis and thus seeking access to local markets. By exercising their right of access to the Greek systems, the said organisations will be able to expand their clearing or other post-trading services to Greek financial markets and products. On the other hand, these provisions facilitate the trading of Greek products abroad, as the establishment of clearing links will be a key aspect for their trading to other markets. At the same time, the said provisions are in line with the right of choice that Mifid" established, as the existence of links will facilitate the exercise of such rights.
Clearing fund provisions
A key aspect for the proper functioning of a system is to have robust risk management arrangements in order to face the credit risk and other risks associated with its functions. As a market practice, clearing funds constitute an appropriate means in facing such kind of risks. In line with this approach are the provisions of article 76 of the Law that recognise the right of a system to establish a clearing fund in terms of covering its credit exposures.
More specifically, the clearing fund is defined by Law as a fund aiming at protecting a system from the credit risks of its members and having as a manager with regard to its function the system operator. Concerning its legal nature, the clearing fund does not constitute a separate legal person but a piece property which is created by the contributions of the fund's participants. Taking into account that the clearing fund does not have legal personality, article 76 paragraph 2 of the Law provides that the system operator acts as a representative in all of the fund's relationships, rights and obligations towards third parties.
The clearing fund will also operate as a risk sharing fund. Article 76 paragraph 4 of the Law defines that, in case the member's participation in the fund (the member share) is less than the amount of damage caused by its default, the difference is payable on a pro rata basis by the rest members' participation in the fund. This characteristic of the fund provides an alternative risk management tool that can be used by the interesting parties activating in the post-trading sector.
Collateral arrangements
A set of provisions are dedicated to the collaterals. In particular, article 77 of the Law refers to the collaterals that the members of a system provide as security in favour of the system for the proper fulfillment of their post-trading obligations. Under the Law, collaterals will be provided in the form of cash or financial instruments. Personal guarantees, mainly having the form of a letter of credit, are not excluded.
The mentioned provisions have been inspired by the so-called Collateral Directive, and respectively the Law 3301/2004, which implements the Directive into the Greek legal system. More specifically, the aforementioned article 77 stipulates that the referred collaterals will be either a "security financial collateral arrangement" or a "title transfer financial collateral arrangement" of the Law.
Concerning the first type of collateral (the security financial collateral), the Law further defines that this collateral constitutes a legal pledge. To this end, the formalities of the creation and perfection of the contractual pledge, as stipulated by articles 1211-1214 of the Greek Civil Code, are not applicable in the examined case. Taking into consideration its statutory nature, this pledge is perfected without any formalities, once the amount of cash collateral or the book entry securities collateral is credited to, or forms a credit in, the relevant account as kept in favour of the system or its operator, as the case may be.
Accordingly, title transfer collateral is effected by a transfer of the full ownership, in favour of the system or its operator, of the cash or securities collateral, which is evidenced by the same flexible manner; by a credit to the relevant account. It should be pointed out that the aforementioned provisions are rather innovative, as collaterals in the form of transfer outright are not broadly recognised under the Greek jurisdiction.
Finally, it is crucial to underline that, due to the application of the provisions of Collateral Directive (Law 3301) in the examined case, all privileges of financial collaterals connected not only with their creation and perfection, but also with the enforcement of collateral, the right of use of collateral, the recognition of title transfer collateral, the close-out netting arrangements, as well as the non-retroactive effect of the insolvency provisions in case of such collateral, are also applicable in case of the collaterals of the system.
Member's default
The provisions of the Law referring to the rights of the system operator to tackle events of default of its members are also rather innovative.
The provisions of article 79 of the Law are of major importance as they mitigate any legal risks connected with the operation of the system in case of default. In terms of achieving the above goal, the said article broadly recognises a set of rights and powers that are granted to the system operator for the purposes of ensuring the smooth functioning of the system and its protection towards systemic risks on the occurrence of a member's default.
Close-out netting
Under article 79 paragraph 1 (a) of the Law, the system operator is entitled to close out the positions of a member that is in a default. Close out has the same meaning as described in the Collateral Directive. Hence, in the case of the operator exercising its close-out netting right following a member's default, the obligations arising out from the member's positions are accelerated so as to be immediately due and expressed as an obligation to pay an amount representing their estimated current value. Either that or they are terminated and replaced by an obligation to pay such an amount.
Following the relevant definition, the operator is also entitled to take account of what is due from the defaulter with regard to its pending positions. In this case a net sum equal to the balance of the account is payable by the defaulter or the counterparty to the relevant transactions from whom the larger amount is due to the other party. In terms of financial instruments traded in the markets, close out and acceleration of positions usually is effected by offsetting contracts that the operator will conclude through the markets.
In line with the close-out right the Law recognises to the system operator the right to use a securities financing mechanism in terms of tackling a default situation. The relevant statutory definition is rather broad and it includes any stock lending or stock borrowing arrangements as well as any form of a repurchase agreement.
Enforcement of collaterals
Enforcement of collaterals provided by a member in favour of the system is effected, on the occurrence of the member's default, in accordance with the provisions of Collateral Directive (see article 79 paragraph 1 (b) of Law). In this context, the system operator is entitled to realise the collateral without keeping any particular formalities.
When the collateral is consisting of financial instruments, such realisation is effected by sale or appropriation of the collateral and by setting off their value against, or applying their value in discharge of, the defaulting member's obligations. As of cash collateral, the operator is entitled to set off the amount against or applying in discharge of the relevant obligations of the defaulting member. As the law requires, any specific term and condition with regard to the enforcement and realisation of collateral has to be stipulated by the system rulebook.
Risk sharing clauses
Basing on the clearing fund concept, on the occurrence of an event of a member's default, the system operator is also entitled to realise under the same flexible conditions the member's share to the relevant fund. Such realisation has to be effected in accordance with the system rulebook.
On the condition that the fund operates as a risk sharing fund, the operator is also entitled, in case the amount of the defaulters share is not adequate to discharge its obligations, to use the shares of the other members on a pro rata basis.
The provisions referring to the clearing fund's operation constitute another flexible tool in terms of managing a default. They contribute to the system proper functioning, as they give to the post trading operators a key alternative to protect the system from credit risks. It is notable that a similar kind of fund has been constituted by the Law 2471/1997, as in force, to the securities markets of Athex. This fund, which is called Guarantee Fund and is operated by Helex, is going to be transformed in due course to a clearing fund under the aforementioned definitions within the transitional period that the Law provides.
The non-retroactive effect of insolvency
Of fundamental importance are the provisions relating to insolvency and, more generally, to the indebtedness of a member of the system.
Article 79 paragraph 3 of the Law stipulates that in case of a member's "indebtedness", which has the meaning as described in the Finality Directive, any actions referring to clearing, settlement, close out netting arrangements, including also the provision by the member of collaterals in favour of the system, are legally enforceable and binding on third parties. This is provided that the pending obligations of the member arise out from transactions that are concluded before the system operator becomes aware of the opening of the insolvency proceedings under the articles 3 to 7 of Law 2789/2000 and the articles 6 of the Finality Directive, respectively.
As it is provided the opening of the insolvency procedures takes place on the date of the publication of the insolvency decisions issued by the competent judicial or administrative authority. In this context, awareness of the system operator takes place by the relevant notification of the Bank of Greece, which acts as the competent authority on those matters.
Comparing the aforementioned provisions of Law 3606 with the relevant provisions of Finality Directive, it is far from clear that the Law 3606 introduces a different finality concept for the post-trading systems. Taking into account the particular nature of the subject matter of the clearing – settlement process, which refers here to transactions in financial instruments and not to pure payment transfer orders of the Finality Directive – the Law recognises the non-retroactive effect of insolvency procedures in relation not only to transfer orders but also to all pending transactions and relevant positions of the defaulter.
Under this legal framework any close-out netting measures, undertaken by the system operator, are valid and enforceable on third parties, even though they take place after the aforementioned opening of the insolvency procedures, provided that they refer to transactions of the defaulting member that are pending on the date of the opening of the procedures concerned.
The said provisions seek to protect the systems from insolvency risks, to which they are exposed when a close out transaction and derived transfer orders are taking place after the commencement of the aforementioned insolvency procedures. By adopting the new finality concept in this specific case close outs subsequent to the above opening procedures will not be henceforth jeopardised as invalid and unenforceable towards third parties.
The transitional provisions for Helex
The post-trading provisions of Law govern all domestic systems. From this point of view, to the definitions of Law fall any system operator registered in Greece and any relevant system operating within the Greek territory. Helex, acting as an operator of the clearing and settlement systems of securities and derivatives markets of Athex, is defined by Law as a system operator of these systems and is, therefore, subject to the scope of application of the provisions. To this end, Helex reforms its post-trading operations in compliance with the relevant licensing requirements, as will be further specified by the regulations of the HCMC.
Summary
The post trading regulation of the Greek capital market system was out of date following the implementation of Mifid into the Greek jurisdiction by Part I of the Law. This regulation had to be revised so as to be more compatible with the post trading EU rights of access and choice that this Directive has recognised. The need for such compatibility has been served by the provisions of Part II of the Law 3606 that incorporates the licensing model in the sector of post-trading systems and operations.
In this context, the new provisions contribute to the safety and effectiveness of the clearing, CCP and settlement functions operating in Greece. As hard coded provisions have been abolished, market factors and organisations activating in the post trading sector are now able to adopt the post trading model of their choice without any legal barriers or limitations. To this end, their initiatives are further encouraged as the new legislation provides the legal certainty with regard to the systems and operators concerned. It eliminates related legal risks by broadly recognising all critical rules as well as EU principal and standards concerning clearing and settlement of transaction in financial instruments and, therefore, it contributes to the further evolution of the Greek capital markets.
This article reflects exclusively the personal views of the author.
| Author biography |
Dr Christina Tarnanidou
Hellenic Exchanges
Christina Tarnanidou works with the Hellenic Exchanges SA as a legal advisor since 1999. Her legal services have been provided to the most of Helex (Hellenic Capital Market Commission) group firms, including ADEX (Athens Derivatives Exchange), ADECH (Athens Derivatives Exchange Clearing House) and Athex (Athens Exchanges). As a lawyer she also worked in many law firms and the banking sector (1997-1999). As an Athex-Helex representative she participates in many national and EU groups and committees of the financial area (for example Target2-securities Group of legal experts).
Tarnanidou is specialised in Greek derivatives law, as well as in other areas of the financial sector (Mifid, exchange regulation, stock lending and short selling, trading methods, link arrangements and post trading infrastructures). She lectures broadly on capital markets seminars for HCMC (Hellenic Capital Markets Commission) and Athex that are carried out for the purpose of certifying traders and investment service providers in Greece. She also provides capital market laws seminars for other organisations and lectures on conferences for lawyers and professionals of the financial markets.
In terms of her academic interests, she teaches capital markets lessons in the Economic University of Athens relating to masters programs.
Tarnanidou is actively participating in the rule making process of Athex and Helex (rulebooks) and she is a drafter of many exchange laws (for example clearing provisions of L3606/2007).
She has published a series of books and articles on, among others, derivatives law, regulated markets, exchange rulebooks analysis and EU capital markets. |