The proposal (COM (2001) 168 final) for a Directive on Financial Collateral Arrangements (the PD) was given on March 27 2001. The Finnish government has officially notified the Finnish parliament of the contents of the PD and attached a brief memorandum to the notification giving a general picture of the views of the Ministry of Finance in respect of the implementation of the PD.
The Directive on Settlement Finality (the FD) was implemented in Finland by the Act on Conditions of Securities and Currency Trading, as well as a settlement system (the NA) effective as of December 11 1999. The NA only applies in respect of collateral given for the fulfilment of a nettable obligation under an agreement in connection with: (i) trading in investment objects and other comparable securities or derivative contracts; or (ii) trading in currency or currency units. The PD applies to financial collateral arrangements satisfying certain general requirements and is, as opposed to the NA, not limited to collateral granted in connection with trading in securities and currency.
The PD contains limitations on applicability as compared to the NA. According to article 2 (4) of the PD, the collateral provider and the collateral taker must each be financial institutions or have a capital base in excess of euro100 million ($86 million) or gross assets in excess of euro1 billion. Although a number of large Finnish companies would meet such requirements, the PD would exclude some of the companies listed on the Main List of the Helsinki Exchanges.
The PD will in most respects not conflict with fundamental principles of Finnish bankruptcy law. A holder of collateral has traditionally been vested with significant powers to liquidate collateral independently of bankruptcy proceedings. Applying the PD in debt restructuring without bankruptcy will, however, conceptually be more problematic. During the automatic stay imposed in connection with a debt restructuring, a holder of collateral will normally not be able to exercise any of its enforcement rights against the insolvent collateral provider. This applies generally to all collateral arrangements, including the financial collateral arrangement covered by the PD.
Where the collateral is critical for the continuation of the business activities of the collateral provider, any enforcement action may defeat the purpose of the debt restructuring process, and this aspect will have to be considered carefully in connection with an implementation of the PD. In insolvency proceedings in most jurisdictions, the insolvency estate has certain recovery rights in respect of qualifying events. While a restriction of such recovery rights, in the form of immunity from recovery for qualifying financial transactions, has as such already been accepted in Finland in the context of the implementation of the FD, the Finnish government emphasizes that the justification of a further extension of this immunity from recovery will need to be clarified.
The approach of the PD differs from the analysis under Finnish law according to which collateral takers are allowed to reuse the collateral only by repledging it to a third party provided that the rights of the collateral provider are respected. However, if the parties to the collateral arrangement have expressly agreed that the collateral taker is entitled to reuse collateral by way of sale and the arrangement does not affect the publicity of the collateral, such reuse of collateral may be regarded as valid and binding both between the parties and with respect to third parties. The memorandum indicates that the right of use pursuant to the PD may result in legislative amendments in connection with the implementation of the PD.
Article 10 of the PD is intended to create legal certainty as to the applicable law by broadening the principle laid down in article 9 (2) of the FD to financial collateral arrangements where the collateral consists of book-entry securities or cash. Article 10 (2) specifies that any question concerning the creation of title to or interest in book-entry securities collateral will be governed by the law of the country in which the relevant account is maintained, and that a relevant account is maintained:
- at the office or branch of the intermediary identified in the agreement governing the account; or
- where the intermediary or the branch is legally established, in any other case.
The provisions of the NA are generally in line with article 10, although the PD will make it clear that the governing law will be determined on the basis of the law of the country of the intermediary through which the collateral taker holds its interest, ie on the basis of the PRIMA. The steps required for realization of the collateral will be governed by the law of the country in which the relevant account is maintained. This rule will further clarify the Finnish conflict of law rules, although a similar outcome would in most cases have been reached by applying the existing NA and general conflict of law principles.
Under the Finnish Act on a Book-Entry Securities System, nominee registration in respect of securities issued within the Finnish book-entry system is not permissible for Finnish natural or legal persons. In practice, this means that the most important situation where the conflict of law rule contained in the PD becomes applicable is where a foreign person holds Finnish book-entry securities abroad through a custodial nominee account in the Finnish book-entry system. The analysis on the basis of the PD will not, in this respect, differ from the present analysis on the basis of the NA.