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In order to meet the objectives of the Financial Services Action Plan, on March 27 2001 the European Commission introduced a proposal for a Directive on financial collateral arrangements. The Belgian presidency wishes the definitive text to be put on paper by the end of 2001.

The proposed Directive seeks to resolve the main problems affecting cross-border use of collateral in financial markets, by abolishing administrative burdens and legal uncertainties.

The proposed Directive creates minimum requirements for the provision of securities and cash as collateral under both pledge and title transfer structures, including repurchase agreements (also called repos). First of all, it restricts the imposition of onerous formalities. Secondly, it ensures effective agreements permitting the collateral taker to re-use the collateral for its own purposes under pledge structures. Thirdly, it provides limited protection of collateral arrangements from some rules of insolvency law by ensuring that winding-up proceedings or reorganization measures do not have retroactive effect. Legal certainty will also be created with regard to collateral arrangements where the collateral consists of book entry securities or cash by applying the Place of the Relevant Intermediary Approach rule (PRIMA).

The adoption of the Directive will also have its impact on Belgian law. The statute of January 2 1991 on securities markets, public debt and monetary policy already recognized the validity of providing collateral by a title of transfer with respect to securities (in the form of repurchase agreements, or repos), cash and book-entry securities. However, the Belgian bankruptcy legislation will have to be modified to secure the collateral-takers adequate protection in case of insolvency of their debtor.

Hugo Keulers and Nele Nys

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