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The law of August 2 2002 on the supervision of the financial sector and financial services includes some substantial changes to Belgian legislation in connection with statutory liens and security interests in favour of financial intermediaries and clearing and settlement institutions.

Statutory liens

Under the old legislation, recognized financial intermediaries were granted a specific statutory lien on the financial instruments and cash remitted to them as margin or coverage, pursuant to statutory and regulatory provisions, for the execution of transactions in financial instruments on a regulated market, and held by them as a result of the subscription, execution and settlement of such transactions. Additionally, clearing and settlement institutions operating a system for the clearing or settlement of securities and other financial instruments were granted a specific statutory lien on the financial instruments, monies and other rights standing to their accounts, to secure their claims in connection with the clearing or settlement of transactions in financial instruments for the account of the participant or the participants' clients.

The old legislation has now been abolished and replaced by the Law of August 2 2002.

Financial intermediaries

The specific statutory lien of financial intermediaries on financial instruments and monies remitted to them in order to be used as coverage for the execution of the transactions in financial instruments has been extended beyond the minimum levels required by the statutory and regulatory provisions since it now also pertains to the financial instruments delivered as margin to the intermediary on a contractual basis. In addition, the statutory lien now also covers margin granted in relation to the subscription of financial instruments and any forward foreign exchange transactions. Foreign currencies remitted as margin are now also subject to the statutory lien. Moreover, the categories of beneficiaries of the statutory lien have been extended to, among others, financial instrument broking firms.

Clearing and settlement institutions

Likewise, the statutory lien of clearing and settlement institutions now also encompasses forward foreign exchange transactions. Specification is made that the statutory liens also pertain to claims from clearing and settlement institutions resulting from loans and advances.

The new law stipulates further that financial instruments, monies and other rights that the clearing and settlement institutions keep on their books in name of their participants but for the account of the clients of such participants, can only constitute the object of the specific statutory lien to secure claims arising out of the transactions concluded by such participants for the account of their clients. Consequently, clearing and settlement institutions, like Euroclear, cannot rely on their statutory lien on the client omnibus accounts of their participants to be compensated for any losses incurred by the clearing institution in connection with proprietary trades and accounts of such participants.

The staturory lien on clients' assets can only apply to the extent that such clients have agreed in writing to the deposit of their financial instruments with the clearing system, in default of which the financial institution makes an illegal use of client assets, punishable by criminal penalties. However, the new law now also expressly confirms that the absence of written authorization does not undermine the rights that third parties, and more specifically the clearing and settlement institutions, have acquired in good faith on the financial instruments held in their accounts. As a result, clearing and settlement institutions can assume that the participants acquired the necessary previous authorization from their clients.

So far one can argue that the new law only refines the rules on statutory liens on financial instruments. More dramatic, however, is the change in the law extending the scope of the statutory lien on client assets by also imposing an extra risk on all clients of the same participant. As a result of the new rule, assets of client A of a participant to a clearing or settlement system may indeed also serve as security for trades done by such participant for client B. This may be especially relevant for those institutions operating large client omnibus accounts with the Belgian ICSD, Euroclear.

While it can be expected that foreign courts may raise objections to such an approach, it should be noted that the transposition in law of the EU Collateral Law Reform Directive and the Hague's (Preliminary Draft) Convention on the law applicable to certain rights in respect of securities held with an intermediary will make Belgium - where Euroclear operates - the jurisdiction governing the question of whether a person's title or interest in book-entry securities will be overridden or subordinated to competing titles and interests. Hence EU member states and contracting states will refer to Belgian law to determine these issues.

Security interests

Royal Decree N° 62 provides for simplified pledging and realization procedures for fungible securities. The procedures of realization are now even further simplified by omitting the requirement of giving prior notice of default to the pledgor.

Another noteworthy change relates to the fact that a pledgee can now rely on the legal presumption that the pledgors are the owners of the pledged financial instruments deposited in the accounts of the clearing and settlement institutions. Unless the pledgor has notified the pledgee beforehand in writing that it is not the owner of the pledged assets, the pledge will be valid and enforceable, even if no authorization to pledge the financial instruments has been obtained from the owner of those instruments (provided always that the pledgee has acted in good faith).

Institutions that have deposited financial instruments in Belgium are advised to review their documentation and procedures in light of these changes.

Marc Vermylen and Ruben Clement

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