The Austrian Ministry of Justice has published a draft bill on financial collateral arrangements (Financial Collateral Act, www.justiz.gv.at/gesetzes/). Comments are to be submitted until June 30 2003. This is the first step to implement the rules set forth in the Financial Collateral Directive (Directive 2002/47/EC of the European Parliament and of the Council of June 6 2002 on Financial Collateral Arrangements) into domestic Austrian law. It is planned that the Financial Collateral Act will enter into force on December 1 2003.
Instead of amending the various statutes regulating cross-border collateral arrangements, including perfection and enforcement, the Austrian legislator has opted to comprehensively set the framework for financial collateral arrangements in a single statute, stipulating that the provisions of the Financial Collateral Act are to prevail over conflicting statutes, and to only amend the Act on Private International Law (Internationales Privatrechtsgesetz - IPRG).
The core areas in which the Financial Collateral Act provides for new rules or at least clarifications of the existing legal framework are the following:
Conflict of laws
The amendment to the IPRG provides that, among other things, the perfection of cross-border financial collateral arrangements involving cash and financial instruments (financial collateral) is governed by the substantive laws of the jurisdiction in which the relevant account is kept, thus adopting the lex libri siti concept.
Creation of financial collateral arrangements
If Austrian law applies, the Financial Collateral Act provides that the creation and perfection of the financial collateral must be evidenced in writing (as such term is used in the Financial Collateral Directive and the Financial Collateral Act). In this respect it will suffice that the financial collateral is credited to the relevant account. With respect to financial instruments the Financial Collateral Act also provides that ownership title and other in rem rights will be transferred by registration or booking in the custody account.
Recognition of title transfer collateral arrangements
By expressly recognizing and providing for the rules applying to title transfer collateral arrangements, the Financial Collateral Act will do away with the concerns voiced in Austria to date with respect to the re-characterization of such arrangements (foreseen in the Isda Transfer Annex, for example) as creating a security interest rather than transferring full ownership title to the collateral.
Power of secured party to dispose of financial collateral
Contrary to Austrian law as now in force the Financial Collateral Act provides that the secured party, subject to an obligation to provide substitute collateral, can dispose of the financial collateral, provided that the parties to the financial collateral arrangement have so agreed.
Foreclosure over financial collateral
The Financial Collateral Act provides for efficient mechanisms of enforcing the secured party's rights to the financial collateral (sale, appropriation and set-off or application in discharge of the secured obligation), which can be taken even without prior notice (period), provided that the parties have so agreed.
Recognition of close-out netting
Under Austrian law as now in force, post-insolvency close-out netting is recognized by law only with respect to certain off-balance sheet financial transactions, options, repurchase transactions, reverse repurchase transactions, securities lending transactions and securities borrowing transactions. The Financial Collateral Act fully recognizes close-out netting notwithstanding the commencement of bankruptcy, liquidation, composition or reorganization proceedings and notwithstanding any assignment, judicial or other attachment/pledge or other disposition of the rights that form part of the close-out netting arrangement, thus considerably expanding the recognition of close-out-netting in Austria.
Whether the (lack of) legislative action with respect to the (other) insolvency law aspects of financial collateral arrangements is in full compliance with the framework set by the Directive is still being discussed with the legislator.