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The Collateral Directive (Directive 2002/47/EC) came into force in the Danish Securities Trading etc Act on January 1 2004. The new rules apply to financial collateral arrangements and close-out netting agreements entered into after that date.

With regard to financial collateral arrangements the rules apply to financial collateral arrangements between financial market players and also to arrangements where both parties are other legal entities or sole trading businesses. In the latter case obligations arising out of ordinary trading business are excluded because the rules only apply to obligations arising out of currency and securities trading, trading on commodity exchanges and deposits and lending.

The rules on financial collateral arrangements are new and contain provisions regarding recognition of right of use, enforcement, additional collateral and substitution of collateral. These rules deviate from Danish general insolvency law and principles of rights in rem.

Danish law has applied a substance over form principle, which, otherwise, could result in a re-characterization of a transfer of title collateral arrangement. According to the new rules a transfer of title financial collateral arrangement may not be re-characterized and such an arrangement covered by the new rules will take effect in accordance with its terms in respect of perfection and enforcement.

The scope where close-out netting agreements may be made has been increased. Previously the rules could only be used in respect of obligations arising out of currency and securities trading close-out netting. Now it can be agreed in respect of a wider range of financial obligations.

Individuals can enter into close-out netting agreements, but in such case the rules on close-out netting only apply to obligations arising out of currency and securities trading.

By Morten Krogsgaard

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