The Finnish Act on Financial Collateral Arrangements (the Act), which entered into force on February 1 2004, implements Directive 2002/47/EC on financial collateral arrangements.
The Act applies to the use of securities (such as shares, bonds and derivatives) and account money as collateral, although its scope is limited to transactions where the collateral provider is an institution, such as a credit institution, an investment firm, an insurance company or a public sector entity. The Act also applies to collateral set by entities (legal persons) to such institutions, provided the collateral consists of publicly traded shares or equity securities. The Act does not apply to security transactions of private individuals, even if the collateral is provided in connection with business operations.
The Act introduces new provisions on, for example, title transfer collateral arrangements in connection with repurchase agreements or other similar transactions. It provides for the enforcement of agreements that confer upon the collateral taker the right of use to the financial collateral, that is, the right to use and sell the pledged assets. Under Finnish law, such terms would previously have been considered invalid. The Act also introduces new rules on the enforceability of appropriation clauses. Parties may agree on terms that give the collateral taker the right to appropriate the financial collateral and set off its value against the secured financial obligations. In this case, any excess amount must be returned to the collateral provider. The Act also provides for new provisions on bilateral close-out netting that will, as a rule, be valid with regard to financial obligations that arose before bankruptcy or reorganization proceedings were initiated.
The Act will considerably reduce the uncertainty in international collateral arrangements. The scope of the new legislation is, however, limited because at least one of the parties to a financial collateral arrangement must be an institution, as defined in the Act. There is also some uncertainty with respect to the tax consequences of certain arrangements as provided by the Act. When passing the Act, the Finnish parliament issued a statement to the government according to which Finnish tax legislation needs to be revised in part to ensure that the transactions allowed under the Act may be used without adverse tax consequences.