Financial Collateral Directive 2002 - EC - 47

Bener
Istanbul - Turkey Client Briefing
General Introduction

EU-Directive on
EU-
Financial Collateral
2002/EC/47

Turkish point of view – the Belgian Window

Paul WOUTERS - Bener Danışmanlık A.Ş. -
Istanbul - Turkey

Bener
Istanbul - Turkey Client Briefing
General Introduction

This Power Point Presentation introduces the viewer
Into some highlights of the EU-Directive on Financial Collateral.
EU-
It only refers to the specific situation with respect to some of the Belgian-Turkish aspects.
Belgian-

If you live in another country then Turkey or refer to another EU-country then Belgium,
EU-
your situation might be different.
In any case, we advice you to get proper legal advice before taking any legal action since
every situation has its’ own merits.

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First example of a problem scenario

A bank buys shares on the stock exchange for the account of a client.
Towards the other market player / seller the bank has a direct and
personal obligation to pay.

Most od the time the bank will be covered by some kind of collateral /
security furnished by the client.

However, when the client does not pay as agreed, the bank has to
finance his credit, is exposed vis-a-vis those third counter parties on the
vis-
stock exchange for immediate payment and sometimes even is
endangered (for instance at stock exchange crash situations where
overnight a lot of clients do not pay their debts).

Though properly secured with collateral, the financial insitution can
not execute rapidly on the security of her clients and can get into
trouble.
trouble. Paul WOUTERS - Bener Danışmanlık A.Ş. -
Istanbul - Turkey

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Second example of a problem scenario

A construction company has a performance security from a subcontractor.

The subcontractor becomes subject to insolvency proceedings and the
construction company suddenly is facing (1)penalties for late performance
by the principal and (2) supplementary costs for replacing the defaulting
subcontractor.

The performance security has to be enforced in order to cover these costs
and penalties.

Though properly secured with collateral, the construction company can
not execute rapidly on the security of the subcontractor and can get into
trouble.
trouble.

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In general :

The establishment of a security requires redaction of formal paperwork /
contracts that have to be updated regularly – for instance when the
composition of the security changes (shares or bonds are sold in the
course of time and substituted by other assets ...) or the debt to which it
is applicable changes - ...

If not properly managed, all this could affect the validity of an originally
properly construed financial collateral.

The enforcement of the collateral most of the time is a costly and
lengthy procedure in courts with all risks attached to it.

Nothing more frustrating then having good collateral but not being able
to use it for a long time (and maybe see its’ market value go down all the
time). Paul WOUTERS - Bener Danışmanlık A.Ş. -
Istanbul - Turkey

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In domestic situations, the legal background is usually known to both
situations,
collateral provider and –taker and the law chosen normally coincides
with the applicable insolvency laws.

However, in a cross-border transaction the laws of different States
cross-
may apply to different parts of a transaction.

For instance: the security provided by a debtor may be situated in one
State, the debt itself may be governed by the law of another State, the
debtor may be incorporated in a third State ...

The cross-border use of securities, together with the international
cross-
nature of the market participants, make it increasingly difficult to
identify which State’s laws apply to which parts of the transaction.

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The EU- Directive on Financial Collateral :
EU-

* the number of transactions
* the speed and sequence with which they have to be executed
* the value in currency that each transaction represents
* the speed with which (additional) security / margin has to
be called
* the sheer size of the (professional) counterparties

make the likelyhood of a “mistake” in the perfection or maintenance
phase and / or the consequences of a non-payment by the “client” a
non-
real danger AND increases the impact of such mistake on the stability
of the financial institutions.

The lengthy legal enforcement process further creates the danger that
one insolvency in the financial chain could trigger another one.

Undesired DOMINO-effect could happen.
DOMINO- Paul WOUTERS - Bener Danışmanlık A.Ş. -
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Within the framework of the Financial Markets Action Plan and
in order to:

* safeguard financial stability and limit contagion effects in case of
default of a party to a financial collateral arrangement

* improve the legal certainty of financial collateral arrangements

* avoid negative effects of cross border insolvency procedures on
such financial collateral arrangements

* limit the administrative burdens for parties using financial collateral

* provide for rapid and non-formalistic enforcement procedures
non-

The EU-authorities issued a Directive that has been implemented now
EU-
in most EU-Member States. Belgium has inserted very “liberal”
EU-
provisions in its’ local legislation, open to a broad range of parties
concerned and of different kinds of collateral that can be used.
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EU Collateral Directive

1. Definitions :

1. what do we mean by financial collateral agreement

2. which parties should be involved in order to use the benefits of the
EU-Directive as applied in Belgium
EU-

3. what is financial collateral : cash or negotiable financial instruments

4. for which debts can it be used : financial debts

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1. What is meant by a “financial collateral agreement”

This is an arrangement under which:

* a collateral provider provides a financial collateral in favor of a
collateral taker

* to secure the performance of an obligation

* and where either full ownership of the financial collateral remains with
the collateral provider (pledge, charge, lien) OR whereby transfer of
the full ownership of the assets with buy-back (repurchase or transfer
buy-
of title arrangement) is agreed upon

The Directive did also expand to close out netting agreements .

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2. Which parties should be involved to make the Directive applicable:

* public authorities from EU-Member States
EU-
* EU central banks, European Central Bank, Bank for International
Settlements, a multilateral development bank, I.M.F., European
Investment Bank
* EU financial institution (credit institution, investment firm, financial
institution, insurance institution, undertaking for collective investment,
management company)
* EU central counterparty, settlement agent or clearing house
* a person - other then a natural person – including unincorporated
firms and partnerships provided the other party is a EU “institution” as
defined above (‘opt out’ possible – Belgium did not do this)

Note: The Belgian Law of December 15, 2004 on Financial Collateral
does NOT implement this restriction and is avaliable to ALL parties,
natural persons included, EU non-residents included, even if neither
non-
collateral taker – giver or debtor are a EU financial institution.
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3. The financial collateral / security can consist of :

* cash (money credited to an account in any currency - or money
market deposits)

* shares or securities equivalent to shares, bonds and other debt
instruments, if these are negotiable on the capital markets

* other securities which give the holder right to acquire such shares,
bonds or debt instruments

* derivatives and any rights relating to them

(note: this definition can be slightly different in all EU-Memberstates)
EU-

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4. The debt has to be a “financial obligation”:

* can be a present or future obligation

* can be an obligation owed to the collateral taker, by a person other
then the collateral provider

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EU Collateral Directive

2. Measures that have been taken :

1. reducing formal requirements

2. easy and rapid enforcement

3. right of use, recognition of title transfer financial
collateral and close-out netting provisions
close-

4. certain insolvency provisions disapplied

5. avoidance conflict of laws

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1. Reducing formal requirements

* There are no longer any legal requirements to create, validate,
perfect or admit in evidence such collateral. However, for
matters of proof it is still advised to draft a broad collateral
agreement.

(e.g. notarial deeds, registration requirements, notification requirements,
public announcements or other formal certification are NOT required)

* The collateral however has to be transfered into the
possession of the collateral taker.
taker.

The deposit of the cash or the financial instruments into a
special account (even held by a third party – bank) is sufficient
to organize transfer of possession and to ensure the validity and
perfection of the collateral takers’ rights without any further
formality.
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* Margin calls and substitution of collateral have been accepted.

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2. Easy and rapid enforcement

The collateral may be enforced:

* without prior notification to the collateral provider / debtor
and without court intervention

* if so agreed upon in the collateral agreement and if proper
valuation standards have been stipulated: even without
forced sale at the stock exchange, but by simple
appropriation and setting off their value – money is enforced
by simple compensation

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3. Right of use

If so agreed upon in the Financial Collateral Agreement and to such
extent:

* the collateral taker is entitled to exercise a right of use in
relation to the collateral
(he can alienate, sell ... the collateral)

* subject to the obligation to transfer equivalent collateral
into the account on the due date of performance

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Recognition of title transfer collateral arrangements

The use of title deed transfer (repo) has been accepted as long as no
natural persons are involved.

Such is opposable to insolvency proceedings and third parties.

Recognition of close-out netting provisions
close-

Such notwithstanding insolvency proceedings and are opposable to third
parties.

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4. Certain insolvency provisions disapplied

In general, the financial collateral arrangements may not be declared
invalid or void or be reversed on the sole basis that winding up
proceedings or reorganisation measures have commenced against one or
more parties involved and they can be opposed to such insolvency
proceedings and third parties.

The rules of the so-called “suspect period” before insolvency are set aside
so-
– except with respect of fraudulent acts.

5. Conflict of laws

The law of the EU-Memberstate in which country the relevant account is
EU-
maintained is applicable.

Such bank account has to be held in Belgium in order to use all of the
facilities mentioned above.
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Résume : present execution scheme in Turkey:

1. creditor notifies debtor that due date has expired and summons to pay
2. if claim is contested: go to court and have debtor sentenced in
payment
3. start and execute enforcement proceedings on the collateral
4. go to stock exchange and sell collateral “at best price”

Résume : optimal use of Directive 2002/EC/47:

The collateral may be enforced (sold) directly without prior notification to
the collateral provider / debtor or court intervention.

If so agreed upon in the collateral agreement and if proper valuation
standards have been stipulated, simple appropriation of the financial
instruments is possible, together with direct compensation of the money
involved.

If so agreed upon and to such extent,Turkey collateral taker is allowed to
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use the collateral, provided restitution by equivalent at due date.

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Some relevant literature:

Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements, Official Journal, L 168/43,
Journal,
27.06.2002, p. 43

Wet van 15.12.2004 betreffende financiële zekerheden en houdende diverse fiscale bepalingen inzake zakelijke-
zakelijke-
zekerheidsovereenkomsten en leningen met betrekking tot financiële instrumenten, B.S., 01.02.2005

Devos, D.,‘The Directive 2002/47/EC on ‘Financial Collateral Arrangements of June 6, 2002’, Melanges en
hommage à Jean-Victor Louis, 2003. p. 258

Löber, K., ‘The developping EU legal framework for clearing and settlement of financial instruments’, E.C.B.,
Legal Working Paper Series, No 1, February 2006

note:

www.UNIDROIT.org almost literally copied the core provisions of the Collateral Directive in its draft convention
on harmonised substantive rules regarding securities held with an intermediary, November 2004 (published
23.12.2004) – final report Augustus 2005
http://www.unidroit.org/english/publications/proceedings/2005/study/78/s-78-23rev-e.pdf

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Paul WOUTERS,

of counsel BENER Danışmanlık A.Ş., Istanbul - Turkey;
admitted to the Antwerp (Belgium) Bar Association in 1985;
Universiteit Antwerpen (Law School – 1983);
Mediator (alternative dispute resolution – 2000)

This presentation only intends to introduce to the broad guidelines of the Directive 2002/EC/47 on financial
collateral. For details and further information on specific issues or implementation into different EU-
EU-
jurisdictions, consult your legal adviser.

These areas of legislation are under constant evolution both on international and EU-level as on national levels.
EU-

It is advised to keep in touch and already prepare your services and administrations for upcomming changes on an ongoing
and daily basis.

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Financial Collateral Directive 2002 - EC - 47

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