Financial collateral arrangements in the financial markets

Abstract

Despite having been enacted over a decade ago, the Financial Collateral Directive still plays a significant role in reducing systemic risk by bolstering market standards through increased mutual, cross-border recognition of collateral arrangements. Emphasis will be placed upon the property and insolvency law implications brought about by the enactment of the FCD: despite the fact that the Directive operates within a specific area of practice that otherwise falls outside the ambit of private law enactment, the effects that the substantive collateral rules have on the domestic laws of traditionally civilian European Member States certainly warrants review, especially insofar as it introduces a self-executing, right of appropriation that, it is argued, may prove prejudicial to debtor rights. The more important provisions promulgated via the European framework relate to the exclusion from the insolvency proceedings of certain financial creditors. In this respect, the law allows parties operating financial contracts to circumvent national insolvency laws and to operate close-out netting clauses, a practice often equated to a super priority of sorts because it derogates from the pari passu principle and its emanations. It allows financial creditors the right to terminate and set-off any open positions despite the counterparty’s insolvency. In this respect, the discussion will focus on the problems that the cross-border enforcement of close-out netting may bring about in what ultimately remains a fragmented area of law. Finally, in the wake of the recent enactment of the SFTR, the discussion will revert to the effect which the reuse of collateral has upon the financial markets and shadow banking activity more specifically. The text attempts to show that the right of reuse is not inherently dangerous, and that curtailing this right would effectively mean cutting off an alternative credit resource within the markets.