Report from the Commission to the Council and the European Parliament on the appropriateness of Article 3(1) of Directive 2002/47/EC on financial collateral arrangements

Collateral is given by a borrower to a lender to minimise the risk of financial loss to the lender if the borrower defaults on its obligations. Since the financial crisis, collateral has become increasingly important, driven by a market need for more secured funding and regulatory requirements.

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements as amended by Directive 2009/44/EC ('FCD') creates a harmonised EU legal framework for the creation and enforcement of collateral, i.e. ‘title transfer financial collateral arrangementsʼ (where the full title to the collateral is transferred to the collateral taker) or ‘security financial collateral arrangementsʼ (where the collateral taker receives a security right, e.g. a pledge or a charge).

The FCD originally covered only cash and financial instruments used as collateral. It abolished formal requirements imposed by Member States on financial collateral arrangements or the provision of collateral, e.g. requirements on the form of the relevant contractual documentation, registration or other notification. Given that the consequence of failing to comply with such requirements was often the invalidity or unenforceability of the collateral against third parties, the removal of those obstacles facilitated the movement of cash and financial instruments across the EU.

In 2009, the FCD was amended to introduce ‘credit claims’ as collateral. A ‘credit claim’ is defined in the FCD as a pecuniary claim arising from an agreement where a credit institution grants credit in the form of a loan. The 2009 revision of the FCD prevents Member States from requiring that the creation or validity of financial collateral arrangements relating to credit claims be dependent on the performance of a formal act, e.g. registration or the notification of the debtor. This aims to ensure that the financial collateral arrangement relating to a credit claim is not invalidated because the arrangement was not registered with a public authority or the debtor was not notified about the collateral arrangement.

The 2009 revision also grants Member States an option to require formal acts, e.g. registration or notification, relating to credit claims used as collateral for purposes of perfection, priority, enforceability or admissibility in evidence against the debtor or third parties. Under the 2009 revision, the Commission was asked to report to the European Parliament and the Council on the continuing appropriateness of the Member State option. This report assesses how Article 3(1) of the FCD was implemented, its results and whether amendments to the Directive are needed.