The Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (FCD) does not currently extend its legal protections to financial collateral arrangements relating to the provision of emission allowances as collateral.
Collateralisation in the EU is defined in the Directive on financial collateral arrangements (FCD). Two types of financial collateral arrangements are defined in Articles 2(1)(b) and 2(1)(c).
The first one is "title transfer financial collateral arrangement" in which a collateral provider transfers full ownership of the collateral to the collateral taker (this includes repos and securities lending arrangements).
The second one is "security financial collateral arrangement" where a collateral provider provides financial collateral by way of security to a collateral taker, but the full ownership of the financial collateral remains with the collateral provider when the security right is established. In that second case, a right-of-use clause might apply. In that context right of use means the right of the collateral taker to use and dispose of financial collateral.
Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 12
Collateral arrangements may take different legal forms, the FCD recognises in that regard:
- “title transfer collateral arrangements”, and
- “security financial collateral arrangements”.
A “title transfer collateral arrangement” (TTCA) is an arrangement under which a collateral provider transfers full ownership of financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations (for example repos).
“Security financial collateral arrangements” stand for an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial collateral remains with the collateral provider when the security right is established (for example pledge).
Only some forms of collateral arrangements receive protection under the FCD.
The FCD does not set out a common insolvency law for Member States but, in order to improve the legal certainty of financial collateral arrangements, the legislation requires that EU Member States disapply certain provisions of national insolvency law to financial collateral arrangements falling under the scope of the FCD.
In particular, the FCD disapplies any national insolvency law that would inhibit the effective realisation of financial collateral (Recital 5, Article 4) or cast doubt on the validity of techniques contemplated under the FCD such as bilateral close-out netting, the provision of additional collateral in the form of top-up collateral and substitution of collateral.
Emission allowances‘ applicability
The MiFID II Directive envisages bringing spot emission allowances within the scope of financial regulation in the EU by classifying emission allowances as financial instruments within the meaning of MiFID.
However, separate legislative action will need to be taken to amend the FCD in order to bring EUAs within the scope of the FCD (Interplay between EU ETS Registry and Post Trade Infrastructure, Publications Office of the European Union, 2015, p. 15, 53, 55). It is argued that:
- while MiFID II envisages bringing spot emission allowances within the scope of financial regulation in the EU by classifying emission allowances as financial instruments within the meaning of MiFID II, the FCD does not link its own definition of “financial instruments” to the corresponding definition under MiFID,
- as a result, the extension of MiFID II to cover emission allowances will not be sufficient to bring emission allowances within the scope of the FCD,
- instead, legislative changes to the FCD will be required to broaden its scope to emission allowances.
Recital 23 of the SFTR
Although the scope of the rules concerning reuse in this Regulation is wider than that of Directive 2002/47/EC of the European Parliament and of the Council (13), this Regulation does not amend the scope of that Directive but should, rather, be read in addition to that Directive. The conditions subject to which counterparties have a right to reuse and to exercise that right should not in any way diminish the protection afforded to a title transfer financial collateral arrangement under Directive 2002/47/EC. Against that background, any infringement of the transparency requirements of reuse should not affect national law concerning the validity or effect of a transaction.
Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR)