For further information contact:
ISDA New York - Milton Bellis,(1 212)332-1202; e-mail mbellis@isda.org

ISDA REPORT PROPOSES APPROACHES TO REFORM LEGAL OBSTACLES
TO COLLATERAL USE IN THE EU

AMSTERDAM, Wednesday, March 15, 2000 -- The International Swaps and Derivatives Association (ISDA) released at its annual meeting here today recommendations to reform the existing legal structure in European Union member states which create obstacles to the effective use of collateral.

Lack of legal certainty for collateralising transactions to reduce credit risk seriously and needlessly impedes the amount of business that could otherwise be done, ISDA holds. Despite legislative improvements in recent years, the current laws and rules throughout the EU relating to the use of collateral remain, in many instances, complex as well as inconsistent, impractical or out of date. The consequences are inefficiency, higher cost and increased risk for Europe's financial markets.

In a report entitled Collateral Arrangements in the European Financial Markets, ISDA proposes nine principles to accomplish an effective, modern legal framework for collateral:

  • rules and procedures for implementing and maintaining a collateral arrangement should be simple, clear and cost-effective.
  • cumbersome existing formalities such as registration, notification, filing and similar requirements should be abolished
  • a collateral taker should be free to deal with the collateral until required to return it
  • a giver of pledge collateral (a pledgor) should be protected from the insolvency of the taker of that collateral (the pledgee)
  • the law governing the creation and priority of the collateral arrangement should be the law chosen by the parties to it
  • where no law is chosen by the parties, the governing law should be the law of the place where the collateral is held; collateral held through an intermediary being deemed held where the intermediary maintains the account, register or other official record representing such collateral
  • the legal nature of a party's holding of securities in a clearing system should be clarified
  • collateral arrangements should be protected from the rights of third parties
  • "top up" deliveries of collateral under mark-to-market collateral arrangements should be protected from avoidance under preference and similar insolvency rules.

    The Collateral Law Reform Group, formed by ISDA last year, prepared the report to provide information and guidance to the European Commission, the European Central Bank and national authorities with responsibility for financial activity.

    "Collateral Arrangements in the European Financial Markets" may be downloaded as a pdf file (61KB).