On 12 February 2021, the European Commission (“the Commission”) launched two public consultations reviewing the Settlement Finality Directive (SFD) and Financial Collateral Directive (FCD). In respect of the SFD, the Commission is mandated to report by 28 June 2021 on how Member States apply the Directive to their domestic institutions which participate directly in systems governed by the law of a third-country and to collateral security provided in connection with their participation. It intends to take this opportunity and also consider a broader set of issues that may warrant targeted amendments to the SFD regime (which was last reviewed in 2008/2009) that are linked with evolving business, technological and regulatory requirements. In respect of the FCD, the Commission has decided to review the Directive in parallel with the SFD review, given the close links between both regimes. Key points included in the consultation documents are summarised below:


  • Participation in a system governed by a law of a third-country: the Commission notes that transactions and collateral posted by EU participants in systems governed by third-country laws are not protected under the SFD regime. To this end, it seeks stakeholder views whether EU financial institutions that participate in third-country systems should be protected under the SFD, and if so, it presents several options that could be used to effectuate such protection. The Commission also queries, among other, whether there is a need to carry out an assessment whether the relevant third-country laws are comparable with the SFD and if so, for which specific provisions such assessment should be carried out and what factors should be taken into account for the purpose of such assessments. The Commission further asks about various aspects of extending the SFD’s scope, both in respect of third-country systems (including relevant designation criteria) and EU entities that could access them.
  • Participants in a system governed by a law of a Member State: the Commission takes note of the existing applicable categories of direct and indirect SFD participants, pointing to the fact that the SFD regime does not mandate the legal form of eligible participants and also that e-money institutions and payment institutions are not currently deemed eligible participants (notwithstanding national law provisions adopted by some Member States and which may lead to un-level playing field issues across the EU-27). The Commission therefore queries, among other, whether the current list of eligible SFD participants should be either limited, extended or otherwise modified, and if so, how should such amendments be done.
  • SFD and technological innovation: noting that the SFD regime was intended to be technologically neutral, the Commission cites concerns received from various stakeholders that the SFD’s requirements create obstacles to the use of DLT (in particular the SFD application in the de-centralised permission-less DLT framework) and crypto-assets. Another major concern is that Member States tend to transpose the existing SFD requirements differently and national competent authorities also interpret them differently, which further enhances legal uncertainty. To this end, the Commission seeks further stakeholder views on a broad set of issues – including whether the concepts of the SFD do not work in the DLT environment (and why), and whether more experience in DLT-based market infrastructure should be gained prior to considering changes within the SFD regime. In addition, the Commission queries whether the definitions of a system, transfer order, book-entry, settlement account, settlement agent as well as links with other financial market infrastructures and trading venues, and the concept of conflict of laws, should be clarified or amended to apply explicitly in the DLT context, and if so – how such changes should be effectuated.
  • Protections granted under the SFD vis-à-vis collateral security: the Commission points to the fact that currently the SFD does not protect collateral security provided by the client of a participant in an SFD system from the effects of opening of insolvency proceedings against the participant or the system operator beyond any protection afforded by sectoral legislation. To this end, the Commission queries whether such protection should be duly granted, and if so, subject to what conditions.
  • Settlement finality under the SFD: the Commission takes note of concerns raised by stakeholders and addressing shortcomings of the SFD regime, and concerning – among other – the legal duty for an SFD system to specify the moments of entry into the system and irrevocability, the provisions of theSFD not accommodating the specificities of clearing systems and the fact that there was no provisions in the SFD regime for ensuring that the moment of settlement finality is identical in relation to both the cash and securities legs of a transaction settled in “delivery-versus-payment” method. The Commission therefore further spells out these and other concerns and seeks stakeholder views whether and how they should be addressed in the context of the SFD review.


  • Scope: the Commission notes that not all financial institutions are currently within the scope of the FCD (e.g. payment institutions, e-money institutions or central securities depositories) and this may create risks for collateral takers/providers. To this end, the Commission seeks stakeholders’ views whether the scope of the FCD should be extended and if so, to which institutions. In addition, the Commission asks whether the current rationale that only financial collateral arrangements should be protected where at least one of the parties is a public authority, central bank or financial institution should be maintained, and should the FCD be exclusively applicable to wholesale markets.
  • Provision of cash and financial instruments under the FCD: the Commission notes that the FCD does not explicitly specify how the provision of financial collateral consisting of “claims relating to or rights in or in respect of” financial instruments (e.g. dividend or interest) which are provided as financial collateral separately from the underlying financial instruments in a security financial collateral arrangement should be evidenced, and also points to the lack of harmonised rules on good faith acquisition in the context of title transfer collateral arrangements that “might undermine the legitimate expectations of a good faith acquirer”. Among other issues therefore, the Commission seeks views whether it is required to specify the ways in which financial collateral such as dividend or interest could be evidenced in writing when it is provided separately from its financial instrument and whether the concepts of “possession”, “control”, “good faith acquirer” require further clarification.
  • ‘Awareness’ of (pre-)insolvency proceedings: the Commission notes that the concept of “awareness” is not very clear in particular in the context of over the counter financial collateral arrangements and asks whether it should be clarified.
  • Recognition of ‘close-out netting provisions’ in the FCD and its impact on SFD systems: the Commission notes that that the FCD does not sufficiently protect close-out netting provisions in cross-border settings as it is silent as to the application of avoidance actions in (pre-)insolvency proceedings to a close-out netting provision. It asks, among other, whether stakeholders have experienced difficulties with the recognition / application of the close-out netting provisions and/or have faced any legal uncertainties relating to close-out netting provisions due to the FCD being silent as regards the FCD’s application of national avoidance actions to such provisions, and if so, what the potential solutions should be.
  • Financial collateral: the Commission notes that currently financial collateral under the FCD consists of cash, financial instruments and credit claims, and questions whether the definition should not be extended to cover stablecoins (if and when they are regulated in EU law, as proposed in draft MiCA legislation). It also points to inconsistencies between the MiFID II and FCD definition of “financial instrument” and notes that whereas the FCD intends to be technology neutral, certain legal uncertainties might arise in the context of financial instruments issued by means of DLT.  Among other, the Commission questions whether emission allowances should be added to the FCD definition of financial instruments, and whether further clarifications are required for crypto-assets that qualify as financial instruments.

Both consultations are open until  7 May 2021.