Regulation of financial collateral in Latvia
RIGA - On May 25 a new law - the Financial Collateral Law 's came into force in Latvia. The law, passed in order to implement EU Directive 2002/47/EC on financial collateral arrangements, is applicable to collateral arrangements with trading in financial derivatives.
Trade in financial derivatives with or between Latvian counter-parties has been practiced for several years now. However, until passage of the Law on Financial Instruments Market (effective as of Jan. 1, 2004), and now the Financial Collateral Law, there was no specific regulation for financial collateral in Latvian legislation, and commercial companies were quite often perplexed in transactions involving publicly-held securities, in particular pledging procedures and priorities.
Subsequent to adopting the Financial Collateral Law, the Law on Commercial Pledge was also amended, which states precisely that financial collateral is outside the scope of property subject to registration as a commercial pledge in Latvia and that such collateralization is recorded by the respective financial institution (credit institution, investment broker company, etc.).
In accordance with the Financial Collateral Law, the creation, validity, perfection and enforceability of financial collateral is not subject to the national requirements as to the form of a contract, nor registration with public registers (nor the Commercial Pledge Register), notification or registration with supervision bodies or other comparable requirements as to notification or registration. The only requirement as to the validity of a financial collateral contract is that it is concluded in writing or in another legally comparable manner, and the financial collateral pledgee (the respective financial institution) acquires constructive possession over the collateral.
This means that third parties concerned (creditors included) are not in principle well protected under the Law as to accessibility of information on existing financial collateral arrangements.
Furthermore, the Law provides that the validity and enforceability of financial collateral arrangements or separate provisions of financial collateral contracts shall not be affected by commencement of liquidation or insolvency proceedings of either of the parties. Moreover the administrator of the respective proceedings has the duty to ensure duly and effective performance of the obligations under those contracts. Hence, the Financial Collateral Law ensures for pledgees of financial collateral the order for discharge of creditors claims in cases of insolvency, which ranks them among high security instruments.
This also means that any person who is offered any financial instrument in the capacity of security (securities and other financial means) that might be utilized as the Financial Collateral should inspect such collateral in detail and conduct due diligence of obligations, because if the financial instruments have already been registered as financial collateral then they will always have priority over other security (pledge). The Law states that validity and enforceability of a financial collateral arrangement shall in no manner be affected even by decisions of courts or public bodies or officials.
Hence, the new Financial Collateral Law has enabled commercial companies to offer their collaboration partners a new type of security; however, at the same time this means that the new Law may cause problems in applying this new legal instrument due to the lack of doctrine and consulting possibilities, and it will take some time until sufficient experience is obtained in Latvia as to exercising of such collateral, as well as settlement of disputes among creditors with different security.
Inese Rendeniece, is a lawyer at the law firm Loze, Grunte & Cers in Riga.
