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Financial collateral arrangements
The EU's Financial Collateral Directive establishes a harmonized legal framework for the use of securities and cash as collateral in financial transactions across the EU. This directive plays a crucial role in minimizing financial risks, promoting market integration, and ensuring the proper functioning of post-trade systems.
Why is Collateral Needed and How is it Used?
Financial Collateral Directive
This framework is essential for reducing credit losses, supporting cross-border business, and enhancing the competitiveness of European financial markets. The EU's collateral rules were updated in 2009 to reflect regulatory and market developments.
The Financial Collateral Directive ensures that collateral is effectively used and enforced across the EU, contributing to the stability and efficiency of the financial markets.
Why is Collateral Needed and How is it Used?
- Collateral is an asset provided by a borrower to a lender to reduce the lender's risk of financial loss if the borrower fails to meet their obligations. It's used extensively across the EU in various financial transactions, including derivatives and general bank lending. The importance of collateral has grown since the financial crisis, reflecting the market's demand for more secured funding.
Financial Collateral Directive
- Financial Collateral Directive: This directive creates a harmonized EU legal framework for the receipt and enforcement of financial collateral. It simplifies the cross-border use of collateral by abolishing many formal requirements (like registration) and improving enforcement rules. For instance, if a borrower defaults, the lender can immediately realize the collateral, even in insolvency proceedings. The directive also clarifies which law applies to book-entry securities collateral in cross-border situations.
This framework is essential for reducing credit losses, supporting cross-border business, and enhancing the competitiveness of European financial markets. The EU's collateral rules were updated in 2009 to reflect regulatory and market developments.
The Financial Collateral Directive ensures that collateral is effectively used and enforced across the EU, contributing to the stability and efficiency of the financial markets.
