The Austrian Act on Financial Collateral (Finanzsicherheiten-Gesetz; FinSG), which regulates the granting and enforcement of financial collateral arrangements between participants in the financial markets, has recently been amended with effect from 30 June 2011. Changes include the extension of the scope of application of the law.
Accordingly, the FinSG – and the benefits of easy establishment of the security right, efficient enforceability of collateral, and certain exemptions from insolvency law provisions – is likely to apply to a significantly wider range of transactions. The amendment of the FinSG implements EU Directive 2009/44/EC, which amended the existing EU Financial Collateral Directive.
Former legal framework
Prior to the amendment, the personal scope of application of the FinSG was limited to certain professional market participants and was hence restricted to the interbank market. In terms of the substantive scope of application, financial collateral exclusively comprised cash (ie, money that is represented by a credit to a designated account but not physical cash) and financial instruments (ie, shares, bonds and other securities).
Extension of the personal scope
Following the amendment of the FinSG, either the collateral taker or the collateral provider of a transaction under the FinSG regime must be a professional market participant. Professional market participants particularly include public authorities, supranational financial market entities, financial institutions subject to supervision, central counterparties, settlement agents, clearing houses, and certain legal entities acting as trustees or representatives (eg, on behalf of bondholders). The counterparty on the other side may now be any legal person, sole proprietorships (Einzelunternehmer), or partnership (Personengesellschaft) outside of the banking industry (extension beyond the interbank market).
Extension of the substantive scope
From 30 June 2011, financial collateral to be provided under the FinSG regime may include not only cash and financial instruments but also credit claims. Such credit claims are defined as monetary claims resulting from an agreement whereby a financial institution grants credit, except cases in which the debtor to the agreement is a consumer, a micro, or a small enterprise.
Credit claims may now effectively be used for the provision of collateral and increase the pool of available collateral. Depending on the creditworthiness of the underlying debtor, security by way of credit claims may be attractive for a collateral taker.
No application of lex commissoria
An important practical aspect is that under the FinSG regime, the lex commissoria does not apply. Accordingly, in the security agreement the parties may agree that a collateral taker may acquire (appropriate) the financial collateral and set off the value of the collateral against the secured obligations. The parties need to agree on the valuation of the financial collateral. In contrast, in connection with regular pledges, such an acceleration clause would not be permissible under Austrian law. The extension of the scope of application of the FinSG may thus also increase the practical application of such enforcement arrangements.
Insolvency law aspects
Prior to the amendment, the FinSG was in particular used in transactions regarding repurchase agreements (repos), securities lendings, and OTC-derivatives. Given that the FinSG was initially enacted due to special practical needs of the financial markets for safety and stability (in respect of certain financial business segments), the extension of the scope of application to non-professional market participants can be criticised. On the one hand, large companies whose treasury departments engage in hedging of foreign exchange, interest, and commodity risks via derivatives may now rightly be enabled to directly participate in the financial collateral regime provided by the FinSG and, compared to the conventional civil law regime of pledges, may therewith reduce their transaction costs. On the other hand, since the extension of application beyond professional market participants does not provide for any limitations towards particular business segments, the FinSG now also applies to the whole credit business (if the type of security is subject to the FinSG).
In particular, the FinSG regime provides for the option to agree on an immediate realisation of the pledge if an insolvency, liquidation, or reorganisation proceeding is opened against the collateral provider or the secured party. The same applies for close out netting, which, under the FinSG, is protected from certain insolvency related interventions. The extension of the benefits regarding insolvency law related exemptions is deemed justified by the needs of the financial markets (even if in part contrary to the general principle of equal treatment of creditors within insolvency proceedings). A collateral agreement may still be challenged under the Austrian Insolvency Code.
In light of the above, the significantly wider (substantive and personal) scope of application of the FinSG is in general justified and desirable under practical economic and legal rationales.
An important practical aspect is that under the FinSG regime, the lex commissoria does not apply. Accordingly, in the security agreement the parties may agree that a collateral taker may acquire (appropriate) the financial collateral and set off the value of the collateral against the secured obligations.