The Financial Collateral Arrangements are newly regulated by a separate act which has taken effect as of 1 January 2011. The main changes to the Act include extension of fi-nancial collaterals and extension of the range of persons allowed to enter into financial collateral arrangements.

  Background

The Czech legislators had to implement the Amending Directive (Directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009) which amends the Financial Collateral Directive (Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements) and decided to review the existing legal regulation.

As a result, the new Act on Financial Collaterals (Act No. 408/2010 Coll., on Financial Collaterals) (the “Act”) was adopted and replaced the rules on financial collateral originally contained in the Czech Commercial Code (Act No. 513/1991 Coll., the Commercial Code, as amended).

At the same time, the related act (Act No. 409/2010 Coll., on change of acts in connec-tion with the adoption of the Act on Financial Collaterals) was adopted. The related act amends a number of other legal regulations, such as the Czech Commercial Code, the In-solvency Act (Act No. 182/2006 Coll., Insolvency Act, as amended) and other acts regu-lating the financial market.

Main changes

The main changes to the Act include extension of financial collaterals and extension of the range of persons allowed to enter into financial collateral arrangements.

According to the Amending Directive, the Act newly stipulates that credit claims are eligi-ble collaterals.

The Act further determines new categories of persons allowed to enter into financial collateral arrangements. This relates in particular to other foreign persons than individuals, individuals who are entrepreneurs and individuals who are not entrepreneurs. The Act stipulates some further conditions in this respect.

Legal nature of financial collateral

Financial collateral arrangements can be established under one of the following collateral-isation techniques: (i) pledge over the financial collateral or (ii) transfer of financial collateral arrangements in favour of the collateral taker. In line with the Directive, Czech law recognises the repurchase agreement of the financial collateral after fulfilment of ob-ligations.

The Act further creates a legal framework for using financial collateral in the form of “pooling”, provided that the assets can be identified at any given time.

Waiver of set-off

Under the conditions stipulated in the Act, in line with the Amending Directive the Act newly stipulates that the debtors of the credit claims may validly waive their set-off rights vis-à-vis the creditors of the credit claim and vis-à-vis any further beneficiary. This waiver can be performed before the occurrence of claim for set-off.

Appropriation of pledged financial collateral

In case of an enforcement event, under the Act the collateral taker is able to realise any financial collateral by way of, inter alia, appropriation, provided that such realisation has been agreed between the parties and the parties also agreed on the valuation of the financial collateral or the manner of its determination. This is a distortion of the general principles of the Czech regulation of pledge.

While the new Act has been adopted and all rules have been more or less rephrased, in fact only a few material changes have been made in addition to the changes required un-der the Amending Directive. The most noteworthy issues of the Czech Act on Financial Collateral have been summarised above.