Financial collateral and netting arrangements: a proposal for bankruptcy reform

Abstract

The legal regime on financial collateral arrangements constitutes a cornerstone in the development of the wholesale capital market. Nevertheless, the Royal Decree-Law 5/2005 extends some of the rules relating to financial collateral and netting arrangements to many retail financial transactions. In our opinion, there is no need of this measure to ensure more efficient and competitive markets. Thus, this paper proposes an amendment to restrict the scope of the act. Our aim is to avoid the use of some bankruptcy immunities in any kind of banking, insurance or securities transactions.

Furthermore, we believe that the principle of legal certainty could be contrary to the general principle of equal treatment of creditors within insolvency proceedings. Firstly, with respect to netting arrangements, we don’t find necessary to prove any detriment arisen from the arrangement to be subject to rescission. And secondly, regarding to financial collateral arrangements, the evidence of fraud as a requirement to contest them represents a step backwards. We suggest therefore revising articles 15.5 and 16.3 of the act in order to apply the system of actions for reimbursement provided by the Insolvency Law, which is compatible with the EU Directives and market requirements.

Finally, according to the Royal Decree-Law 5/2005, financial collateral and netting arrangements may only be contested by the insolvency administrators. Since we do not find any reason for creditors’ lack of standing, we propose to remove this issue from the act so that article 72 of the Insolvency Law shall apply to these arrangements.