The Serbian Parliament adopted the Financial Collateral Act ("FCA") on 8 June 2018 (published in the Official Gazette of the Republic of Serbia, no. 44/2018). The FCA bill was proposed by the Serbian Central Bank (National Bank of Serbia, "NBS") on 22 May 2018 and the FCA will apply as of 1 January 2019. Financial contracts which have not been enforced by 1 January 2019 will be enforced pursuant to the existing rules that were in force before the FCA started to apply.
The FCA should transpose the EU Directive on Financial Collateral Arrangements into Serbian law. Its main features are as follows:
- Title transfer type of collateral. Under the FCA, the financial collateral arrangement is an arrangement whereby, for the purpose of securing the performance of its or another entity's financial obligation, the collateral provider undertakes to transfer title to collateral to the collateral taker or to establish a security interest (pledge) on the collateral in favour of the collateral taker, and the collateral taker undertakes to return to the collateral provider the collateral received or equivalent collateral upon and/or concurrently with the discharge of the financial obligation. The FCA finally introduced the title transfer type of collateral into Serbian law and removed re-characterisation risks (though not for corporates as counterparties, see below).
- Types of collateral. The collateral may be: (i) cash, (ii) financial instruments/securities, and (iii) credit claims.
- Eligible Counterparties. Eligible entities under Article 4 FCA are the Republic of Serbia, National Bank of Serbia, banks, broker-dealers, investment funds, insurance firms and other domestic financial sector entities, the EU, EU member states, ECB, IMF and other financial institutions. Corporates are not eligible to enter into financial collateral arrangements (and other financial contracts – financial derivatives and repo transactions) regulated by the FCA.
The FCA draft published by the NBS in September 2016 was wider in terms of eligible counterparties. It provided that any other entity and a natural person may also be a party to a financial collateral arrangement (and other financial contracts) as long as they enter into this arrangement with an eligible entity counterparty listed in the FCA. Regrettably, this provision has been removed from the final text of the FCA.
- Exchange control restrictions. Very restrictive Serbian foreign exchange law and regulations override the FCA. The FCA imposes that a cross-border acquisition and/or transfer of cash, securities and credit claims constituting the collateral between a resident and/or a non-resident entity and the establishing of a pledge on these types of collateral shall be subject to the restrictions laid down in the regulations governing foreign exchange operations.
- Safeguards from insolvency law avoidance rules. The provision, acquisition, substitution, top-up and enforcement of collateral will be exercised freely regardless of the commencement and continuation of insolvency and liquidation proceedings in respect of the collateral provider or the collateral taker. Where the collateral was provided, acquired or substituted on the day of initiation/opening of insolvency or liquidation proceedings, but after the moment of issuance of an appropriate decision on the initiation/opening of such proceedings, the financial collateral arrangement will be enforceable if the collateral taker can prove that it was not aware, nor should have been aware, of the initiation/opening of such proceedings.
- Enforcement. Upon the occurrence of an agreed enforcement event or events, the collateral taker is entitled to enforce its claim against the collateral through out-of-court proceedings (without prior enforcement notice or warning, court decisions and public auctions), and/or claims and obligations shall be netted off between the collateral provider and the collateral taker. The collateral taker should, no later than the day following the day the claims are settled against the collateral, notify the collateral provider of the settlement of claims.
- Close-out netting. The financial collateral arrangement may lay down that, following the occurrence of an enforcement event, the following steps will be undertaken automatically (if automatic early termination is agreed) or at a party's request:
mutual obligations in respect of one or more financial collateral arrangements shall be considered due and expressed as a monetary obligation, or shall be terminated and replaced by a new monetary obligation, in accordance with their estimated current value and/or the value determined as set out in the financial collateral arrangement; and/or
1. mutual claims and obligations of the parties under one or more financial collateral arrangements shall be netted, so that the difference in the amount of claims (net amount) is payable by the party from whom the larger amount is due to the other party.
2. Applicability of the FCA to financial contracts. The FCA extends application of the close-out netting provision and related netting protections and insolvency safeguards of the FCA beyond financial collateral agreements to specified financial contracts, thereby displacing the current netting provision of Article 82(3) of the Serbian Insolvency Act (Zakon o stečaju). This legislative novelty is also suitably propped up by the Insolvency Act Amendments Act (Zakon o izmenama i dopunama zakona o stečaju), which was adopted together with the FCA.
- Discrimination of corporates. The FCA provides that financial collateral arrangements and financial contracts (e.g. financial derivatives and repo transactions, etc.) under the FCA may be entered only by certain specified eligible entities listed in Article 4 of the FCA. Corporates are not among these entities. After the deletion of the netting provision from the Insolvency Act and its replacement by Articles 17 and 20 of the FCA, close-out netting rules in Serbia will be improved but will not apply anymore to corporates as counterparties. If the aim is to promote hedging as a useful risk mitigation tool for all relevant market participants, the FCA selected an awkward approach by neglecting the corporates.
- Further alignment. The FCA further aligns Serbian insolvency rules by displacing a dubious Article 12 of the Act on Insolvency and Liquidation of Banks and Insurance Companies (Zakon o stečaju i likvidaciji banaka i društava za osiguranje).
By Petar Kojdic, Partner, Schoenherr