Meaning The Financial Collateral Directive is an EU provision aimed at facilitating the use and enforcement of financial collateral. It establishes common principles concerning the creation and enforcement of collateral. Typically, collateral is enforced through appropriation without recourse to a court or any formal procedure. These regulations apply to financial collateral where the provider and recipient of the collateral are: A supervised institution like a […]
Managing Issue Bonds are issued in much the same way as a public issue of shares. A lead manager will prepare a prospectus, strike the price, and arrange for placement. Generally, an investment bank will advise. Larger issuers may issue their bonds in outside their home jurisdiction. An investment or merchant bank may act as lead manager to the issue. There may be several lead […]
Payment Obligations Bonds have the common feature that the issuer i.e. debtor promises to pay the bearer or holder of the bond a specified sum on a specified date. The terms and conditions of the bond are ultimately a matter of commercial agreement. Formerly most bonds were issued on an unsecured basis. There may be a clause by which the company agreed not to further […]
Settlement finality in payment and securities settlement systems Transfers and payments of financial products must be regulated to avoid major risks, especially those linked to the insolvency of participants – in the transaction. This EU law lays down rules to minimise such risks. Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement […]
Credit rating agencies SUMMARY OF: Regulation (EC) No 1060/2009 on credit rating agencies WHAT IS THE AIM OF THE REGULATION? It seeks to regulate the activity of credit rating agencies to protect investors and European financial markets against the risk of malpractice. Its aim is to guarantee the independence and integrity of the credit rating process and to improve the quality of the ratings […]
EU rules on derivatives contracts Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories The European market infrastructure regulation (known as ‘EMIR’), lays down rules regarding over-the counter (OTC) derivative contracts, central counterparties (CCPs)* and trade repositories*, in line with the G20 commitments made in Pittsburgh in September 2009. EMIR aims to reduce systemic risk, increase transparency in the OTC market and […]
Debt Instruments Bonds, commercial paper, medium-term notes and certificates of deposits are of the same broad legal nature and format. There is a certificate or document of title by which the issuer or debtor promises to pay the bearer specified amounts of money on a specified date. A bond, when used in the context of securities, is effectively a transferable loan. Some bonds may be […]
Nature of Options Convertible bonds give the holder the option to convert the bond into another security. This may be debt or share capital of the issuer company or of a guarantor. Most commonly, the conversion is to equity. The option allows the holder to subscribe for debt or equity in the issuer company. The bond is surrendered in return for the new issue, share […]
Shorter Variants The following are debt instruments with shorter maturities, generally, than bonds. commercial paper certificates of deposit, medium-term notes, acceptance credits. Each is a bearer security negotiable by delivery. They are all debentures or acknowledgements of indebtedness in a wider sense. Acceptance credit facilities may provide short-term finance through the acceptance of eligible bills. Bills are bills of exchange. Acceptance credit facilities may be […]
Mortgage Backed Securities The Asset Covered Securities Act 2001 to 2007 allows the issue by designated institutions of mortgage-backed securities. The legislation avoids the need for the creation of such securities by use of somewhat artificial elaborate structures in the manner set out in a separate chapter. The legislation does not cover all issuers. It applies to designated mortgage credit institutions and designated public credit […]
Nature of Derivatives Derivatives are financial products or assets whose value is indirectly derived from an underlying product or asset. The main types of financial derivatives are swaps, options, and futures. Swaps involve one party exchanging an obligation for another. Interest rates and r currencies are commonly the subject of swaps. Options entitle a buyer to sell or buy an amount of underlying assets such […]
Overview The so-called over-the-counter derivatives market is significant. The value of derivative transactions runs to trillions of euros and dollars, etc., many times the value of the entire economy of the world. They represent a mechanism for risk management and exchange of payment profiles in terms of risk and credit exposure. Derivatives have been criticised for their apparent part in accentuating the financial crisis. Certain […]
Types of Risk I A number of types of risks are often identified in the context of derivatives. Credit risk is the risk that the counterparty will not pay when due. In the case of exchange-traded derivatives, a clearinghouse may provide a guarantee for the trades of its members. There has been a move towards requiring use of clearinghouses to reduce risk and deleverage following […]
Financial Collateral A Directive on financial collateral seeks to reduce credit risk in collateral financial transactions between financial institutions. The purpose is to provide for the rapid and informal enforcement of financial collateral. States may not make the creation, protection, enforceability or admissibility of financial collateral arrangement dependent on the performance of any formal act. States must ensure the entity taking collateral is able to […]