Official translation

REPUBLIC OF LITHUANIA

LAW ON FINANCIAL COLLATERAL ARRANGEMENTS

15 April 2004 No. IX-2127

Vilnius

CHAPTER 1

GENERAL PROVISIONS

Article 1. Purpose of the Law

1.	This Law shall regulate financial collateral arrangements and peculiarities of their implementation.

2.	The purpose of the Law is to ensure safe, reliable and effective implementation of financial collateral arrangements.

3.	This Law is intended to ensure the application of the European Union legal act indicated in the Annex to this Law.

Article 2. Definitions

1. "Relevant account" means a book entry securities account or register in which entries are made by which that book entry collateral is provided to the collateral taker.

2. "Relevant financial obligations" means obligations which are secured by a financial collateral arrangement and which are performed through cash settlement and/or delivery of financial instruments. Relevant financial obligations may also consist of or include:

1)	present, future or prospective obligations (including such obligations arising under a master arrangement (on general principles) or similar arrangement);

2)	obligations owed to the collateral taker by a person other than the collateral provider;

3)	obligations of a specified class or kind arising from time to time.

3. "Repurchase agreement" means an arrangement under which one party (seller) undertakes to sell financial instruments or cash to another party (buyer), which pays the purchase price, and under which it is agreed that the seller undertakes to repurchase the same or equivalent financial instruments or the same amount of cash from the buyer for the repurchase price at the set time in the future.

4. "Settlement agent" as defined in the Republic of Lithuania Law on Settlement Finality in Payment and Securities Settlement Systems or an undertaking of another European Union Member State that meets the definition of a settlement agent laid down in the legal acts of that state.

5.	"Close-out netting provision" means a provision of a financial collateral arrangement, or of an arrangement of which a financial collateral arrangement forms a part, or, in the absence of any such provision, any statutory rule by which, on the occurrence of an enforcement event, whether through the operation of netting or otherwise:

1)	the obligations of the parties are accelerated so as to be immediately due and expressed as an obligation to pay an amount representing their estimated current value, or are terminated and replaced by an obligation to pay such an amount; and/or

2)	an account is taken of what is due from each party to the other in respect of such obligations, and a net sum equal to the balance of the account is payable by the party from whom the larger amount is due to the other party.

6.	"Insurance undertaking" means an undertaking which holds a license for insurance activities issued according to the procedure laid down in the Republic of Lithuania Law on Insurance or an undertaking that has the right to engage in insurance activities in accordance with the legal acts of another European Union Member State. The term “insurance undertaking” used in this Law shall also refer to a branch of a foreign country insurance undertaking established in the Republic of Lithuania.

7. "Financial instruments" means shares in companies and other securities equivalent to shares in companies, debt securities which can be traded in securities markets, and any other securities which give the right to acquire any such shares, debt or other securities by subscription, purchase or exchange or which give rise to a cash settlement (excluding instruments of payment), including units of collective investment undertakings, money market instruments and claims relating to or rights in or in respect of any of the foregoing.

8.	"Financial collateral arrangement" means a security financial collateral arrangement or a title transfer financial collateral arrangement whether or not these are made as separate agreements or are part of the master agreement (on general principles) giving rise to the main obligation. The financial collateral arrangement must indicate the relevant financial obligations.

9. "Security financial collateral arrangement" means an arrangement under which a collateral provider provides financial collateral in favour of, or to, a collateral taker, thus securing the performance of relevant financial obligations to the collateral taker, and where the full ownership of the financial collateral remains with the collateral provider.

10.	"Title transfer financial collateral arrangement" means an arrangement, including repurchase agreements, under which a collateral provider provides financial collateral to a collateral taker in order to secure the performance of relevant financial obligations to the collateral taker, and where the full ownership of financial collateral is transferred to the collateral provider.

11. "Financial collateral" means cash and financial instruments that are used to secure performance of relevant financial obligations under a financial collateral arrangement.

12. "Book entry securities collateral" means financial instruments provided under a financial collateral arrangement to secure relevant financial obligations, title to which is evidenced by entries in a relevant account maintained by an intermediary.

13. "Financial institution" as defined in the Republic of Lithuania Law on Financial Institutions or an undertaking of another European Union Member State that meets the definition of a financial institution laid down in the legal acts of that state.

14. "Financial brokerage firm" as defined in the Republic of Lithuania Law on Securities Market or an undertaking of another European Union Member State, which meets the definition of a financial brokerage firm laid down in the legal acts of that state.

15. "Investment company with variable capital" as defined in the Republic of Lithuania Law on Collective Investment Undertakings or an undertaking of another European Union Member State, which meets the definition of an investment company with variable capital laid down in the legal acts of that state.

16. "Clearing house" as defined in the Republic of Lithuania Law on Settlement Finality in Payment and Securities Settlement Systems or an undertaking of another European Union Member State, which meets the definition of a clearing house laid down in the legal acts of that state.

17. "Credit institution" as defined in the Republic of Lithuania Law on Financial Institutions or an undertaking of another European Union Member State, which meets the definition of a credit institution laid down in the legal acts of that state.

18. "Winding-up proceedings" means realisation of the assets and distribution of the proceeds of a legal person among the creditors, shareholders or members as appropriate, which may be conducted as judicial or other proceedings, including where such winding-up proceedings are terminated by a composition or other analogous measure, whether or not they are founded on insolvency or are voluntary or compulsory.

19. "Equivalent financial collateral":

1) in relation to cash, means a payment of the same amount and in the same currency;

2) in relation to financial instruments, means financial instruments of the same issuer, forming part of the same issue or class and of the same nominal amount, currency and description or other assets consisting of financial instruments, where a financial collateral arrangement provides for the transfer of other assets following the occurrence of any event relating to or affecting any financial instruments provided as financial collateral.

20. "Central counterparty" as defined in the Republic of Lithuania Law on Settlement Finality in Payment and Securities Settlement Systems or an undertaking of another European Union Member State, which meets the definition of the central counterparty laid down in the legal acts of that state.

21. "Provided financial collateral" means financial collateral that is transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral taker or of a person acting on the collateral taker’s behalf.

22. "Cash" means money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits, with the exception of ready cash.

23. "Enforcement event" means an event of default or any similar event as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or by operation of law, the collateral taker is entitled to unilaterally realise financial collateral or a close-out netting provision comes into effect.

24. "Reorganisation measures" means measures which involve any intervention by state or municipal authorities or bodies, which are intended to preserve or restore the financial situation of a legal person, affect pre-existing rights of third parties, including measures involving a suspension of payments, suspension of enforcement measures, reduction of claims and other measures.

25. "Management company" as defined in the Republic of Lithuania Law on Collective Investment Undertakings and the Republic of Lithuania Law on the Supplementary Voluntary Accumulation of Pensions or an undertaking of another European Union Member State which meets the definition of management company laid down in the legal acts of that state.

26. "Intermediary" means a settlement agent or intermediary of public trading in securities within the meaning of the Republic of Lithuania Law on Securities Market or a settlement agent or intermediary of public trading in securities of another European Union Member State which meets the definition of an intermediary laid down in the legal acts of that state.

Article 3. Scope of the Law

1.	The provisions of this Law shall apply to financial collateral arrangements under which a collateral provider and collateral taker are entities specified in paragraph 2 of this Article, and if the activities of entities specified in subparagraphs 3 to 6 of paragraph 2 of this Article which are subject to prudential supervision. The subject of such arrangements shall be financial collateral satisfying the requirements of Article 5 of this Law.

2.	The collateral provider and the collateral taker must each belong to one of the following categories:

1) a public authority (excluding publicly guaranteed undertakings unless they fall under subparagraphs 2 to 9 of this paragraph), including public authorities of European Union Member States charged with or intervening in the management of public debt or authorised to hold accounts for customers;

2) a central bank, the European Central Bank, the Bank for International Settlements, the International Bank for Reconstruction and Development, the International Finance Corporation, the Asian Development Bank, the African Development Bank, the Council of Europe Development Bank (former the Council of Europe Resettlement Fund), the Nordic Investment Bank, the Caribbean Development Bank, the European Bank for Reconstruction and Development, the European Investment Fund and the Inter-American Investment Corporation, the International Monetary Fund and the European Investment Bank;

3) a financial institution, including a credit institution and a financial brokerage firm;

4) an insurance undertaking;

5) an investment company with variable capital;

6) a management company;

7) a central counterparty, settlement agent or clearing house, including similar institutions regulated under the legal acts of the Republic of Lithuania, acting in the futures, options and other derivatives markets to the extent not covered by the Law on Settlement Finality in Payment and Securities Settlement Systems;

8) a person other than a natural person, who acts in a trust or representative capacity on behalf of any one or more persons that includes any bondholders or holders of other forms of securitised debt or any institution as defined in subparagraphs 1 to 7 hereof;

9) a person other than a natural person, provided that the other party is an institution as defined in subparagraphs 1 to 8 hereof.

3. This Law shall not apply to the rights which any person may have in respect of assets provided as financial collateral, and which arise otherwise than under the terms of the financial collateral arrangement and otherwise than on the basis of any legal provision or rule of law arising by reason of the commencement or continuation of winding-up proceedings or reorganisation measures.

4. The provisions of Chapter XII, Book 4 of the Civil Code shall apply mutatis mutandis to security financial collateral arrangements.

5. The provisions of this Law in relation to the realisation or evaluation of financial collateral and the calculation of the relevant financial obligations shall be conducted in a commercially reasonable manner.

6. Promissory notes, bills of exchange and cheques shall not be treated as securities for the purpose of this Law.

CHAPTER 2

FINANCIAL COLLATERAL ARRANGEMENTS

Article 4. Obligations Secured by a Financial Collateral Arrangement

1.	The performance of relevant financial obligations may be secured by a financial collateral arrangement.

2.	Financial collateral is a derivative obligation of the main relevant financial obligation. The rights of the collateral taker are derivative from his rights as a creditor and the exercise of these rights shall depend on the performance of obligations secured by a financial collateral arrangement.

3.	A financial collateral arrangement shall secure the relevant financial obligations that exist at the moment of their performance, including interest, late charges, loss incurred due to a default on the term of performance of these obligations as well as expenses necessary for recovery, unless otherwise specified in the arrangement.

Article 5. Subject Matter of a Financial Collateral Arrangement

1.	Subject matter of a financial collateral arrangement is financial collateral.

2.	Financial instruments that will pass into the ownership of the collateral provider in the future according to the concluded transactions and cash that will be transferred to the account designated by the parties may also be a financial collateral. Financial instruments may be used for the enforcement of obligations only after the title to them has passed to the collateral provider.

3.	Unless otherwise established by laws or an arrangement, the financial collateral shall cover income generated by the collateralised financial instruments and cash.

4.	The collateral provider must be the owner of the provided financial collateral, save where otherwise established by laws. Financial instruments or cash that are in common ownership may be provided as financial collateral only upon written consent of all co-owners.

5.	In case of a dispute, the provision of financial collateral should be evidenced in writing. Written evidence should identify the financial collateral. The crediting of financial instruments provided as financial collateral into the relevant account (or such collateral forming a credit in the account) or the crediting of cash provided as financial collateral into the designated account (or such collateral forming a credit in the account) shall be recognised as written evidence under this Law.

6.	The parties to an arrangement may agree on the procedure for the valuation of financial instruments.

7.	Unless otherwise agreed by the parties to a financial collateral arrangement, the value of financial instruments negotiable on regulated markets is established according to the latest market value of financial instruments in that regulated market.

Article 6. Withdrawal of Financial Collateral, Substitution of Financial Collateral and the Provision of an Additional Financial Collateral Under a Financial Collateral Arrangement

1.	The parties to a financial collateral arrangement may agree on the provision of an additional financial collateral and the substitution or withdrawal of financial collateral.

2.	If the collateral provider substitutes the financial collateral indicated in a financial collateral arrangement, it shall provide an equivalent financial collateral at the latest by the moment of the financial collateral withdrawal.

3.	The additionally provided or substitute financial collateral shall be subject to the terms of the financial collateral arrangement to which the original financial collateral was subject and shall be treated as having been provided at the same time as the original financial collateral was first provided.

4.	Any right of substitution of financial collateral or to withdraw excess financial collateral in favour of the collateral provider shall not prejudice the financial collateral provided to the collateral taker.

Article 7. Origination of the Right of Use

The right of use shall arise from the moment of providing the financial collateral to the collateral taker and shall be valid during the time when the financial collateral is at the disposal of the collateral taker or his authorised representative or is held by him. Cash and financial instruments shall be treated as provided to the collateral taker, when cash provided as financial collateral is credited to the designated account and financial instruments provided as financial collateral are credited into the relevant account.

Article 8. Termination of the Right of Use

1. According to the security financial collateral arrangement, when the title to financial collateral passes from the collateral provider to another person who is not the collateral taker, the right of use shall remain effective.

2. According to the security financial collateral arrangement, the financial collateral may not be subject to a subsequent financial collateral arrangement and subject to the title transfer collateral arrangement. The collateral provider shall indemnify the losses incurred by any creditor due to default on this obligation.

3. The right of use shall terminate when all relevant financial obligations have been performed or, on the occurrence of an enforcement event, financial collateral is realised in the manners indicated in paragraph 3 of Article 9.

CHAPTER 3

ENFORCEMENT OF FINANCIAL COLLATERAL ARRANGEMENTS

Article 9. Enforcement of Financial Collateral Arrangements

1.	The collateral provider shall notify the collateral taker in writing of the performance of relevant financial obligations not later than on the same day.

2.	According to the financial collateral arrangement, the collateral taker (creditor) shall have the right, in case the debtor defaults on his relevant financial obligations secured by financial collateral, to satisfy his claim from the financial collateral or its value prior to other creditors.

3. On the occurrence of an enforcement event, the collateral taker shall have the right to realise financial collateral provided under the security financial collateral arrangement unilaterally in the following manners, subject to the terms agreed in a security financial collateral arrangement:

1) to sell or appropriate financial instruments or apply their value in discharge of the relevant financial obligations;

2) in case of cash, to set off the amount against or otherwise apply it in discharge of the relevant financial obligations.

4. Appropriation of financial instruments is possible only if the parties have agreed on the appropriation of financial instruments and their valuation in the security financial collateral arrangement.

5. The manners of realising the financial collateral referred to in paragraph 3 shall, subject to the terms agreed in the security financial collateral arrangement, be without any requirement to the effect that:

1) prior notice of the intention to realise must have been given;

2) the terms of the realisation be approved by a court, other institution or other person;

3) the realisation be conducted by public auction or in any other manner established in the legislation;

4) any additional time period must have elapsed.

6. If, on occurrence of an enforcement event, the financial collateral is realised according to a unilateral statement of the collateral taker, the collateral taker, not later than on the next day after such an event, shall submit in writing the information on the obligations performed and their amount to the debtor and the collateral provider.

7.	On occurrence of an enforcement event, the obligation of the collateral taker to return the financial collateral provided under the title transfer security financial collateral arrangement to the collateral provider shall terminate.

8. A financial collateral arrangement shall come into effect in accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker.

9. It shall be presumed that the collateral taker exercises his rights set out in this Article legally and in a commercially reasonable manner, unless the collateral provider proves otherwise.

Article 10. Settlements after Realising Financial Collateral

If, on occurrence of an enforcement event or a close-out netting provision coming into effect, on the realisation of financial collateral or the termination of the collateral taker’s obligation to return financial collateral to the collateral provider, the amount received exceeds the collateral taker’s claim, the difference shall be immediately paid to the collateral provider.

Article 11. Additional Rights of Collateral Taker Under the Security Financial Collateral Arrangement in the Absence of an Enforcement Event

1. The collateral taker shall acquire the right to exercise the right of use, hold and dispose of financial collateral provided under a security financial collateral arrangement if this is provided and as provided in the arrangement.

2. If the collateral taker exercises the rights specified in paragraph 1 of this Article, he shall:

1) transfer equivalent financial collateral to replace the original financial collateral at the latest on the due date for the performance of the relevant financial obligations covered by the security financial collateral arrangement; or

2) transfer equivalent financial collateral on the due date for the performance of the relevant financial obligations or, if and to the extent that the security financial collateral arrangement so provides, set off the value of the equivalent collateral against or apply it in discharge of the relevant financial obligations.

3. It shall be treated that the equivalent financial collateral provided in the case set out in subparagraph 1 of paragraph 2 of this Article is subject to the terms of the same security financial collateral arrangement that was concluded in respect to the original financial collateral and that the equivalent financial collateral has been provided under the security financial collateral arrangement at the same time as the original financial collateral was provided.

4. Exercise of the rights indicated in paragraph 1 of this Article in accordance with the provisions of this Article shall not modify the collateral taker’s rights under the security financial collateral arrangement related to the provision of the collateral taker’s financial collateral in order to perform the obligation established in subparagraph 1 of paragraph 2 of this Article.

Article 12. Application and Implementation of the Close-out Netting Provisions

1. A close-out netting provision may be applied to the obligations, if an enforcement event occurs when:

1) the obligation indicated in subparagraph 1 of paragraph 2 of Article 11 has not yet been performed;

2) at least one obligation of the collateral taker to provide the equivalent financial collateral under the title transfer financial collateral has not yet been performed.

2. A close-out netting provision can take effect:

1) notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of collateral provider and/or the collateral taker;

2) notwithstanding any purported assignment of the financial collateral, judicial or other attachment or other disposition of or in respect of such rights.

3. The operation of a close-out netting provision shall not be subject to any of the requirement set out in paragraph 5 of Article 9 of this Law, unless otherwise agreed by the parties.

Article 13. Provisions Disapplied

1. A financial collateral arrangement, as well as the provision of financial collateral under such arrangement, may not be declared invalid or void or be reversed on the sole basis that the financial collateral arrangement has come into existence, or the financial collateral has been provided:

1) on the day of the commencement of winding-up proceedings or reorganisation measures, but prior to the order or other decision making that commencement; or

2) in a prescribed period prior to, or defined by reference to, the commencement of the winding-up proceedings or reorganisation measures or by reference to the making of any decision or the taking of any other action or occurrence of any other event in the course of the winding-up proceedings or reorganisation measures.

2. Where a financial collateral arrangement or a relevant financial obligation has come into existence, or a financial collateral has been provided on the day of, but after the moment of the commencement of, winding-up proceedings or reorganisation measures, such arrangement shall be legally enforceable and binding on third parties if the collateral taker can prove that he was not aware, nor could be aware, of the commencement of the winding-up proceedings or reorganisation measures.

3. Where a financial collateral arrangement contains an obligation to provide financial collateral or additional financial collateral, taking into account the changes in the value of the financial collateral or in the amount of the relevant financial obligations, or a right to withdraw financial collateral on providing an equivalent financial collateral, the provision of financial collateral, the provision of an additional financial collateral or the substitution of financial collateral under such an obligation or a right shall not be treated as invalid or declared void on the sole basis that:

1) such provision or substitution was made on the day of the commencement of winding-up proceedings or reorganisation measures, but prior to the order or other decision making that commencement or in a prescribed period prior to, and defined by reference to, the commencement of winding-up proceedings or reorganisation measures or by reference to the making of any order or other decision or the taking of any other action or occurrence of any other event in the course of the winding-up proceedings or reorganisation measures;

2) the relevant financial obligations were incurred prior to the date of the provision of the financial collateral, additional financial collateral or the substitution of the financial collateral.

Article 14. Claim Limitation Period

A one-year limitation period shall be set for claims regarding a unilateral realisation of the financial collateral on occurrence of an enforcement event arising from financial collateral arrangements.

Article 15. Applicable Law

1.	If book entry securities are provided as financial collateral (including the title to book entry securities) and the title to these book entry securities is registered in accordance with the procedure prescribed by law in a register or a relevant account existing in a European Union Member State, then the title of persons as collateral takers to these book entry securities shall be established by the law of that European Union Member State.

2.	If book entry securities are provided as a financial collateral (including the title to book entry securities) and the title to these book entry securities is registered in accordance with the procedure prescribed by law in a register or a relevant account existing in the Republic of Lithuania, then the title of persons as collateral takers to these book entry securities shall be established by the law of the Republic of Lithuania.

3. Paragraphs 1 and 2 of the Article shall be applied in establishing:

1) the type of book entry securities and the title to securities;

2) the requirements set for the conclusion of a book entry securities financial collateral arrangement and the provision of a financial collateral under such arrangement so that such arrangement and the provision of a financial collateral is effective against third parties;

3) whether the title of a person to a book entry securities financial collateral was acquired legally and in good faith;

4) actions for realising the book entry securities financial collateral on occurrence of an enforcement event.

CHAPTER 4

FINAL PROVISIONS

Article 16. Entry into Force of the Law

This Law shall enter into force as from 1 May 2004.

I promulgate this Law passed by the Seimas of the Republic of Lithuania.

ACTING PRESIDENT OF THE REPUBLIC	ARTŪRAS PAULAUSKAS

Annex to the Law of the Republic of Lithuania No. IX 2127

of 15 April 2004

LEGAL ACT OF THE EUROPEAN UNION IMPLEMENTED

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on Financial Collateral Arrangements.