ON FINANCIAL COLLATERAL ARRANGEMENTS, NETTING AND DERIVATIVES

 

LAW OF GEORGIA

ON FINANCIAL COLLATERAL ARRANGEMENTS, NETTING AND DERIVATIVES

 

Chapter I – General Provisions

 

Article 1 – Scope of the Law

This Law regulates the issues of entering into derivative contracts, netting and the use of financial collateral arrangements. The purpose of this Law is to develop the derivatives market in Georgia, as well as to establish a regulatory legal framework required for netting, financial collateral arrangements and entering into derivative contracts. This Law shall not apply to cases of securitisation.

 

Article 2 – Definition of terms

For the purposes of this Law, the terms used herein shall have the following meanings:

a) insolvent party – a party against which a limited regime of activity (‘a regime’) has been commenced under this Law;

b) derivative – a transaction under Article 3(1) of this Law;

c) default – the non-performance or improper performance of an obligation by a party to a transaction, the commencement of a regime, or other cases envisaged by an agreement between the parties to a transaction;

d) collateral provider – a person ensuring the performance of secured financial obligations by means of financial collateral under a financial collateral agreement;

e) equivalent security – a security defined as an equivalent security by an agreement between the parties;

f) measures for securing an obligation – measures applied in accordance with the legislation of Georgia, which are intended to ensure the performance by a person of an obligation provided for by the legislation of Georgia and/or the contract, and which include any procedural compulsory enforcement measure (including measures for securing a claim and the enforcement of a decision) and the means of securing claims as provided for by the Tax Code of Georgia and the Civil Code of Georgia (including security measures to enforce the payment of tax arrears, a pledge, and a mortgage);

g) qualified financial contract – any financial agreement, contract or transaction (including any procedure or condition relating to that financial agreement, contract or transaction, or any part thereof) that is subject to a netting agreement and under which an obligation to pay or deliver arising out of that contract shall be performed at a specified time or within a specified period, and may depend on any condition or contingency. A qualified financial contract includes the following contracts:

g.a) derivative contracts;

g.b) securities contracts, including margin loan agreements, contracts for the purchase, sale or loan of securities, such as repo agreements, reverse repo agreements, securities lending agreements, securities purchase or sale transactions on terms of repurchasing them, as well as any contract that is related to mortgage secured loans, rights associated with such loans or mortgage secured securities;

g.c) commodities contracts, including contracts for the purchase, sale or loan of commodities, such as repurchase and reverse repurchase transactions on commodities, commodities lending transactions, purchase or sale transactions on commodities on terms of repurchasing them, except for spots (spot transactions) relating to commodities;

g.d) financial collateral agreements;

g.e) clearing or payment agreements on securities transactions or agreements on the performance of securities depository functions;

g.f) any contract that the National Bank of Georgia defines as a qualified financial contract in accordance with this Law;

h) a netting agreement with a multi-branch party – any netting agreement (transaction) between two parties entered into by at least one party to a qualified financial contract through its principal place of business and its one or more branches located in a jurisdiction other than the principal place of business of the undertaking;

i) collateral taker – a person in whose favour financial collateral is provided under a financial collateral agreement;

j) net position – net position provided for by the Law of Georgia on Payment Systems and Payment Services;

k) organised market – a market segment in which trade is performed in accordance with established rules;

l) option – a derivative contract that may be entered into in both the organised and the non-organised markets, under which one party shall, at the request of the other party, sell the underlying asset (sale option) to that party in the future, or to buy from that party the underlying asset (purchase option) at a price and on terms determined by the parties at the time of entry into the transaction. An option may involve an obligation of one party to pay a certain amount (fee) to the other party in exchange for the exercise of the right of option (premium);

m) repo agreement – a transaction that provides for the sale of a security on terms of repurchasing it or other security equivalent thereto at an agreed price;

n) commencement of a regime – the moment when a regime enters into force under the legislation of Georgia or a foreign country;

o) underlying asset of a derivative (‘underlying asset’) – a financial instrument, a commodity, national currency, foreign currency, or a right to pecuniary claim. The National Bank of Georgia may expand and define the list of underlying assets;

p) base rate of a derivative (‘base rate’) – the price of an underlying asset, interest rate, index, exchange rate, the indicator of statistical information determined by an independent third party, physical, biological, chemical environment indicators, another event, fact or circumstance. The National Bank of Georgia may expand and define the list of base rates;

q) close-out netting – the following action or a combination of the following actions:

q.a) the termination, liquidation and/or acceleration of all payment or delivery obligations and/or rights of claim, arising from one or more qualified financial contracts entered into under a netting agreement;

q.b) the assessment and/or calculation of the final, market, liquidation or substitution value (price) of the obligations or rights terminated and/or accelerated in accordance with sub-paragraph (q.a) of this article;

q.c) the conversion into one currency of the value (price) assessed and/or calculated in accordance with sub-paragraph (q.b) of this article;

q.d) the calculation of net liability in accordance with sub-paragraphs (q.b) and (q.c) of this article by netting claims or otherwise, payable by a party with such liability;

r) net debit position (net liability) – liability provided for by the Law of Georgia on Payment Systems and Payment Services;

s) credit claim – a right to a pecuniary claim arising on the basis of a credit/loan issued by a financial institution or a credit institution;

t) net credit position (net claim) – a net claim provided for by the Law of Georgia on Payment Systems and Payment Services;

u) title transfer financial collateral arrangement – a type of financial collateral arrangement (including a repo agreement) which provides for the transfer of the ownership of financial collateral to the creditor (collateral taker) for the purpose of securing the relevant financial obligation (secured financial obligation) of the debtor (collateral provider);

v) representative of the financial sector – a representative of the financial sector as provided for by the Organic Law of Georgia on the National Bank of Georgia;

w) regime – a set of measures taken in accordance with the legislation of Georgia or a foreign country for the purpose of insolvency, bankruptcy or rehabilitation, the application of temporary administration, resolution or liquidation, which causes or may cause the termination or suspension of the transfer of the ownership of or a right to claim a financial instrument, or of cash transfers and/or payment transactions, or the imposition of restrictions thereon. For the purposes of this Law, a regime shall include:

w.a) the commencement of a liquidation process in accordance with the Law of Georgia on Entrepreneurs;

w.b) the initiation of insolvency proceedings in accordance with the Law of Georgia on Rehabilitation and the Collective Satisfaction of Creditors’ Claims;

w.c) the introduction of a regime of temporary administration, the commencement of a liquidation process, or the introduction of a resolution regime in accordance with the Law of Georgia on Commercial Bank Activities or the Law of Georgia on Insurance, the introduction of a regime of compulsory administration and/or the initiation of liquidation or bankruptcy proceedings;

w.d) any other analogous regime, procedure or action that has a similar, analogous purpose and/or result;

x) swap – a derivative that may be entered into in both the organised and the non-organised markets, and whereby one or both parties is/are obliged to make one-time or periodic payments to the other party, the amounts of which are determined on the basis of a different base rate or a base rate of different type/value on the terms determined by the parties at the time of entry into the transaction. A swap (swap transaction) may also provide for the delivery or exchange of the underlying asset to which the base rate, on the basis of which the amount of payment is determined, is related;

y) spot – a transaction whereby a commodity, a financial instrument or currency is bought or sold, which provides for settlement (payment or delivery) on the spot date;

z) security financial collateral arrangement – a type of financial collateral arrangement under which financial collateral owned by a debtor or a third party is provided to a creditor (collateral taker) to secure the latter’s claim, and where the ownership of the financial collateral is not transferred to the creditor (collateral taker);

z₁) reverse repo agreement – a transaction which provides for the purchase of a security on the condition of selling it or other security equivalent thereto back to the seller at an agreed price;

z₂) netting – netting provided for by the Law of Georgia on Payment Systems and Payment Services;

z₃) netting agreement:

z₃.a) an agreement entered into between two parties, granting the parties the right of netting and/or close-out netting of existing and/or future claims and obligations arising out of one or several qualified financial contracts entered into under such agreement (framework netting agreement) or in connection therewith;

z₃.b) an agreement combining two or more framework netting agreements;

z₃.c) a financial collateral agreement relating to or stemming from an agreement referred to in sub-paragraph (z₃.a) and/or (z₃.b) of this article;

z₄) securities lending agreement – an agreement under which one party (the lender) transfers the ownership of a security to the other party (the borrower) for consideration or or a fee, and the borrower provides the lender with a relevant subject to secure the claim (financial collateral). In addition, the borrower shall be obliged to return to the lender the same security or other security equivalent thereto;

z₅) financial collateral agreement – an agreement under which financial collateral is subject to a security financial collateral arrangement or a title transfer financial collateral arrangement. A financial collateral agreement may be entered into either as part of a master agreement or as a separate agreement, or by specifying general terms and conditions;

z₆) financial collateral – a financial instrument, a credit claim, cash (money) available in or to be credited to an account in the future;

z₇) a financial instrument:

z₇.a) a negotiable security certifying shareholding in a local or a foreign company, or a security equivalent thereto;

z₇.b) a negotiable debt security, instrument, or obligation;

z₇.c) a right issued by an investment fund;

z₇.d) a derivative;

z₇.e) a money market instrument;

z₇.f) precious metal on an account;

z₇.g) claims relating to financial instruments in sub-paragraphs (z₇.a)-(z₇.f) of this article, rights in or in respect of any of these instruments;

z₈) futures – a derivative contract entered into in the organised market, under which one party shall be obliged to sell the underlying asset to the other party on a specified date in the future, and the other party shall be obliged to buy such underlying asset at a price and on terms determined by the parties at the time of entry into the transaction;

z₉) forward – a derivative contract entered into in the non-organised market, under which one party shall be obliged to sell the underlying asset to the other party on a specified date in the future, and the other party shall be obliged to buy such underlying asset at a price and on terms determined by the parties at the time of entry into the transaction;

z₁₀) cash flows – the movement of cash generated under the conditions of an agreement entered into between the persons;

z₁₁) equivalent financial collateral:

z₁₁.a) in the case of money – the payment of cash in the same amount and currency;

z₁₁.b) in the case of a financial instrument – a financial instrument issued by the same issuer or debtor of the same issue or class, nominal value (amount), currency and description, or the transfer of other equivalent asset provided for by a financial collateral agreement upon the occurrence of a pre-defined circumstance that affects the financial instrument supplied under the financial collateral arrangement or is related thereto;

z₁₂) commencement of a financial collateral arrangement (commencement of a collateral arrangement) – an event of default of a party, or any other event determined by the parties, whereby the collateral taker is entitled, in accordance with the provisions of a financial collateral agreement or by operation of law, to appropriate or realise financial collateral, or perform close-out netting;

z₁₃) cash – money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits;

z₁₄) secured financial obligation – an obligation which is secured by a financial collateral agreement and which gives a right to cash settlement and/or delivery of a financial instrument. A secured financial obligation may consist of or include the following:

z₁₄.a) a present, actual or future, contingent or prospective obligation (including an obligation arising under a master agreement or a similar agreement);

z₁₄.b) an obligation owed to the collateral taker by a person other than the collateral provider;

z₁₄.c) any other obligation of a specified class and kind arising from time to time;

z₁₅) book entry securities collateral – financial collateral provided under a financial collateral agreement, which consists of financial instruments and title to which is evidenced by entries in the securities register or in an account opened with or on behalf of a licensed financial institution;

z₁₆) relevant account – in relation to book entry securities collateral provided to a collateral taker under a financial collateral agreement, the register or account that may be maintained by the collateral taker and in which entries are made whereby the financial collateral is considered to have been provided to the collateral taker;

z₁₇) right of use of financial collateral – in the case of a security financial collateral arrangement, the right of the collateral taker to use or dispose of financial collateral as the owner of it in accordance with the terms of the security financial collateral agreement;

z₁₈) money market instruments – instruments of the class that are usually used in the money market, including treasury bonds and deposit certificates, and excluding instruments of payment;

z₁₉) commodity – a generic movable thing that may be supplied by buying and selling in wholesale amounts under the terms and conditions of an agreement, and that has appropriate commodity properties;

z₂₀) spot date – the date on which a spot transaction is settled, not later than 3 banking working days after entering into the transaction;

z₂₁) financial institution – a financial institution as provided for by the Law of Georgia on Securities Market;

z₂₂) central counterparty – a legal person that interposes itself between the parties to a contract traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.

Law of Georgia No 7174 of 18 September 2020 – website, 25.9.2020

 

Chapter II − Derivatives and Netting

 

Article 3 − Derivative

1. A derivative is a qualified financial contract the value and cash flows of which, under the terms and conditions of that contract, depend on the underlying asset or base rate, and which provides for settlement by performing actual delivery or by cash, including through netting or close-out netting, and which meets one of the following conditions:

a) imposes on one party to the transaction an obligation to buy, sell or accept the right(s) of claim relating to another derivative;

b) imposes on one party to the transaction an obligation to buy, sell or transfer the ownership of the underlying asset to the other party to the transaction in the future, who shall be obliged to accept the underlying asset and pay an appropriate price in return;

c) obliges one or both parties to the transaction to perform a one-time or periodic payment(s) in favour of the other party in the future, including in the case of a request for payment by that party.

2. Unless the parties agree otherwise, the party who is to perform the actual delivery under a derivative shall not be obliged to own the underlying asset at the time of entering into the transaction.

3. A transaction shall not be considered to be a derivative if it meets one of the following conditions:

a) a purchase agreement (including a delivery agreement) which does not specify that it is a derivative, is not qualified as a derivative by a relevant legal act of the National Bank of Georgia, and meets all the following conditions:

a.a) in accordance with the terms of the transaction, the obligation can be performed only by delivering (accepting) the underlying asset and the transaction does not envisage the performance of an obligation only through cash settlement by one party to the other party at the time of the performance of the obligation in accordance with the price of the underlying asset;

a.b) the terms of the transaction do not allow the termination of the transaction by entry into a similar transaction, the quantity of the underlying assets and the terms of delivery of which are equivalent (although the price of such transaction may differ from the price of the first transaction) and the party to which, who participated in the first transaction as a seller, participates in the new transaction as a buyer, whereas the person who participated in the first transaction as a buyer participates in the new transaction as a seller;

b) it is an instrument of payment, a spot, a credit line agreement, a repo agreement, a loan agreement, a leasing agreement, a bank deposit agreement, a bank account service agreement, an insurance agreement, a surety agreement, a bank guarantee agreement, or factoring or a similar agreement;

c) due to a violation by a party of the terms of the transaction, an obligation to pay an amount (penalty, damages) arises, the amount of which varies according to the base rate, but such a transaction (the terms of which have been violated) does not meet the definition of ‘derivative’.

4. A party to a derivative contract may be a public institution, the National Bank of Georgia, a foreign central bank, an international financial institution, a representative of the financial sector, a local or a foreign financial institution, an investment fund, a central counterparty, a settlement agent, or a clearing institution.

5. A party to a derivative contract may also be any person, including a partnership, or an organisational entity with no legal personality, provided that the other party to the transaction is a person as specified in paragraph 4 of this article. In that case, the person specified in paragraph 4 of this article shall be obliged to declare and explain to the other party the risks and threats associated with the derivative contract in question. The National Bank of Georgia may establish a procedure for disclosing risks and threats and entering into such transactions.

6. A derivative contract may be entered into both in writing (including in electronic form) and orally. In the case that the parties enter into a transaction orally, the transaction shall provide for the exchange of a confirmation of entry into the transaction, which allows the determination of the content of the transaction. The confirmation of entry into the transaction shall be available in writing (including in electronic form) or as an audio recording. An audio recording under this paragraph shall be subject to the requirements defined by the legislation of Georgia.

7. The validity and enforceability of a derivative contract cannot be questioned on the sole basis that it has been entered into in accordance with the legislation of a foreign country. The validity and enforceability of such derivative shall be regulated in accordance with the relevant legislation of that foreign country.

8. A qualified financial contract is not betting, gaming or a lottery, and shall not be considered void or declared ineffective on the basis of a provision of the legislation of Georgia that regulates relationships related to betting, gaming or a lottery.

 

Article 4 − Enforceability of a netting agreement

1. A netting agreement shall be enforceable in accordance with its terms, including in respect of the insolvent party, and in some cases, the guarantor, or any other person who acts as surety for the party to the netting agreement. Such agreement shall not be suspended, declared ineffective or otherwise restricted by any action of an administrative or regulatory/supervisory body, a liquidator, a bankruptcy manager/a rehabilitation manager/a rehabilitation supervisor, a temporary administrator, a special manager or another person performing similar functions, by any provision of the law relating to the regime that has been enacted against the insolvent party, or by any other provision of this Law applicable to insolvent parties, unless otherwise provided for by the netting agreement.

2. After the commencement of a regime, the only obligation of the party to deliver or pay under a netting agreement (if any) shall be equal to the net liability calculated in accordance with the netting agreement.

3. When a regime is commenced in respect of a party, all rights of the other party to claim delivery or the receipt of payment under the netting agreement shall be equal to the net claim calculated under the netting agreement.

4. The power of an administrative or regulatory/supervisory body, a liquidator, a bankruptcy manager/a rehabilitation manager/a rehabilitation supervisor, a temporary administrator, a special manager, or another person performing similar functions, to terminate or make voidable any transaction or agreement shall not impede the termination, liquidation and/or acceleration of all payment and/or delivery obligations and/or rights of claim arising out of one or several qualified financial contracts entered into under or in connection with a netting agreement. If such power is still being exercised, it shall apply only to a net amount arising from all qualified financial contracts that are calculated in accordance with the provisions of the relevant netting agreement.

5. The provisions of a netting agreement which determine the calculated net balance of the final, market, liquidation or substitution value of a payment and/or delivery obligation and/or a right of claim terminated and/or accelerated under one or several qualified financial contracts, shall not be subject to the relevant provisions of legislation which restrict the netting between the insolvent party and the other party of obligations, of the payable amount or of the termination value, or the offset of claims.

6. An administrative or regulatory/supervisory body, a liquidator, a bankruptcy manager/a rehabilitation manager/a rehabilitation supervisor, a temporary administrator, a special manager, or another person performing similar functions, shall not have the right to terminate or question one or both of the following actions:

a) the transfer, modification or substitution of an amount, financial collateral, or any other right, by an insolvent party to the other party under a netting agreement;

b) an obligation to deliver or pay that the insolvent party owes to the other party under or in connection with a netting agreement and that is considered detrimental or advantageous to another creditor, except where there is clear and reliable evidence that the insolvent party performed the disbursement (transfer) or assumed an obligation only with the intention to prevent, delay or mislead any person who is or has become a creditor of the insolvent party at the time or after such disbursement (transfer) or the emergence of an obligation to deliver or pay.

7. Except in the cases provided for by Article 37²(2) and Article 37¹¹(7) of the Law of Georgia on Commercial Bank Activities, measures for securing obligations applied by a court, an administrative or regulatory/supervisory body, a liquidator, a bankruptcy manager/a rehabilitation manager/a rehabilitation supervisor, a temporary administrator, a special manager or another person performing similar functions, or a moratorium, cannot restrict or delay the execution in accordance with paragraphs 1-3 of this article of a netting agreement entered into and enforceable under law.

8. Unless otherwise provided for by an agreement between the parties, neither party shall, when selling, accepting into ownership or liquidating financial collateral under a financial collateral agreement, or when terminating, liquidating and/or accelerating the payment and/or delivery obligations and/or the rights of claim in the case of netting, be obliged to give the other party or any other person prior notice or receive consent from, or give additional time to, that person. This article is without prejudice to the relevant applicable legal norms that require from a party to sell, accept into ownership or liquidate in a commercially reasonable way.

9. For the purposes of this article, a netting agreement shall be considered as such even where its provisions relate to an agreement, a contract or a transaction that is not a qualified financial contract. In addition, a netting agreement shall be considered valid and effective only for a transaction that is a qualified financial contract under this Law.

10. For the purposes of this article, a financial collateral agreement shall be considered as such even where its provisions relate to a transaction that is not a netting agreement or a qualified financial contract. In addition, for the purposes of this article, such derogation shall apply only to an agreement, a contract or a transaction that is a netting agreement or a qualified financial contract under this Law.

11. For the purposes of this article, a netting agreement and all qualified financial contracts entered into under it shall constitute a single agreement.

12. For the purposes of this article, the term ‘netting agreement’ also includes a netting agreement entered into with a multi-branch party.

13. A party to a netting agreement may be a public institution, the National Bank of Georgia, a foreign central bank, an international financial institution, a representative of the financial sector, a local or a foreign financial institution, an investment fund, a central counterparty, a settlement agent, or a clearing institution.

14. A party to a netting agreement may also be a person (except for a natural person), including a partnership, or an organisational entity with no legal personality, provided that the other party to the agreement is a person as defined in paragraph 13 of this article.

Law of Georgia No 7174 of 18 September 2020 – website, 25.9.2020

 

Article 5 – Finality of settlement under derivative contracts and financial collateral agreements

1. Disbursement/transfer orders for cash or financial instruments with respect to a derivative and financial collateral shall be irrevocable.

2. The irrevocability of orders and the finality of settlement provided for by paragraph 1 of this article shall be regulated by the Law of Georgia on Payment Systems and Payment Services.

3. The legal acts, regulations and decisions, on the basis of which transactions/payments made before the commencement of a regime may be declared void or ineffective, shall not apply to transactions entered into/payments made as a result of netting/close-out netting.

 

Article 6 – Reporting

1. The National Bank of Georgia may, in accordance with procedures established by itself, request and receive from the parties to a derivative contract any (including confidential) information on the transactions entered into.

2. The National Bank of Georgia may also request the information referred to in paragraph 1 of this article from a person who is not a representative of the financial sector.

3. The list of information provided for by paragraph 1 of this article shall be determined by the National Bank of Georgia.

 

Chapter III – Financial Collateral Arrangement

 

Article 7 – Parties to a financial collateral arrangement, subject and scope of a financial collateral arrangement

1. A collateral provider or a collateral taker may be a public institution, the National Bank of Georgia, a foreign central bank, an international financial institution, a representative of the financial sector, a local or a foreign financial institution, an investment fund, a central counterparty, a settlement agent, or a clearing institution.

2. A collateral provider or a collateral taker may also be a person (except for a natural person), including a partnership, or an organisational entity with no legal personality, provided that the other party to the financial collateral agreement is a person as defined in paragraph 1 of this article.

3. This chapter shall also apply to the claims in respect of the loan assets of a collateral provider, which have been registered under the legislation of Georgia and encumbered with a collateral arrangement in favour of the National Bank of Georgia.

4. A financial collateral arrangement may be applied to secure any type of obligation, including an existing, future, potential or conditional obligation that a collateral provider or a third party has or may have in respect of a collateral taker.

5. Collateral provided in accordance with the legislation of Georgia may not be used as security financial collateral, except in cases provided for by Article 10(1) of this Law.

6. A measure for securing obligations provided for by the legislation of Georgia shall not be applied against financial collateral.

7. A financial collateral agreement entered into in accordance with the legislation of a foreign country shall be valid and its enforceability shall be regulated under the legislation chosen by the parties. The requirement of this Law or any other law may not question the validity and/or enforceability of such agreement.

8. The introduction of a resolution regime with respect to a commercial bank in accordance with the legislation of Georgia shall not become a basis for the commencement of a financial collateral arrangement if the commercial bank duly performs the obligations provided for by the financial collateral agreement or the agreement of which the financial collateral arrangement is a part.

9. The National Bank of Georgia may, based on the purposes of resolution, impose restrictions on the right to terminate an obligation, in accordance with the Law of Georgia on Commercial Bank Activities.

 

Article 8 – Validity of a financial collateral agreement

1. This Law shall apply to a security financial collateral agreement if it has been entered into in writing (including in electronic form or by other reliable means) and a collateral taker or a person acting on his/her behalf may own and/or control financial collateral in accordance with paragraph 2 of this article.

2. A collateral taker or a person acting on his/her behalf shall own and/or control financial collateral:

a) if the financial collateral is a financial instrument to a bearer − by transferring it into physical possession;

b) if the financial collateral is a book entry financial instrument − by transferring it to the account of the collateral taker or an account opened in the name of the collateral taker or a third party in the licensed financial institution/securities registrar acting on behalf of the collateral taker, or by registering in an appropriate manner, by such licensed financial institution/securities registrar, the existence of a collateral arrangement over the financial instrument;

c) if the financial collateral is cash in an account − by transferring it to the account of the collateral taker or an account opened in the name of the collateral taker or a third party in the bank acting on behalf of the collateral taker;

d) if the financial collateral is a credit claim − by submitting a list of claims to the collateral taker in writing, or in another equivalentmanner, and registering them in the Public Registry.

3. The National Bank of Georgia may issue a legal act to regulate issues provided for by paragraph 2 of this article.

4. This Law shall apply to a title transfer financial collateral agreement if it has been entered into in writing (including in electronic from or by other reliable means) and the collateral provider transfers the ownership of the financial collateral to the collateral taker or a person acting on his/her behalf. A title transfer financial collateral arrangement shall arise after the collateral taker or the person acting on his/her behalf has had transferred to them the ownership of the financial collateral and is able to dispose of the financial collateral (including alienating or pledging it) as an owner.

5. In the case of the performance of obligations provided for by a financial collateral agreement, the collateral taker shall return the financial collateral to the collateral provider, or shall act in accordance with the financial collateral agreement.

6. For the validity, enforceability and admissibility of a financial collateral agreement as evidence, it shall not be required to register it with the registration authority (except in the case provided for by paragraph 2(d) of this article) or to perform any formal action against it, including the performance and translation of notarial actions in Georgian.

7. A collateral provider shall have no right to use financial collateral provided under this Law to secure other obligations, except in cases provided for by this chapter.

8. A collateral taker shall, under this Law, have a preferential and unconditional right that the claim secured by a financial collateral arrangement be satisfied as compared to other secured creditors.

 

Article 9 – Enforcing a financial collateral arrangement

1. In the case of the commencement of a financial collateral arrangement, in accordance with the terms and conditions of the financial collateral agreement, the collateral taker may sell the financial collateral as follows:

a) in the case of financial instruments − by selling or accepting them into ownership, for the covering or netting of a secured financial obligation;

b) in the case of cash − for the covering or netting of a secured financial obligation;

c) in the case of credit claims − by selling or accepting them into ownership, for the covering or netting of a secured financial obligation.

2. Acceptance into ownership shall be permitted if both of the following conditions are met:

a) the parties have agreed on the accepting into ownership under a security financial collateral agreement;

b) the parties have agreed on the determination of the price of financial instruments and credit claims under a security financial collateral agreement.

3. To sell the financial collateral provided for by paragraph 1 of this article, the following shall not be required:

a) the giving of prior notice of the sale;

b) the approval of the terms and conditions of the sale by a court, an administrative or regulatory/supervisory body, a liquidator, a bankruptcy manager/a rehabilitation manager/a rehabilitation supervisor, a temporary administrator, a special manager, or a person performing the functions similar to those of persons under this sub-paragraph;

c) sale at a public auction or in any pre-determined form;

d) the expiry of additional time for performing the secured obligation.

4. A financial collateral agreement shall be enforced in accordance with its terms and conditions, regardless of the commencement or extension of a regime with respect to the collateral taker or the collateral provider.

5. This article is without prejudice to the relevant applicable legal norms that require from a party to sell or determine the price of financial collateral and to calculate a secured financial obligation in a commercially reasonable way.

6. Financial collateral remaining after the full coverage of obligations secured by a financial collateral arrangement, or an excess amount remaining from the proceeds of the sale of the financial collateral, shall be returned to the collateral provider.

7. If the proceeds of the sale of financial collateral are not sufficient to fully cover the obligations secured by a financial collateral arrangement, the collateral taker shall enjoy the rights provided for by the legislation of Georgia for non-secured creditors in respect of the remaining obligations.

Law of Georgia No 7174 of 18 September 2020 – website, 25.9.2020

 

Article 10 – Right to use financial collateral in a security financial collateral agreement; increasing, reducing and substituting financial collateral

1. A security financial collateral agreement may provide for the right of a collateral taker to use financial collateral in accordance with the terms and conditions specified by the parties.

2. When exercising the right referred to in paragraph 1 of this article, one of the following conditions shall be met:

a) the collateral taker shall substitute the initial financial collateral with equivalent financial collateral not later than on the day when the secured financial obligation provided for by the security financial collateral agreement is performed;

b) the collateral taker may transfer the equivalent financial collateral on the last day of the time limit for performing the secured financial obligation or, if so provided for by the terms and conditions of the security financial collateral agreement, deduct the value of the equivalent financial collateral against the secured financial obligation.

3. Equivalent financial collateral transferred for the performance of a secured financial obligation as defined in paragraph 2(a) of this article shall be deemed to have been delivered under the security financial collateral agreement on the basis of which the initial financial collateral was delivered, and it shall be considered to be primary financial collateral in accordance with the terms and conditions of the agreement.

4. The use of financial collateral by a collateral taker in accordance with this article shall not result in abolishing or otherwise terminating the right of the collateral taker or shall not impede its execution with respect to the financial collateral under the security financial collateral agreement that has been transferred for the performance of an obligation defined in paragraph 2(a) of this article.

5. If a collateral arrangement has commenced before the performance of an obligation defined in paragraph 2(a) of this article, close-out netting may be applied to such obligation.

6. Paragraphs 1-5 of this article shall not apply if the financial collateral is credit claims.

7. In the case of a change in the value of financial collateral or a secured financial obligation, the financial collateral shall be increased or reduced accordingly if so provided for by the financial collateral agreement.

8. A collateral provider may substitute the financial collateral with other collateral of the same value by withdrawing the original financial collateral if so provided for by the financial collateral agreement.

9. The right of a collateral provider to increase, reduce or substitute the financial collateral shall not restrict the right of a collateral taker to own and/or control the financial collateral in accordance with Article 8 of this Law, if so provided for by the financial collateral agreement.

10. After the full performance of obligations secured by a financial collateral arrangement or in a case defined by a financial collateral agreement, unless otherwise provided for by that agreement, the collateral taker shall, in the case of the provision of credit claims as collateral, return to the collateral provider the credit claims provided as collateral, and in the case of the provision of cash as collateral, the same amount of cash in the same currency, and in the case of financial instruments, equivalent financial instruments.

11. Increasing, reducing or substituting financial collateral in accordance with this article shall not result in entering into a new financial collateral agreement.

 

Article 11 – Prohibition of the application of relevant norms of legislation on insolvency

1. A financial collateral agreement, and the provision of financial collateral under such agreement, shall not be declared invalid, void or ineffective on the sole basis that the financial collateral agreement has come into existence, or the financial collateral has been provided in one of the following periods:

a) on the day of the commencement of a regime, but prior to the entry into force of the legal act providing for that commencement;

b) in a prescribed period prior to the commencement of a regime, as envisaged by the regime, or in a period defined by reference to any legal act, action or event, which was taken into account during the commencement of the regime.

2. If a financial collateral agreement has been entered into, a secured financial obligation has arisen, or financial collateral has been provided on the day of, but after the moment of the commencement of a regime, it shall be enforceable and binding on third parties only if the collateral taker can prove that he/she was not aware, nor ought to have been aware, of the commencement of the regime.

3. Where a financial collateral agreement provides for the provision of financial collateral or an obligation to provide additional financial collateral in the case of changes in the financial collateral or the secured financial obligation, or for the withdrawal of financial collateral by way of substitution or exchange by providing new financial collateral of substantially the same value, the right or the obligation to provide, increase, substitute or replace financial collateral may not be declared invalid, void or ineffective on the sole basis that it satisfies either or both of the following conditions:

a) such provision was made on the day of the commencement of a regime, but prior to the entry into force of the legal act providing for the commencement of the regime, or in a prescribed period prior to the commencement of the regime, or in a period defined by reference to the legal act, action or event that is provided for by such proceedings, activities or measures;

b) the secured financial obligation arose prior to the provision of the financial collateral or the additional collateral, as well as prior to the substitution or replacement thereof.

 

Article 12 – Application of norms of foreign legislation

1. Issues provided for by paragraph 2 of this article in relation to book entry securities collateral shall be governed by the legislation of the country in which the relevant account is maintained. A reference to the legislation of a country shall imply only the legislation of that country, disregarding any norm under which, in deciding the relevant issue, reference should be made to the legislation of another country.

2. The issues referred to in paragraph 1 of this article are as follows:

a) the legal nature and proprietary effects of book entry securities collateral;

b) any action that is necessary for entering into, or the entry into force of, a financial collateral agreement and for rendering binding on third parties a transaction that is similar to the provision/accounting of book entry securities collateral;

c) a case where a person’s title to book entry securities collateral is overridden by, or subordinated to, a competing title of another person, or a good faith acquisition has occurred;

d) a combination of actions to be carried out after the commencement of a regime, which are required for the realisation of book entry securities collateral.

 

Article 13 – Transitional provision

An obligation to register in the Public Registry credit claims used as financial collateral under Article 8(2)(d) of this Law, which has been provided to a commercial bank (a collateral taker) by a microfinance organisation or a credit institution (a collateral provider), shall arise from 1 January 2021.

 

Article 14 – Entry into force of the Law

This Law shall enter into force on the 15th day after its promulgation.

 

President of Georgia                                                    Salome Zourabichvili

 

Tbilisi

20 December 2019

No 5672-რს