NEW LEGAL SOLUTIONS IN THE FIELD OF FINANCIAL TRANSACTIONS

The Law on Financial Collaterals (hereinafter: the Law)

Adopted in an urgent procedure by the National Assembly of the Republic of Serbia on June 8, 2018, and effective as of January 1, 2019, the Law introduces entirely new concepts aimed at establishing clear rules for the creation, recording, and enforcement of financial transaction collaterals.

The existing regulations governing financial collaterals—found in the Law on Obligations, the Law on Enforcement and Security, and the Law on Pledge—were not harmonized with one another or with international standards. The new Law aligns Serbia’s legislation with Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements.

Key Provisions:

1. Financial Collateral Contracts and Qualified Subjects:
   For the first time, the legal framework includes financial collateral contracts in Serbia’s financial market. However, participation is limited to qualified entities such as the Republic of Serbia, autonomous provinces, local self-government units, public authorities, the National Bank of Serbia, banks, insurance companies, and other financial sector entities. Foreign entities like the European Union, EU Member States, the European Central Bank, the International Monetary Fund, and other EU-regulated financial institutions are also included.

   Due to the underdeveloped financial market and the economic capacity of non-qualified entities, the Law excludes natural persons and non-qualified legal entities. Any legal entity concluding such contracts without authorization is subject to fines ranging from RSD 100,000 to 2,000,000 (approximately EUR 845 to EUR 16,910).

2. Types of Collateral:
   Collateral can include cash, financial instruments, and credit claims, with precise definitions provided in the Law. Collateral arrangements may involve either:

   • Transfer of ownership of collateral to the taker, who may use and dispose of it as an owner; or
   • Pledge creation, where the taker holds a pledge but not ownership, with provisions allowing the taker to use and dispose of the collateral to avoid blocking financial assets and promote market liquidity.

   Once the secured financial obligation is fulfilled, the collateral taker must return the collateral or its equivalent to the provider.

3. Bankruptcy and Insolvency Provisions:

   • The Law excludes financial collateral arrangements from the application of bankruptcy rules, ensuring that rights and obligations under such contracts remain enforceable regardless of bankruptcy, liquidation, or reorganization procedures involving either party.
   • If a contract or collateral arrangement is established before a bankruptcy decision, it cannot be nullified. Arrangements concluded on the day of or after the initiation of bankruptcy are valid if the taker was unaware of the proceedings.
   • Provisions of the Law on Bankruptcy that conflict with the new Law are inapplicable to financial collaterals.

4. Collateral Enforcement:
   Enforcement is streamlined, allowing for extrajudicial measures without court involvement, public auctions, or prior notice. Conditions for enforcement are agreed upon by the parties and may include failure to meet obligations or the initiation of bankruptcy.

5. Close-Out Netting:
   The Law introduces “close-out netting,” which allows mutual obligations under financial contracts to be set off early, reducing obligations to a net amount payable by one party. Netting applies automatically or upon request when enforcement conditions arise. Bankruptcy proceedings do not impact netting implementation. This mechanism can also apply to other qualified financial contracts, such as derivatives or purchase agreements, as defined by the National Bank of Serbia.

6. Recording Collaterals:
   The transfer of financial instruments and the establishment of pledges are regulated and recorded by the Central Securities Depository.

Benefits and Limitations:

The Law provides greater certainty and benefits to qualified entities entering financial collateral arrangements. However, natural and non-qualified legal entities must continue to rely on existing legal provisions for collateral agreements.

Attorney at Law Damir Petrović

Disclaimer:
The information provided herein is for general informational purposes only and does not constitute legal advice or a legal opinion. Law Firm Petrović Mojsić & Partners disclaims all responsibility and liability for actions taken or not taken based on this content.