3.4 Implications for payment and settlement systems
Actions by creditors based on the payment interpretation of the pari passu clause could be
used to interfere with international payment and securities settlement systems by stopping
payments by the borrower to the system or payments by the system to the borrower. Indeed,
such action was taken against Euroclear in the Elliott litigation. Commercial banks are
integrated into the world’s payment and settlement systems so that attacks on them as
innocent bystanders could have systemic consequences in upsetting the requirement for
finality in systems which deal with very high volumes at high speeds in circumstances where
liquidity is essential. As an operational matter it would be extremely difficult to try to
administer payment instructions which may be the subject of a court injunction along the lines
of that obtained by Elliott Associates in the Peru litigation.
In addition to these practical reasons for not favouring the payment interpretation, the public
policy objective of preventing this sort of disruption is mirrored in the Directive of the
European Parliament and of the Council of 19th May, 1998 on settlement finality in payment
and securities settlement systems, 98/26/EC, OJ L 166, 11/06/1998, p.45 (the “Settlement
Finality Directive”). The preamble to the Settlement Finality Directive outlines the policy of
the European Union in this area. The recitals note, among other things, that the Settlement
Finality Directive aims at contributing to the efficient and cost effective operation of cross-
border payment and securities settlement arrangements in the European Community, and that
the reduction of systemic risk requires in particular the finality of settlement. It is noted that
the provisions of the Settlement Finality Directive do not prohibit the kinds of attachment
proceedings pursued in the Elliott case
30
.
3.5 Implications for restructuring sovereign debt
One particular mischief caused by the payment interpretation is the implications that follow
from it in the context of restructuring sovereign debt. As is noted from the facts of the Elliot
case, a sovereign debt restructuring is usually effected through an exchange offer whereby
existing debt obligations are exchanged for new debt obligations on terms more favourable to
30
Under Article 9 of the Belgian Act of April 28, 1999, (EU settlement finality directive), as modified by Article 15 of the Belgian Act of
November 19, 2004, no cash settlement account with a settlement system operator or agent nor any transfer of money to be credited to such
cash settlement account, via a Belgian or foreign credit institution, may in any manner whatsoever be attached, put under trusteeship or
blocked by a participant (other than the settlement system operator or agent), a counterparty or a third party. The amendment, which is
reflected in italics, was published in the Belgian State gazette of December 28, 2004 and entered into force in January 2005. As noted by the
European Central Bank (ECB) when consulted on the draft Belgian legislation, “the draft law enhances legal certainty in relation to
payments through payment and settlement systems and thus fosters the safety and efficiency of payment and settlement systems”. See
Opinion of the European Central Bank of 16 March, 2004 at the request of the Belgian Ministry of Finance (CON/2004/9), para 9, published
on the ECB’s website at www.ecb.int.
10023-21079 ICM:773519.12
16