учебный год 2023 / Haentjens, Harmonisation Of Securities Law. Custody and Transfer of Securities in European Private Law

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Further, recommendation 12 of the 2001 CPSS/IOSCO Report states that ‘entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers’ securities. It is essential that customers’ securities be protected against the claims of a custodian’s creditors.’ The recommendation thus mainly addresses custody risk and concludes that besides accurate accounting, segregation could contribute to safekeeping and that ‘ideally, a customer’s securities are immune from claims made by third-party creditors of the custodian’. In addition, ‘it should be highly improbable that a customer’s securities could be frozen or made unavailable for an extended period of time’,51 e.g. by segregation. Finally, recommendation 12 refers to the importance of assessing the legal framework by global custodians, especially when custody concerns multi-national layers.52

In 2003, the G30, in its turn, issued ‘A Plan of Action’.53 This document contains twenty recommendations that should improve the safety and efficiency of international capital markets in the light of their rapid growth and structural change, as well as market shocks as occurred on September 11, 2001. It is considered by its drafters to go further than the CPSS/IOSCO recommendations in setting more ambitious goals, more concrete time frames and providing ways of implementation. Whereas the CPSS/IOSCO recommendations provided minimum standards, the 2003 G30 Plan of Action contains rules for ‘best practices’, while focusing more on the crossborder aspect of today’s internationalised markets. It concludes that ‘characteristics of performance’ should be globally consistent so as to ‘create the cross-system linkages ultimately required to produce a seamless global infrastructure’.54

Besides recommendations that concern operational aspects and aim at the creation of an ‘interoperable global network’,55 the 2003 Plan of Action also contains recommendations that address the current legal diversity so as to mitigate legal risk. Other recommendations concern the improvement of the governance of providers of clearing and settlement services. The report finds that ‘the legal and regulatory frameworks on which clearing and settlement systems are founded continue to develop piecemeal and largely on a domestic basis.’56 The most important legal recommendation for the purpose of this study is recommendation 15, which reads: ‘Advance legal certainty over rights to securities, cash, or collateral.’

51CPSS/IOSCO Recommendations 2001, 19.

52Cf. also Recommendation 19, 24.

53An executive summary is available through www.group30.org.

54G30 2003 Plan of Action, 6.

55Of this category of recommendations, recommendation 1 is the most relevant in the context of this book: ‘eliminate paper and automate communication, data capture, and enrichment’.

56G30 2003 Plan of Action, 3.

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In May 2006, the G30 published a ‘Final Report on Global Clearing and Settlement’, in which the implementation of the 2003 Plan of Action was assessed.57 It concludes that much progress in the area of interoperability has been achieved in the EU. With regard to the legal recommendations on the other hand, it had to conclude that the call for legal certainty ‘raised complex legal issues’, which are currently being addressed by the HSC and

UNIDROIT.

9.2.3 UNIDROIT instrument on substantive law

Since its establishment in 1926, the International Institute for the Unification of Private Law (‘UNIDROIT’) has facilitated the creation of harmonisation instruments in the field of private and commercial law as an intergovernmental organisation.58 Traditionally, these instruments take the form of International Conventions, but other, less binding instruments have also been promulgated, such as the 2004 Principles of International Commercial Contracts.

In 2002, UNIDROIT started a project that would have to result in a harmonisation instrument on the substantive law regarding securities held with an intermediary. At the time of writing, several meetings of governmental experts have taken place, but the text of the instrument has yet to be finalised. Final agreement on the form of the instrument has also not been reached. The following section will therefore be based on the text of the preliminary draft convention as the third meeting of governmental experts had adopted in November 2006.59

The UNIDROIT secretariat has explained that, as a matter of principle, provisions have only been drafted when thought necessary for the reduction of legal or systemic risk, or for the promotion of market efficiency.60 In addition, all provisions drafted were considered necessary for achieving international compatibility and internally sound systems of securities custody and transfer law, especially with a view to investor protection and efficiency. The instrument thus addresses both purely domestic and crossborder situations.

57An executive summary of the report is available through www.group30.org.

58From 1926 until the demise of the League of Nations in 1940, UNIDROIT was an auxiliary organ of the League.

59Preliminary Draft Convention on Substantive Rules Regarding Intermediated Securities as adopted by the Committee of Governmental Experts at its third session, 6-15 November 2006, Doc. 57 of Study LXXVIII, hereinafter referred to as ‘UNIDROIT draft convention’ or ‘preliminary draft convention’. Provisions are only discussed that are not indicated to be subject to further consideration.

60Explanatory Notes to the Preliminary Draft UNIDROIT Securities Convention, 68.

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Furthermore, UNIDROIT has explicitly stated that it would take a functional approach that seeks to leave the technical, legal implementation to the participating states.61 This was thought essential because ‘the law governing securities holding and transfer is embedded in national legislation and integrated within several different legal areas: commercial law, corporate law, tax law, insolvency law, etc., as well as through measures carried out by regulatory authorities.’62 As a consequence, the UNIDROIT instrument was drafted so that it provides neutral language which avoids legal classifications.63

Nonetheless, it became clear in the course of the project that the functional approach could not avoid some participating states being forced to amend ‘significant’ areas of their laws. It was considered, however, that an even more functional, model law approach would not be able to guarantee the degree of harmonisation required, and was therefore rejected.64 Consequently, the preliminary draft convention currently proposes to address the soundness of national securities laws in the following ways, mainly so as to accommodate the needs of principal market participants:

-First, it seeks to establish the effectiveness against third parties of a book-entry in a securities account.65 Article 7(2) of the present preliminary draft convention therefore provides that a credit enty in a securities account is effective without any necessary further step. The draft convention allows for the reversal of debit entries or designations of a securities account (for instance, in the context of the creation of a security interest) if the relevant intermediary was

not duly authorised to do so, either by the accountholder, collateral taker or non-convention law.66 The draft convention allows for the reversal of credit entries if the acquirer had (actual or construed) knowledge of an adverse claim or if his account was gratuitously

credited and an adverse claim has subsequently been brought forward.67

-Second, it seeks to establish the effectiveness against third parties of a security interest that has been created by a collateral agreement and by either a designating entry to mark the pledged securities as

61See, e.g., Explanatory Notes to the Preliminary Draft UNIDROIT Securities Convention, 70.

62Explanatory Notes to the Preliminary Draft UNIDROIT Securities Convention, 70.

63Initially however, the introduction of a completely new concept was considered that should denote the package of rights enjoyed by an accountholder; PAECH (2002), 1160.

64Implementation Report, February 2006, Doc. 26 of Study LXXVIII, 9.

65Article 5(2).

66Article 11(1). The consequences of ineffectiveness or reversal are to be determined by the non-convention law; Article 11(2)(c).

67Article 12(1), (2) and (3).

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collateralised, by the simple fact that the collateral taker is the collateral giver’s intermediary, or by control agreement.68 But in order for one or more of these methods to be effective, the relevant contracting state must have made a declaration to that effect.69 The convention further provides rules on the enforcement of a security interest and other rules concerning collateral transactions in its Chapter VI, but an opt-out provision for the entirety of this chapter has been included to avoid conflicts with relevant existing legislation.70

-Third, it seeks to harmonise the priority rules for competing security interests. Article 13 states that security takers that have obtained their interest by being the collateral giver’s intermediary, by designation of the collateralised securities as such or by control agreement, are ranked equally according to the time of, respectively, the conclusion of the collateral agreement, the designation of the entry, or the conclusion of the control agreement. Yet if the security giver is an intermediary, the priority ranking is not to be determined by the convention, but by non-convention law. In addition, all

priority rules are made subject to party agreements that determine otherwise.71

-Fourth, it seeks to establish that accountholders may enjoy their rights undisturbed, and these rights include: the right to enjoy the

monetary and voting rights attached to an accountholder’s securities, and his right to dispose of the securities to which he is entitled.72 But an accountholder’s right to obtain his securities otherwise than through a securities account (for instance, by physical delivery out of the book-entry custody system) is made subject to, inter alia, the

law under which the securities are constituted, the terms of the securities and the account agreement.73 Furthermore, the UNIDROIT convention expressly provides that, although effective against all third parties, the latter two of these three rights can only be exercised against the relevant intermediary, while the first right can only be

exercised against the relevant intermediary as well as against the issuer.74

68Article 8(1) and (2). Article 1(k) defines ‘control agreement’.

69Article 8(4).

70Article 32. This provision has been drafted especially in view of the European Financial Collateral Directive, see infra, s. 9.3.3.

71Articles 13(6) and 14, respectively.

72Article 5(1)(a) and (b), respectively. The convention further provides that the law of the participating states must permit voting and the exercise of other accountholders’ rights by persons other than the accountholders themselves, such as the intermediaries; Article 24(2). Cf. Article 13 of the proposed EU Shareholders Rights Directive, see infra, s. 1.3.3.

73Article 5(1)(c).

74Article 5(2).

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-Fifth, it seeks to preserve the integrity of the intermediated holding system. Under these rules no attachment of accountholders’

securities is allowed at any other tier than that of an accountholder’s immediate intermediary.75 Furthermore, Article 18 states that, in

principle, an intermediary is bound, and only entitled to follow its own accountholders’ instructions.76 In the same vein, Article 19 requires an intermediary to hold an amount of assets with other intermediaries or the issuer itself that corresponds to (at least) the aggregate amount of its clients’ entitlements. Yet these obligations imposed on intermediaries are made subject to the relevant provisions of non-convention law, as well as account agreements or rules of a securities settlement system.

While the provisions just discussed are likely to contribute to the facilitation of the interconnection between national systems, UNIDROIT also envisaged provisions specifically designed to further cross-border connections. These provisions include a set of basic concepts and address the allocation of losses in the case of a shortfall of available securities in an intermediary insolvency.77 For instance, the current version of Article 1 provides that securities are ‘of the same description’ if they are of the same class (in the case of shares or stock), or of the same currency and denomination and form part of the same issue (in the case of other instruments).

Losses that occur as a result of a shortfall in an intermediary insolvency are shared by the accountholders entitled to the type of securities in which the shortfall occurs, in proportion to their entitlements. If an intermediary operates a settlement system, the rules of this system may determine otherwise, while the allocation rule is further subject to domestic nonconvention rules on insolvency proceedings and rules on fraudulent preferences.78

As the discussion of the preliminary draft convention’s provisions shows, the domestic laws of participating states retain a fair amount of discretion. Most provisions of the convention have been made subject to domestic nonconvention law, account agreements, as well as the rules of a securities settlement system. In addition, its standards and functional approach do not seem to require (radical) amendments of domestic laws. The latter issue will

75Article 17.

76Exceptions are made for instructions by security takers, persons designated by agreement, court decisions, any non-convention law rule and rules of a settlement system (when the intermediary is the operator of a settlement system); Article 18(2). Moreover, the consequences of a lack of authorisation are determined by domestic non-convention law; Article 11(2).

77PAECH (2002), 1160.

78Articles 22 and 16.

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be examined in greater detail in the following chapter, but it can be preliminarily concluded, and only with regard to the jurisdictions analysed in the previous chapters, that the current draft UNIDROIT convention will enhance the interoperability and internal soundness of these jurisdictions to a limited extent only.

9.2.4 Hague convention on private international law

Unification of private international law is generally seen as preliminary to the harmonisation of substantive law;79 once the rules of substantive law have been harmonised, the need for uniform conflict of laws rules will become less urgent. At present, however, differences in domestic rules on securities custody, transfer and ownership are many and conflicts of laws regularly arise. Moreover, it has already been stated that international nonuniformity is inevitable, even after harmonisation measures have become effective. Consequently, many studies on the cross-border settlement of securities transactions have stressed the need for uniform conflict of laws rules, especially in the context of legal certainty.80 However, current conflict of laws rules not only differ from jurisdiction to jurisdiction, but are also often unclear and outdated.

In May 2000, Australia, the United Kingdom and the United States proposed to the Hague Conference that it should facilitate a convention that addressed the problems and possible systemic risk81 caused by differences in private international law regarding indirectly held securities. In February 2003, the final text of the Hague Securities Convention (‘HSC’) was released.82

The present Hague Securities Convention caters for all systems of indirect holding as it does not cover ‘direct’ relationships between investors and the issuer or between investors and the securities themselves.83 Also, it does not cover the purely contractual aspects of relationships between parties to a securities transfer or between an investor and his intermediary (although a conceptual distinction between ‘proprietary issues’ and ‘contractual issues’ has been avoided).84 Consequently, the HSC applies mainly to ‘proprietary’

79E.g., CPSS/IOSCO Recommendations 2001, 9.

80E.g., CPSS 1995 Report, 55, Recommendation 8 of the ISSA Recommendations 2000, CPSS/IOSCO Recommendations 2001, 43, Recommendation 15 of the G30 2003 Plan of Action, 10.

81Cf., e.g., POTOK (2004), 205.

82Its text is available at www.hcch.net. Recently, an extensive Explanatory Report on the HSC by Roy Goode, Hideki Kanda and Karl Kreuzer has been published (hereinafter referred to as ‘Explanatory Report (2005)’), the reading of which is highly recommended, not least because of the numerous examples and fact patterns provided.

83Explanatory Report (2005), 11.

84The issues covered are enumerated in Article 2(1).

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issues, even if these arise in a custody relationship that is purely contractual in nature. Furthermore, the HSC is not confined to specific types of transactions or situations; it applies to all situations with some international aspect.85 As usual, the convention has been made subject to public policy rules86 and core insolvency rules of national law.87 Rights that have been established before insolvency, however, remain subject to the law designated by the HSC.88

At an early stage in the development of the HSC, it was concluded that the conflict rules that traditionally determined the applicable law for property law issues regarding securities were insufficient to match the reality of indirect holding systems.89 In the course of the convention negotiations, it also became clear that neither the place of the relevant intermediary (‘PRIMA’), nor the place of the relevant securities account (‘PRACA’) provided practical connecting factors in today’s world of electronic agility.90 Primacy was therefore given to the autonomy of the parties to a securities account agreement to determine the applicable law.

The pivotal article of the HSC in this regard is Article 4(1), under which the applicable law is determined by the parties to the relevant securities account agreement. Parties may either have agreed on a certain law to apply to the account agreement as a whole, as a consequence of which this law applies to all of the (property law) issues mentioned in Article 2(1), or parties may have agreed on a law to govern specifically all Article 2(1) issues. In the latter case, purely contractual issues may thus be governed by the law of another jurisdiction.91

Party autonomy, however, is not unlimited as it has been made subject to a reality check. This reality check concerns the relevant intermediary’s location; the law designated by the parties must be the law of a so-called ‘qualifying office’ of the intermediary concerned. Article 4(1)(a)(iii) provides the general rule in this respect: an office of an intermediary is classified as a ‘qualifying office’ if it is ‘engaged in a business or other regular activity of maintaining securities accounts’. Since this criterion might be considered too general,92 paragraphs 4(1)(a)(i), 4(1)(a)(ii) and 4(1)(b) have been added, representing specific ‘safe harbours’; in the event that one of the criteria there listed has been met, an office is undoubtedly

85Article 3.

86Article 11.

87Article 8.

88Cf. the EU Settlement Finality Directive; see infra, s. 9.3.3. See also Explanatory Report (2005), 24.

89Explanatory Report (2005), 4-5 and 18-19.

90Explanatory Report (2005), 7. On PRIMA, see also supra, Ch. 3.3.

91ROGERS (2005), 40.

92Cf. ROGERS (2005), 33.

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classified as a ‘qualifying office’. Article 4(2) lists elements that must be disregarded in this respect.93

If the rule just discussed does not lead to a result, either because the law chosen does not meet the qualifying office requirement, or because no choice of law has been made, or because there has been no account agreement at all, Article 5 provides fall-back rules. These rules also refer to the law of the relevant intermediary, underpinned by the traditional lex incorporationis (Article 5(2)) or siège réel (Article 5(3)) rules.

The HSC does not provide specific provisions on the law that applies to transfers of title or security interests in book-entry securities. Rather, the general rule of Article 4(1) also governs perfection requirements and their effects; as a result, once securities have been credited to the securities account of the transferee, the law governing this account governs the nature of the latter’s interest, its creation, the proprietary validity of the transfer and the like.94 The HSC thus does not require a preliminary characterisation of the other interests in the chain of custody.95

This approach, however, does not solve conflicts of laws when a transferee obtains a valid interest under the law of his securities account, while the transferor has remained the owner under the law of his securities account. The same problem occurs when a transferee obtains a valid interest under the law of his securities account, while a second transferee who has acquired the same securities in good faith also obtains a valid interest under the law governing his securities account. In short, the HSC does not solve these problems of priority as it does not refer to a single law. However, it does make clear to which double liability intermediaries may be subject.96

The Hague Securities Convention provides a modern conflict of laws rule that is adapted to the needs of modern practice. It is submitted that it makes the applicable law readily identifiable, although it can be questioned how an express choice of law in an account agreement could be known to third parties. Therefore, and because it moves away even further from the lex rei sitae than the current EU Directives do,97 it remains to be seen whether it will find much support in the European jurisdictions that still depend heavily

93 On the reality check, contra RANK (2005), 258, pro TENENBAUM (2004), 847 and HAENTJENS (2006), 83-84.

94It has been argued that the law of the transferor should apply (lex creationis) to these issues; OOI (2003), 301. However this does not seem to have been the intention of the drafters of the HSC; see Explanatory Report, 84-85 and, e.g. POTOK (2004), 216.

95Explanatory Report (2005), 52. But see OOI (2003), 305-306.

96According to the Explanatory Report, the double liability ‘was not created by the Convention’ but ‘has always existed with respect to cross-border transfers of securities through a chain of intermediaries’; Explanatory Report (2005), 86.

97Cf. TENENBAUM (2004), 842 and see infra.

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on traditional conflict of laws rules.98 At the time of writing, no countries have yet formally ratified the Convention, which should take effect once it has been ratified by three or more countries.99

9.3 EUROPEAN HARMONISATION

9.3.1 Introduction

Since 1973, the European Community and later on, the European Union (‘EU’) have undertaken to establish a single market for financial services. Although the introduction of a single currency has accelerated this development100 and a significant integration of market participants has occurred since then, a true single market has not yet been established because of legal and operational barriers. Various studies show that the legal barriers result from a lack of a harmonised legal framework and stress the need for the creation of such a framework.101

The lack of a legal framework is addressed at different levels, mainly by the European Commission. At the most general level, the feasibility of a harmonised contract law is currently investigated,102 while at a more specific level, directives that purport to harmonise financial services law have been put in place and continue to be drafted. Most specifically, the so-called Legal Certainty Group has examined the desirability of the harmonisation of securities custody and transfer law. In the following sections, both the financial law harmonisation, and the initiatives to bring about a harmonisation of securities custody and transfer law will be discussed. But first, some introductory remarks on the private, sector-driven integration of

98For a further discussion of the possible objections against the HSC and its merits, see HAENTJENS (2006), 96 et seq.

99Whereas the US and Switzerland have recently set in motion national procedures to ratify the Treaty, the EU Council is currently reluctant to do so. The European Commission, however, had published a proposal and recommendation in which ratification was advocated; Proposal for a Council decision concerning the signing of the Hague Securities Convention, COM(2003) 783 final and Legal assessment of certain aspects of the Hague Securities Convention, of 3 July 2006, SEC(2006), 910). Probably a cautioning opinion of the European Central Bank (of 17 March 2005, CON/2005/7, OJ C 81/10) has contributed to this position; see HAENTJENS (2006), 96-98.

100LÖBER (2005), 155.

101On the subject of securities law, see, e.g., Giovannini 2001 Report, 55 and EFMLG 2003 Report. See infra, s. 9.3.4. It must be noted however, that the EU Treaty limits its own legislative authority by the principles of subsidiarity and proportionality; Article 5 EU Treaty and see infra, Ch. 12.2.2.

102See http://ec.europa.eu/consumers/cons_int/safe_shop/fair_bus_pract/cont_law/

index_en.htm for an overview of the latest developments and the most important documents on this subject. See also, e.g., HARTKAMP ET AL. (2004) and SMITS (2005), both collections of essays.

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the European markets will be made, because the legal harmonisation to be discussed is undertaken in order to accommodate and further this (functional) integration.

9.3.2 Sector-driven harmonisation

The technical operation of national clearing and settlement systems has been given a strong impetus towards harmonisation by recent mergers of stock exchanges, CSDs and clearing companies.103 Yet, the European clearing and settlement infrastructure still suffers from fragmentation, especially where it concerns equities settlement. The cross-border settlement of fixed-income securities is less affected, since the settlement of these securities is

predominantly carried out by International Central Securities Depositories (ICSDs).104

Currently, the EU-based ICSDs Clearstream International and Euroclear provide clearance and settlement facilities for domestic as well as crossborder transactions. Already since 1980, the settlement of transactions between these institutions and their participants is facilitated by an electronic ‘bridge’ between them.105 Clearstream International is the merged entity of the Luxembourg-based Cedel International and Germany’s CSD Deutsche Börse Clearing AG. Clearstream International holds Clearstream Bank Luxembourg (CBL), Clearstream Bank Frankfurt (CBF) and Clearstream Services Luxembourg (CSL). Euroclear was founded in 1968 by the New York-based Morgan Guarantee Trust Company. As a result of various mergers that took place in the last decade, Euroclear SA/NV held as of 1 January 2005: the ICSD, Euroclear Netherlands (the CSD of the Netherlands, formerly known as Necigef), Euroclear France (France’s CSD, formerly known as Sicovam SA) and CrestCo of the UK. Soon, it will also incorporate CIK of Belgium.106

Prominent European exchanges have also been the subject of recent mergers and takeovers. On 22 September 2000, the Dutch, Belgian and French markets merged to form, respectively, Euronext Amsterdam, Euronext Brussels and Euronext Paris, with Euronext NV as the Amsterdam-based holding company. Since 2002, Euronext NV also holds the stock exchanges of Lisbon and the London-based derivatives market LIFFE. It is the purpose of this pan-European exchange that trading takes place on one single trading

103See BENJAMIN (2003), 224.

104Derivatives are settled by clearing houses and are predominantly contractual in nature, as a consequence of which less problems arise in the settlement of cross-border transactions; Giovannini Group 2001 Report, 20.

105See Euroclear Annual Report 2002, 46 and Giovannini Group 2001 Report, 30.

106Euroclear Annual Report 2004, 60.

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