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

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Giovannini Group and EFMLG 2003 Reports

As a follow-up to the first report of the Giovannini Group on securities clearing and settlement in 2001, the European Commission issued a consultation document through which it sought to investigate the market’s opinion on the removal of the legal and tax barriers identified, as well as on the removal of competitive distortions between clearing and settlement providers.161 In this document, the European Commission announced its intention to draft a ‘Uniform Securities Code’, but also acknowledged that such a code would be ‘far from easy to design’, because of the intricate links it would have with various areas of national law.162

In 2003, the Giovannini Group issued a second report on clearing and settlement within the EU. In this report, it did not express support for the Commission’s idea of a European Securities Code. It argued that the EU should confine itself to the reform and harmonisation of certain aspects of securities law, most notably ownership of book-entry securities. The Group further substantiated the issues it addressed in its first report and proposed that a future harmonisation instrument should cover investors’ ownership rights, but also investor protection from intermediary insolvency, the tradability of book-entry securities, priority issues and shortfalls in securities accounts.

The European Financial Market Lawyers Group (‘EFMLG’), a private organisation set up in 1999 by the ECB, also issued a report in 2003, in which it supported the idea of a future European directive on the custody and transfer of book-entry securities. Moreover, it expressed further thoughts on the issues that such a directive should cover. First, the EFMLG indicated that a future directive should abolish all certificates, thus accomplishing full statutory dematerialisation at a Community level.163 Second, it should describe the exact nature and extent of an investor’s rights. Third, it should provide for the protection of investor’s rights in intermediary insolvencies. Moreover, it should ensure the full tradability of book-entry securities, for instance by the protection of acquirers in good faith, and it should safeguard the safety of settlement systems by double-entry bookkeeping164 and by the separation of an intermediary’s own assets from those of its clients. In sum, a future framework directive should focus on the effects of the registration of securities by book-entry and, at the same time, address the organisation of securities infrastructure. On the other hand, the report acknowledged that the

161 Communication from the Commission to the Council and the European Parliament,

Clearing and Settlement in the European Union, Main policy issues and future challenges,

COM(2002) 275. The competition issue has been addressed by the MiFID, see supra, s. 9.3.3.

162COM(2002) 275, 12.

163EFMLG 2003 Report, 21.

164‘Double bookkeeping’ refers to the direct correspondence of credits and debits of a beneficiary’s account with the crediting and debiting of the counterparty’s account; see ESCB-CESR 2004 Report, 86. See also EFMLG 2003 Report, 19.

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legal relationship between investor and intermediary should remain the prerogative of the Member States.165

The European Commission took due notice of both reports and released a second consultative document in April 2004.166 In this document, the Commission acknowledged the findings of the second Giovannini Group report and subsequently set up a ‘Clearing and Settlement Advisory and Monitoring Expert Group’ (‘CESAME’) that would have to focus on operational and competitive aspects. The Commission further announced its intention to draft a directive that should provide market participants with access to clearing and settlement systems throughout the EU, a common regulatory framework and governance arrangements.167

With regard to the legal barriers discerned by the Giovannini Group, the Commission argued that barrier 14 had been addressed by the SFD and FCD, while barrier 15 had been removed not only by these same directives, but also by the Hague Securities Convention. Yet it recognised that the absence of an EU-wide framework for the treatment of interests in securities still hampers legal clarity and the overall soundness and efficiency of the Community infrastructure for securities custody and settlement (barrier 13).168 Consequently, it set up two study groups to investigate the issue further and to advise the Commission accordingly. First, the fiscal compliance group or FISCO examines the need for European harmonisation in view of the variations in national tax procedures and second, the Legal Certainty Group focuses on substantive law issues of custody, ownership and transfer of book-entry securities. As a first step, this group issued a detailed questionnaire to investigate the exact nature of the differences in the current national legal systems of all the EU Member States.

Finally, the Commission stated that future EU legislation should also address the diversity of national rules on the consequences of securities transfers for the exercise of corporate rights and that issuers should be able to choose the location of their securities.169 The recent proposal for a directive on shareholders’ rights has taken up the first of these two corporate law issues,170 while the second one will perhaps be examined by the Legal Certainty Group.171

165EFMLG 2003 Report, 22.

166Communication from the Commission to the Council and the European Parliament,

Clearing and Settlement in the European Union, The way forward, COM(2004) 312 final.

167COM(2004) 312 final, 13.

168COM(2004) 312 final, 24.

169COM(2004), 312 final, 26. See also LÖBER (2005), 183-184.

170See supra, 9.3.3.

171See Advice of the EU Clearing and Settlement Legal Certainty Group of 11 August 2006 (hereinafter: Legal Certainty Group Advice), 1, available at http://ec.europa.eu/internal_market/.

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ESCB-CESR 2004 Report

In a joint effort by the Committee of European Securities Regulators (‘CESR’) and the European System of Central Banks (‘ESCB’), they issued ‘Standards for Securities Clearing and Settlement in the European Union’ in September 2004. While the legal status of these standards is still unclear, they could serve as a basis for regulation by national authorities and be used as oversight standards by central banks.172 In a motion adopted in June 2005, the European Parliament expressed very serious criticism of the timing, the legal basis and the content of these standards.173

The ESCB-CESR standards are based on the CPSS/IOSCO Recommendations 2001 and address mainly operational technicalities.174 As does CPSS/IOSCO standard 1, the ESCB-CESR standards require a wellfounded, clear and transparent legal basis for clearing and settlement systems and the links between them.175 But unlike the CPSS/IOSCO standards, ESCB-CESR standard 1 refers to the SFD and, more importantly, promotes European harmonisation of laws in order to reduce systemic risk by minimising the discrepancies between national rules.176 Standard 12 is similar to CPSS/IOSCO standard 12 in that it also requires intermediaries to ‘fully’ protect customers’ securities and stresses that it is ‘essential’ that ‘customers’ securities be protected against the claims of the creditors of all entities involved in the custody chain.’ Compared to the CPSS/IOSCO Standards, ESCB-CESR standard 12 requires more explicitly a customer’s consent before an intermediary may use (or vest a lien in) this customer’s securities for its own business. Furthermore, it is more detailed in its support of double bookkeeping and segregation of intermediary’s securities from its clients’.177

Recent developments

The European Parliament closely followed the work of the Commission and that of the groups which the Commission had established. In June 2005, it adopted a motion in which it stated that it saw no need for a framework directive on the regulation of clearing and settlement providers. Further, it concluded that the higher costs of cross-border settlement of securities transactions are mainly caused by inconsistencies between national laws. Consequently, the motion supported the work of the Legal Certainty Group investigating the desirability of a directive on securities custody and transfer law. It even urged the Commission to make this work a ‘priority instrument

172LÖBER (2005), 187.

173Motion of the European Parliament of June 6 2005, A6-0180/2005 final, 7-8.

174See supra, s. 9.2.2.

175ESCB-CESR 2004 Report, 15.

176ESCB-CESR 2004 Report, 15 and 19.

177ESCB-CESR 2004 Report, 60-62. On double bookkeeping, see Ch. 10.2.5.

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for promoting convergence at European level’,178 but it also acknowledged that it might take ‘many years’ to achieve such harmonisation. It further required that economic and impact assessments be made before legislative instruments would be drafted.179

As a follow-up, a study group set up by the European Commission found in its ‘Draft Working Document on Post-Trading’ that the harmonisation of national securities laws and, more generally, a reduction in post-trading costs, would lead to a higher GDP of between 0.2% and 0.6% in the subsequent years.180 These (preliminary) findings stress the economic benefits of European harmonisation and the Legal Certainty Group therefore continued to prepare its advice to the Commission.

Most recently, the Legal Certainty Group completed a concise report of the responses to the questionnaire mentioned above and published its advice to the European Commission. In short, the Group advised that legislative action be taken to harmonise the legal effects of book-entries, but did not disclose a view on the specific form which harmonisation should take. It further suggested that ratification of a possible future UNIDROIT instrument might be preferable to the enactment of separate EU legislation.181

More specifically, the Legal Certainty Group argued that any harmonisation instrument should be based on the following principles: an accountholder should have the right to dispose of his securities, and to retrieve them when requested. These rights should be of a mandatory law nature. Furthermore, an accountholder should have the right to exercise the corporate rights attached to his securities, and to receive the corporate information necessary for such exercise. These rights, however, might be addressed by the proposed Shareholders’ Rights Directive. All accountholder’s rights should arise at the moment of a credit, and extinguish at the moment of a debit entry in an accountholder’s securities account.

The Legal Certainty Group further advised that any intermediary should be under the obligation to: maintain sufficient assets to satisfy its clients’ claims, to provide its clients with corporate information, to pass on corporate information and to exercise instructions with regard to corporate actions, to exercise instructions with regard to its clients’ securities account, to

178Motion of the European Parliament of June 6 2005, A6-0180/2005 final, 14.

179This requirement is in accordance with the European Commission’s policy for the years 2005-2010 to legislate only when strictly necessary and only when tangible benefits have been ex ante determined; see, e.g., Commission Staff Working Document, Single Market in Financial Services Progress Report 2004-2005, SEC(2006), 17, 3.

180This estimate is the result of different model specifications. Further, it should be noted that the figure is dependent on the competitive form of the market and changes in the behaviour of economic agents have not been calculated; Draft Working Document on Post-Trading, 48-50.

181Legal Certainty Group Advice, 10.

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segregate its own assets from its clients’ assets and to replace those assets when required. Only the first of these obligations should be of a mandatory law nature, while the two following obligations might be addressed by the proposed Shareholders’ Rights Directive. Other mechanisms that the Legal Certainty Group proposed in order to protect an accountholder’s rights include: protection of a bona fide purchaser of book-entry securities, a prohibition of upper-tier attachment and an insulation of an accountholder’s rights from his intermediary’s insolvency.

At the time of writing, the European Commission had not yet responded to the Legal Certainty Group’s advice.

9.4 CONCLUSION

The analyses just discussed show that a fully efficient functioning of the European internal market is still hampered by legal barriers. It has further become clear that these barriers are neither sufficiently, exhaustingly nor adequately dealt with by either existing EU legislation or the recommendations discussed above.182 The global recommendations mentioned could not result in the dramatic legal modernisation and harmonisation that is currently necessary, while the EU instruments discussed have been proven to be limited in scope as they cover rather specific transactions and situations. In addition, they have not addressed national differences that still exist with regard to investors’ ownership rights, investor protection from intermediary insolvency, the tradability of bookentry securities, priority issues and shortfalls. Moreover, the conflict of law rules provided for in these instruments are inconsistent and not globally compatible.183

As a consequence, the European Commission and other entities are investigating the desirability and substance of a harmonisation instrument that addresses these issues so as to provide a European legal framework on book-entry securities.184 Such an instrument should principally aim at the limitation of risk and investor protection.185 Furthermore, it should be consistent with existing Community legislation and be compatible globally,

182Cf. Operational Conclusions established at the CESAME meeting of 8 June 2006, 17 and

18.The current EU legislation on securities accounts has even been referred to as a ‘legal patchwork’; PARTSCH-BOBRICHEFF (2005), 40.

183Cf. HAENTJENS (2006), 38.

184The Commission also considers legislative action to eliminate the current barriers that exist in the area of bank accounts (current, savings and as well as securities accounts); White Paper, Financial Services Policy 2005-2010, 14.

185Cf. LÖBER (2005), 156 and 188 and LÖBER (2006), 61. See SMITS (2006), 72 et seq. for a

(critical) discussion of these policy goals in the area of European private law harmonisation.

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notably with the recommendations discussed above.186 In the next chapter, it will be discussed in detail to what extent the European jurisdictions that have been analysed in the previous chapters should be modified to meet these policy goals, especially in the light of existing US law, the UNIDROIT initiative and the advice of the Legal Certainty Group. Whether a European harmonisation instrument that fosters financial stability and investor protection will be prohibitively complicated by the relationship between securities custody and transfer law with property, contract and commercial law, will be the subject of Chapter 11.

186 LÖBER (2005), 185. On 20 December 2005, the European Commission announced that it had been granted authority by the European Council to take part in the UNIDROIT negotiations on behalf of the EU; press release of December 20 2005, IP/05/1637.

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10 NATIONAL SECURITIES LAWS COMPARED AND EVALUATED

10.1 INTRODUCTION

As has been shown in the preceding chapter, the barriers that impede the smooth functioning of the European internal market with regard to the settlement of securities transactions are neither sufficiently, exhaustively, nor adequately addressed by existing EU legislation. Both for substantive law and conflict of laws rules a common legal framework is lacking, which leads to legal uncertainty and higher costs in the settlement of cross-border transactions. It has been argued that as a consequence, the European Commission and other entities are justifiably investigating the feasibility and substance of a harmonisation instrument to provide such a framework.

It is submitted that the smooth functioning of the European internal market is as much hampered by legal diversity as it is frustrated by outdated doctrines that do not fit current market practices. The process of European harmonisation should therefore not only result in the international compatibility of national laws, but also be considered an opportunity to modernise outdated domestic systems. In other words, a new European regime of securities custody and transfer law should be sought, rather than merely making the laws of all member states compatible.

The joint objectives of ‘compatibility’ and ‘internal soundness’ have accordingly been formulated as explicit policy goals for a future instrument of global harmonisation for the UNIDROIT project.1 It is the present author’s view that with regard to the European harmonisation process, the ‘internal soundness’ of national securities custody and transfer laws could be achieved through a modernisation that aims at minimising the legal risk (thus contributing to the financial stability of the market) and maximising investor protection.2 Furthermore, all modernisation initiated at the Community level should be consistent with existing Community legislation or the acquis communautaire and be compatible globally, notably with the

1UNIDROIT 2003 Position Paper 5 and 13.

2Cf. LÖBER (2005), 156 and 188 and LÖBER (2006), 61. See SMITS (2006), 72 et seq. for a (critical) discussion of these policy goals in the area of European private law harmonisation. The most recent economic impact assessment estimates that the result of a reduction in posttrading costs results in an increase of GDP of between 0.2% and 0.6% in the subsequent years; Draft Working Document on Post-Trading, 48-50. Interestingly, the UNIDROIT 2003 Position Paper, 28 states that the issues that require the ‘balancing of considerations such as investor protection, freedom of contract and economic efficiency’ should remain the prerogatives of national legislature.

10 National securities laws compared and evaluated

recommendations that have been examined in the previous chapter and with the proposed UNIDROIT instrument.3

It has been argued, however, that the European harmonisation and modernisation should go further than the UNIDROIT project, i.e. a higher degree of uniformity should be the objective of an EU instrument, because European systems would already show a degree of integration that is absent at the global level.4 However, all Community legislation initiatives are curbed by the principle of subsidiarity, according to which supranational law should restrict itself to matters that cannot be better left to the national sphere. This principle has been codified in the EC Treaty and it will be ascertained in a later chapter whether the modernisation measures that will be proposed in the following sections exceed the boundaries of the Treaty.5

While it is generally accepted that national securities custody and transfer laws should have a clear and transparent legal basis,6 so that parties are able ‘to determine in advance with certainty and predictability the substantive law that will govern their rights and obligations’,7 this rather general principle must be substantiated in more detailed standards. In the next sections therefore, principal aspects of the securities laws of Belgium, France and the Netherlands, as analysed in chapters 5 to 7, will be compared and evaluated. For the evaluation, the said aspects will be tested against the recommendations as discussed in the previous chapter, in order to ascertain to what extent the jurisdictions investigated must be modernised in the context of a possible European harmonisation.

10.2 PRINCIPLES OF MODERNISATION AND POLICY PERSPECTIVES

10.2.1 Introduction

As has just been indicated, a modernisation of European securities custody and transfer laws should aim at achieving financial stability and investor protection.8 Although these policy goals necessarily intertwine because

3LÖBER (2005), 185. On 20 December 2005, the European Commission announced that it had been granted authority by the European Council to take part in the UNIDROIT negotiations on behalf of the EU; press release of December 20 2005, IP/05/1637.

4Cf. LÖBER (2005), 188. See Ch. 12.4.3.

5Ch. 12.2.

6CPSS/IOSCO Recommendations 2001, Recommendation 1 and ESCB-CESR 2004 Report,

7GUYNN (1996), 33.

8Cf. Article 3(1)(c), (h), (m) and (t) of the Treaty Establishing the European Community. Sections (c) and (h) refer to the establishment of a common or internal market and the

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financial stability contributes to the optimal protection of accountholders and vice versa, the latter one is specifically served with rules that preserve an accountholder’s rights in intermediary insolvencies, with rules that ensure the processing of information related to corporate actions and the exercise thereof, and with a prohibition of upper-tier attachment. Intimately connected to these rules, but more general in character, are the rules that clearly state the effects of credit entries in a securities account and define the nature of an entitlement to securities held in a securities account. Financial stability on the other hand, is specifically served with clear rules on the transfer of securities by book-entry, with the protection of an acquirer in good faith, with the ensured finality of securities transfers, with clear rules on the collateralisation of securities, and with harmonised rules on the eligibility of securities and intermediaries. 9

It has been argued, however, that modern rules on these subjects would alter current security, property and insolvency law mechanisms and structures.10 In this view, the alteration would unacceptably weaken the position of investors and result in a shift in balance between creditors, merely to the advantage of large financial institutions.11 Especially liberal regimes for the enforcement of security interests in financial collateral, the protection of an intermediary’s creditors in good faith and party autonomy with regard to the choice of law have given cause for such criticism.

The extent to which modern legal regimes for book-entry securities would alter security and property law (and, to a lesser extent, insolvency law), is the subject of the next chapter, where it will be shown that the modernisation of securities custody and transfer laws need not result in any substantial alteration of more general areas of law. The argument that the modernisation of securities custody and transfer laws will necessarily weaken the position of investors will be discussed in greater detail below, but it must already be briefly stated here that that argument cannot withstand closer scrutiny, principally because it assumes an equalisation of investors/accountholders to (retail) consumers, and creditors to financial institutions. But, as ROGERS has put it: the divide between (secured) creditors and accountholders does not translate ‘neatly into any lines of class, wealth, power, or the like’, since accountholders may just as plausibly be ‘large financial institutions’, as creditors may represent retail consumers (e.g. pension funds and the like).12

according ‘approximation’ of laws, while section (t) refers to consumer protection as a policy goal of which the European Community has the authority to act. Section (m) refers to the strengthening of the competitiveness of the Community as a policy goal.

9Cf. the EFMLG 2003 Report, in which the Group advocates a European harmonisation instrument that is based on two pillars, viz. the organisation of the securities infrastructure on the one hand, and the effects of book-entries on the other.

10According to JOHANSSON (2005), 1109 and 1114, ‘clear examples’ of this could be given. Unfortunately, she does not provide such examples, nor does she substantiate her statement.

11JOHANSSON (2005), 1115.

12ROGERS (1996), 1529.

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10.2.2 Securities infrastructure

Securities eligible13

Various reports support the full dematerialisation of securities and recommend that all certificates be replaced by book-entries in securities accounts or registers.14 Market stability is arguably enhanced when no disputes can arise over lost, stolen or otherwise disappeared certificates. Moreover, it has been calculated that the costs of custody and administration are substantially reduced by complete dematerialisation.15 This recommendation is, of course, mainly directed at jurisdictions where certificated bearer securities form the majority of securities in circulation. Of the jurisdictions investigated in the previous chapters, it therefore concerns the Netherlands and the US, as practically all French securities have been dematerialised since the 1980s, while Belgian securities will be dematerialised over the next decade.

On the other hand, mistakes can also be made when securities are processed by book-entry, with costly litigation as a consequence (operational risk).16 In addition, (full) dematerialisation may increase the risk that intermediaries create interests in securities by credit entries in their clients’ securities accounts without having obtained the corresponding assets at the higher tier.17 Furthermore, measures to achieve full dematerialisation may also come at substantial costs, since it has serious consequences for both legislation and market practices. The (market-driven!) efforts to dematerialise US securities custody,18 the complex Belgian legislation19 and

13On the harmonisation of the concepts ‘securities’ and ‘financial instruments’, see infra, Ch.

14Giovannini Group 2001 Report, 59, Giovannini Group 2003 Report, 14, EFMLG 2003 Report, 7 and 20 and G30 2003 Plan of Action, Recommendation 1.

15DTCC estimates that the annual costs of issuing, storing and processing paper certificates in the US is $250 million, while the costs of processing a single paper certificate transfer is estimated to be $32 more than a non-certificated one; see ‘$250 million – The Annual Cost of Processing Paper Securities’, the first in DTCC’s ‘no-more-paper’ series. In France, it was estimated that the costs of custody could be reduced by 40% to 45% by the dematerialisation of all securities; RIPERT & ROBLOT (1996), no. 1758.

16Cf. Ch. 4.4. As anecdotal evidence, a mistake by the Japanese brokerage firm Mizuho may be referred to. Mizuho intended to sell 1 share of J-Com for ¥610,000 ($5,065), but instead offered 610,000 shares for ¥1 a piece. The value of these shares together was then $3.1 billion. Because of the very strict finality rules of the Japanese clearing and settlement system as well as exchange rules, the order could not be reversed, as a consequence of which the loss could amount to more than ¥30 billion ($250 million); CNN press report of December 9, 2005. Cf. also infra, s. 10.2.8.

17The author is grateful to Professor W.A.K. Rank for his explanation on this point. See also infra, s. 10.2.5.

18See, e.g., www.dtcc.com/nomorepaper for the ‘no more paper’ campaign of DTCC.

19See Ch. 5.2.

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