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

11 Harmonisation and coherence of national laws

securing its finality and recognising an accountholder’s interests, also when the credit entries are ‘uncovered’.

Finally, a harmonisation of the circumstances in which bona fide acquirers are protected against competing interests would have no influence on the current coherence of the European jurisdictions investigated, while no modernisation was proposed with regard to the priority of accountholders in intermediary insolvencies.

In sum, none of the modernisation measures diminish current coherence disproportionately and unjustifiably. On the contrary, most measures that have been proposed in the preceding chapter have been shown to improve coherence, which applies especially to the issues that need explicit modernisation most urgently, such as the codification of the different aspects of accountholder interests, accountholder protection in intermediary insolvencies and securities transfers by book-entry. The introduction of a new concept to denote accountholder interests as a whole, however, has been shown to decrease disproportionately the coherence of the jurisdictions investigated and has therefore not been advanced. Consequently, the Giovannini Group was right when it stated: ‘(…) there is no need to revolutionise property laws in general, only those dealing with securities’.96 Except for the introduction of a new accountholder interest concept, it has been shown that no doctrinal objections can indeed be validly made if such a ‘revolution’ confines itself to the property laws dealing with securities.

96 Giovannini Group 2003 Report, 17. Contrast the statement of the Legal Certainty Group: ‘In all cases, book-entry rights are un-classified, un-characterised and doctrinally neutral at the harmonising EU level. They neither replace nor alter national property rules concerning securities.’ Legal Certainty Group Advice, 8.

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12.1 INTRODUCTION

As has been noted previously, UNIDROIT aims at a global harmonisation of securities custody and transfer law that reduces legal or systemic risk and improves market efficiency.1 Consequently, the UNIDROIT Secretariat has stated that it would only consider the drafting of a harmonisation instrument if that would be evidently needed to ensure the internal soundness of national systems and their interoperability or compatibility.2 With regard to the European harmonisation, a similar argument can be made, especially in the light of the constraints imposed by European, i.e. Community law.

Chapter 10 scrutinised the ‘internal soundness’ of selected European systems and advanced proposals for modernisation accordingly. These proposals have subsequently been tested against coherence considerations in the chapter that followed, but the ‘interoperability’ or ‘compatibility’ of the European jurisdictions investigated has not been examined in detail and will therefore be further elaborated upon in this chapter. Moreover, although this book is not primarily concerned with European law stricto sensu and its institutional matters, some remarks will be made here on the question of whether the harmonisation measures that would satisfy the requirements of internal soundness and interoperability could withstand the constraints of EU law.

Thus, the possible scope of future EU legislative action in the field of securities custody and transfer law will be the main focus of this chapter, and the most important issue to be discussed in that context will be to what extent a harmonisation instrument should be comprehensive. It could be questioned, for instance, whether such an instrument should take a functional approach, or be more systematic and prescribe classifications. In other words, it could be questioned whether it shoud achieve minimum or maximum harmonisation, and to what extent it should touch on different, other relevant areas of the law. Closely connected with this issue is what form the EU harmonisation instrument should take, which could be determined, in part, by ascertaining the extent to which national legislation must be changed and the range of subjects that should be covered. In that

1Ch. 9.2.3 and 10.1.

2See, e.g., PAECH (2002), 1158 and UNIDROIT 2003 Position Paper, 6 and 14.

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vein, it will be discussed whether a soft law instrument, a directive or a regulation should be chosen.

In the following sections, the legal basis for any EU harmonisation instrument in the field of securities custody and transfer law will be discussed first, after which views will be advanced on the preferred scope of such instrument. Finally, the argument will be made that a directive would be the most appropriate form for the measure of harmonisation and modernisation proposed above.

12.2 LEGAL BASIS

As a general principle, a restrictive approach enhances any harmonisation initiative’s chances of success, while such an approach might also be warranted to preserve competition between legal systems.3 For the EU, the limits to harmonisation are set by the Treaty Establishing the European Community (‘EC Treaty’) Article 5. First, it states that the European legislature should restrict itself to matters for which the Treaty has explicitly granted legislative authority. Second, it provides that EU legislation should comply with the principles of subsidiarity and proportionality, meaning that the Community should only consider the regulation of matters that cannot be better left to the national sphere, and that it should not go beyond what is necessary to achieve the objectives of the Treaty. In the following, it will therefore be examined first, whether the EC Treaty empowers the European legislature to adopt a harmonisation instrument in the field of securities custody and transfer law, and second, for what matters of securities custody and transfer law a need for harmonisation exists.

It is submitted that EC Treaty Article 95 provides the most appropriate legal basis for Community legislation on securities custody and transfer law, as the article empowers the European legislature to adopt harmonisation measures that ‘have as their object’ the enhancement of the internal market.4 But in the Tobacco case of 2000, the European Court of Justice (‘ECJ’) ruled that EC Treaty Article 95 does not provide a legal basis for harmonisation measures in all areas where legal disparities between national rules exist. According to the Court, EC Treaty Article 95 provides a legal ground for harmonisation, only where it ‘genuinely has the improvement of the functioning of the internal market as its object’.5

3Cf. Ch. 9.1.1.

4EC Treaty Article 14(2) further defines ‘internal market’ as being an area of free movement of goods, persons, services and capital.

5Case C-376/98, Germany v. Parliament and Council, 2000 ECR I-8419 (Tobacco Advertising). See, e.g., MOLONEY (2002), 722, ROTH (2002), 764, VAN ERP (2004), 538 and VAN GERVEN (2004), 505-506. See also HESSELINK (2005), especially 76-77, on the legal

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Without reiterating all the arguments that have been brought forward previously, a harmonisation of securities custody and transfer law will be 'genuinely’ beneficial to the functioning of the internal market, as the research referred to above clearly shows the significant economic benefits of harmonisation in that field.6 More specifically, a harmonisation that would eliminate current legal diversity would contribute to the reduction of posttrading costs, resulting in a higher GDP of 0.2% or more in the subsequent years.7 Moreover, it would control the existing legal uncertainty which involves unacceptable (systemic) risks in view of the economic importance of today’s securities markets and their smooth functioning.

Taking into account the measures of modernisation as proposed above, Community harmonisation of securities custody and transfer law would also improve accountholder protection and market stability, and thus support the freedom to provide services and the free movement of capital.8 In addition, it would serve consumer protection and enhance the competitiveness of the European market by making it globally compatible, which are all explicit policy goals of the European Union.9

In sum, EC Treaty Article 95 empowers the European legislature to draft a harmonisation instrument in the field of securities custody and transfer law, if it would bring about a harmonisation and modernisation as proposed. Such a harmonisation instrument would therefore most probably comply with the constraints as codified in EC Treaty Article 5 and as interpreted by the ECJ.

12.3 SCOPE AND INTEROPERABILITY

12.3.1 Introduction

As just stated, EU law dictates that legislative action may only be undertaken on the Community level if it would not be better left to the national legislatures.10 In the case of securities custody and transfer law, this requirement comes particularly into play when considering the ‘interoperability’ of national systems, as a supranational legislature is evidently in a better position to establish such interoperability when that is

basis for a European harmonisation of non-mandatory rules in contract law, and WEATHERILL (2006), 105 et seq., on the case law subsequent (but not contrary) to the Tobacco case, in particular Case 210/03, 2004 ECR I-11893 (Swedish Match).

6E.g., G30 2003 Plan of Action, 4-5 and Giovannini Group 2001 Report, ii. See Ch. 9.1.1.

7EC Economic Impact Study (2006), 18.

8See also EFMLG 2003 Report, 27. Cf. SFD Recital 3.

9EC Treaty Article 3(1)(c), (h), (m) and (t).

10EC Treaty Article 5.

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absent than the national legislatures themselves. The scope of a harmonisation instrument, or whether that instrument matches the EU requirement of subsidiarity, should therefore be determined by an assessment of whether interoperability is currently absent and, subsequently, whether particular measures of harmonisation would significantly contribute to the interoperability of the national systems concerned.

In the context of the national Canadian harmonisation of securities custody and transfer law, it has been considered that the interoperability of national systems is established when those systems display either ‘technical uniformity’ or ‘functional consistency’. It was noted that a limited number of matters, such as conflict of laws and the description of accountholder interests, requires technical uniformity, but that for other issues, functional consistency suffices to achieve ‘the desired level of safety and efficiency.’11 In the following sections, it will be examined for a number of issues that have been investigated in the previous chapters whether harmonisation is needed to establish true interoperability in the form of either ‘technical uniformity’ or ‘functional consistency’.

12.3.2 Definitions

For the interoperability of national systems, as well as for the certainty of scope, it is of critical importance that a harmonisation instrument in the field of securities custody and transfer law provides clear definitions of the categories of financial instruments, the account providers and CSDs it covers. On the one hand, exhaustive definitions that specifically describe the categories of financial instruments covered by the harmonisation instrument envisaged would facilitate the smooth cross-border settlement of securities transactions. A clear set of criteria for the eligibility of financial instruments would prevent disputes over instruments that are eligible to be credited to a securities account in one jurisdiction, but are excluded in another.12

Precisely defined categories of securities would thus enhance legal certainty, but would also necessarily leave out certain categories, which might be particularly undesirable in view of the ever evolving (securities) markets and the emergence of new financial instruments.13 Moreover, because of such developments, a theoretically satisfactory and broadly acceptable definition

11SPINK & PARÉ (2004), 355.

12In some jurisdictions, for instance, derivatives are subject to securities custody and transfer laws, while these instruments are excluded from those laws in others. The US UCC for example, can apply to derivatives, while statutory provisions of, for example, French and Dutch law expressly do not cover derivatives. See Ch. 8.3.2 (US), Ch. 6.3.1 (France), and 7.2 (the Netherlands), respectively.

13BERNASCONI (2000), 43-45.

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of financial instruments has proven to be extremely difficult.14 In addition, normative reasons require that the financial instruments covered by a future harmonisation be defined as broadly as possible, since the legal regime determining accountholders’ rights and duties should not differ, depending on whether the accountholders are entitled to securities which may or may not fall within certain contestable definitions.

The better view would therefore be that a future EU harmonisation instrument should cover all (entitlements to) securities and financial instruments that are credited to a securities account, but that it should be left to supranational regulatory authorities to further define the categories of those securities and other financial instruments that are eligible for being credited to a securities account. This also seems to be the view of the Legal Certainty Group and corresponds with existing Community legislation, but also with the approach taken in the US UCC, the UNIDROIT draft convention, and the HSC.15

A similar line of argumentation can be made with regard to securities account providers. As in the case of financial instruments, it is submitted that a possible future instrument of EU harmonisation should define ‘intermediary’ or ‘account provider’ as broadly as possible, so that all accountholders are protected by that instrument.16 To ensure the necessary degree of interoperability, it is submitted that the requirements for eligibility should be determined by (prudential) regulatory law at the Community level, and that it should include at least credit institutions, investment firms and all (I)CSDs.17 That view has also been taken by the Legal Certainty Group, and corresponds with existing Community legislation, such as the Directive on Markets in Financial Instruments (‘MiFID’).18

14In France, for instance, no consensus exists on the precise scope of the term valeurs mobilières (securities) and its relation to the term instruments financiers (financial instruments). In short, the only common characteristic which seems to be uncontested to some extent is tradability on a stock exchange, a characteristic which has been codified in art. L. 228-1 C. com. Under US law, on the other hand, UCC § 8-102(a)(15)(ii) required ‘securities’ to be also tradable on a securities market. Furthermore, when an instrument is not tradable, issuers can opt for application of Article 8, provided the instrument is a medium for investment. Provided they can be registered by means of a securities account, the UCC can also apply to other financial instruments such as derivatives; UCC § 8-103(e). See Ch. II.3.2.1. Cf. also Rank in EISMA ET AL. (2002), 19-49.

15See Legal Certainty Group Advice, 8, MiFID Annex I, Section C, Ch. 8.3.2 (US) and UNIDROIT draft convention Article 1(a) and (b), and Explanatory Report (2005), 31, respectively. The EFMLG on the other hand, did not favour extension to derivatives, but also advised against an exhaustive definition of securities; EFMLG 2003 Report, 20, 22 and 28.

16The Legal Certainty Group decided to use ‘account provider’ as the most appropriate term to denote a person who maintains positions regarding securities by way of book-entry. See MARKT/G2/MNCT D(2005), memo on ‘account provider’, Brussels, 6 April 2005, available at http://ec.europa.eu/internal_market/financial-markets/clearing/certainty_en.htm.

17Cf. the EFMLG 2003 Report, which proposed to further include corporate issuers and supervised insurance undertakers.

18Legal Certainty Group Advice, 9 and see MiFID Article 5(1).

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Further, it is the Legal Certainty Group’s view that a future harmonisation instrument should cover not only settlements within certain securities settlement systems, but all settlements of securities by book-entry. It follows that both purely domestic settlements and cross-border settlements should be made subject to the instrument. As has been shown in the context of the Settlement Finality Directive (‘SFD’), rules of securities custody and transfer law that apply only to certain, specific clearing and settlement systems can easily result in unjust dichotomies and incoherence within an already specific and functional area of law.19 The view of the Legal Certainty Group must therefore be supported from a coherence and normative perspective, as derogatory rules on certain securities settlements are only justified when they result from the unique position of securities settlement providers as the highest tier of the custody chain.

In sum, normative and coherence considerations require that a possible future harmonisation instrument of securities custody and transfer law should cover all categories of financial instruments that can be credited to a securities account, account providers, CSDs and securities settlements, so that virtually all accountholders are equally protected by the harmonisation instrument’s provisions. While the definitions of that instrument should thus be as broad as possible, legal certainty and interoperability require that regulatory law at the Community level should determine the eligibility of financial instruments to be credited in securities accounts, as well as account providers and CSDs.

12.3.3 Characterisation

In the preceding chapter, it has been argued that the introduction of a new concept that would refer to accountholder interests as a bundle of rights would be unwarranted from a coherence perspective. UNIDROIT, the Hague Conference and the Legal Certainty Group also considered a functional approach that would refrain from the introduction of legal classifications as the best course to take and drafted or advised accordingly.20 It can be questioned, however, whether such a functional approach can guarantee the required degree of interoperability.21

More specifically, it might be objected that re-characterisation remains problematical without harmonisation on the conceptual level.22 Recharacterisation occurs when the applicable (substantive) law classifies a

19Ch. 11.2.7.

20See Ch. 10.2.3.

21Cf. UNIDROIT Implementation Report, February 2006, Doc. 26 of Study LXXVIII, 9.

22Cf. Explanatory Notes to the Preliminary Draft UNIDROIT Securities Convention, 46-48 and SPINK & PARÉ (2004), 343.

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certain interest differently than parties originally intended, which thus involves considerable (legal) risk for the parties concerned. Assume, for instance, that a Dutch judge classifies a securities entitlement that has been established under US law as a contractual claim and consequently does not give the accountholder the protection normally awarded to accountholders under Dutch law. But from this example, it can only be concluded that the issue of re-characterisation must be addressed by a unification of private international law, so that the applicable law is easily ascertainable and indeed identically determined by all forums. In addition, it showed that such unification of conflict of laws rules should give effect to the parties’ intent, which arguably is the most appropriate way to make the applicable law, and thus the consequent characterisations predictable.23

Moreover, harmonisation or unification of the separate elements of accountholder interests, i.e. of the effects of a credit entry in a securities account, also minimises the risk of differing characterisations by the courts and their unwanted consequences. Thus, when no harmonisation is established on the conceptual level, the interoperability of national systems must be ensured by specific and precise harmonisation of the effects of a credit in a securities account, because these effects normally follow from the classification of either the accountholder – intermediary relationship, or the accountholder interest.

An accountholder’s right of disposal, retrieval, to vest security interests, and to receive and exercise the rights attached to his securities typically follow from the classification of his interests,24 and the harmonisation of these rights by explicit provisions is therefore advisable for considerations of interoperability. Furthermore, it has been noted that the (im)possibility of upper-tier attachment and uncovered credit entries in a securities account also follows from the classification of accountholder interests as a direct property right.25 The prohibition of upper-tier attachment and the proprietary effect of uncovered credits should therefore be also explicitly provided for in a harmonisation instrument on interoperability considerations, even when all jurisdictions investigated currently prohibit upper-tier attachment in a similar way.

12.3.4 Accountholder protection in intermediary insolvency

It has been shown above that as a result of its classification of accountholder interests, Dutch law does not give accountholders (proprietary) protection in their account provider’s insolvency under certain circumstances and it has

23See Ch. 10.2.11.

24See Ch. 11.2.2.

25Ch. 10.2.10 and10.2.5.

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been argued that such law should be modernised on normative and coherence grounds.26 As a third ground, it is added here that such law renders the system concerned not fully interoperable with other systems of custody law.

For instance, if an investor holds a securities account with a Dutch intermediary, which in turn holds a cross-border securities account with a foreign participant of a foreign settlement system, Dutch law applies to the said investor’s interests pursuant to PRIMA. However, Dutch law does not grant this investor the proprietary protection that is enjoyed by other Dutch accountholders, or more accurately, by the holders of (Dutch) securities that have been admitted by the Dutch CSD and are thus covered by the relevant Dutch statute. In the Dutch intermediary’s insolvency, the said investor would therefore be left with a mere contractual claim, which is probably contrary to his expectations, as he might have assumed to be protected by the Dutch statute. Systems such as the Dutch thus do not allow for cross-border links without serious consequences for accountholder protection and therefore distort the interoperability between systems of securities law.

Conversely, when an accountholder holds a securities account with an intermediary of a jurisdiction that grants proprietary protection or otherwise confers top priority to accountholders in intermediary insolvency (such as France and Belgium), while this intermediary holds the corresponding securities with an intermediary from a jurisdiction where the accountholders are not so protected under all circumstances (such as the Netherlands), the upper-tier intermediary’s insolvency would prove to be problematical for the lower one, since it cannot pass on its loss of securities under the law that governs its relationship with its clients. This poses a serious risk which would most likely be passed on to the clients of the lower intermediary in the form of higher custody costs, but also indicates the defective interoperability of the system that does not grant accountholders a top priority in intermediary insolvencies under all circumstances.

It is submitted therefore, that ‘functional consistency’ is currently not achieved with regard to the consequences of intermediary insolvencies to accountholder interests and that systems like the Dutch should be harmonised with systems that better protect accountholder interests. Thus, the Legal Certainty Group’s advice that such harmonisation (and modernisation) of accountholders’ priority in intermediary insolvencies be established on the EU level has been shown to comply with the principle of subsidiarity as a necessary measure to achieve full EU interoperability.

26 Ch. 10.2.6 and 11.2.5.

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