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

12 Towards the European harmonisation of securities law

In addition, a regulation would not be the most appropriate instrument of harmonisation from a coherence perspective, since it would involve the introduction of a separate, alien body of legislation, without respecting the specifics of member states’ legal systemisation, which has been noted as a serious objection also with regard to the European Securities Code.71 While it has been shown that most of the harmonisation measures discussed above would not encroach detrimentally or disproportionately on the coherence of the jurisdictions investigated, that discussion presupposed that the least intrusive approach would be taken. As a consequence, it concluded, for instance, that a functional approach should be taken and that no new concept to denote accountholder interests should be introduced. Thus, a less intrusive instrument than a regulation would be more appropriate, which would also be in accordance with the constraints imposed by the subsidiarity principle.

A directive is such an instrument, as it is binding only with regard to the substantive result and allows the member states to choose the form and method of implementation. It is submitted that a directive would therefore not encroach disproportionately on member states’ systemisation of law, and would, at the same time, bring about the harmonisation and modernisation currently needed. Moreover, the risk of supererogatory implementation would probably not materialise, because the harmonisation of securities custody and transfer law are not likely to be implemented in a civil code.72 Furthermore, the instrument would be as comprehensive as possible and therefore meet the objection of fragmentation commonly brought forward against Community legislation, provided it would contain all the measures of modernisation proposed above.73

On the other hand, the uniformity which a directive can achieve is necessarily less than a regulation usually accomplishes, inter alia because a directive might be implemented and amended differently by the national legislatures, notably with respect to the terminology used, while national courts might also interpret the implemented provisions differently.74 It is submitted, however, that in the instance of securities custody and transfer law, a directive would ensure the harmonisation needed by adopting a functional approach where less uniformity is needed, while containing provisions of a more detailed nature where technical uniformity is necessary. Alternatively, a framework directive could be drafted which would set out the overarching policy goals, while a more detailed directive or regulation could prescribe specific implementing measures that require (near)

71EFMLG 2003 Report, 28.

72Currently, none of the jurisdictions investigated have codified securities custody and transfer law in their civil codes.

73Ch. 10.3.

74Cf. TAYLOR (1978), 101-102 in the context of the US UCC.

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uniformity.75 The classification of accountholder interests for instance, could be left to national law, while provisions ensuring accountholder protection in intermediary insolvencies should be drafted so as to achieve technical uniformity.

In sum, a directive would be the most appropriate legislative form to achieve the harmonisation and modernisation so urgently needed for the European Union. It has been shown that a directive would represent the best possible medium between respecting the current systemisation of the national laws investigated and having enough binding force to accomplish the necessary reduction of uncertainty. If a directive would contain all the measures proposed in the preceding chapters, it could also claim to be as comprehensive as possible, while observing the constraints imposed by the principles of subsidiarity and proportionality at the same time.

12.5 CONCLUSION

The scope of a future EU legislative action in the field of securities custody and transfer law has been the main focus of this chapter, where it has been shown that a restrictive approach should be chosen, both to preserve some competition between legal systems and to comply with the principles of subsidiarity and proportionality codified in the EC Treaty. More generally, a restrictive and functional approach that would result in minimum harmonisation has been concluded to provide for the greatest opportunity of success.

EC Treaty Article 95, as interpreted by the ECJ in the Tobacco case, proved to provide a legal basis for a Community instrument on securities custody and transfer law. In addition, the principle of subsidiarity would be complied with, as it has been shown that interoperability is currently most notably absent with regard to the protection of accountholder interests in intermediary insolvencies, the possibility of uncovered credits and the regimes for securities transfers by book-entry. Consequently, it has been submitted that the protection of bona fide transferees and the priorities between those transferees, as well as the requirements for and the moment of the transfer of securities by book-entry should be included in the harmonisation.

Furthermore, it was concluded that functional consistency should be sufficient where it regards the classification of the accountholder –

75 Such an approach is called the ‘Lamfalussy approach’; cf. http://ec.europa.eu/internal_market/securities /transposition/index_en.htm, for examples of directives that have already been adopted on that basis.

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intermediary relationship, and, more generally, of accountholder interests. But, as a consequence, technical uniformity should be established with regard to the elements of accountholder interests, such as an accountholder’s right of disposal, retrieval, to vest security interests and to receive and exercise the rights attached to his securities. In the same vein, the prohibition of upper-tier attachment and the possibility of uncovered credit entries in a securities account should be codified, so as to establish the required degree of interoperability.

Thus, a EU harmonisation instrument on securities custody and transfer law that would contain derogatory rules should be confined to the rules traditionally classified as property law rules, and it has accordingly been submitted that it should include neither specific issues of corporate, regulatory or insolvency law, nor general issues of contract law. Moreover, it was concluded that separate conflict of laws provisions would not be needed in a future instrument on securities custody law, provided the EU would ratify the HSC, which was strongly advised.

Normative and coherence considerations on the other hand, have been shown to require that a harmonisation instrument 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. Except for the author’s position on the harmonisation of the transfer regime for bookentry securities, these positions are in accordance with those of the Legal Certainty Group and existing Community legislation.76

Finally, it was determined that a directive would be the most appropriate form for the measure of harmonisation and modernisation proposed above, as a treaty or similar, less directly binding instrument would not be able to

76 See LÖBER (2006), 51-52 and MARKT/G2/MNCT D(2006), minutes of meeting 25 and 26 April 2006, available at http://ec.europa.eu/internal_market/financialmarkets/clearing/certainty_en.htm, a position which was supported by the clearing and settlement industry, witness their responses to earlier consultation documents, available at the same website. The EFMLG on the other hand, suggested that a European harmonisation should bring about full statutory dematerialisation at a Community level and provide the exact nature and extent of an investor’s rights, for the protection of investor’s rights in intermediary insolvencies, for the full tradability of book-entry securities including the protection of good faith acquirers, for the safeguarding of the safety of settlement system by double-entry bookkeeping (implying the direct correspondence of credits and debits with the crediting and debiting of beneficiaries accounts) and separation of an intermediary’s own assets from its clients’ and rules on securities transfers. See EFMLG 2003 Report, 19 et seq. See also supra, Ch. 9.3.4. The EU Commission, in its turn, thought that apart from a reform of investors’ ownership rights, investor protection from intermediary insolvency, the tradability of bookentry securities, priority issues and shortfalls, the processing of corporate actions and the issuer’s ability to choose the location of its securities should be included in a harmonisation instrument; Communication from the Commission to the Council and the European Parliament, Clearing and settlement in the European Union of 28 May 2002, COM(2002)257.

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achieve the level of harmonisation and modernisation which is currently lacking, but is so urgently needed, while a regulation or a Uniform Securities Code proved to involve a disproportionate encroachment on the coherence of national systems.

In the context of the US UCC, it had been concluded that the harmonisation of commercial law at the federal level would be ‘politically unattainable, philosophically unwise and practically unfeasible’ as it would sacrifice state interests and the possibility of experimentation, but that it would also be a remedy against ‘territorial instincts, self-identity need, provincial chauvinism and the fear of a federal tyrant.’77 It is shown here that the harmonisation of commercial law at the EU Community level should equally steer between these Skylla and Charybdis, but that, generally, ‘federalisation’ should be preferred over ‘provincial chauvinism’.

77 TAYLOR (1978), 101-102.

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SUMMARY AND RECOMMENDATIONS

omnia mutantur, nihil interit everything changes, nothing perishes

OVID1

As practices change, so too must language and concepts. That, in a nutshell, is the lesson to be drawn from the past few decades’ work on the commercial law of investment securities.

ROGERS2

Introduction

The present book started from the premise, stated in Chapter 1.1, that whereas practices may converge on the functional level, doctrinal path dependence prevents, or at least shapes, a corresponding convergence at the formal, i.e. legal level.3 It is submitted that this premise has not been falsified by the chapters that followed. Rather, it has been shown that current practices of book-entry securities custody and transfer have been principally shaped by market forces, and that those practices show a remarkable convergence, both globally and regionally. But the underlying legal infrastructure has not uniformly followed that convergence, and, where modifications to the law have been made, those modifications have been largely shaped so as to be in accordance with existing rules and general principles of private and commercial law.

Such ‘doctrinal path dependence’ proves to be particularly problematical when the accountholder – intermediary relationship is defined in traditional, private law concepts, when the rules on tangible movables are applied to credit-entries in securities accounts, and when traditional transfer regimes are applied to securities transfers. For instance, it has been shown that the

1P. OVIDIUS NASO, METAMORPHOSES 15.165.

2ROGERS (1995), 689-690.

3MICHELER (2006). Cf. also CANIVET (2003), 50-51: ‘(…) la convergence ne peut se faire qu’au prix de concessions parfois difficiles à accepter lorsqu’elles atteignent des pratiques fortement enracinées.’

Summary and recommendations

conflict of laws rules in many jurisdictions are still based on the lex situs rule, which applies the law of the place where the securities are located. From the perspective of accountholder protection and market stability, these discrepancies between, on the one hand, the reality of securities custody and transfer, and its inflexible legal underpinnings on the other, contribute to an undesirable situation of legal uncertainty. More in particular, the application of ill-fitting concepts of general private law has proven to create uncertainty for securities accountholders and account providers alike, about which rights they can enforce, and against whom. As the most unwarranted consequence of such discrepancy, a strict application of a ‘property law construct’ or a consensualist transfer regime leaves accountholders with a mere contractual claim in their account provider’s insolvency.

However, these discrepancies also show to what extent legal systems are ‘path dependent’, i.e. what value is attributed to the preservation of their internal coherence. On a more theoretical level, Chapter 2 summarised how legal theorists currently assess the relevance of coherence, and coherence proved to further equality, legal certainty and rationality in a given legal system. Current coherence of national systems of law must therefore be taken into account when proposing alterations to parts of those systems, or as DE VAUPLANE & BORNET stated: ‘Seuls les principes généraux du droit structurent ce système juridique qui sans eux deviendrait fragile et évanescent car sans réelle charpente. (…) L’approche factuelle du droit des marchés financiers est simplement le reflet de la complexité des pratiques qu’il est indispensable d’appréhender, de comprendre, et d’encadrer au sein d’un système juridique.’4

Part I

Chapter 2 therefore developed a coherence model as a tool to assess the consequences of a harmonisation of securities custody and transfer law. It concluded that in the context of the present study, harmonisation proposals should be tested against a non-foundationalist coherence concept that allows for value-pluralism. In other words, it was neither assumed that only coherence considerations determine what the law is, nor that only coherence considerations determine what the law should be.

It was also shown, however, that as an important principle of systemisation, coherence should always be realised to the maximum extent possible, as it furthers equality, legal certainty and rationality in a given legal system. More in particular, it has been shown that a system of law is considered coherent

4 DE VAUPLANE & BORNET (2001), no. 1245. Cf. also MICHELER (2006), 16-17, VAN ERP (2004), 540 and 546, and WILHELMSSON (2002), 92.

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when its elements, i.e. its norms, values and principles, are logically consistent and show some monism, i.e. unity of principle. Logical consistency is established when a given system of law shows a sound internal architecture, i.e. if all norms of a specific area of law fit logically into the more general parts of the law, and when it is both absent of intrinsic contradictions and of instances of inconsistent valuation (Wertungswiderspruch).

If these conditions are not met, the legal system under scrutiny must be considered not to be coherent or in-coherent. But if no inconsistencies can be found, whilst the rules and norms of the given system are supported by many different principles, that system is weakly coherent. With regard to harmonisation legislation on a supra-national level, it was therefore concluded that coherence considerations should only prevent a harmonisation proposal if it would cause a system of strong coherence to become incoherent or weakly coherent, while coherence could not be preserved to some extent and coherence would be (felt to be) diminished unjustifiably and disproportionately.

In Chapter 3, a brief historical overview was given of securities custody and transfer law. It discussed major developments in the practice of the custody and transfer of securities, and showed that during the last few centuries, the law had constantly been adapted to those changes, in some instances after crises had painfully demonstrated the inadequacy of the contemporary framework. It was also shown that while the immobilisation and dematerialisation of securities has dramatically changed the practice of securities custody in the second half of the 20th century, neither substantive, nor private international law has kept pace with that development. It was argued that the main underlying problem is posed by the fact that most European jurisdictions still base their securities custody and transfer laws on traditional property law concepts, while they still characterise securities as tangible movables.

In Chapter 4, operational aspects of the current practice of global securities transfers were explained, and it was shown how, in an overwhelming variety of possibilities, securities may be transferred. Some characteristics of the pre-transfer stage (clearing) were discussed, as well as typical fact patterns in the actual transfer of securities by book-entry (settlement) and the creation of security interests in such securities. As a consequence of the current socalled ‘multiple access model’, settlement appeared to be extremely complicated in a cross-border context, although key market participants continue to consolidate and integrate.

It was argued that most of the risks inherent in the current financial markets and, more specifically, to securities settlement systems, can be mitigated by operational measures, which have indeed been implemented in many

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Summary and recommendations

systems. These measures have also been recommended in reports and recommendations drafted mainly by international organisations. Legal risk, however, caused by a mismatch between law and practice, is still substantial and thus presents a threat to the financial markets as a whole (systemic risk). It was therefore concluded that risk has not yet been properly addressed.

Part II

In the chapters of Part II (Chapters 5 through 8), an analysis has been made of current Belgian, French, Dutch and US securities custody and transfer law. These jurisdictions have been chosen because they represent typical and economically important systems of securities law. Each of these jurisdictions is examined on two levels: first, a comparative analysis has been made on the basis of specific legal questions which will be listed immediately below, and second, the interaction is examined between the securities laws of the said jurisdictions and the more general areas of law in which these securities laws are embedded, on the basis of the coherence concepts discussed in Chapter 2.

Thus, for each of the said jurisdictions, answers to specific questions have been sought that mainly concern either the rights and duties of a securities accountholder, or the integrity of the custody system. More in particular, it was asked, as a preliminary issue, which categories of securities are eligible to be credited in a securities account. Second, it was asked what the nature of the interests is that an accountholder enjoys with regard to the securities to which he is entitled. That issue encompassed the following questions: how are an accountholder’s interests characterised? How are they evidenced? For example, is a credit entry in a securities account a proof of ownership or is it a constitutive element for the existence of securities? Are informal dispositions over securities, i.e. dispositions that are not registered by a book-entry in a securities account possible? Are provisional credit entries in securities accounts possible?

Third, as another important question related to the nature of accountholder interests, it was questioned how an accountholder’s interests in his securities are protected against the account provider and third parties. This question becomes particularly acute when the account provider becomes insolvent, and the most pertinent questions then become: how are shortfalls availed that occur as to the securities held by the account provider? How are an accountholder’s interests in securities separated from the account provider’s property, and, more generally, how are accountholder interests protected against the claims of the account provider’s general creditors?

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Summary and recommendations

Fourth, it was investigated what the requirements for a transfer of securities by book-entry are. Other questions in that respect included: When is a transfer of securities by book-entry effective, i.e. when can the transferee assert his interests in the transferred securities against third parties? Under what circumstances can bona fide transferees rely on the crediting of their securities account, especially when having acquired a non domino, and, more generally, under what circumstances may credit entries in a securities account be reversed?

Fifth, the creation, perfection and enforcement of security rights that can be vested in securities were examined. More specifically, it was questioned what the requirements are for the creation of a security right in book-entry securities and how such a security interest may be enforced. Moreover, it was asked whether upper-tier attachment is possible, i.e. whether it is possible for an accountholder’s creditor to exercise his rights against highertier account providers. Finally, the conflict of laws rules of the selected jurisdictions were analysed and compared, insofar as they concerned the custody and transfer of securities, both as title transfer and by way of security.

As stated, the coherence of the jurisdictions thus investigated has also been studied. More accurately, the relationship between national securities laws and the more general areas of law in which those securities laws are embedded has been analysed. It was concluded that Belgian law has created a very modern and clearly successful legal infrastructure for the custody and transfer of book-entry securities, and that under Belgian law, accountholders are, overall, well protected, while (legal) certainty of the settlement system seems ensured. But the relationship of the book-entry securities custody and transfer law with the more general areas of Belgian law was often concluded to be weakly coherent and sometimes incoherent, in spite of recent legislative amendments (Chapter 5.7.2).

French securities law was shown to be characterised mainly by its statutory and comprehensive dematerialisation. As a result of that dematerialisation, realised in the 1980s, almost no French securities can today be found in a physical form. The dematerialisation sparked intense scholarly debate about almost every aspect of French securities custody and transfer law, and that debate showed that only a few rules of general private and commercial law match the current practice of securities custody and transfer. As a reaction, the French legislature and judiciary introduced for some specific issues rules of securities law that clearly derogate from general private law principles, and it was concluded that these rules established a weakly coherent relationship between French securities law and general private law. But in other instances, where such clear rules are absent, it was argued that this relationship is unclear and sometimes even incoherent (Chapter 6.7.2).

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Summary and recommendations

Unlike French securities law, Dutch law is (still) primarily framed so as to accommodate the circulation of bearer securities. Yet it has been shown that virtually none of the cornerstones of Dutch securities custody and transfer law are fully consistent with general private law principles. Because of the strict dogmatic structure of Dutch private law, and the application of general private law principles to specific and functional areas of law, the inconsistencies and derogations are clearly apparent, perhaps even more so than in less dogmatic systems. It was concluded, therefore, that the relationship between Dutch securities law and the more general areas of law in which it is embedded, is characterised by incoherence and weak coherence. Where the inconsistencies result in unwarranted consequences, notably the corrosion of accountholder protection, it was argued that they should be solved (Chapter 7.7.2).

In the US, the UCC harmonised state securities custody and transfer law through its Article 8, which underwent a major modification in 1994. That revision introduced new concepts for sui generis phenomena of securities custody law, and (functionally) maintained coherence with other parts of the law. Thus, the 1994 revision of UCC Article 8 has turned previously existing incoherence into weak coherence, and also retained its strong coherence with general principles of US private and commercial law. In sum, it was concluded that the UCC should be regarded as an example for a future European harmonisation of securities custody and transfer law, both from a substantive law and a coherence point of view (Chapter 8.7.2).

Part III

Chapter 9 starts with a summary of the arguments that have been made for, as well as against, harmonisation and concludes mainly on economic grounds, that the harmonisation of securities custody and transfer law is strongly advisable. Subsequently, the global and European initiatives that have been undertaken so far to achieve such harmonisation were discussed. On the global level, attention was paid to the recommendations drafted by various international organisations such as the G30, BIS and IOSCO, and the draft convention of UNIDROIT on substantive securities law and the Hague Conference on conflict of laws were also separately discussed. On the EU level, several Directives and the work of the Legal Certainty Group were explained.

It was concluded, however, that the global recommendations could not result in the dramatic legal modernisation and harmonisation that is currently needed, while the EU instruments currently in place were proven to be too limited in scope. In addition, it was demonstrated that the EU lacks harmonisation of, notably, the national differences that still exist with regard

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