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

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distinction between the solutions contemporarily chosen is between jurisdictions that confer investors with some kind of co-property interest in their securities and still regard securities as tangible movables, and jurisdictions that have developed other views. Co-property interests are known in civil law jurisdictions such as Germany, Spain and the Netherlands, where it is based on the Depotgesetz, the Ley del Mercado de Valores and the Wet giraal effectenverkeer, respectively. In common law jurisdictions such as England and Wales, co-ownership follows from the common law concept of trust.

Co-property rights may be distinguished between co-ownership in actual pools of securities and co-ownership in notional pools of securities. Fungible custody in Belgium and Luxembourg is based on Koninklijk Besluit (Royal Decree) no. 62 and several Règlements grand-ducal (Grand-ducal Decrees) respectively, which establish co-ownership in notional pools of securities.33 Whereas the former system confers upon investors a direct, traceable property right in the physical certificates themselves, the Belgian/Luxembourgian system grants investors a co-property right, regardless of where the actual securities are located, i.e. irrespective of how many intermediaries are interposed between the investor and the actual custodian of securities.34

Although the precise classification of investors’ interests in securities is unclear under French law, it is undisputed that investors do not have a coownership right in pools of securities.35 Under US law on the other hand, investors enjoy a package of rights in rem as well as in personam against their intermediary, as the US Uniform Commercial Code (‘UCC’) Article 8 provides investors with proprietary and contractual rights in respect of the securities to which they are entitled. Italian and Brazilian law present yet a different solution, by a legal fiction that regards custody on a fungible basis as depositum, i.e. the administration of individual assets per individual client.

3.2.5 Conclusion

In sum, the practice of securities custody has dramatically changed in the second half of the 20th century, as securities ceased to be physically held on an individualised basis and became registered in pooled securities accounts with multiple layers of intermediaries, while the certificates themselves were

33Of 17 February 1971, of 8 June 1994, of 7 June 1996, of 16 August 2000 and a statute of 3 September 1996. See Ch. 5.3.6.

34In the Netherlands for example, third (or lower)-tier investors are not granted co-ownership rights in the actual pool of securities. See Ch. 7.3.5. See also GOODE (1996), 171.

35See Ch. 6.3.5.

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immobilised in the vaults of CSDs or abolished altogether.36 In addition, the settlement of securities transactions is becoming fully international, as issuers, CSDs, ICSDs, intermediaries and investors are increasingly often located in different jurisdictions.

However, most European jurisdictions still regard securities as movable tangibles and apply traditional property law concepts to securities transfers and custody. For example, some systems have retained the direct relationship between investors and their securities (tracing), which seems to be contrary to the fungible and intangible nature of current securities and is most often utterly impractical due to the multiple layers of intermediaries.37 Furthermore, the application of possession, and in fact all in rem actions, to book-entry securities proves to be problematical, not only because of the intangible nature of interests in securities that are expressed through accounts, but also because of the pooling or commingling of securities. For Belgium, France and the Netherlands, these problems will be discussed at greater length in the following chapters.

Consequently, various jurisdictions have modernised their securities laws or are about to do so. In 1994, for instance, the US introduced a new body of law creating a new type of interest for securities account holders.38 Both Canada and Switzerland have recently published draft acts on the custody and transfer of securities held with an intermediary, that are both based on concepts similar to the US UCC and will thus introduce a new type of accountholder interest.39 The English Financial Markets Law Committee, on the other hand, has recently recommended that the Law Commission should prepare a statute to modernise securities custody and transfer law, but was of the opinion that no radical changes were necessary.40 Similarly, it has been argued that German law should abandon the co-ownership construct in favour of the trust concept.41 Finally, it remains to be seen what the effects of a possible future global and/or EU harmonisation instrument will be on these developments.

36Cf. Mooney (1990), n.340: ‘A fungible bulk of securities is the antithesis of a discrete certificate, (…)’.

37Cf. SOMMER (1998), 1204 et seq. and THEVENOZ (2005), 303. The impracticality of the tracing approach especially comes to light in cross-border situations; see infra, s. 3.3.

38UCC Article 8, Part 5 and corresponding provisions in UCC Article 9 (1994). See Ch. 8.3.4 and, e.g., REITZ (2005), 361 and 367.

39The Canadian proposal for a Uniform Securities Transfer Act was published on August 1, 2003; see SPINK & PARÉ (2004). The Swiss draft Federal Act on the Custody and Transfer of Securities Held with an Intermediary was published in December 2004; see THÉVENOZ (2005), 307.

40FMLC 2004 Report, Issue 3, available at www.fmlc.org.

41See, e.g., EINSELE (2005), 261.

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3.3 CONFLICT OF LAWS

3.3.1 Introduction

When a suit in which a conflict of laws has arisen is brought before a court, the court will first have to ascertain its jurisdiction, after which it will have to classify the issue in dispute. An important classification that has to be made in that regard is whether the issue is contractual or proprietary in nature, a distinction known to all jurisdictions investigated.42 Contrary to the conflict of laws rule applied to proprietary aspects, the private international law rule governing contractual aspects seems fairly settled; parties to an agreement may determine the law wich is applicable thereto (lex contractus), a rule which is made explicit in the European Rome Convention 1980.43 The international private law concerning proprietary aspects of custody and transfer law, however, had to face the same challenges as substantive law, and the following sections will show that its solutions have not always been satisfactory.

3.3.2 Lex situs, lex societatis and their problems

Traditionally, the lex rei sitae, lex situs cartae or lex situs, all names for the same rule, has been applied as the appropriate conflict of laws rule for proprietary issues concerning bearer securities, referring to the law of the jurisdiction in which the assets concerned are located at the time a conflict of laws occurs. It derives from the mediaeval theory of Statutes and is still applied in most jurisdictions throughout the world, often also to conflicts concerning securities.44

Because proprietary claims are enforceable not only inter partes, but erga omnes, they require clear and easy choice of law rules to provide third parties with legal certainty. As a consequence, the applicability of the law of the jurisdiction where the tangibles concerned are located seems appropriate. This may undoubtedly be true with respect to immovable property, but problems arise from the outset when the rule is applied to movables, because of their ability to move across borders. To demonstrate this inherent difficulty, one only has to consider cases in which the movable object is

42Even if the subject-matter concerned is classified as contractual in nature, e.g. the delivery thereof is considered to have proprietary aspects; cf. BENJAMIN (2000), 155.

43Convention on the Law Applicable to Contractual Obligations, Rome 19 June 1980 (80/934/EEC), OJ L 266/1.

44KROPHOLLER (2004), 541 and on the theory of Statutes id., 11-13. Cf. POTOK (2002), 8 n.7.

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stolen, cases in which security interests are vested in movable objects and cases of movables in transit.45

In the case of securities held through multiple tiers of custodians, these problems become even more urgent. Applying the lex rei sitae rule would compel one to ‘look through’ the whole chain of custody to the place where the securities in question are located,46 and a number of objections to such an approach have been put forward.47 First, the lex rei sitae itself is not unequivocal, or is at least applied differently in different jurisdictions and sometimes even interpreted differently within a single jurisdiction; it can refer to the law of the certificates’ location, to the law of the issuer’s location (which is sometimes called the lex societatis, see below), to the law of the securities register’s location and to the law of the highest tier’s location.48 It will be obvious that these connecting factors do not necessarily refer to the same jurisdiction.

Secondly, in the case of fungible securities, bearer certificates of the same kind are not always kept in one single vault. Therefore, the location of the securities which give rise to the dispute cannot possibly be determined, since it is impossible to establish whether the securities concerned are the ones which are kept in the vault of one intermediary or held on a different level in the chain of custodians, possibly in another jurisdiction.49 Furthermore, as a result of the multi-layered structure of custody, it is unlikely that the parties to the dispute have access to information known by upper-tier intermediaries concerning the location of the securities in their custody.50 Especially in a cross-border situation, this inaccessibility of information is not uncommon due to the sometimes highly complicated structures of custody.

Thirdly, if an investor wishes to transfer his international securities portfolio comprising securities of issuers of different nationalities as a whole, multiple jurisdictions would be applicable to the same transfer and its proprietary aspects, which implies large-scale costs and a greater legal risk.51 Further, some securities transactions permit so-called substitution, i.e. the replacement of securities provided as collateral by other securities, and these are possibly located in a different jurisdiction. In such a situation, it would

45Cf., e.g., STRIKWERDA (2002), nos. 159-162, SIEGEL (1994), 221, CLARKSON & HILL (2002),

487and VERHAGEN (2000), 114.

46See BERNASCONI (2000), 3 and 28-29 and GUYNN ET AL. (1996) 27. Cf. POTOK (2002), 28, stating that in direct holding systems, a look-through approach would still be feasible.

47Cf. POTOK (2004), 208-209.

48Explanatory Report on the Hague Securities Convention, 18.

49See also AUSTEN-PETERS (2000), 198 and ROGERS (2005), 18: “There is no answer to the question whether the Australian’s Investor’s position is part of one mass or the other. The question is not factually difficult, it is metaphysically absurd.”

50ROGERS (1996), 1459 and BENJAMIN (2000), 162.

51See POTOK (2001), 58-59 and AUSTEN-PETERS (2000), 204.

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be impossible to determine the law which is applicable to the proprietary aspects of the transaction.52

In the case of registered securities, the lex societatis is traditionally applied where conflicts of laws occur as to proprietary matters, referring to the law of the issuer’s location. The lex societatis rule, however, is also neither easy to use, nor unequivocal. First, the lex societatis could refer to either the location of the issuer or the location of the issuer’s register, which are not necessarily in the same jurisdiction. Furthermore, a great deal of debate exists in legal literature on an issuer’s location; it could refer to either the place of incorporation (lex incorporationis) or the place where the issuer performs its main activities or has its headquarters (siège réel). In France, Belgium and Germany, for instance, the siège réel theory is employed, whereas in the Netherlands the lex incorporationis is implemented.53

It should be noted that under the rules just discussed, the preliminary question is whether the securities concerned classify as registered, bearer, certificated or uncertificated securities and even this cannot always be determined with certainty.54

3.3.3 PRIMA

To meet these difficulties,55 a new conflict of laws rule had to be formulated. Taking the practical reality of the indirect holding system as a starting point, the 1998 Oxford Colloquium on Collateral and Conflict of Laws developed the so-called Place of Relevant Intermediary Approach (‘PRIMA’), referring to the rule that proprietary issues concerning indirectly held securities are governed by the law of the place of the most relevant intermediary.56 The relevant intermediary means the intermediary/custodian with which the relevant party to the dispute maintains his securities account and the law of the first intermediary’s jurisdiction (from the point of view of the accountholder concerned) in the chain of custody thus applies to the proprietary issue in question.

52BENJAMIN (2000), 162.

53STRIKWERDA (2002), no. 199.

54See ROGERS (1996), 1457 as to the qualification of global certificates.

55Described by James Rogers, Reporter to the Drafting Committee to Revise UCC Article 8 (1994) as being of “horrendous complexity”; ROGERS (1996), 1457.

56The contributions to the said Oxford Colloquium have been published in Butterworths’ Journal of International Banking and Financial Law – Special Supplement/September 1998. The term ‘Place of the Relevant Intermediary Approach’ and its acronym have been introduced by Richard Potok, see BENJAMIN & YATES (2002), 77, n.1.

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At present, several variations of PRIMA may be distinguished. First, under Belgium’s private international law, proprietary issues of cross-border securities transactions are governed by the law of the location of the assets transferred,57 a rule which resembles the traditional rei sitae rule. The assets, however, are considered to consist of the accountholder’s claims against his intermediary, rather than the underlying securities and, as a result, this rule generally refers to the intermediary’s location.

The conflict of laws rule of the EU Settlement Finality Directive (‘SFD’)58 also seems to be a variation on the lex sitae, as it designates the location where the relevant party’s securities are registered as the appropriate connecting factor. The EU Financial Collateral Directive (‘FCD’)59 on the other hand, designates the place where the relevant securities account is maintained as the appropriate connecting factor.60 This variation of PRIMA has therefore also been called ‘PRACA’, standing for the Place of the Relevant Account Approach.61

Moving still further away from the lex rei sitae is the variation of PRIMA under which the accountholder and custodian are allowed to designate the law applicable to all aspects of their respective rights and duties. Here, no relation whatsoever exists between the location of the assets concerned and the law which is applicable. This rule is applied in the US UCC and the Hague Securities Convention, but under the HSC, party autonomy to designate the applicable law in the account agreement is restricted and must have some connection with the actual place of the intermediary or one of its branches.

It has been argued that PRIMA – in all its variations – is a modification of the traditional lex rei sitae rule, since it considers the place of a securities accountholder’s entitlement as an appropriate connecting factor.62 It is submitted, however, that to consider the intermediary’s location as a ‘place’ in the sense of the traditional situs rule would be confusing or at least highly artificial. It would suggest the possibility of locating the physical location of the object of the dispute, whilst it is controversial if intangibles have a situs at all. Moreover, not all jurisdictions classify the place of the relevant intermediary as the place where the accountholder’s entitlement is situated. Thirdly, if PRIMA is understood to allow party autonomy to designate the

57Koninklijk Besluit (Royal Decree) no. 62 of 1967; see POTOK (2004), 210.

58Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (OJ L 166/45), see Ch. 9.3.3.

59Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168/43). See Ch. 9.3.3.

60On the discrepancy between the rules of the SFD and the FCD, see HAENTJENS (2006), 37. But see POTOK (2004), 212.

61DE VAUPLANE & DAIGRE (2003), 34.

62The EU Collateral Directive Recital, no. 8 expressly states so. See also BENJAMIN (2000),

151et seq.

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governing law,63 as is the case in the HSC and the UCC, even less connection with the traditional lex situs rule exists.64

In conclusion, PRIMA is being accepted worldwide, both on the national level65 and on the regional level. On a global level, the Hague Securities Convention has also adopted the PRIMA rule. However, telling differences may be discerned regarding the precise form of PRIMA adopted, even among different EU directives. These differences, together with more traditional conflict of laws rules and relevant substantive securities law, will be investigated further in the next chapters.

3.4 CONCLUSION

In the previous sections, it has been shown that during the last centuries, the law has constantly been adapted to changes in practice of securities custody, in some instances after crises had painfully demonstrated the inadequacy of the contemporary framework. It has also been shown that although the practice of securities custody has dramatically changed in the second half of the 20th century, neither substantive, nor private international law has kept pace with that development, while the modernisation of conflict of laws rules seems a little more advanced.

The main underlying problem seems to be that most European jurisdictions still base their securities custody and transfer laws on traditional property law concepts, and remain to characterise securities as tangible movables. While the change in the conception of securities as tangibles in lieu of intangibles had revolutionised legal thinking in the 19th century, it may be time to introduce a new concept of assets, or to return to the concept of intangibles, thus following the developments that have taken place in the custody of monetary assets.66

63It is debatable, however, if such a rule could still be classified as a PRIMA rule; RANK (2005), 250.

64Cf. TENENBAUM (2004), 842.

65For an overview of the implementation of the PRIMA rule, see BERNASCONI (2000), 50 et seq.

66Cf. DROBNIG (1988), 41. See also MOUY & DE VAUPLANE (1995), 58: ‘Depuis la dématérialisation, les auteurs sont partagés sur la nature juridique des droits du titulaire d’un titre au porteur. Un courant majoritaire considère qu’il s’agit toujours d’un droit de propriété, qui de corporel est alors devenu incorporel. D’autres auteurs pensent au contraire que le titulaire du titre ne dispose, à l’encontre de son teneur de compte, que d’un droit de créance. Dans cette dernière analyse, la relation titulaire du titre/teneur de compte présente des similitudes manifestes avec celle ayant pour objet un compte espèces, puisqu’il est admis que le titulaire du compte espèces ne détient qu’une créance en restitution des sommes y figurant, sans toutefois que ce rapprochement apparaisse convainquant en raison des différences de natures entre les titres et les espèces.’

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Accordingly, various authors have noted the similarities between the current practice of securities custody and modern monetary accounts.67TP PT But others have stressed the differences, most notably that money accounts generally express purely contractual interests, so that entitlement holders are merely unsecured claimants in their account provider’s insolvency, whereas securities account holders are generally protected from the claims of the insolvent intermediary’s general creditors.68TP PT Secondly, a credit institution is typically not under an obligation to keep all monetary funds to which its clients are entitled readily available to be retrieved by these clients, whereas securities account holders usually have the right to retrieve the assets corresponding with their security entitlements at any time.TP69PT Thirdly, the exercise of voting rights traditionally attached to the ownership of securities

warrant a different approach to the custody of securities than to monetary funds.70TP PT

However, notwithstanding the extent to which the modern practice of securities custody resembles money accounts, it is clear that ‘traditional legal garments fit poorly on the frame of current practice’.71PT TP Yet it will have to be seen in the following chapters whether modernisation in the context of harmonisation would be feasible from a doctrinal perspective.PT72TP In other words, it will have to be seen whether a transition in the conception of securities from tangibles to intangibles or something else would be as difficult for us as it would have been for the ancient Greeks, who strictly divided their (legal) world into ‘visible’ and ‘invisible’ property (phanera ousia and aphanēs ousia).73PT TP

67TP PT E.g., MOONEY (1990), 403-405 and SOMMER (1998), 1182 and 1201. Cf. also REITZ (2005), 367, n.21.

68TP PT See, e.g., DE VAUPLANE & BORNET (2001), no. 52.

69PT TP See ROCKS & BJERRE (2004) 37. Cf. SCHRANS & STEENNOT (2003), 110 and UCC § 8-504 official cmt. 3

70TP PT GUYNN (1996), 29.

71PT TP MOONEY (1990), 307.

72TP PT But cf. MOONEY (1990), 413: ‘A new model, divorced from common law and U.C.C. property law constructs, also could form a more plausible base for unification of law on the international level. An approach not rooted in longstanding domestic doctrine might provide a more likely basis for harmonizing widely varying doctrine in other nations.’

73PT TP See, e.g., COHEN (2005), 290. But the current distinction in civil law jurisdictions has its roots in Roman law; e.g. VAN ERP (2004), 536.

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4 PRACTICE AND RISKS OF THE POST-TRADE PROCESS

4.1 TRADE, CONFIRMATION, CLEARING, SETTLEMENT

The preceding chapter aimed to provide some insight into today’s practice of securities custody, its historic background and legal framework. That overview showed that apart from the safekeeping of investors’ assets, the framework of securities custody mainly serves the facilitation of transfers of securities. A closer investigation of current practices of securities transfers reveals that securities transfers are effectuated in an overwhelming variety of fact patterns, but the main distinction is between transfers following from trades concluded on an institutionalised market or exchange, and from other, i.e. over the counter (‘OTC’) transactions.

Whereas the modern, institutionalised market practice requires four steps to be taken in order to come to a complete or perfected transfer of (rights in) securities, viz. trade, confirmation, clearing and settlement, trade and settlement usually suffice in the instance of OTC transactions.

‘Trade’ refers to the expressed intention of parties to deliver securities against the payment of funds,1 and while different exchanges have different rules for the matching of buyers and sellers and the establishment of the conditions for delivery and payment, in OTC situations, the trade stage is often completely left to party autonomy. ‘Confirmation’ is simply the report of the trade to the parties and, again, different exchanges have different rules for the effectuation and legal significance of that confirmation.2 Clearing is used in a narrow sense as “the calculation of the mutual post-trade obligations of market participants”3 or, in a wider sense, as the management of the credit exposures between trade and settlement. The actual transfer of securities against payment is usually classified as settlement, although settlement is sometimes used in a wider sense to mean the post-trade process as a whole.4 Throughout the present dissertation, ‘clearing’ and ‘settlement’ will both be used in their precise, narrower sense.

1Some deliveries, however, are ‘free’, i.e. made without corresponding payment; BENJAMIN (2003), 127.

2Confirmation, however, may become complicated when parties to a trade act on behalf of others who are located in different jurisdictions, which is not uncommon; CPSS/IOSCO Recommendations 2001, 37.

3BENJAMIN (2003), 128 and BIS-Glossary.

4See Giovannini Group 2001 Report 2001, 6 and RANK (1999), 76.

4 Practice and risks of the post-trade process

As noted, the four steps just listed may be taken in various ways, but they may also occur at various times in relation to each other. First, the moment of agreement between parties may be separated from the moment of settlement in various ways. In so-called fixed-settlement systems, settlement takes place after a fixed period of time has elapsed since the conclusion of the contract, while in other systems the moment of settlement is agreed upon. The moment of payment may also be separated from the moment of securities transfer in various ways. However, since the risk of nonperformance increases as time elapses, it is preferable to make the moment of transfer and the moment of payment coincide.5 True coincidence is called Delivery versus Payment (‘DVP’) or real-time settlement, which means in practice that securities are transferred only upon payment being received.6

In the following sections, some general remarks will be successively made on the most common fact patterns of clearing and settlement in both national and international situations. Thereafter, more generally, the risks that have been discerned in the context of securities settlement will be discussed, where it will be argued that harmonisation would be the solution to the legal risk that is currently experienced.

4.2 CLEARING

As noted above, in most situations where securities transactions are concluded on an institutionalised market, the transactions of market participants are cleared, i.e. calculated together. That calculation is made in various ways.7 In so-called ‘gross settlement’, or ‘trade-for-trade settlement’ systems, payment for and the delivery of every single transaction is calculated individually and no netting or set-off takes place.8 In other systems, the obligations to deliver securities are expressed per transaction (on a gross basis), whilst obligations as to the money side of transactions are offset at an agreed point in time (netted).

However, whereas trade-for-trade settlement systems might provide a high level of transparency, they are increasingly costly and technically difficult to realise, as the volume of securities transactions has grown dramatically over the last decades. Moreover, netting or set-off of securities and payment transfers reduces the risks associated with individual transfers9 and thus

5See infra, s. 4.4.2.

6Furthermore, real-time systems may be distinguished from quasi-DVP systems, in which the moments of delivery and payment are separated, but settlement is guaranteed by a third party, often a central counter party or clearinghouse.

7See DALHUISEN & VAN SETTEN (2003), 130 n.245 and RANK (1999), 76.

8Cf. BIS Glossary 2003.

9See infra, s. 4.4.

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