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

4 Practice and risks of the post-trade process

4.5 CONCLUSION

Operational aspects of the current practice of securities transfers have been the main subject of the preceding sections. It has been shown how, in an overwhelming variety of possibilities, securities may be transferred OTC or via institutionalised markets. Some characteristics of the pre-settlement stage or clearing have been discussed, as well as typical fact patterns in the actual transfer of book-entry securities and the creation of security interests in such securities (settlement). As a consequence of the current multiple access model, however, settlement appeared to be extremely complicated in a crossborder context, although key market participants continue to consolidate and integrate.

From the discussion of the risks inherent to financial markets and, more specifically, to securities settlement systems, it follows that most of the risks can be mitigated by operational measures, which have indeed been implemented in many systems. These measures have also been recommended in reports and recommendations drafted mainly by international organisations, which will be discussed at greater length in a later chapter.64 However, although it has been shown how legal risk substantially contributes to systemic risk and thus represents a threat to the financial markets as a whole, it is hypothesised that that risk has still not been properly addressed. It will therefore be one of the main objectives of the following chapters to ascertain more precisely to what extent the existing legal frameworks are internally sound, i.e. to what extent they support current market practice and do not result in unintended and unforeseen consequences.

64 Ch. 9.2.2.

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PART II

SECURITIES LAWS OF SELECTED

JURISDICTIONS

LE PLAIDEUR Par quelle étrange barbarie se peut-il que des compatriotes ne vivent pas sous la même loi ?

L’AVOCAT Il en est ainsi de poste en poste dans le royaume : vous changez de jurisprudence en changeant de chevaux.

THE LITIGANT What strange kind of barbarism is it that citizens must live under different laws?

THE LAYWER Thus, when you travel in this kingdom you change legal systems as often as you change horses.

VOLTAIRE1

1 VOLTAIRE, Dialogue Entre un Plaideur et un Avocat, in ŒUVRES (1751), reprinted in

DIALOGUES ET ANECDOTES PHILOSOPHIQUES, 10-11 (R. Naves ed., Éditions Garnier 1955).

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5 BELGIUM

5.1 INTRODUCTION

5.1.1 Trading, clearing and settlement

Under the rule of Napoleon, the Bourse de Fonds Publics de Bruxelles was founded as Belgium’s first stock exchange (2 July 1801).1 Since April 1999, this exchange has comprised not only a stock-market, but also a derivatives market called Belfox. On 22 September 2000, the Dutch, Belgian and French markets merged to form Euronext Amsterdam, Euronext Brussels and Euronext Paris with Euronext NV as the Amsterdam-based holding company. Since 2002, Euronext NV also hosts the stock exchange of Lisbon and the London-based derivatives market LIFFE, which became Euronext Lisbon and Euronext LIFFE respectively. Trading takes place on one single trading platform.2

LCH.Clearnet SA (‘Clearnet’)3 performs the roles of the central counterparty (‘CCP’) and the clearing house for all these exchanges.4 In its capacity as CCP, it replaces all transactions concluded between market participants by transactions with Clearnet itself. That legal process, called novation, as well as all rules regulating participation in the Clearnet clearing system, are governed by French law.5

On 1 April 1968, the Caisse Interprofessionnelle de Dépôts et de Virement de Titres/Interprofessionele effectendepositoen girokas (‘CIK’) was established by statute as the central securities depository. Since 1991, CIK has managed a settlement system for the settlement of equity, and since 15 July 1998, also for the settlement of public and private sector debt.6

1See www.euronext.com.

2As a recent development, Euronext and the New York Stock Exchange announced on June 2, 2006 a merger of the two companies, thus forming the world’s largest and first transatlantic exchange. At the time of writing however, the merger had not yet taken full effect; see www.euronext.com and infra, Ch. 9.3.2.

3In February 2001, the French Banque Centrale de Compensation (Central Clearinghouse Bank) Clearnet SA merged with the CCP of the Amsterdam and Brussels markets. On 22 December 2003, London Clearing House merged with Clearnet and the group now technically consists of LCH.Clearnet SA and LCH.Clearnet Limited. It is owned by the Euronext group for 80% and by the Euroclear group for 20%. See www.euroclear.com and infra, Ch. 9.3.2.

4See Ch. 4.2 for a discussion of these concepts.

5Clearnet Rules Article 1.2.3.1.

6Before 15 July 1998, bonds were cleared and settled by the Banque Nationale de Belgique/Nationale Bank van België (Central Bank of Belgium, ‘NBB’), which now only

5 Belgium

International securities transfers were then settled through the Euroclear system, managed by the Morgan Guarantee Trust Company, Brussels branch, which later became the independent Euroclear Bank. On January 1, 2006, CIK was integrated into the Euroclear system and it is now called Euroclear Belgium.7 Besides its links with the other members of the Euroclear Group (viz. Euroclear Bank, Euroclear France, Euroclear Nederland and CRESTCo of the UK and Ireland), Euroclear Belgium maintains links with SEGA of Switzerland and Clearstream Bank Frankfurt.

The Belgian CSDs and their settlement systems are supervised by the

Banque Nationale de Belgique/Nationale Bank van België (Central Bank of Belgium, ‘NBB’) and the Commission Bancaire, Financière et des Assurances/Commissie voor het Banken Financiewezen (‘Commission for Banking and Financial Markets, ‘CBFA’).8 At the time of writing, statutorily designated CSDs are CIK, NBB and Euroclear Bank,9 and their participants are regulated by the NBB and CBFA.10

5.1.2 Sedes materiae

Belgium’s law on book-entry securities demonstrates a strong connection with general private law, but also with corporate law. Unless derogatory rules are provided for by specific statutory instruments, general rules of private law apply, notably those laid down in the Code Civil/Burgerlijk Wetboek (Civil Code, ‘BW’). General rules of corporate law, as well as rules concerning corporate securities, have been codified in the Code des Sociétés/Wetboek van Vennootschappen (Code of Corporate Law, ‘W. Venn.’).

The famous Arrêt Royal/Koninklijk Besluit (Royal Decree, ‘KB’) no. 62 of 10 November 196711 is the oldest Belgian statutory instrument that specifically regulates book-entry securities law. This KB was mainly intended to facilitate the circulation of (bearer) securities by book-entry into securities accounts. It accommodates the centralised custody of bearer certificates, as a result of which immobilisation was strongly stimulated. As a general principle, however, immobilised securities remain governed by

effectuates the transfer of funds, i.e. the money leg of settlement. Giovannini Group 2001 Report, 22.

7 Joint Media Release by Euroclear and Euronext of 14 November 2005, available at www.euronext.com.

8Act of 22 February 1998 Article 8 and Act of 2 August 2002, Article 23(3). See also Act of

2January 1991 Article 22 and Article 468 W. Venn.

9KB no. 62 of 10 November 1967 Article 1(1)(1) and KB of 28 August 2002 Article 2.

10Act of 28 April 1999. Cf. Explanatory Memorandum to the draft Act of 14 December 2005, Doc 51 1974, 21.

11Hereinafter: KB no. 62.

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5 Belgium

rules of general private law, in particular by rules regarding movable tangibles, so far as KB no. 62 does not explicitly derogate from those rules.12 Since its enactment, KB no. 62 has been modified on several occasions.13

The Acts of 2 January 1991 and 22 July 1991 created the possibility of completely dematerialised issuance for certain specific categories of securities; the former Act introduced detailed provisions for the custody of dematerialised government bonds, and the latter Act laid down that these provisions must apply to certain categories of commercial paper.14 The Code of Corporate Law further expanded the category of securities eligible for this method of issuing to all corporate bonds. Thus, while KB no. 62 initiated or at least statutorily stimulated the immobilisation of securities custody and created the possibility to transfer by book-entry, the just named legislation on the dematerialisation of securities created a new mode of issuing and holding securities.15 A recent Act however, has initiated the gradual abolition of all bearer certificates and envisages the complete dematerialisation of all Belgian securities.16 The KB of 18 August 1999 statutorily underpins the operation and regulation of clearing and settlement institutions. The Acts of 28 April 1999 and 15 December 2004 transposed into Belgian law the EU Settlement Finality Directive and the Collateral Directive respectively.

It is likely that the up to date and apt legislation that has just been mentioned, has contributed to the success of the Brussels-based Euroclear Bank in becoming the world’s largest international central securities depository.17 In the following sections, the current Belgian legal infrastructure for the custody and transfer of securities, as well as its relationship with more general areas of law will therefore be analysed in greater detail. First, the main doctrinal distinctions with regard to financial instruments will be discussed. In the section that follows, legal aspects of securities custody will be analysed, with particular emphasis on securities accounts, the accountholder – intermediary relationship and the consequences of intermediary insolvencies. In Sections 4 and 5 of this chapter, the transfer of securities by book-entry, and the creation and enforcement of security interests in securities will subsequently be discussed. Section 6 will deal with Belgian private international law concerning securities custody and transfer. The chapter will conclude with answers to the questions posed in Chapter 1.2.2 and a coherence analysis.

12SCHRANS & STEENNOT (2003), 107.

13The latest, important modification dated 23 December 2005.

14Act of 22 July 1991 Article 7(1).

15BODDAERT (2004), 94.

16Act of 14 December 2005.

17In 2005, Euroclear Bank held € 7.1 trillion in securities for its clients; see Euroclear Annual Report 2005, 13 available at www.euroclear.com.

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5Belgium

5.2CATEGORIES OF SECURITIES

As for their function, Belgian law distinguishes securities from derivatives, but both categories are considered to be ‘financial instruments’.18 With regard to securities, an important legal distinction under Belgian law is made as for their form: a distinction is made between effecten op naam (registered securities) and effecten aan toonder (bearer securities).19 In time, however, this distinction will become obsolete as all toondereffecten will be converted into dematerialised securities by 2014.20 Dematerialised securities are also generally considered to form a separate, third category of securities.21

With regard to toondereffecten, Belgian law considers the certificates to incorporate investors’ rights.22 The classification of bearer securities as movable tangibles enhanced the circulation of securities enormously by simplifying the requirements for their transfer,23 as pursuant to Article 1583 in conjunction with Article 1138 BW, simple traditio (delivery) suffices for movables to be transferred. The classification also advanced legal certainty for subsequent acquirers; pursuant to Article 2279 BW, in principle, all bona fide possessors of movable tangibles are deemed to be the owners of the movables concerned.24 Ownership of registered securities is proven and enforceable against third parties by their registration in the issuer’s register; Article 504 W. Venn. Although a certificate is often issued to the owners of registered securities, neither these certificates nor registration in the issuer’s register represent conclusive, i.e. unchallengeable, evidence of title, as title may be proven 'by all legal means’.25

The category of dematerialised securities was introduced in 1991.26 Originally, only government bonds and certain categories of corporate debt instruments, i.e. commercial paper, were eligible for this mode of issue.27 As

18See, e.g. Act of 2 August 2002 Article 2(1). The listing of financial instruments which this provision provides, however, must not be generalised since it must be read in the context of this Act only; SCHRANS & STEENNOT (2003), 84 and 86 et seq.

19See also SCHRANS & STEENNOT (2003), 105-106. Order securities exist, but are rare; see SCHRANS & STEENNOT (2003), 105, n.121.

20Act of 14 December 2005. Explanatory Memorandum to the draft Act of 14 December 2005, Doc 51 1974, 8.

21See Act of 2 January 1991 Article 1(1)(3) and Article 460(2) W. Venn. Cf. SCHRANS & STEENNOT (2003), 289-290. The distinction however, is not uncontroversial; see SUNT (1996), 50-451.

22VAN RYN & HEENEN (1981), 103. A subtle distinction has been made here: although it incorporates the investor’s rights, a certificate is not considered to be the investor’s rights against the issuer; SCHRANS & STEENNOT (2003), 109 and 111.

23VAN RYN & HEENEN (1981), 81.

24Cf. TISON (1996), 230-231.

25VAN RYN & HEENEN (1981), 127 and PEETERS & VAN DER VORST (2001), 450.

26Acts of 2 January 1991 and 22 July 1991.

27See TISON (1996), 258.

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5 Belgium

part of an important modification of securities law and company law, the Act of 7 April 1995 created the possibility to issue dematerialised shares, profitsharing certificates, (convertible) bonds and warrants issued by naamloze vennootschappen (public companies).28 The modification was intended to ‘modernise the custody of securities, to accelerate securities transactions and to reduce printing costs’.29

To these considerations, the Belgian Government added that the use of bearer certificates may facilitate financial crime and the funding of terrorism,30 and therefore issued a draft Act on 1 August 2005 that would convert all toondereffecten into dematerialised securities by 2014. The Act was adopted 14 December 2005. It results, first, in a prohibition on issuing bearer certificates as of 1 August 2008.31 Second, on that same date, rights to bearer certificates expressed by securities accounts will statutorily be converted into rights that relate to dematerialised securities.32 Third, holders of bearer certificates must demand their conversion into dematerialised securities or effecten op naam before 31 December 2013.33 Ownership of dematerialised securities is proven and can be asserted against third parties by book-entry in a securities account.34

5.3 CUSTODY OF BOOK-ENTRY SECURITIES

5.3.1 Introduction

In Belgium, as in most countries, securities may be held in custody on an individualised as well as on a fungible basis. Only fungible custody enables transfer by book-entry35 and is not hindered by the requirement that deposited assets must be returned in specie.36 However, as in most countries, the major problem of fungible custody is that depositors lose their right of ownership when their securities become commingled with other securities of the same kind held by their custodian.

28W. Venn. Book VIII, Title 3. This listing is probably not intended to be exhaustive; SUNT

(1996), 453. It is a matter of debate whether commanditaire vennootschappen op aandelen

(partnerships limited by shares) are also allowed to issue dematerialised securities under W. Venn.; TISON (1996), 233-234 and SUNT (1996), 446. As the latter author indicates however, this debate is not of much practical importance since such companies are only limited in number.

29TISON (1996), 230.

30Explanatory Memorandum to the draft Act of 14 December 2005, Doc 51 1974, 4-7.

31Act of 14 December 2005 Article 3(1).

32Act of 14 December 2005 Article 5.

33Act of 14 December 2005 Article 7.

34See further infra, s. 2.3.2.

35SCHRANS & STEENNOT (2003), 253 and cf. Ch. 3.1.3.

36BODDAERT (2004), 83.

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5 Belgium

There has been some debate in Belgian legal literature on the precise nature of this loss of ownership. It has been argued that upon deposit, a custodian acquires full power of disposal over the assets, whereas the depositors lose all ownership rights. It has also been argued, quite to the contrary, that depositors acquire a right of co-ownership, even without any statutory provisions declaring this.

Both these positions however, do not seem to be generally accepted.37 The most generally accepted view is that once deposited assets become commingled, depositors are then unable to revendicate their assets38 since the individualisation of assets is required for all proprietary rights to be enforced regarding those assets.39 Although depositors thus remain owners, their right of ownership is not enforceable and they are left with a mere contractual claim against their custodian, who will be considered to be the owner in the eyes of third parties.40

As a matter of principle, fungible custody requires securities to be fungible. However, neither toondereffecten nor effecten op naam are ipso facto fungible under Belgian law, since Belgian law deems fungible only those assets that cannot be designated except by reference to size, weight or number.41 Because toondereffecten and effecten op naam are individualised by number or registration respectively, specific contractual arrangements or statutory provisions are therefore required to establish fungible custody.42 The Belgian legislator has enacted KB no. 62 to that effect, and the statute mainly allows for toondereffecten to be held in custody on a fungible basis, provided that the depositor has consented. Such consent however, may have been implicit.

Unlike toondereffecten, dematerialised securities are considered fungible by nature, but it will be seen that the (legal) treatment of dematerialised securities is in many ways identical to the treatment of fungible securities under KB no. 62. The only major difference seems to be that, subject to the

37PEETERS & VAN DER VORST (2001), 453.

38Hof van Beroep te Antwerpen 20 August 1990, T.R.V. 1990, 540. See also SAGAERT (2003),

391and E. HUYGHE in his annotation of Hof van Beroep te Antwerpen, 20 August 1990, T.R.V. 1990, 544-545.

39See, e.g., SAGAERT (2003), 380-381.

40PEETERS & VAN DER VORST (2001), 453.

41Contra SAGAERT (2003), 386-387, who argues that genera (assets that are ‘fungible’ by nature, such as oil and the like) and fungibles (assets that are considered equal with a view to a certain legal relationship between parties) should be clearly distinguished. Commingling of the first kind is called confusio, as a result of which a new asset is created, whereas the commingling of the latter kind is known as commixtio, which does not form a new asset; id.,

42Some authors argue that bearer securities are fungible by nature, but are individualised by certain actions, e.g. the custodian’s obligation to return the deposited assets in specie; e.g. SAGAERT (2003), 399; BODDAERT (2004), 138-139.

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