DIRECTORATE GENERAL FOR INTERNAL POLICIES
POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY
ECONOMIC AND MONETARY AFFAIRS
SECURITIES LAW DIRECTIVE (SLD) WHAT'S IN A SECURITIES ACCOUNT?
WORKSHOP
Abstract
This workshop aims to prepare the upcoming discussion on the expected Commission proposal for a securities law directive (SLD) which is expected to be adopted in Summer 2011 and the subsequent report of the Committee on Economic and Monetary Affairs. It is linked to the briefing paper PE 464.416 on 'cross-border issues of securities law: European efforts to support securities markets with a coherent legal framework' and is designed to illustrate present European and U.S. regulation on securities credited to accounts by intermediaries as well as international approaches in the area.
IP/A/ECON/NT/2011-10 JUNE 2011 PE 464.428 EN
This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. AUTHORS
Philipp PAECH, Lecturer in Financial Law, London School of Economics France DRUMMOND, Professor, University Panthéon-Assas Paris II Francisco J. GARCIMARTÍN ALFÉREZ, Professor, University Madrid Eva MICHELER, Senior Lecturer, London School of Economics Sandra ROCKS, Cleary Gottlieb LLP, USA Luc THÉVENOZ, Centre for Banking and Financial Law, University of Geneva RESPONSIBLE ADMINISTRATOR
Doris KOLASSA Policy Department Economic and Scientific Policy European Parliament B-1047 Brussels E-mail: [email protected] LINGUISTIC VERSIONS
Original: EN Abstract: DE/FR ABOUT THE EDITOR
To contact the Policy Department or to subscribe to its newsletter please write to: [email protected] Manuscript completed in June 2011. Brussels, © European Parliament, 2011. This document is available on the Internet at: http://www.europarl.europa.eu/activities/committees/studies.do?language=EN DISCLAIMER
The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament.
Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy.
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CONTENTS
PROGRAMME OF THE SLD WORKSHOP 4
CURRICULA VITAE OF SPEAKERS 6
Philipp PAECH 6
France DRUMMOND 6
Francisco J. GARCIMARTÍN ALFÉREZ 6
Eva MICHELER 7
Sandra ROCKS 7
Luc THÉVENOZ 7
PRESENTATIONS 8
1. PRESENTATION BY PHILIPP PAECH 9
2. PRESENTATION BY FRANCE DRUMMOND 21
3. PRESENTATION BY FRANCISCO J. GARCIMARTÍN ALFÉREZ 33
4. PRESENTATION BY EVA MICHELER 43
5. PRESENTATION BY SANDRA ROCKS 47
6. PRESENTATION BY LUC THÉVENOZ 57
BRIEFING PAPER 67
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PROGRAMME OF THE SLD WORKSHOP
DIRECTORATE GENERAL FOR INTERNAL POLICIES
POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICIES
WORKSHOP: Securities Law Directive (SLD) - What's in a securities account? - Draft Programme -
30 June 2011, European Parliament, Brussels Room ASP 1G1; 10.30 - 13.00 hrs, Interpretation: DE, EN, FR
Chaired by Sharon BOWLES, ECON Chair
10.30 - 10.35 h Introduction: Sharon BOWLES, ECON Chair
10.35 - 12.30 h Presentation Session: What is the context of a possible proposal for a Securities Law Directive? The issue of intermediated securities and legal risk
Opening remarks by Othmar Karas, ECON rapporteur Guest speakers: Philipp Paech Lecturer in Financial Law, London School of Economics;
Research Fellow, Institute for Law and Finance Frankfurt
Basic overview on (intermediated) securities holding systems: main issues to be resolved; and the context of securities law and other initiatives/issues
France Drummond Professor, University Panthéon-Assas
The different providers of securities services (Central Securities Depositories 'CSDs', account providers; the 'functional approach') and their responsibilities in relation to corporate actions; and the French system (dematerialised securities and nature of ownership)
Francisco J. Garcimartín Alférez, Professor, University Madrid
The Spanish securities holding system; and the differences between direct and indirect holding systems
Eva Micheler Senior Lecturer, London School of Economics; Professor, University Vienna
A comparison of the UK and the German/Austrian holding system - book-entry securities and the legal position of account holders
Sandra Rocks Cleary Gottlieb LLP; USA
The US system: problems encountered and solution applied, and current issues in connection with the provision of collateral
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Luc Thévenoz Centre for Banking and Financial Law, University of Geneva
Substantive law harmonisation and choice/conflict of law: Effectiveness and reversal principles; and main issues for choosing the applicable law and resolve disputes (Hague/Geneva convention)
12.30 - 13.00 h Discussion
N.B. Philipp Paech - involved in the work of the Commission's Legal Certainty Group whilst a seconded national Expert to the European Commission - has prepared an introductory briefing paper on the main issues of cross-border securities law.
This briefing paper can be downloaded at: http://www.europarl.europa.eu/activities/committees/studies/download.do?language=de&file=37268
(please note that the previous link http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=36911
is no longer operational)
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CURRICULA VITAE OF SPEAKERS
Philipp PAECH Dr Philipp Paech joined the Law Department of the London School of Economics in 2010 after working in the Financial Markets Directorate of the European Commission for four years. He is also a Research Fellow at the Institute for Law and Finance in Frankfurt. He was secretary of the EU Clearing and Settlement Legal Certainty Group of the European Commission and Chairman of the G30 Clearing and Settlement Legal Committee. From 2002 to 2006, he was a member of the UNIDROIT Secretariat in Rome and co-ordinated work on what is today, the Geneva Securities Convention. Earlier work experience includes the Association of German Banks and the Boston Consulting Group. Philipp holds a doctorate from the University of Bonn and obtained the Diploma of EU Studies from the University of Toulouse.
Philipp’s principal research interest is EU and international financial markets law and regulation and the close interaction with insolvency and general civil/commercial law, covering adjacent aspects of private international law. He has worked extensively on legal risk and inefficiencies of cross-jurisdictional disposition of securities, and on cross-jurisdictional exercise of investor rights. Additionally, Philipp advises on legal aspects of the financial market infrastructure, covering institutions like central securities depositories, central counterparties and securities settlement systems. In the context of the recent financial crisis, he has focussed on netting mechanisms and the resolution tools applicable to systemically important financial institutions.
France DRUMMOND France Drummond is a law professor at Université Panthéon-Assas, Paris 2 and the author of several publications on French capital markets law, including the treatise 'Droit des Marchés Financiers', co-authored with Thierry Bonneau (Economica, 3rd ed. 1200 p.). She is a member of the Sanctions Commission of the French Financial Markets Authority (AMF).
Francisco J. GARCIMARTÍN ALFÉREZ Francisco Garcimartín Alférez is a Senior Professor of Private International Law at Universidad Rey Juan Carlos in Spain. Having published articles in most leading law journals on different aspects of private international law and cross-border transactions, he also co-authored 'The European Insolvency Regulation: Law and Practice' (The Hague, Kluwer, 2004) together with Professor Virgós. An expert in financial legislation, he often works with the Spanish CNMV (Comisión Nacional del Mercado de Valores) and the Spanish government, and has represented the latter in different international organisations, such as UNIDROIT (International Institute for the Unification of Private Law), UNCITRAL (United Nations Commission on International Trade Law), The Hague Conference and the Council of the European Union. He also works as a consultant for Linklaters SLP.
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Eva MICHELER Eva Micheler studied law at the University of Vienna and at the University of Oxford. She joined the LSE Law Department in 2001. She is a Senior Lecturer at LSE and a Professor at the University of Economics in Vienna where she habilitated in 2003. Before joining LSE, she was also a TMR fellow at the Faculty of Law at the University of Oxford. She wrote widely and extensively on company and comparative law in both English and German. Her publications include two books (Property in Securities – a Comparative Study, 2007; Wertpapierrecht zwischen Schuld- und Sachenrecht, zu einer kapitalmarktrechtlichen Theorie des Wertpapierrechts, 2004) and many articles on securities.
Sandra ROCKS Sandra M. Rocks is Counsel at Cleary Gottlieb Steen & Hamilton LLP in New York City. Ms. Rocks graduated from Columbia University School of Law in 1979 and was admitted to the New York State Bar in 1980. Ms. Rocks represents primarily investment banks and clearing organizations in connection with asset-based financing and financial market transactions, with a principal focus on investment property collateral. Ms. Rocks participated on behalf of EMTA (formerly the Emerging Markets Traders Association) in the UNIDROIT project to create the Convention On Substantive Rules For Intermediated Securities, which was finalized in October, 2009 and in the development by The Hague Conference on Private International Law on the Law Applicable to Certain Rights in Respect of Securities Held with Intermediaries (the "Hague Securities Convention"), which was finalized in December 2002. Ms. Rocks, together with Carl Bjerre, is the author of The ABC’s of the UCC, Article 8: Investment Securities, Second Edition. She has authored and co-authored numerous articles on Uniform Commercial Code and securitization matters and is a frequent speaker on Articles 8 and 9 of the UCC and related international initiatives.
Luc THÉVENOZ Luc Thévenoz is professor at the Faculty of Law of the University of Geneva (Switzerland) and the director of its Centre for Banking and Finance Law. His research and teachings include the law of obligations, contracts, trusts, as well as the law of banking and securities transactions, markets and regulation. He is the chairman of the Swiss Takeover Board, the regulatory agency supervising the takeover market. He has previously served as a commissioner of the Swiss Federal Banking Commission (2001-2007) and a member of the International Arbitral Tribunal for Dormant Accounts in Switzerland (1997-2001). He has contributed to a number of legislative and regulatory projects, including in the areas of trusts, intermediated securities, takeovers, and unclaimed assets. Luc Thévenoz represented Switzerland during the whole Unidroit project of a Convention on Substantive Rules for Intermediated Securities and was a member of the Drafting Committee and the main author of its French authentic version. He contributed significantly to the design and drafting of the Swiss Act on Intermediated Securities for which he has recently co-authored a commentary in English.
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PRESENTATIONS
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1. PRESENTATION BY PHILIPP PEACH Lecturer in Financial Law, London School of Economics
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Why harmonise the law of securities holding?
Dr Philipp PaechLondon School of Economics
European Parliament/Econ Workshop
30 June 2011
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1. SAFETY OF HOLDINGS2. EFFICIENCY OF INVESTORS’ RIGHTS
The two spheres of harmonisation in the SLD:
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Safety: a crisis situation
3
Fund(= investor)
Intermediary
Creditor ofthe Fund
Country A Country B
Country C
1m sharesin the account
Country DCreditorof Intermed.
Pledge400.000
Pledge 1
m ?
600.0
00 ?
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Notes on the previous slide.
The example depicts a crisis situation with numerous legal problems. It is inspired by the Lehman case which was, naturally, much more complex.
•A fund holds, amongst many other assets, 1m shares in ABC‐Corporation in an account maintained by its intermediary.
•The Fund needs cash and pledges 400,000 ABC shares to its creditor in order to obtain credit.
•The Fund’s intermediary is on the brink of insolvency and also needs cash. It is allowed, under the account agreement with the Fund, to re‐use (or ‘re‐hypothecate’) the securities of the Fund in order secure its own obligations, but only those securities which are not already pledged, i.e. 600,000. The intermediary disregards the preceding pledge to the Fund’s Creditor and pledges to its own Creditor the entirety of 1m ABC‐shares.
•Shortly thereafter, the intermediary becomes insolvent.
•The fund is under huge financial pressure. It tries to retrieve its 1m shares from the estate of the intermediary. The insolvency administrator refuses as the situation with the Intermediary’s Creditor is unclear, as the latter benefits from a security interest over the entirety of 1m shares and the applicable securities law of Country D does not provide a clear answer on whether the security interest is (fully) valid.
•Because of this, the Fund falls insolvent as well.
•The insolvency administrator of the Fund does not recognise (under the insolvency law of Country A) the pledge established over 400,000 shares in favour of the Fund’s Creditor.
•The first reason is that the law of Country D governed the securities account and therefore the creation of the pledge. The method used under D‐law is a control agreement. Creating a pledge by the method of control agreement, however, is unknown under the law of Country A.
•The second reason is that it is not clear whether the Creditor of the Intermediary has priority despite the fact that the Creditor of the Fund obtained its interest first in time.
•The Creditor of the Fund itself gets into financial difficulties as a consequence.
The case shows how important it is that the law provides clear answers. It is true that the law is incapable of preventing fraud or avoiding insolvencies. However, as soon as something goes wrong, the resulting uncertainty should not be perpetuated, or even exacerbated, by an unclear legal framework. For example, in the Lehman case, affected funds were eventually able to retrieve their securities from the Lehman bankruptcy estate. However, it took months and some cases are still being looked at. In the meantime, many became insolvent as a consequence of the liquidity problem caused by their assets being trapped in the insolvency.
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Investor rights: try to exercise them ...
5
A‐Fund B‐Fund C‐Fund
ABC Issuer
CSD
Y‐Bank
M‐Bank
Country X
Country Z
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Notes on the previous slide.
The example depicts a situation of theoretically simple ‘corporate actions’, i.e. exercise of investor rights, which are hampered by the cross‐jurisdictional nature of the case.
•ABC Issuer, the CSD and Y‐Bank are situated in Member State X. The holding and settlement regulation in that Member State provides for just one level of intermediaries between the CSD and the investor, not more and not less. Therefore, all mechanisms included in the relevant laws are built on the understanding that the intermediary‘s (here: Y‐Bank‘s) clients are ‘proprietors‘ of the securities. One of Y‐Bank‘s clients is M‐Bank of Member State Z, holding securities on behalf of its own clients. The law of Member State X regards M‐Bank as proprietor and therefore shareholder. M‐Bank has three account holders holding securities of ABC‐Issuer: A‐Fund, B‐Fund and C‐Fund.
•A‐Fund wants to attend the general annual meeting personally. M‐Bank would be happy to appoint it as its representative for his part of the securities holding ("proxy"). B‐Fund and C‐Fund would prefer M‐Bank to channel their vote to the general meeting through the chain of intermediaries. B‐Fund wants to vote against a proposed dividend increase whereas C would vote in favour of it. However, as M‐Bank wonders whether as the proprietor of the securities, it cannot split its vote according to its account holders’ instructions.
•After the annual general meeting of the issuer, A‐Fund and B‐Fund wish to challenge in court a part of the decisions taken, which is generally possible under the procedure stipulated in the statute of the issuer. However, the terms provide that only a shareholder can do so. M‐Bank, as the shareholder, is very reluctant to engage in a courtproceeding on behalf of its account holders because of the risk and cost involved and has therefore excluded this possibility in the standard account agreement which governs its relationship with account holders. A‐Fund and B‐Fund are therefore unable to challenge the decision in court.
•ABC issuer gives subscription rights to all its shareholders. M‐Bank and C‐Fund cannot agree on how these rights should be exercised and by whom. While they are still arguing over it, the deadline passes.
•There is a takeover‐bid and A‐Fund wants to accept it. It gets into difficulties with the legal shareholder, M‐Bank, over who should accept it and how.
•Supposing the case is about bonds of ABC‐Issuer, instead of shares. ABC‐Issuer needs to restructure because of a crisis. B‐Fund and the legal shareholder, M‐Bank, fight over whether the idea of a 10% haircut for bondholders is acceptable.
Of the above cases, only the first one (on relating to voting and participation in the annual general meeting) is addressed by the Shareholders rights directive. Other rights are outside its scope. Investors’ rights relating to bonds are not covered at all.
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LAW, REGULATION AND THE VARIOUS INITIATIVES
What needs to be achieved?
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Safety: Law or regulation?
9
Safety and soundnessof the law are important for:
• Institutional and retail investors• Every participant who takes financial collateral:
– ECB (ca. 35% cross‐border collateral)– CCPs (take ‘margin’, i.e. collateral). Recital 40 of EMIR proposal: ‘Margins are the primary line of defence for a CCP’.
– CSDs and securities settlement systems– Every lender in the financial markets– Every party to a repo, securities lending or derivative contract.
– Financial collateral directive resolves only the some of the problems.
• Cross‐border situations make up for a significant part. Bound to increase in an integrated EU financial market.
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The various instruments and initiatives
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THE INTERACTION BETWEEN CONFLICT‐OF‐LAWS AND SUBSTANTIVE LAW RULES
Why are cross‐jurisdictional situations so complicated?
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A‐Investor B‐InvestorFrankfurtBank
D ‐Investor E‐Investor others
Rolls Royce(Issuer)
CRESTLondon
LondonBank
others
ParisBank
N‐Bank othersL‐Investor
X‐Bank
K‐Bank
F‐InvestorFrankfurtFund
25000
26000
50000
1m RR shares
5000
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FrankfurtBank
Rolls Royce(Issuer)
CRESTLondon
LondonBank
ParisBank
FrankfurtFund
English law
English law
English law
French law
German law5000
25000
26000
50000
1m shares
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The importance of holding models
• Five basic models (cf. Annex and ‘Briefing paper’):– Trust– Security entitlement– Undivided property– Shared property in a pool– Transparent holding (direct unshared property)
• Distinction ‘direct’ vs. ‘indirect’ holding not very useful.• What is relevant is that the situation is safe and sound for
all involved parties.• The notions of ‘property’ or ‘ownership’ do mean different
things in different jurisdictions and are not workable cross‐border. They are therefore as such not a guaranty for safety and soundness.
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The basic criteria for safety and soundness
• Can the account holder rely on – that the credit appearing on his account balance does actually represent securities and legally
attributes them to him?– that this credit cannot be revoked without any compelling reason?– that this credit is robust, i.e. that third parties have no access to the securities and that it is
shielded from the account provider’s insolvency?– that his instructions must be followed by the account provider?– that he can exercise the rights flowing from the securities, like receiving dividends/interest
and exercise voting rights?
• Can the account provider rely on– that it is only bound to accept instructions from the account holder or any other clearly
authorised person?– that such instruction cannot be revoked after certain conditions have been met?
• Can third parties rely on– that, if the account holder provides a security/collateral interest over securities to them
(pledge, charge, etc.), this security interest is robust and cannot be adversely affected by actions of other parties or dragged into the intermediary’s insolvency?
– that they can, as soon as the conditions for a realisation of the security interest are met, proceed towards that realisation on the basis of a clear and reliable framework?
• Can the issuer rely on– that not a greater number of securities holders/investors will claim rights (dividend, voting
rights) against it than the number of securities it had originally issued (no inflation of the issue/excess securities)?
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THE FIVE BASIC HOLDING MODELS
Annex
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Investor = equit. owner
Issuer
Bank =Legal Owner
Bank = equit. owner
CSD =Register
TRUST 1
TRUST 2
Ownership
Trust model(UK)
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Investor =Holder of s.e.
NomineeLegal Owner
Bank =Holder of s.e.
Bank =Holder of s.e.
CSD
Legal OwnershipLegal Ownership
Issuer
s.e. = security entitlement
Security entitlement model(USA)
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Investor = full proprietor
Bank =no right
Bank =no right
CSD =Register
Prop
erty
Securities in the account
Issuer
Undivided property model(France)
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Investor =shared property
Issuer
Bank = residual right
Bank = residual right
CSD = Pool ofsecurities
Prop
erty
Certificatesabcd efgh ijklm nop
qrs tuvwx yz
Pooled property model(Germany)
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CSD
Issuer
Account Operator‐ no right ‐
Custodianproprietor/owner etc.
C D E
X YF
BA
Acc. Acc. Acc. Custodian accountAcc.Acc.
G H I K
Acc.
Direct p
roperty
Transparent model(Finland, Greece)
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For further details cf. the ‘Briefing Paper’ on Cross‐border issues of securities law (June 2011)
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2. PRESENTATION BY FRANCE DRUMMOND Professor, University Panthéon-Assas Paris II
DematerialisedSecurities
Analysis and processingunder French Law
Workshop Securities Law Directive,European Parliament30 June 2011, Brussels
France DrummondProfesseur, Université Panthéon‐Assas Paris II
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1981 : General and compulsory dematerialisation
1984 : Implementation
Government’s objectives ? ‐ cost reduction‐ traceability
The government did not seek to change the legal regime of securities. But are there any unintended legal consequences of dematerialisation ?
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Has dematerialisation altered…?
… the legal conceptual nature of the investor’s right in its security?NO: the investor has an ownership right in the securities credited to his securities account.
NO: the security is the equity share or debt instrument issued by the issuer.
NO: the investor who owns the share is a shareholder and the investor who owns a bond is a bondholder.
NO: the intermediary is the custodian of the securities like a depositary of intangible securities.
…the nature of the security?
…the nature of the investor’s rights against the issuer?
…the nature of the relation between the investor and the intermediary?
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I. Main issues
1. What is the nature of the securities standing to the credit of asecurities account?
2. What is the nature of the investor’s right over securities standing to the credit of his securities‐account?
II. Subsequent issues
1. The relationship between investor and issuer
2. The relationship between investor and his account provider
3. The nature of the accounts maintained by the CSD
III. Additional Issue
The French system in an International environment
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I. Main issues
1. The nature of the securities standing to the credit of a securities account: the issued securities
Why ?
- a policy choice
- technically practicable
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I. Main issues
A policy choice
To avoid securities inflation: – For one issued share, there is a single financial asset, in only one account: the asset
is the share itself, located in the securities account of its owner.
Only the account opened in the name of the owner of the securities by his account provider qualifies legally as “securities account”, to which securities are credited by their owner and held in custody.
– This means that any acquisition of a security results in the credit of the security to the acquirer’s securities account and the corresponding debit of the seller’s securities account (no credit without debit).
To preserve a direct link between the investor and the issuer, owner of the issued security.
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Issuer
CSD Euroclear France
Issue accountRegister(1000)
Participant’s account(300)
Account provider 2CSD participantAccount provider’s 1 account
For clients For its own
(200) (100)
Account provider 1
Investor’s accountSecurities account
(200 shares)
InvestorInvestor Own accountSecurities account
(100 shares)
Others participant'saccounts
(700)
Others account providers’accounts
Securities accounts
Mirror accounts
Register
I. Main issues Legally and technically practicable
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I. Main issues
2. The investor’s right over securities standing to the credit of his securities account: ownership right
Why?
- a policy choice
- legally practicable
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I. Main issues
A policy choice in favour of investors’ protection
Ownership confers an exclusive right to the investor who is protected:
– Against his account provider: the account provider may not dispose of the securities in any way without the investor’s consent
– Against his account provider’s creditors: the investor may always claim restitution of its securities, even in case of the account provider’s insolvency, without entering into competition with that account provider’s secured or unsecured creditors
– Against any third party claiming the securities: the investor may not enter into competition with any third party claiming the securities as verus dominus (true owner) when he is in good faith (protection of the bona fide acquirer)
Ownership vests the investor with the full prerogatives attached to property, including the right to dispose of the securities.
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I. Main issues
A policy choice in favour of issuers’ governance
The investor is the owner of the shares and the shareholder; the rights flowing from the shares are attributed to him.
Vote
Information
Dividends
Right attribution (e.g. preferential subscription rights)
The investor enters into a direct relation with the issuer.
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I. Main issues
A policy choice in favour of legal predictability
By preserving the legal analysis of the investor’s rights, existing solutions and precedents continue to apply:
‐ Right to claim restitution of securities
‐ “En fait de meubles, la possession vaut titre” (possession of movables constitutes title )
‐ Definition of bad faith
‐ Invalidity of the sale of a thing belonging to another
‐ Custodian’s duties…
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I. Main issues
A legally practicable solution
The property rights regime codified in 1804 was designed for tangibles. But the legal doctrine and the Court decisions have admitted that an ownership right might exist for intangibles and have adapted the mechanisms of transfer of ownership to that environment.
Examples:
‐ acquisition of property: credit of securities to the acquirer’s securities‐account; ‐ claim restitution: instruction to the insolvency administrator to transfer securities to another securities‐account;
‐ possession: book entry in a securities‐account…
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II. Subsequent issues
1. The relationship between investor and issuer
A direct connection link between a shareholder or bondholder
and the issuer
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II. Subsequent issues
2. The relationship between investor and his account provider
Custody account‐keeping agreement custody agreement
Only a limited list of categories of regulated entities may act as custody account keepers (account providers). Custody account keepers are regulated as Investment firms.
Account providers’ duties: ‐ Safekeeping of securities: respect strict accounting rules, segregation of
accounts‐ Execute the owner’s orders‐ Facilitate the exercise of rights attached to securities in its custody‐ Not dispose of the securities without the investor’s agreement
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II. Subsequent issues
3. The nature of the accounts maintained by the CSD
A CSD is a notary (maintaining issuance account(s)) and an account provider maintaining mirror accounts (participants’ accounts ). These accounts do not qualify as securities accounts.
‐ The CSD maintains two types of accounts:
‐ An Issuance account that records the issuances
‐ Participants’ accounts that replicate the book‐entries contained in the securities accounts maintained by those participants for their clients
‐ The CSD ensures that at any time the balances of both types of accounts (issuance account / participants accounts) are equal.
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III. Additional issue
The French system in an International environment:
How does it work ?
The investor who holds a securities account with an account provider in France has:
A property right on the securities, irrespective of whether the securities are issued by a French or foreign issuer and of the nature of the securities.
The rights attached to the securities against the issuer as defined by the lex societatis (Issuer’s Law) and the issuance contract.
The rights against his account provider as defined by the custody account‐keeping agreement, regulated as an investment service.
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III. Additional issue
The French system in an International environment
Example : An investor, whose securities account is held by a French custody account keeper, buys shares issued by a French company and shares of an Austrian company.
1. What is credited to his securities account?
Credited are a) shares (securities issued by the French company) and b) securities representing a right of co‐ownership of the shares issued by the Austrian company and deposited with the Austrian CSD.This diversity is not a problem in itself. There are different kind of securities in a securities account: shares, bonds, units of funds.
2. What are his rights over these securities?
The investor has a property right on these securities (French shares and Austrian securities): so he has the right to sell, pledge or claim restitution of these securities. Securities are disposed of by debiting his securities account. Collateral securities are realised in accordance with the Collateral Directive, regardless of the origin (French or Austrian) of the securities.
3. What are his rights flowing from these securities?
The investor has the rights flowing from the securities as defined by the lex societatis and the issuance contract: voting rights, dividends ... attached to the shares issued by the French company ; co‐ownership of the Austrian Company’s shares deposited with the Austrian Company and rights attached to this co‐ownership right, as they result from Austrian Law and the issuance contract.
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III. Additional issue
The French system in an International environment
4. What happens when the investor collateralises the securities ?
He transfers to the collateral taker:‐ The full property on the collateralised securities if the securities are debited from his securities account
and credited to the collateral taker’s securities account, irrespective of whether the securities are issued by a French or Austrian issuer and of the nature of the securities.
‐ A limited interest if securities are earmarked in his securities account or credited to a special account opened in his [investor collateral provider] name and debited from his securities account, irrespective of whether the securities are issued by a French or Austrian issuer and of the nature of the securities.
5. What happens if a conflict occurs between two collateral takers ?
Collateral is always visible, so a conflict between two collateral takers results necessarily from a mistake of the collateral provider’s account provider. If it occurs and if the (insolvent) account provider is unable to remedy the situation, Article 9 of Collateral Directive applies: ‐ If securities are still in the investor’s securities account held by the French custody account keeper, French Law applies.
‐ If securities have been debited from the investor’s securities account and credited to one of the collateral taker’s securities account, held by an Austrian account provider in Vienna, Austrian Law applies.
19
III. Additional issue
The French system in an International environment
6. What happens in case of an account providers’ bankruptcy?
‐ In case of bankruptcy of the French custody account keeper:
the investor may claim restitution of the securities = he may give instruction to the insolvency administrator to transfer securities to another account provider.
‐ In case of bankruptcy of the Austrian intermediary:
we presume that the French account provider (as the securities are registered in his name), on behalf of the investor, will keep the co‐ownership right in the mass of the shares kept by the Austrian CSD, and will be protected from the Austrian intermediary’s creditors, if the intermediary respected the duty to segregate the accounts.
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Workshop Securities Law Directive ____________________________________________________________________________________________
20
III. Additional issue
The French system in an International environment:Where is the legal uncertainty? What can be improved?
Regulation of account providers : it must be harmonised at EU level and upgraded as an investment service
Rule ‘no credit without debit’: it must be generalised at EU level to avoid securities inflation and conflicts of rights over securities
Technology must be improved to speed up and secure the flow of information
Anything else in legal terms? - The rights attached to the securities against the issuer are defined
by the lex societatis and the issuance contract (outside scope of legislation on intermediated securities).
- The rights over the securities? Is it possible to harmonise themthrough a functional approach?
21
III. Additional issue
The French system in an International environment:Limits of the functional approach
Examples :«Securities standing to the credit of a securities account confer upon the account holder (b) the right to effect a disposition» Second public Consultation on the harmonisation of securities law, p.6.
How to translate it into French law ? A share cannot confer the right to dispose of the share… the right to dispose of the share cannot result from the share itself…
«A security interest, or a limited interest other than a security interest, in intermediated securities may be acquired and disposed of by debit and credit of securities to securities accounts» Unidroit convention on substantive rules for intermediated securities, art. 11.4.
How to translate it into French law? A book‐entry in a securities‐account is the security; the credit of the securities‐account transfers the security itself to the account holder, owner of the security…
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
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22
In conclusionThe French legislation has chosen to maintain, for dematerialised securities, the concepts and techniques well tried for tangible securities, simply adapted to the intangible environment.
Objectives are clearly defined:‐ Investors’ protection‐ System Integrity‐ Quality of the issuers’ governance
Methods are simple:‐ Investor’s ownership right on securities‐ Rule “no credit without debit”‐ Regulation of custody account keepers
With 30 years of hindsight, it works, both in a national and international contexts.
Except the regulation of account providers, we doubt that there is something to gain from a European initiative in this area, if not clearly targeted to ensure the integrity of the system and to insure the investor’s rights on the securities they own.
Workshop Securities Law Directive ____________________________________________________________________________________________
3.PRESENTATION BY FRANCISCO J. GARCIMARTÍN ALFÉREZ Professor, University Madrid
1
Direct and Indirect Holding Direct and Indirect Holding Systems. Systems.
The Spanish modelThe Spanish model
Francisco Garcimartín
University Rey Juan Carlos
Workshop Securities Law Directive on 30 June 2011European Parliament, Brussels,
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
2
Introduction: SummaryIntroduction: Summary
Holding of securities: Fact-patterns and conceptual framework
Direct holding systems
Indirect holding systems
Transparent systems
The Spanish system
3
Holding of securities: fact patterns Holding of securities: fact patterns and conceptual frameworkand conceptual framework
Operational aspects Legal world
Architecture of the systems: different fact-patterns in the way of
holding securities
Legal characterisation and legal treatment
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Workshop Securities Law Directive ____________________________________________________________________________________________
4
Holding of securities: fact patternsHolding of securities: fact patterns
Operational aspects
Architecture of the systems: different fact-patterns in the way of holding securities. Three simple models + combinations
and variations
Direct holding: Direct registration in the CSD
Indirect holding: Indirect registration in the CSD through a chain of omnibus accounts
Transparent systems: Individual registration in the CSD but through an intermediary
No intermediated system
Fully intermediated system
Semi-intermediated system
5
Holding of securities: fact patternsHolding of securities: fact patterns
Direct registration in the CSD
Issuer
CSD
Investor
In the CSD, the securities are registered in the name of the investor.
The investor has a direct relationship with the CSD.
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6
Holding of securities: fact patterns Holding of securities: fact patterns
Indirect registration in the CSD
Issuer
CSD
Intermediary
Investor
Clients´ omnibus account
Own account
In the CSD, the securities are not registered in the name of the investor, but in an onmibus account (clients´account).
The investor does not have a direct relationship with the CSD.
only one clients´accountor different accounts for
categories of clients
7
Holding of securities: fact patternsHolding of securities: fact patterns
Indirect registration in the CSD: variations
Issuer
CSD
Intermediary
Investor
Clients´ omnibus account
Own account
Multi-tier system
CSD
Intermediary 1
Intermediary 2
Intermediary 3
Investor
Two-tier system
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Workshop Securities Law Directive ____________________________________________________________________________________________
8
Holding of securities: fact patternsHolding of securities: fact patterns
Transparent systems
Issuer
CSD
Intermediary
Investor
Own account
In the CSD, the securities are registered in the name of the investor.
But (different to direct holding systems) the investor does not have a direct relationship (communication) with the CSD.
9
Holding of securities: fact patternsHolding of securities: fact patterns
Transparent systems: variations
Issuer
CSD
Intermediary
Investor
Own account
CSD
Intermediary
Own accountInt-1 account
CSD
Int-1 accountOwn account
Intermediary
Clients have individual accounts in the CSD. The intermediary is a mere account operator.
Intermediary has a global account. Clients have sub-accounts.
Intermediary has a global account, but the CSD is regularly informed about the identity of the clients.
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
10
Holding of securities: fact patterns Holding of securities: fact patterns and conceptual frameworkand conceptual framework
Direct holding Indirect holding Transparent systems
In the CSD, are the securities registered in the name of the investor?
Does the investor have a direct relationship with the CSD?
YES
YES
NO
NO
YES
NO
11
Holding of securities: fact patterns Holding of securities: fact patterns and conceptual frameworkand conceptual framework
Operational aspects Legal world
Architecture of the systems: different fact-patterns in the
way of holding securities
Legal characterisation and legal treatment
Direct holding
Indirect holding
Transparent systems
Direct ownership: investors are owners of the original securities
Derivative entitlement: securities entitlement or
beneficial ownership
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Workshop Securities Law Directive ____________________________________________________________________________________________
12
An overview of the Spanish An overview of the Spanish regime on bookregime on book‐‐entry securitiesentry securities
Main characteristics of the Spanish regime
Fully dematerialised system: the creation, the transfer and the exercise of the rights take place as a consequence of entries in an electronic registry
Book-entry securities are created by the registration in the corresponding electronic registry (art. 8 LMV).
The transfer of the securities and the creation of security interests is effective by electronic book-entries in the corresponding registry (art. 9 LMV).
Thirdly, the exercise of the rights arising from the securities is conditional upon the inscription of the acquisition in the corresponding book-entry: the person who is shown in the corresponding registry is deemed to be the (legitimate) owner of the securities and is, consequently, entitled to exercise the rights attached to the securities vis à vis the issuer (art. 11 I LMV). This issuer, in turn, is in principle liable only vis à vis the person indicated in the registry.
13
Architecture of the registry Architecture of the registry
Iberclear(CSD)
Participant
*RR = Register Reference, see following slide
Iberclear(CSD)
Participant A
Participant A Account
Own securities
Clients´securities
Individual clients’ accounts
RR*1
RR2RR3 RR4 RR5…
RR1 RR2 RR3 RR4
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
14
An overview of the Spanish An overview of the Spanish regime on bookregime on book‐‐entry securitiesentry securities
Key function of the RR
As explained on the web page of Iberclear: “All operations are numbered, […] The operation number consists of 15 digits, and in the case of a Stock Market trade is supplied by the Stock Exchanges, as they are the source of that operation. When, as a result of a purchase or other type of change of ownership, securities are accredited to new holders (or at the moment of the initial registration of the issue), the operation number becomes what is known as the Register References (RR). This RR number is entered into the register when the participant, by means of a sale, changes ownership or cancels it from the system. This results in the cancellation of the original ownership by replacing it by the RR. With the maintenance of these RR numbers and the rules for keeping them up to date, the aim is to strengthen the synchronisation between the central and the individual registers. This will avoid authorising the settlement of a sale trade against the overall balance of a participant whilst the participant is unable to identify the securities traded and their original holder.”
http://www.iberclear.es/Iberclear/home/home.htm
15
4 Consequences4 Consequences
The Proprietary-Law function of the RRs: RRs allocate a discrete bundle of fungible securities to individual investors.
Investors are direct owners of an identifiable bundle of fungible securities.
Credits are valid and effective as long as they are supported by a valid RR at the CSD level and, therefore, only those credits that are supported by a valid RR at the CSD level are deemed to attribute proprietary rights.
Intermediary – Account holder relationships: Custody and administration agreement + strict liability of the intermediary
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Workshop Securities Law Directive ____________________________________________________________________________________________
16
Spanish Law and the SLDSpanish Law and the SLD
Regulated world: semi-direct holding Non-regulated world
ISSUER
Spanish CSD
Participant
Investors
Creation of book-entry securities
Acquisition and disposition (=proprietary rights)
Exercise of rights
Spanish CSD
Participant
Intermediary
?
Foreign CSD
Participant
Spanish Intermediary
?
Spanish Investors
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
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Workshop Securities Law Directive ____________________________________________________________________________________________
4. PRESENTATION BY EVA MICHELER Senior Lecturer, London School of Economics
1
A comparison of the UK and the German/Austrian holdingsystem - book-entry securities and the legal position of account holders
Dr Eva Micheler
European Parliament Workshop on SLD, 30 June 2011, Brussels
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
2
1. Germany and UK
Clearstream Banking AG & CrestCo Ltd
property law
civil v comm law
tangibles v intangibles
negotiable instruments v registered securities
transfer of title - the traditional method
physical delivery v securities registers
on
3
2. Germany and UK
wholesale market
immobilisation v dematerialisation
depositories computer instructions
intermediaries and retail investors
legal position of account holders
bailment v trust law
pro rata ownership v certainty of subject
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4
3. Germany and UK
private international law
lex situs v law of the debt
or PRIMA
unauthorised transfers
bona fide purchaser v estoppel
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Workshop Securities Law Directive ____________________________________________________________________________________________
5. PRESENTATION BY SANDRA ROCKS Cleary Gottlieb LLP, USA
© 2011 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.
Throughout this presentation, “Cleary Gottlieb” and the “firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term “offices”includes offices of those affiliated entities.
The U.S. System of Securities Holdings: Problems encountered and solutions applied and current issues in connection with the provision of collateral
European ParliamentSecurities Law Directive WorkshopWhat’s in a Securities Account?
Brussels 30 June 2011
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
Overview of U. S. Holding Systems
2
Bank
ISSUER
Broker
Co.• •
Broker
Co.• •
• •
• •
Co. DTC
Direct Holding System
Indirect Holding System
Experience under U.S. law applicable to the development of the “indirect holding system”
Revamping of U. S. commercial law governing securities held through intermediaries market driven in many respects
Substantive and choice of law rules proved inadequate to avoid systemic risk in the context of cross-border trading in and financing of essentially fungible assets
Background
3
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Commercial law response:
New legal concept – Security entitlement: hybrid property interest/statutory and contract rights
• pro rata property interest in particular financial assets
• statutory duties for intermediaries (“Part 5 Rules”)
– maintain sufficient financial assets
– not encumber without permission
– pass through distributions
– act on account holder’s directions
duties are satisfied if intermediary acts as agreed upon with accountholder (otherwise “reasonable commercial standards”apply)
(all in context of extensive regulation)
U.S. Response: Uniform Commercial Code (“UCC”) Articles 8 and 9
4
Coverage of all financial assets (new legal concept)
• defined to include
(i) a security;
(ii) an obligation of a person or a share, participation or other interest in a person or in property or an enterprise of a person, which is, or is of a type, dealt in or traded on financial markets, or which recognized in any area in which it is issued or dealt in as a medium for investment; or
(iii) any property that is held by a securities intermediary for another person in a securities account if the securities intermediary has expressly agreed with the other person that the property is to be treated as a financial asset under this article. §8-102(a)(9) (emphasis added)
U.S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
5
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
The scope of the indirect holding system rules is determined, insignificant part, by what falls within the definition of “financial asset.”Although there is no statutory limit under the UCC on what assets can be included, the indirect holding system rules only apply if the asset isin fact held in a securities account.
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
6
§8-102 Official Comment
9. “…Thus, questions of the scope of the indirect holding system rules cannot be framed as “Is such-and-such a ‘financial asset’ under Article 8?” Rather, one must analyze whether the relationship between an institution and a person on whose behalf the institution holds an asset falls within the scope of the term securities account as defined in Section 8-501. That question turns in large measure on whether it makes sense to apply the Part 5 rules [of Article 8 of the UCC] to the relationship.”
■ Separate regulations and other factors may limit what can legally or practically be held in a securities account.
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
7
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Examples of non-securities financial assets:
Interests in certificates of deposit
Interests in life insurance policies
Interests in certain limited partnerships and limited liability companies
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
8
Adverse claims cannot be asserted against acquirers without notice
Security interest in all or part of securities account contents (no legal distinction between “fixed” and “floating” security interests)
Enforceability in a pledgor’s insolvency and against other creditors by notice filing or control; pledgor’s continued access to collateral not a problem
Intermediary priority plus statutory purchase money security interest in favor of intermediary
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
9
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
Remedies
• self-help remedies widely available
– secured party must act in commercially reasonable manner
– greater flexibility allowed when collateral is “of a type commonly sold on a recognized market”
Reuse rights clarified and enhanced – secured party considered to remain secured notwithstanding retransfer to a third party (essential for, e.g., swap markets where reuse is standard market practice)
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
10
Clear and innovative choice of law rules – rule for indirect holding based on accountholder-intermediary relationship in vast majority of cases
no “look through” and no renvoi
Interface with corporate law and regulatory regimes left open-ended
Special treatment of clearing organizations
Shortfall allocation and customer vs. creditor rules
U. S. Response: Uniform Commercial Code Articles 8 and 9 cont’d.
11
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Workshop Securities Law Directive ____________________________________________________________________________________________
§8-111. Clearing Corporation Rules
A rule adopted by a clearing corporation governing rights and obligations among the clearing corporation and its participants in the clearing corporation is effective even if the rule conflicts with this [Act] and affects another party who does not consent to the rule.
§ 8-511. Priority Among Security Interests and Entitlement Holders.
(c) If a clearing corporation does not have sufficient financial assets to satisfy both its obligations to entitlement holders who have security entitlements with respect to a financial asset and its obligation to a creditor of the clearing corporation who has a security interest in that financial asset, the claim of the creditor has priority over the claims of entitlement holders.
The Special Position of Clearing Corporations
12
To the extent necessary for a securities intermediary to satisfy all security entitlements with respect to a particular financial asset, all interests in that financial asset held by the securities intermediary are held by the securities intermediary for the accountholders, are not property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary
An accountholder’s property interest with respect to a particular financial asset is a pro rata property interest in all interests in that financial asset held by the securities intermediary, without regard to the time the accountholder acquired the security entitlement or the time the securities intermediary acquired the interest in that financial asset.
Source: UCC §8-503 (emphasis added)
Intermediary Insolvency
13
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
Official Comment 1 to UCC §8-503 provides, in relevant part, “Although this section describes the property interest of entitlement holders in the assets held by the intermediary, it does not necessarily determine how property held by a failed intermediary will be distributed in insolvency proceedings. If the intermediary fails and its affairs are being administered in an insolvency proceeding, the applicable insolvency law governs how the various parties having claims against the firm are treated.” (emphasis added)
Intermediary Insolvency cont’d.
14
Distributional rules for intermediary depend on entity type. Examples include:
Securities Investor Protection Act for stockbrokers
• customer name security• customer property (treated fungibly and shared pro rata based on
customers’ net equity claims)
Part 190 of the Commodity Exchange Act for futures commission merchants – concept of customer property according to “account class”
Federal Deposit Insurance Act/State Banking Law
• generally recognizes custodial/trust assets as not available to general creditors
• commercial law rules generally apply (including pro rata allocation if shortfall in particular financial asset)
Insolvency Law
15
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Lehman Brothers insolvency proceeding highlighted risks to pledgors –notably “independent amounts” (“IA”) posted in swap transactions
Industry and regulatory push to protect collateral
• White Paper on Independent Amounts (March 1, 2010) produced jointly by International Swaps and Derivatives Association (“ISDA”), Managed Funds Association, and Securities Industry and FinancialMarkets Association
• ISDA IA Segregation Documentation Working Group developing a menu of approaches
Credit and regulatory capital concerns for secured parties
Current Issues Regarding Collateral
16
The Dodd-Frank Wall Street Reform and Consumer Protection Act
• §724 to require swap dealers and major swap participants to offersegregation of certain collateral posted in uncleared swap transactions
• rulemaking by the Commodity Futures Trading Commission (“CFTC”) not finalized (industry has submitted comments on proposals)
• extensive proposals regarding segregation of collateral for cleared and uncleared swaps by the Federal Deposit Insurance Corporationand certain other supervisory bodies and the CFTC also pending
• CFTC proposal pending imposing requirements on futures commissions merchants and derivatives clearing organizations regarding cleared swaps customer collateral and making related changes to the futures commission merchant insolvency regime
Current Issues Regarding Collateral cont’d.
17
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
56
www.clearygottlieb.comwww.clearygottlieb.com
NEW YORK
WASHINGTON
PARIS
BRUSSELS
LONDON
MOSCOW
FRANKFURT
COLOGNE
ROME
MILAN
HONG KONG
BEIJING
BUENOS AIRES
Workshop Securities Law Directive ____________________________________________________________________________________________
6. PRESENTATION BY LUC THÉVENOZ Centre for Banking and Financial Law, University of Geneva
www.unige.ch/cdbf
International harmonisation of conflict of laws and substantive law
The Hague and Geneva Conventions
Prof. Luc Thévenoz
Workshop at the European Parliament : Securities Law Directive, 30 June 2011
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
2
The European Union, a microcosm of diversity
1. Transparent model
Spain, Poland, Nordic countries
2. Undivided property model
France
3. Pooled property model
Germany, Austria
4. Trust model
England
5. Entitlement model
Belgium ?? Luxembourg ???
(From Dr. Paech presentation)
3
Diversity means differences
Differences in legal framework:
Nature and characterisation of rights of account holders when securities are credited to their securities account
Methods for transferring securities held with an intermediary
Validity requirements and legal effects of book entries in securities accounts, effects of invalidity, reversals
etc.
Difference in operational systems and procedures:
Functions of CSD
Account maintenance
etc.
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4
Differences create risks and inefficiencies
Connection between systems
Legal risk
Operational risk
Systemic risk
generate a need for
Operational standards
Legal harmonization
5
Purposes of legal harmonization
Enhance soundness of legal systems
Allow benchmarking of legal systems
Improve legal compatibility of national systems
Reduce transaction costs
Increase legal certainty
Reduce legal risk
Deepen market integration
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
6
EU harmonisation versus international harmonisation
Conflict of laws
EU directives predate the Hague Convention
Substantive law
Legal Certainty Group benefited from, and provided valuable input to, the Unidroit project
7
Conflict of laws: current EU directives
Determines which (national) law governs the creation, transfer, contents, extinction of rights in respect of securities held through intermediaries
EU approach based on “place where the securities account is maintained”
Settlement Finality Directive (SFD, 1998)
Reorganisation and Winding Up of Credit Institutions Directive (WUD, 2001)
Financial Collateral Directive (FCD, 2002)
Overall very effective
But differences in wording, scope, and national implementation
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8
Conflict of laws: The Hague Convention
Hague Conference on Private International Law
First conference held in 1893
International organisation established in 1955
71 State members (inc. all EU members) plus the EU
Hague Convention on the Law Applicable to Certain Rights in Respect of securities held with an Intermediary
Work began in 2000
Text of convention adopted in 2002
Currently ratified by Switzerland & Mauritius and signed by USA
Will enter into force upon 3rd ratification
9
Current EU directives
Purely objective test (place where securities account is maintained)
Scope limited to the scope of the 3 directives
Lack of ex ante certainty as to the applicable law
Hague Convention
Choice of law in the account agreement, subject to intermediary maintaining securities account in the relevant jurisdiction
The designated law may not be the law of the place where that particular securities account is maintained
EU directives and Hague Convention compared
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10
Substantive law : UNIDROIT and the Geneva Convention
Institute for the International Unification of Private Law
An international organisation established in Rome in 1926
Unidroit Convention on Substantive Rules for Intermediated Securities
Project began in 2002
6 inter‐governmental meetings (11 weeks over 5 years)plus additional seminars and committees
Diplomatic conference attended by 50 States, inc. EU and 19 Member States
Convention adopted in Geneva in 2009
Official Commentary to be published soon
11
Geneva Securities Convention: the first principles
Core (essential) harmonisation
Only when required by legal or systemic risk or by efficiency considerations
Functional approach
Avoids imposing one legal model
Rules are expressed in terms of results
On all non‐harmonised matters, deference to the “non‐Convention law”
Contracting States make or confirm legal choices in their non‐Convention law and, when required, make declarations in respect of such choices
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12
The Geneva Securities Convention illustrated 1/2
Rights arising from the credit of securities to securities account – Article 9
Right over the intermediated securities
Right to dispose of them (transfer, charge, etc.)
Right to have he securities delivered, if not disallowed by corporate law or terms of issue
Rights flowing from (“attached to”) the securities
Must flow to the ultimate account holder
Depending from non‐Convention law, may flow through account holders acting as intermediaries (e.g. trust or entitlement models)
Any other rights as determined by the non‐Convention law
e.g., undivided or pooled property rights in the securities
13
The Geneva Securities Convention illustrated 2/2
Acquisition and disposition of intermediated securities (or any limited interest therein) – Articles 11 & 12
Credits, debits, effectiveness, authorisation
Validity requirements and reversals determined by non‐Convention law
“No debit without credit” possible under non‐Convention law
Three additional, optional methods
Priority among interests in the same intermediated securities
Generally prior tempore (first in time), but non‐Convention law may give super‐priority to designating entries
Protection of innocent acquisition
Non‐Convention law may offer more extensive protection
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Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________
14
Conflict of laws: current SLD work and Hague Convention follow different approaches
In most cases, will produce same result (partial international legal certainty)
Substantive law: current SLD work builds upon Geneva Convention
Both comply with functional approach
EU proposed choices fit within the space open by the Convention for the non‐Convention law
EU harmonisation or international harmonisation?
15
Should the EU Securities Law Directive be compatible with the Geneva Securities Convention?
Diversity of legal systems and need for increased legal certainty are similar
EU can achieve a higher degree of harmonisation without derogating from the international instrument
Emerging markets show strong interest for the international standard: diverging from the Geneva Convention would send the wrong signal
Because of very significant cross‐border securities holdings between EU and rest of the world, legal certainty should improve within and acrossEU border
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16
Prof. Luc ThévenozCentre for Banking and Financial LawUniversity of Geneva
T +41 (22) 379 [email protected]
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BRIEFING PAPER N.B. Philipp Paech - involved in the work of the Commission's Legal Certainty Group whilst a seconded national Expert to the European Commission - has prepared an introductory briefing paper on the main issues of cross-border securities law published under PE number PE 464.416. Its title is 'Cross-border issues of securities law: European efforts to support securities markets with a coherent legal framework'.
Abstract: The briefing provides the legal background understanding in respect of securities which are held through banks and other intermediaries necessary to access the highly complex area of cross-border securities law which is in between commercial-, insolvency- and property law. It also describes adjacent legislation and neighbouring international initiatives. As the relevant laws are heavily fragmented, the holding and transfer of such securities as well as the exercise of investor rights is cumbersome and sometimes legally uncertain. Lastly, the main mechanisms of the envisaged legislation are presented. Throughout the text, a number of crucial issues are explained that had been discussed controversially in the past.
This briefing paper can be downloaded at:
http://www.europarl.europa.eu/activities/committees/studies/download.do?language=de&file=37268