DIRECTORATE GENERAL FOR INTERNAL POLICIES ECONOMIC …

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.

mailto:[email protected]

mailto:[email protected]

http://www.europarl.europa.eu/activities/committees/studies.do?language=EN

Workshop Securities Law Directive ____________________________________________________________________________________________

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

3

Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________

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

4


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)

5

http://www.europarl.europa.eu/activities/committees/studies/download.do?language=de&file=37268

http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=36911


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

8


1. PRESENTATION BY PHILIPP PEACH Lecturer in Financial Law, London School of Economics

1

Why harmonise the law of securities holding?

Dr Philipp PaechLondon School of Economics

European Parliament/Econ Workshop

30 June 2011

9


2

1. SAFETY OF HOLDINGS2. EFFICIENCY OF INVESTORS’ RIGHTS

The two spheres of harmonisation in the SLD:

3

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 ?

10


4

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.

5

Investor rights: try to exercise them ...

5

A‐Fund B‐Fund C‐Fund

ABC Issuer

CSD

Y‐Bank

M‐Bank

Country X

Country Z

11


6

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.

7

LAW, REGULATION AND THE VARIOUS INITIATIVES

What needs to be achieved?

12


8

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.

13


10

The various instruments and initiatives

11

THE INTERACTION BETWEEN CONFLICT‐OF‐LAWS AND SUBSTANTIVE LAW RULES

Why are cross‐jurisdictional situations so complicated?

14


12

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

13

FrankfurtBank

Rolls Royce(Issuer)

CRESTLondon

LondonBank

ParisBank

FrankfurtFund

English law

English law

English law

French law

German law5000

25000

26000

50000

1m shares

15


14

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.

15

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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16

THE FIVE BASIC HOLDING MODELS

Annex

17

Investor = equit. owner

Issuer

Bank =Legal Owner

Bank = equit. owner

CSD =Register

TRUST 1

TRUST 2

Ownership

Trust model(UK)

17


18

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)

19

Investor = full proprietor

Bank =no right

Bank =no right

CSD =Register

Prop

erty

Securities in the account

Issuer

Undivided property model(France)

18


20

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)

21

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)

19


20

22

For further details cf. the ‘Briefing Paper’ on Cross‐border issues of securities law (June 2011)

[email protected]


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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2

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 ?

3

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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4

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

5

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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6

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.

7

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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8

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

9

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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10

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.

11

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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12

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…

13


1. The relationship between investor and issuer

A direct connection link between a shareholder or bondholder

and the issuer

27


14


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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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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16

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.

17



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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18



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.

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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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20


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


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…

31


32

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.


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,

33


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

34


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


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.

35


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


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

36


8


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


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.

37


10


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


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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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

39


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

40


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

41


42


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

43


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

44


4

3. Germany and UK

private international law

lex situs v law of the debt

or PRIMA

unauthorised transfers

bona fide purchaser v estoppel

45


46


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

47


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

48


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

49


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.


7

50


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


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


9

51


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)


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


11

52


§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

53


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

54


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

55


56

www.clearygottlieb.comwww.clearygottlieb.com

NEW YORK

WASHINGTON

PARIS

BRUSSELS

LONDON

MOSCOW

FRANKFURT

COLOGNE

ROME

MILAN

HONG KONG

BEIJING

BUENOS AIRES


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

57


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.

58


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

59


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

60


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

61


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

62


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

63


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

64


16

Prof. Luc ThévenozCentre for Banking and Financial LawUniversity of Geneva

T +41 (22) 379 [email protected]

65


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67

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:



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