STOCK MARKETS INTEGRATION:
Legal certainty of securities holdings in cross-border operations
The EU case
Comments by
Professor MAURICIO BAQUERO HERRERA
Legal Consultant Banking, Financial Markets and Economic Integration
Observatory of Banking and Financial Law
Externado University of Colombia
ACSDA´s First Legal Workshop
August 29th y 30th 2011
Santiago de Chile
JUSTIFICATION
The former presentation explained the process towards the
implementation of MILA and its main practical, technical and legal issues.
I am going to focus on some of them.
Maria del Pilar Jacome, (present here today with us) in a chapter of a book
recently published by Externado University of Colombia, has made an
interesting revision of the main legal issues that may arise in cross border
operations vis a vis Colombian regulation. I keep thinking about some of
the interesting questions that she raised, mainly those related to property
rights and the granting of collateral in such operations.
As many of them seem to share the same basis which is the legal
certainty of securities holdings in cross-border operations, I decided to
focus on this subject considering the nature of this legal Workshop. At
the same time, it fits very well with this morning conference on the current
status of the Hage and Unidroit conventions.
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THIS PRESENTATION
1.
Revises the significant European regulation, advise and
proposals related to the legal certainty of securities holdings in
cross-border operations.
2. Focuses on the three legal barriers identified and listed by the
Giovannini reports (2001-2003), emphasizing on the work that
has been done by the Legal Certainty Group on Barrier 13 (2008).
3. Points out the main aspects that a future EU Securities Law
Directive (SLD) may include according to the consultations made
recently.
4. Opens the floor for discussion and exchange of ideas,
experiences and opinions.
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1. The significant European regulation and advice
related to Financial Markets Infrastructure
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IDENTIFYING (LEGAL) BARRIES WITHIN EU C&S SYSTEMS
The Process
How to achieve Integrated Financial Markets? (Lamfalussy 2001)
Financial Market Infrastructure was not included in the Financial Services Action Plan,
agreed for the period 2000-2005, but become one of the priorities for the post-2005
period. A consultative group or experts was asked by the European Commission to
address the most basic pillar of the infrastructure that supports financial markets: the
system that ensures that securities exchanged within the European economy are
properly delivered from the seller to the buyer.
In 2001 the (Alberto) Giovannini Group identified the sources of inefficiency that
existed in the arrangements at the time. The Group listed 15 barriers to efficient crossborder clearing and settlement. The barriers were categorized under the three headings
of national differences in
• Technical requirements/market practice (10) (SESAME GROUP)
• National differences in tax procedures (2) (FISCO GROUP)
• Issues relating to legal certainty (3) (LEGAL CERTAINTY GROUP)
Main Conclusion of the two reports (2001-03)
The process to create an adequate clearing and settlement infrastructure in European
financial markets is made up of two ingredients:
(a) a concerted system of initiatives designed to replace the fifteen barriers with
standards, regulations, and laws adequate to an efficient and barrier-free market, and
(b) adequate regulatory/supervisory structures that ensure that the benefits of a barrierfree market will be made available to all market participants through low-cost and safe
post-trading services
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IDENTIFYING (LEGAL) BARRIES WITHIN EU C&S SYSTEMS
Giovannini Barriers related to legal certainty of securities holdings
in cross-border operations
Barrier 13: The absence of an EU-wide framework for the treatment of
interests in securities: (including procedures for the creation, perfection and
enforcement of security) it has been identified as the most important source of legal
risk in cross-border transactions. It is the issue of whether the securities in question
actually belong to those in whose names they were held. ¿Is this an issue of finality,
i.e. whether a transfer of securities from A to B made by accounting entry is final?
Barrier 14: National differences in the legal treatment of bilateral netting for
financial transactions. The principle that mutual obligations arising in financial
market transactions may be netted has been accepted throughout the EU.
However. the removal of all remaining legal uncertainties as to netting is necessary.
Barrier 15: Uneven application of national conflict of law rules. Some EU legal
systems treat as different the ownership of a security outright and an entitlement
(against a settlement system or intermediary) to own such a security. Others
elevate such an entitlement to being equal to ownership of the underlying security.
Where legal systems of both types are in play, there can an irreconcilable conflict.
It seems to be unanimously accepted that only legislation can resolve this problem.
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IDENTIFYING (LEGAL) BARRIES WITHIN EU C&S SYSTEMS
MiFID
1 November 2007, the Markets in Financial
Services Directive (MiFID) entered into force
on 1th November 2007. Its goals are to
build a single market for investment services
and trading venues allowing for much
greater competition on the basis of a
uniform, higher standard of investor
protection across Europe.
It orders the way in which market actors are
required to behave. It is also principlesbased (while it does introduce detailed rules
in some areas).
Single
Passport
enables
authorised
investment firms and credit institutions to
provide their services freely across borders .
on the basis of authorisation in their home
Member State.
Settlement Finality Directive
DIRECTIVE
2009/44/EC
OF
THE
EUROPEAN PARLIAMENT AND OF THE
COUNCIL of 6 May 2009
(Amends
Directive 98/26/CE on Settlement Finality in
Payment
and
Securities
Settlement
systems of 19/5/1998) It contains provisions
regarding transfer orders and netting (e.g.
legal enforceability of transfer orders and
netting, irrevocability of transfer orders, no
unwinding of netting, etc.),
insolvency
proceedings
(e.g.
non-retroactivity
of
insolvency proceedings, determination of
applicable law, etc.), collateral security (e.g.
insulation from insolvency proceedings,
determination of the law applicable to crossborder provision of collateral security)
EC Directive on Financial Collateral
Arrangements
EC Directive on financial collateral
arrangements (2002/47/EC), adopted on 6
June 2002. It creates a uniform EU legal
framework to limit credit risk in financial
transactions through the provision of
securities and cash as collateral. It is aimed
at
• Removal of the major obstacles for the
(cross-border) use of collateral
• Creation of clear, effective and simple
regimes
for
financial
collateral
arrangements
• Limitation of administrative burdens,
formal acts and cumbersome procedures
to create and enforce financial collateral
• Recognition of specific risk mitigation
techniques used in the financial markets
• Recognition of the right to re-use pledged
collateral
• Creation of legal certainty on the
applicable law.
See Directive 2009/44/EC
CESAME (1 and 2)
The European Commission’s Clearing and
Settlement Advisory and Monitoring Expert
group (the “CESAME” group): to achieve the
goal of a barrier-free Single European
Market.
EGMI GROUP
Winding- Up Directive for Credit
Institutions
If a credit institution with branches in
other Member States fails, its windingup will be subject to a single bankruptcy
proceeding initiated in the Member
State where the credit institution has its
head office.
Code of Conduct on Clearing and
Settlement
The McCreevy Code is based upon three
pillars: price transparency, access and
interoperability and service unbundling and
accounting separation. (2006)
MOG
The Monitoring Group of the Code of
Conduct on Clearing and Settlement
(MOG)
FISCO GROUP
The European Commission’s Clearing
and Settlement Fiscal Compliance
(“FISCO”) expert group
LEGAL CERTAINTY GROUP
It analyses issues of legal uncertainty
relating to the integration of EU securities
clearing and settlement systems, and
advise the Commission accordingly.
Expert Group on Market Infrastructures. Its
mission is to contribute to the development
of an efficient, safe and sound European Committee of European Securities Regulators
(CESR) Post-trading Expert Group (PTEG)
post-trade market.
2. The work that has been done by the Legal
Certainty Group on Barrier 13 (2008)
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IDENTIFYING (LEGAL) BARRIES WITHIN EU C&S SYSTEMS
Main Legal Issues
Legal Certainty of Security Holdings
.
Nature of the Book Entries
Book entry securities? Is this a new kind o a neutral option to
name them
The rights arising from the security are now attached to
inscriptions in a registry ?
The intermediated security challenge:
Direct or Indirect Holding of Securities?
The "in rem" analysis relies on the autonomy of the
securities vis-a-vis the custodian as to its valuation: the
securities have a value by themselves, irrespective of the
custodian's identity. (protective approach). (Paribas).
Intermediaries are mere record-keeping insititurions (
Garcimartín 2006). Does the book-entry create a valid
property right?
Interest in Securities Approach
A neutral Approach
Barrier 13
Legal Certainty Group, Second Advice on solutions to legal
barriers related to post-trading within the EU, 2008. (First
Advice 2006). The treatment of "book-entry securities“: This issue
had been identified by the Giovannini Reports as the single most
important legal obstacle to a legally sound cross-border framework
for post-trading arrangements. The LCG Advice addresses it in its
Recommendations 1 – 11,
Does Finality create property ?
The question of the date of transfer must not be confused with the
very different issue of finality. Is finality linked to the transfer of
ownership? It aims at avoiding any cancellation of settlement
procedures which may likely cause unexpected and very quick
needs of cash, source of eventual defaults and bankruptcy..
(Paribas)
4. Main aspects that a future EU Securities Law
Directive (SLD) may include according to the
consultations made recently
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HOW TO DEAL WITH LEGAL UNCERTAINTY IN CROSS BORDER SECURITIES OPERATIONS IN THE EU
The (future) EU Securities Law Directive (SLD)
The Commission Services are currently preparing a draft Directive on legal certainty of securities
holding and transactions (Securities Law Directive – SLD)
A first public consultation on this issue was held between 16 April and 11 June 2009.
In November 2010, the European Commission launched a second public consultation which
contains 22 sections which cover the full scope of the possible legislative approach. The dead
line for sending replies was set in January 2011.
The consultation paper recognizes that in the EU the cross-border holding and disposition
(outright sale, pledge, etc) of securities held through securities accounts across borders:
a. suffers from legal uncertainty and it is often not clear what an investor owns,
b. is ineffective, and
c. does not allow investors to exercise the rights attached to those securities (receipt of
dividends or interests, voting, agreeing to corporate measures like stock splits, etc) without
major obstacles.
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HOW TO DEAL WITH LEGAL UNCERTAINTY IN CROSS BORDER SECURITIES OPERATIONS WITHIN THE EU
The (future) EU Securities Law Directive (SLD)
1 – Objectives
9 – Priority
2 – Shared Functions
10 – Protection of account
holders in case of
insolvency of account
provider
3 – Account-held
securities
Compatible
Convention
with
the
Geneva
Securities
4 – Methods for
acquisition and
disposition
5 – Legal effectiveness
of acquisitions and
dispositions
6 – Effectiveness in
insolvency
7 – Reversal
8 – Protection of
acquirers against
reversal
11 – Instructions
12 – Attachment by
creditors of the account
holder
13 – Attachment by
creditors of the account
provider
14 – Determination of the
applicable law:
Keeps different approach but there is a
consultation on the Hague Convention
15
–
Cross-border
recognition
of
rights
attached to securities
16 – Passing
information
on
17 – Facilitation of the
ultimate
account
holder's position
18
–
discriminatory
charges
Non-
19 – Holding in and
through
third
countries
20 – Exercise by
account provider on
the basis of contract
21 – Account provider
status
22 – Glossary
4. Exchange of views, ideas and conclusions
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