Annexes to COM(2018)89 - Applicable law to the proprietary effects of transactions in securities - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)89 - Applicable law to the proprietary effects of transactions in securities. |
|---|---|
| document | COM(2018)89  |
| date | March 12, 2018 |
The conflict of laws provisions in the Settlement Finality Directive, Financial Collateral Directive and Winding-up Directive designate the applicable law based on a common approach. They are similar in that they all designate an applicable law based on the place of the relevant register or account (and in the case of the Settlement Finality Directive and the Winding-up Directive, the centralised deposit system). Nevertheless, the provisions differ in detail and there appear to be some differences in how they are interpreted and applied across Member States. In particular, this concerns the definition and determination of where the account is 'located' or 'maintained'.
3.Improving clarity in the existing EU acquis
3.1. Do the terms 'maintained' and 'located' mean different things?
The Commission is of the view that the difference in wording, referring to the place of the account or register, does not imply any difference in substance.
The Settlement Finality Directive, Financial Collateral Directive and Winding-up Directive define the applicable law by reference to the place of the relevant account. In accordance with Article 9(2) of the Settlement Finality Directive and Article 24 of the Winding-up Directive, the applicable law is the law where the account or register is 'located', while the Financial Collateral Directive refers in Article 9(1) to the law in which the relevant account is 'maintained'. None of the Directives however specify whether 'located' means the same as 'maintained'.
The Commission is of the view that ‘located’ means the same as ‘maintained’ for the following reasons.
First, Recital (7) of the Financial Collateral Directive explains that the objective of the conflict of laws provision is to extend the principle already set out in the Settlement Finality Directive 13 .
Second, as previously highlighted in the 2007 Commission Working Document, the difference in wording between the Financial Collateral Directive and the Settlement Finality Directive reflects recognition – when adopting the Financial Collateral Directive – that EU securities markets had evolved in ways that allowed for a more suitable expression, i.e. the place where the account is maintained – to be used to describe the same formula 14 .
Third, the differences in terminology are not present in all linguistic versions of the Directive. While the English versions of the Settlement Finality Directive and Winding-up Directive use the terms 'located' and the Financial Collateral Directive uses that of 'maintained', several language versions of the Settlement Finality Directive and the Financial Collateral Directive refer to the exact same term, e.g. the French, Italian and Romanian versions of the Settlement Finality Directive and Financial Collateral Directive include the same reference to where the relevant account is 'located' (situé - situato - se află). In other linguistic versions, other terms are used, such as the Portuguese language version that makes a differentiation between 'located' and 'situated' and the Dutch version referring to 'located' and 'held'.
3.2. Determining where the account or register is 'located' or 'maintained'
The Commission observes that under national implementation there are different ways to determine where a securities account is 'located' or 'maintained'. Without prejudice to potential future decisions of the Court of Justice of the European Union, these different ways of interpretation all appear to be valid under the Directives. The conflict of laws provisions in the three Directives do not provide clear definitions of how to determine where the securities account is located or maintained. However Recital (8) of the Financial Collateral Directive states clearly the common basis for conflict of laws across the EU:
The lex rei sitae rule, according to which the applicable law for determining whether a financial collateral arrangement is properly perfected and therefore good against third parties is the law of the country where the financial collateral is located, is currently recognised by all Member States.
Further sources are not available to clarify how maintenance and location should be determined, as other EU acts do not provide such definition, and so far there is no case law from the Court of Justice of the European Union on how these concepts should be interpreted.
The Commission observes that many Member States, when transposing the provisions of the Settlement Finality Directive and the Winding-up Directive, have not included any additional criteria in their national legislation that would prescribe how to determine the jurisdiction where the account or register is 'located'. 15 Similarly, many national transpositions of the Financial Collateral Directive do not add any clarifications at national level as to how to determine where the account is 'maintained'. 16
In those cases where national laws do provide additional guidance, approaches may differ in their result. Also, in those Member States where no clarification was added in the national transposition, case law or academic literature might provide elements that help apply the concepts of the location or maintenance of the account in practice. These non-codified elements might also lead to diverging results. 17
There are a number of Member States that currently interpret and apply the conflict of laws provisions of the Financial Collateral Directive in a way that they look at the place where the custody services are provided. Others look at the account agreement for information about the place where the account is maintained. The latter solution might offer the convenience of potentially avoiding different applicable laws internationally, in transactions involving jurisdictions that apply a choice of law solution. Another approach that avoids different laws applicable to an international transaction in a narrower set of cases (where a third-country choice of law clause opts for the law of a Member State), is when 'maintained' is determined in a way that it allows the choice of that Member State's law to be valid under the Hague Securities Convention 18 . This is the case when 'maintained' is defined as effecting or monitoring entries to securities accounts, administering payments or corporate actions, or performing any other regular activity necessary for the administration of securities accounts. Without prejudice to any future decisions of the Court of Justice of the European Union, all of the above solutions appear to be valid under the relevant EU provisions.
4.Conclusion
This Communication provides a proportionate response to the residual legal uncertainty of existing EU conflict of laws rules in the field of proprietary effects of securities transactions. A clarification of the Commission's views should shed light on existing solutions as to how the relevant provisions of the Settlement Finality Directive, Financial Collateral Directive and Winding-up Directive are applied at present, leaving freedom to the Commission to assess in the future – in light of international, technological or market developments – whether further action may be necessary. In this respect, it should be underlined that this Communication is without prejudice to the interpretation that the Court of Justice of the European Union may give of the aforementioned issues in the future. The Court remains responsible in the final instance for interpreting the Treaty and secondary legislation, or by future Commission action, in particular of a legislative nature. This Communication is also without prejudice to future Commission action taken in accordance with Directive 2003/87/EC with regard to greenhouse gas emission trading allowances.
National authorities and administrations should take into consideration the clarifications provided in this Communication when applying the conflict of laws provisions of the Settlement Finality Directive, the Financial Collateral Directive and the Winding-up Directive. Member States should continue to observe if any legal discrepancies occur at the level of national interpretations that might cause market disruptions, and aim to converge in their interpretation and application of the existing EU rules.
The Commission will continue to monitor developments in this area and in consultation with stakeholders assess how national interpretations and market practices evolve, in light of international and technological developments. Evidence from stakeholders on the impact of specific issues on the functioning of the internal market will be particularly assessed. Any possible future legislative initiative will be accompanied by an impact assessment.
(1)
Communication on ‘Action Plan on Building a Capital Markets Union’ (‘CMU Action Plan’), COM(2015) 468 final.
(2)
Communication on ' on the Mid-Term Review of the Capital Markets Union Action Plan', COM(2017) 292 final.
(3)
ECB data suggests that the estimated volume of cross-border investments, by residence of the investor, stood at EUR 10.6 trillion in 2016. Source: ECB securities settlement statistics (28.6.2017).
(4)
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements ('Financial Collateral Directive') OJ L 168, 27/06/2002.
(5)
Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (‘Settlement Finality Directive’) OJ L 166/45, 11/6/1998.
(6)
Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions ('Winding-up Directive) OJ L 125 , 05/05/2001.
(7)
Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims COM(2018) 96.
(8)
Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/2011.
(9)
See Article 9(1) and (2) of the Financial Collateral Directive, Article 9(2) of the Settlement Finality Directive and Article 24 of the Winding-Up Directive, which refer to book-entry securities (FCD and SFD) or (financial) instruments recorded in a register or account (WUD).
(10)
The contractual elements include for example the offer, its acceptance, consideration, certainty of terms of the contract, etc. and are subject to the conflict of laws rules of the Rome I Regulation. Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I): http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32008R0593&from=EN
(11)
Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I).
(12)
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
(13)
The principle in Directive 98/26/EC whereby the law applicable to book entry securities provided as collateral is the law of the jurisdiction where the relevant register, account or centralised deposit system is located, should be extended in order to create legal certainty.
(14)
Commission staff working document 'Legal assessment of certain aspects of the Hague Securities Convention', p. 8, SEC(2006) 910.
(15)
At least 16 Member States have not added further clarifications in their national provisions implementing the relevant provisions of the SFD and the WUD. Source: Evaluation in Annex 5 to the Impact Assessment SWD(2018)52, pp 116-117.
(16)
At least 13 Member States have not added further clarifications in their national provisions implementing the relevant provision of the FCD. Source: Evaluation, pp 117-118.
(17)
For example there are different approaches under the FCD to determine where the account is maintained. Source: Evaluation, pp 117-118.
(18)
Convention on the law applicable to certain rights in respect of securities held with an intermediary, available at: https://assets.hcch.net/docs/3afb8418-7eb7-4a0c-af85-c4f35995bb8a.pdf