Brussels, 5 July 2006
The European Commission has issued its legal assessment of the Hague Securities Convention, an international treaty providing a uniform legal formula for determining the ownership of securities held in electronic form. This is in response to a request from the EU's Council of Ministers for clarification of four specific legal issues (see below for details). The assessment finds that three of the issues pose no major difficulty, while on the fourth issue it cautions that the use of more than one Convention law within securities settlement systems would endanger financial stability. The Commission therefore recommends that the European Community and Member States now sign the Convention, and that the Settlement Finality Directive be amended so that securities settlement systems are governed by one Convention law only.
Internal Market and Services Commissioner McCreevy said: "In today's global financial markets we can no longer afford uncertainty about which law is applicable to indirectly held securities. The 'location of the account formula' has worked fine in Europe's transition to a fully integrated single securities market, but now that European citizens are able to reap the benefits of participation in global financial markets, we need legal rules that are sustainable world-wide. Therefore, we need to change. The USA and Switzerland are about to sign the Convention and the EU should not lag behind."
On 15 December 2003, the Commission submitted to the Council a proposal for a Council Decision concerning the signing of the 2002 Hague Securities Convention (see IP/03/1725). The Convention establishes a conflicts-of-law regime, under which the law applicable to holdings of securities is the one named in the account agreement with the relevant intermediary. This differs from the regime which is currently applied in the European Community, under which the law applicable to holdings of securities is determined by the location of the account.
It is this switch from one formula to another that has prompted a wide-ranging debate about the merits of adopting the Convention. On 23 June 2005, the Council asked the Commission to assess four legal issues, namely: (1) scope of application, (2) extent of third-party rights, (3) consequences for substantive and public law and (4) impact of the diversity of laws on settlement systems and prudential regimes.
The Commission's legal assessment, issued in the form of a staff working paper, concludes that the first three issues would not pose major difficulties, but that the application of the Convention may affect the financial stability of securities settlement systems, if participants in such a system decided to apply more than one Convention law.
The Commission therefore suggests that, apart from changing three Directives, in which the 'location of the account' formula appears, an additional eligibility criterion be introduced in Article 2 of the Settlement Finality Directive to ensure that, within systems, one and only one Convention law should be expressly chosen by all participants. These amendments would have to be introduced after the signing of the Convention and before its ratification.
The USA and Switzerland will be the first countries to sign the Convention on
5 July 2006 and it is expected that soon more countries will follow.