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Brussels, 5 July 2006
The Hague Securities Convention is an international treaty finalised in 2002 by the Hague Conference on Private International Law (www.hcch.net). It is intended to establish a rule that would apply across the major securities markets of the world to determine the law applicable to certain issues in respect of the holding, transfer and collateralisation of securities credited to a securities account held with an intermediary in an international context. The heart of the Convention’s regime is laid down in Article 4(1), according to which the law applicable to the issues covered by the Convention is the law in force in the State that the relevant intermediary and the account holder have expressly agreed as governing their account agreement.
Why has the Commission carried out a legal assessment?
The Commission has written its legal assessment in response to a specific request from the Council to clarify four legal issues that arose in the course of the debate over the Commission's proposal of 15 December 2003 to sign the Convention. The issues concern (1) the scope of application, (2) the extent of third party rights, (3) the consequences on substantive and public law and (4) the impact of the diversity of laws on settlement systems and prudential regimes. To advance the debate, the Commission has gone beyond what was asked of it, by setting out and evaluating the options available for the Community and its Member States.
Why is the Commission focusing on conflicts of law?
There is no such focus. The Convention is only one of a series of measures and potential measures that the Commission is working on, with the objective of ensuring a comprehensive and stable legal regime for the EU securities markets. Thus, there are a wide range of regulatory measures, most notably MiFID (Markets in Financial Instruments Directive), that order the way in which market actors are required to behave. Then there are three matters of substantive law: the Financial Collateral Directive, that creates a zone of protection for collateral transactions, and which the Commission is currently evaluating, the Commission's Legal Certainty Group (see http://ec.europa.eu/internal_market/financial-markets/clearing/certainty_en.htm), that is exploring the need for an EU-wide substantive law regime for the holding and transfer of securities, and the UNIDROIT Convention, which aims for a parallel exercise at the global level (www.unidroit.org). There is also the Settlement Finality Directive, which is aimed at the stability of the infrastructure of the EU financial system. In this overall context, there is the need to tackle the problems of conflicts of law that the Convention aims to address and which is expounded in the Commission's assessment. When all the above initiatives have come to fruition, the objective of ensuring safety, efficiency and certainty in the legal framework of the EU financial markets will be achieved.
Is there a current EU regime on applicable law for indirectly held securities?
Yes, in some cases, essentially where securities are used as collateral in the banking sector. Three Directives contain a rule to determine the law by which questions about who has what rights over securities are to be answered. These rules differ slightly in phrasing, but are nearly all based on the same formula: the law which determines rights in securities is that of the Member State (or, in some cases, third country) in which the securities account that records the existence of those rights is located. In the Settlement Finality Directive (1998) the reference is to the law of the place where the account is located; in the Collateral Directive (2002), it is to the law of the place where the account is maintained. In the Winding-up Directive of Credit Institutions (2001) the "location of the account" formula applies to all rights, whether or not related to collateral, but only when they belong to a credit institution.
Is that EU legislation compatible with the Convention?
No. The Convention and the EC Directives take a different approach on the law applicable for indirectly held securities. Community legislation is based on a "location of the account" formula: the Convention is based on the law expressed in the relevant account agreement. These two approaches are incompatible and, consequently, the Directives will have to be changed if the Convention is ratified.
How many countries have signed the Convention?
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.
Will the Community sign the Convention and, if so, when?
The Commission made a proposal to sign the Convention at the end of 2003, but Member States have so far been unable to decide on this proposal. The Council will resume the debate on the basis of the Commission's legal assessment, but this is a highly complex legal matter and it is thus difficult to say how much time the Council will need to arrive at a common position. Now that the USA and Switzerland are about to sign the Convention, the Commission hopes that the Community will decide to sign the Convention this year as well.
How much time is needed for the Community to ratify the Convention?
We will cross that bridge when we get to it. The signing of the Convention would only be a first (although crucial) step. Afterwards the Commission will put forward the necessary proposals to amend the above directives and a proposal for a Council Decision, which requires the assent of the European Parliament, to ratify or accede to the Convention. Further, each Member State will have to prepare its instruments of ratification, assuming that the Community and its Member States would wish to ratify or accede simultaneously.
What's the urgency of adopting the Convention?
The current EU rules were drafted before the Convention was in place, and - as far as the Commission knows - the 'location of account formula' has never been put to the test in court. On the face of it, there is no problem. However, work carried out by the Commission shows that the 'location of account formula' is limited in scope and leaves too much room for interpretation. Since stability in financial markets is of utmost importance, it is therefore essential (and thus urgent) that as many countries as possible ratify the Convention.
Which law applies in a securities transaction, e.g. between an EU-investor and an US intermediary (or vice versa)?
The Convention is not yet in force. Within the context of the Financial Collateral Directive, a court in an EU Member State would apply the law of the country where the account is deemed to be located, irrespective of whether that location is inside or outside the European Community. However, for all other purposes, there is uncertainty and the answer very much depends on the facts and the law of the forum.
If the Community and the US were both party to the Convention, it would no longer be relevant where the account is deemed to be located in order to determine the applicable law. If nothing else, the law applicable to securities held through intermediaries will be the law as expressed in the account agreement, which can be either the law of an EU Member State or the law of one of the States of the USA, or any other law, all subject to the Qualifying Office test (the latter essentially means that the intermediary has a real office in the country concerned).
Why does the Commission recommend an additional rule for securities settlement systems?
The European Central Bank and others have raised the concern that the Convention may have adverse consequences for the smooth, efficient and sound operation of securities settlement systems, if a diversity of laws applicable to proprietary issues were ever to arise within a system (that is to say, within the arrangements between the system's operator and its members). If this should happen, the commonality needed for the operation of settlement within the system, and thus systemic stability at large, would be threatened. In order to avoid this, the Commission recommends amending Article 2 of the Settlement Finality Directive so that systems are governed by one Convention only.