18 Hague Securities Convention
| (27916)
10918/06
SEC(06) 910
| Commission staff working document: legal assessment of certain aspects of the Hague Securities Convention
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| Legal base | — |
| Document originated | 3 July 2006
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| Deposited in Parliament | 20 October 2006
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| Department | HM Treasury |
| Basis of consideration | EM of 31 October 2006
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| Previous Committee Report | None
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| To be discussed in Council | No date set
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| Committee's assessment | Legally and politically important
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| Committee's decision | Cleared
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Background
18.1 The Convention on the Law Applicable to Certain Rights in
Respect of Securities held with an Intermediary was adopted by
the Hague Conference on Private International Law on 13 December
2002. The Convention (the 'Hague Securities Convention') sets
out rules to determine the applicable law in respect of the holding,
transfer and use as collateral of securities held by an intermediary
in a securities account.
18.2 The Hague Securities Convention defines "securities"
as any shares, bonds, or other financial instruments or assets
(other than cash), or any interest therein[62]
and a "securities account" as an account maintained
by an intermediary to which securities may be credited or debited.[63]
An "intermediary" is defined as a person who "in
the course of business or other regular activity maintains securities
accounts for others or both for others and for its own account
and is acting in that capacity".[64]
18.3 The Hague Securities Convention accordingly
deals with the applicable law relating to rights over indirectly
held securities. Shares and bonds are now largely held in "dematerialised"
form. In other words, an individual's ownership of securities
is shown in the form of entries in electronic registers, rather
than in the form of paper certificates. Such registers are typically
held by securities depositories, with accounts at securities depositories
being usually held by financial intermediaries, banks and brokers.
Investors will therefore often own shares and bonds indirectly.
Their intermediary will be registered as the owner at the securities
depository, whilst the investor will be credited as holding shares
and bonds in accounts they hold with an intermediary.
18.4 The principal rule in the Hague Securities Convention
(Article 4) is that the law chosen[65]
by express agreement between the intermediary and the account
holder to govern their account agreement is also to govern the
issues covered by the Convention. This choice is subject to the
requirement that the relevant intermediary has an office carrying
on business in the State whose law is to apply. In cases where
the applicable law cannot be determined under Article 4, a series
of "fall-back" rules are provided under Article 5. These
provide that the applicable law, in order of priority, is to be
the law of the place where the office which made the account agreement
was situated, the law of the place of incorporation of the intermediary,
or the law of the principal place of business of the intermediary.
18.5 The Community has adopted choice of law rules
in this field which differ slightly from those of the Hague Securities
Convention. Under Directive 98/26/EC of 19 May 1998 on settlement
finality in payment and securities settlement systems,[66]
the applicable law in a case where securities are provided as
collateral is that of the Member State in which rights with respect
to securities are legally recorded in a register, account or centralised
deposit system. Under Directive 2001/24/EC of 4 April 2001 on
the reorganisation and winding up of credit institutions,[67]
a similar choice of law rule governs proceedings for the enforcement
of proprietary rights in financial instruments. Finally, under
Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements,[68]
the law applicable to any question in relation to book entry securities
collateral is to be the law of the place where the account is
maintained.
18.6 At the end of 2003, the Commission submitted
to the Council a proposal for a Council Decision authorising signature,
on behalf of the Community, of the Hague Securities Convention.
The Commission staff working document
18.7 The Commission staff working document notes
that the Hague Securities Convention establishes a choice of law
rule that the law applicable to holdings of securities is the
one specified in the account agreement with the relevant intermediary.
The document notes that "this differs from the regime which
is currently applied in the European Community where the law applicable
to holdings of securities is determined by the location of the
account". The document also notes that it was this "switch
from one formula to another" which prompted a "wide-ranging
debate" about the merits of adopting the Convention following
the submission of the draft Council Decision authorising signature
of the Hague Securities Convention.
18.8 The document recalls that in June 2005 the Council
asked the Commission to assess four legal issues arising in the
course of the debate over the adoption of the Hague Securities
Convention. These were, first, the scope of application, secondly,
whether third parties would be prejudiced as a result of adoption
of the Convention, thirdly, whether the Convention would jeopardise
existing rules which apply to EU securities markets and finally
whether the Convention would jeopardise the stability of a securities
settlement system by permitting several systems of law to be chosen.
18.9 Each of these questions is examined in turn
in the document. On the first question, the Commission concludes
that the scope of the Hague Securities Convention would not give
rise to any significant difficulty or uncertainty in relation
to the existing framework of Community legislation. In reply to
the suggestion that investors could be pushed into holding their
securities under a law which does not provide property rights
for indirect holders of securities, the Commission notes that
the laws of all EU Member States (and the law of the State of
New York) grant property rights to indirect holders of securities.
18.10 On the question of whether third parties might
be disadvantaged by the choice of law rules under the Hague Securities
Convention, the Commission points out that those taking securities
as collateral already make inquiries to obtain the information
necessary to accept the collateral, and that it would not require
much effort to add the question of the applicable law to the relevant
information they collect. The Commission also points out that
the Hague Securities Convention does not alter rules of jurisdiction
or procedure with respect to proceedings by creditors to establish
their rights over a debtor's securities or otherwise to enforce
their rights.
18.11 In reply to the suggestion that adoption of
the Hague Securities Convention might affect the operation of
a number of laws relating to such matters as company law and market
abuse, the Commission points out that the purpose of the Convention
is to determine the law applicable to the rights attached to securities
and not other laws, and that it does not therefore affect the
laws applicable to the rights and duties of companies issuing
securities. The Commission also points out that the Convention
contains an explicit exception to preserve the effect of mandatory
rules of public policy, such as those relating to market abuse.
18.12 On the final question relating to the stability
of a securities settlement system, the Commission notes that the
current uncertainty over the relevant applicable law is not good
for financial stability and agrees that commonality is necessary
for effective operation of a securities settlement system. However,
the Commission also notes that it is the case at present that
in such situations a number of systems of law may fall to be considered
and that this is inevitable in any cross-border arrangement for
the holding of securities. The Commission considers that the Convention
would clarify the position by removing doubts about the applicable
law and would give parties greater flexibility in determining
the applicable law. The Commission concludes that "if anything,
the element of choice under the Convention rule assists in the
reduction and more effective management of risk, rather than creating
or increasing it".
18.13 In the light of its assessment, the Commission
proposes three options. These are, first, to adopt the Hague Securities
Convention and to make the necessary modifications to remove the
choice of law rule based on the location of the account in the
three relevant EC Directives, secondly, to adopt the Convention
and remove the "location of the account" criterion in
the EC rules, whilst introducing a new rule to provide that in
respect of proprietary issues arising in securities settlement
systems, only one system of law should be chosen by all the parties.
(In this regard, the Commission rejects the view that the chosen
law should be that of a Member State as being incompatible with
the freedom of choice established by the Convention). This appears
to be the option preferred by the Commission.
18.14 The third option would be to reject the Convention
and maintain the "location of the account" formula for
determining the applicable law. The Commission points out that
whereas such a solution would provide certainty in a Community
context it would not provide such certainty with respect to transactions
where any aspect relates to third countries.
The Government's view
18.15 In his Explanatory Memorandum of 31 October
2006 the Economic Secretary to the Treasury (Ed Balls) states
that the Government believes that the Community should sign the
Hague Convention as it offers an opportunity to reduce legal uncertainty
regarding indirectly held securities on a global scale and should
help to promote both financial stability and a greater level of
financial activity. The Minister also states that the Government
agrees with the Commission that most of the issues raised in relation
to the Convention do not constitute major difficulties.
18.16 The Minister adds this further comment:
"Recent meetings in the Civil Law and European
Securities Committees have indicated that a significant number
of Member States are either opposed to the EU[69]
signing the Convention, or currently have reservations about the
EU signing the Convention. It has been suggested that one way
forward might be to convene a meeting of legal experts to discuss
the key points at issue, to see if the concerns that some currently
have can be resolved. The UK would support such an initiative."
Conclusion
18.17 We thank the Minister for his helpful Explanatory
Memorandum, which covers a careful and thorough analysis by the
Commission.
18.18 We agree that accession by the Community
to the Hague Securities Convention would reduce legal uncertainties,
but we note that accession is opposed by a number of Member States.
18.19 We are content to clear the document, as
it is effectively spent, but we would expect any initiative for
Community accession to be the subject of a formal proposal which
would be deposited with an Explanatory Memorandum in the normal
way. We would wish, in particular, to give close attention to
the declaration of competence which the Community would be required
to make under Article 18 of the Hague Securities Convention.
62 See Article 1(1)(a) of the Convention. Back
63
See Article 1(1)(b). Back
64
See Article 1(1)(c). Back
65
It should be noted that the choice of law rules are 'universal'
i.e. they apply in all cases involving a choice of law whether
or not the law concerned is that of an EU Member State or a member
of the Hague Conference on Private International Law. Back
66
OJ No. L 166 of 11.06.98, p.45. Back
67
OJ No. L 125 of 5.05.01, p.15. Back
68
OJ No. L 168 of 27.06.02, p.43. Back
69
The Commission paper refers to the EU in the body of the text,
but the formal position is that it would be the European Community,
not the EU, which would accede. This appears to be recognised
in the conclusions of the Commission's paper. Back
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