Hague Securities Convention
Encyclopedia
The Convention on the law applicable to certain rights in respect of securities held with an intermediary, or Hague Securities Convention is an international multilateral treaty
intended to remove, globally, legal uncertainties for cross-border securities
transactions. The Convention was drafted under the auspices of the Hague Conference on Private International Law
, which has been working to harmonize international private law
since 1893.
Switzerland
and Mauritius
have ratified the convention, while it has been signed (but not ratified) by the United States
. In addition, the European Commission
recommended in July 2006 that its member states sign the Convention.
s from a purely direct holding system
to a mixed direct and indirect holding system
. The reforms, though largely beneficial, have created an alarming level of uncertainty as to the question of "what law applies" in cross-border securities transactions. The development of a global agreed-upon method of determining the legal regime governing any such transactions lagged behind market practice, leaving financial markets with significant legal risk
.
The problem stems from the fact that intermediaries exist between an investor
and the company which issues a particular security.
Historically, many jurisdictions attempted to apply the traditional, but now arguably outdated, lex rei sitae
test to securities held with intermediaries, by "looking through" the tiers of intermediaries to the laws of one or more of: the jurisdiction of incorporation
of the issuer, the location of the issuer's register, or the location of the actual security certificate (the so-called "look-through approach
").
's Settlement Finality Directive of 1998. That directive has been adopted by a number of states. In 2002, the European Community also passed the European Union
's Collateral Directive, though this has yet to be implemented by most member states.
On 23 June 2005, the European Council
asked the European Commission
to assess and clarify 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 EC assessment found that three of the issues pose no major difficulty., On the fourth issue it cautioned that the use of more than one Convention law within securities settlement systems would endanger financial stability.
In July 2006 the European Commission indicated its desire to amend the European Union's Settlement Finality Directive and the European Collateral Directive so that those directives are consistent with the Hague Securities Convention.
The Commission therefore recommended that the European Union 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.
Switzerland
, which is a European nation that is not part of the European Union and which therefore does not have to wait for agreement among all member states to be reached, has already signed the Convention.
joining the Convention has been expressed in Japanese legal circles.
in January 2001 to consider the appropriate conflict of laws
rule. At this first meeting, initially the concept embraced by the PRIMA approach was adopted. The next two years of negotiations and meetings were spent determining an appropriate formulation of the language of the convention, and which PRIMA concepts to accept and which to reject. At the end of the negotiations, the idea that the place of the relevant intermediary was the place to focus on was unanimously rejected in lieu of the approach described below.
The fundamental issue during negotiations was to determine a test that would accurately locate the one jurisdiction
for any set of circumstances that would be the jurisdiction whose law would apply. The result of the analysis was that for financial institution
s with many offices, it is often not possible to point to one particular location. Delegates concluded that a test that tried to actually locate a particular securities account would result in an unacceptable level of impossibility or uncertainty.
Over time a new approach was developed:
The second step is to apply the "qualifying office" test. Art 4(2) contains a "black list" of activities, each of which by itself is not sufficient to constitute maintenance of securities accounts.
Article 5(1): Where the previous rule does not provide a result, and a written account agreement exists which "expressly and unambiguously" states that the relevant intermediary entered into the account agreement through a particular office, the applicable law is the law of the location of that office, provided the "qualifying office" test is fulfilled.
Article 5(2) and (3): These provide a fallback where Art 5(1) provides no answer. Under these provisions, the applicable law is determined with reference to the place of incorporation or organisation of the relevant intermediary, or its principal place of business.
or Australia
), Art 12 indicates that the applicable law can be the law of a territorial unit specified in the account agreement provided that the relevant intermediary has a qualifying office somewhere in the multi-unit state.
In this situation, the Convention provides that the relevant intermediary is the account holder's own intermediary, and the account agreement between the account holder and its intermediary is the relevant account agreement to determine the law governing either perfection or completion.
started a negotiation process with a view to harmonise the material aspects of intermediated securities. The purpose is to achieve a further step towards legal integration of securities markets, that consist not only in identifying the applicable law, but also in harmonising some parts of the legislation of the signatory States. These negotiations eventually reached the adoption, in October 2009, of the Unidroit convention on substantive rules for intermediated securities
also known as the Geneva Securities Convention.
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...
intended to remove, globally, legal uncertainties for cross-border securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
transactions. The Convention was drafted under the auspices of the Hague Conference on Private International Law
Hague Conference on Private International Law
The Hague Conference on Private International Law is the preeminent organisation in the area of private international law....
, which has been working to harmonize international private law
Private law
Private law is that part of a civil law legal system which is part of the jus commune that involves relationships between individuals, such as the law of contracts or torts, as it is called in the common law, and the law of obligations as it is called in civilian legal systems...
since 1893.
Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and Mauritius
Mauritius
Mauritius , officially the Republic of Mauritius is an island nation off the southeast coast of the African continent in the southwest Indian Ocean, about east of Madagascar...
have ratified the convention, while it has been signed (but not ratified) by the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. In addition, the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
recommended in July 2006 that its member states sign the Convention.
The need for the Convention
The Convention is largely a response to the move in recent times in most nationNation
A nation may refer to a community of people who share a common language, culture, ethnicity, descent, and/or history. In this definition, a nation has no physical borders. However, it can also refer to people who share a common territory and government irrespective of their ethnic make-up...
s from a purely direct holding system
Direct holding system
The direct holding system is a traditional system of securities clearance, settlement and ownership in which owners of securities had a direct relationship with the issuer...
to a mixed direct and indirect holding system
Indirect holding system
The indirect holding system is a system of securities clearance, settlement and ownership system most widely used in the world today. It consists of one or more tiers of intermediaries between issuer and investor...
. The reforms, though largely beneficial, have created an alarming level of uncertainty as to the question of "what law applies" in cross-border securities transactions. The development of a global agreed-upon method of determining the legal regime governing any such transactions lagged behind market practice, leaving financial markets with significant legal risk
Legal risk
Legal risk is risks that counterparty are not legally able to enter into a contract. Another legal risk relates to regulatory risk, i.e., that a transaction could conflict with a regulator's policy or, more generally, that legislation might change during the life of a financial contract.-The Risk...
.
The problem stems from the fact that intermediaries exist between an investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
and the company which issues a particular security.
Historically, many jurisdictions attempted to apply the traditional, but now arguably outdated, lex rei sitae
Lex rei sitae
Lex rei sitae is a legal doctrine of property law and of International private law. It is Latin for "the law where the property is situated". The law governing the transfer of title to property is dependent upon, and varies with, the lex rei sitae....
test to securities held with intermediaries, by "looking through" the tiers of intermediaries to the laws of one or more of: the jurisdiction of incorporation
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
of the issuer, the location of the issuer's register, or the location of the actual security certificate (the so-called "look-through approach
Look-through approach
The look-through approach is a conflict of laws rule applied to the proprietary aspects of security transactions. It is an application of the traditional lex rei sitae test....
").
Europe
The Place of the Relevant Intermediary (or "PRIMA") approach was adopted in Europe under the European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
's Settlement Finality Directive of 1998. That directive has been adopted by a number of states. In 2002, the European Community also passed the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
's Collateral Directive, though this has yet to be implemented by most member states.
On 23 June 2005, the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
asked the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
to assess and clarify four legal issues, namely: (1) scope of application; (2) extent of third-party rights; (3) consequences for substantive and public law
Public law
Public law is a theory of law governing the relationship between individuals and the state. Under this theory, constitutional law, administrative law and criminal law are sub-divisions of public law...
; and (4) impact of the diversity of laws on settlement systems and prudential regimes.
The EC assessment found that three of the issues pose no major difficulty., On the fourth issue it cautioned that the use of more than one Convention law within securities settlement systems would endanger financial stability.
In July 2006 the European Commission indicated its desire to amend the European Union's Settlement Finality Directive and the European Collateral Directive so that those directives are consistent with the Hague Securities Convention.
The Commission therefore recommended that the European Union 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.
Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, which is a European nation that is not part of the European Union and which therefore does not have to wait for agreement among all member states to be reached, has already signed the Convention.
Japan
Strong support for JapanJapan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
joining the Convention has been expressed in Japanese legal circles.
New test
The first Special Commission of the Convention met at The HagueThe Hague
The Hague is the capital city of the province of South Holland in the Netherlands. With a population of 500,000 inhabitants , it is the third largest city of the Netherlands, after Amsterdam and Rotterdam...
in January 2001 to consider the appropriate conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
rule. At this first meeting, initially the concept embraced by the PRIMA approach was adopted. The next two years of negotiations and meetings were spent determining an appropriate formulation of the language of the convention, and which PRIMA concepts to accept and which to reject. At the end of the negotiations, the idea that the place of the relevant intermediary was the place to focus on was unanimously rejected in lieu of the approach described below.
The fundamental issue during negotiations was to determine a test that would accurately locate the one jurisdiction
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
for any set of circumstances that would be the jurisdiction whose law would apply. The result of the analysis was that for financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s with many offices, it is often not possible to point to one particular location. Delegates concluded that a test that tried to actually locate a particular securities account would result in an unacceptable level of impossibility or uncertainty.
Over time a new approach was developed:
- the account holder and relevant intermediary may choose in the account agreement the law to govern the issues under the Convention;
- this choice will be respected under the Hague Convention provided that the chosen law is of a place where the relevant intermediary has an office that is involved in the maintenance of securities accounts (a "qualifying office").
Main rule
The main rule of the Convention can be summarised as follows:- Article 4: The first step is to look to the law expressly agreed between the account holder and its immediate (relevant) intermediary in the account agreement. If no such express designation is made, but the parties have expressly agreed on the law to govern the account agreement, then the governing law shall govern the issues under the Convention.
The second step is to apply the "qualifying office" test. Art 4(2) contains a "black list" of activities, each of which by itself is not sufficient to constitute maintenance of securities accounts.
Article 5(1): Where the previous rule does not provide a result, and a written account agreement exists which "expressly and unambiguously" states that the relevant intermediary entered into the account agreement through a particular office, the applicable law is the law of the location of that office, provided the "qualifying office" test is fulfilled.
Article 5(2) and (3): These provide a fallback where Art 5(1) provides no answer. Under these provisions, the applicable law is determined with reference to the place of incorporation or organisation of the relevant intermediary, or its principal place of business.
Multi-unit states
Where the primary rule in Art 4 leads to the law of a territorial unit of a multi-unit state (such as CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
or Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
), Art 12 indicates that the applicable law can be the law of a territorial unit specified in the account agreement provided that the relevant intermediary has a qualifying office somewhere in the multi-unit state.
Relevant intermediary as collateral taker
In Art 4(3), the Convention expressly provides that it applies in the specific case where an account holder:- Holds interests in securities through an intermediary; and
- PledgePledge (law)A pledge is a bailment or deposit of personal property to a creditor to secure repayment for some debt or engagement, The term is also used to denote the property which constitutes the security....
s or transfers title to securities held with an intermediary to that particular inventory.
In this situation, the Convention provides that the relevant intermediary is the account holder's own intermediary, and the account agreement between the account holder and its intermediary is the relevant account agreement to determine the law governing either perfection or completion.
Other issues
Other issues governed by the Convention include:- Issues of priority between competing dispositions;
- The requirements for the realisation of such an interest; and
- The duties of an intermediary to competing claimants to an interest in securities held with the intermediary.
Other related international conventions
In 2003 UnidroitUNIDROIT
The International Institute for the Unification of Private Law, also known as UNIDROIT, is an independent intergovernmental Organisation based in Rome, Italy...
started a negotiation process with a view to harmonise the material aspects of intermediated securities. The purpose is to achieve a further step towards legal integration of securities markets, that consist not only in identifying the applicable law, but also in harmonising some parts of the legislation of the signatory States. These negotiations eventually reached the adoption, in October 2009, of the Unidroit convention on substantive rules for intermediated securities
Unidroit convention on substantive rules for intermediated securities
The Unidroit convention on substantive rules for intermediated securities, also known as the Geneva Securities Convention, was adopted on 9 October 2009. So far , it has been signed by only one of the 40 negotiating States...
also known as the Geneva Securities Convention.