Abstract
The protection of an innocent acquirer plays a pivotal role in intermediated securities transactions, for despite massive and speedy securities transactions in the intermediated system, a purchaser of intermediated securities may have the legal certainty that her intermediated securities are not subject to any adverse claim, unless she had an actual or constructive notice of the fact that her acquisition could violate another’s interest. The innocent acquisition rule, thus, ensures settlement finality in the intermediated system, and facilitates dynamic safety of securities transactions. However, due to the special characteristics of intermediated securities transactions, such as book-entry transfers without physical securities deliveries, and anonymity of counterparties of transactions on a stock exchange in general, it was considered that the concept of the traditional so-called good faith acquisition or bona fide acquisition which is applied to a tangible property is not appropriate for intermediated securities transactions. In this respect, from the early stage the wording of innocent acquisition was selected, and the principle of the innocent acquisition protection was formulated with a neutral and fact-based structure.
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Notes
- 1.
Clearing is the process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement (the BIS Glossary at 7). Especially, the netting is the key benefit of clearing, considerably lowering the total settlement volume. As to the process of clearance and settlement, see generally BIS, Recommendations for Securities Settlement Systems: Report of the CPSS-IOSCO Joint Task Force on Securities Settlements Systems (Basel: BIS, 2001) at 38~40. See also André Alfes, Central Counterparty - Zentraler Kontrahent - Zentrale Gegenpartei: Über den Vertragsschluss an der Frankfurter Wertpapierbörse mittels des elektronischen Handelssystems Xetra unter Einbeziehung einer Central Counterparty (Berlin: Duncker & Humbolt, 2005) at 170~174 for the concept of clearing from the German law perspective.
- 2.
The Frankfurt Stock Exchange. It is also called FWB, Frankfurter Wertpapierbörse in German. It is the largest stock exchange in Germany. Deutsche Börse AG is the operator of the Frankfurt Stock Exchange.
- 3.
The Korea Exchange. It is an integrated Korean stock exchange which has 3 divisions: Stock Market division, KOSDAQ Market division, and Derivatives Market division. The new integrated Korea Exchange was launched in January 2005.
- 4.
A global custodian provides its customers with custody services through worldwide network with the custodians located in the country in which the securities transactions and settlements occur. Examples are Deutsche Bank, Citibank, Bank of New York, HSBC, Standard Chartered Bank, and State Street Bank.
- 5.
A local custodian provides custody services for securities traded and settled in the country in which the custodian is located. From the international viewpoint, sometimes CSDs and global custodians can also function as local custodians.
- 6.
See BIS, Cross-border Securities Settlement (Basel: BIS, 1995) at 17~30 & 46~57 for more details of legal risks and legal issues involved in cross-border securities transactions. See also generally Roger McCormick, Legal Risk in the Financial Markets (New York: Oxford University Press, 2006) for legal risks involved in the financial markets.
- 7.
See e.g. Steven L. Schwarcz (with contribution by Joanna Benjamin), “Intermediary Risk in the Indirect Holding System for Securities” (2002) 12 Duke J. Comp. & Int’l L. 309 for general information on intermediary risk. Intermediary risk is also called custody risk (BIS, ibid. at 20, explaining that “the potential loss of the securities held in custody in the event that the intermediary becomes insolvent, acts negligently or commits fraud.” This report also points out that segregation is the key factor in the protection of investors’ securities). To put it briefly, intermediary risk means risk where investors can lose their securities in the case of insolvency of the intermediary with which the securities are held, if the legal system does not clearly separate the investors’ portions from the intermediary’s own assets. When the legal system fails to provide clear and sound legal protection, the intermediary’s general creditors can attach the investors’ securities. As explained in the BIS report, intermediary risk can also arise in the cases of negligent acts of frauds of the intermediary. However, the risk generally materialises when the intermediary becomes insolvent.
- 8.
Systemic risk is the risk of the inability of one institution to meet its obligations when due which will cause other institutions to be unable to meet their obligations when due. Systemic risk is substantiated and spread to other financial institutions in times of financial stress due to the web-like closely interrelated intermediaries in the intermediated system. As regards risks in securities clearing and settlement, see generally BIS, supra note 6 at 41~45.
- 9.
See generally UNIDROIT Study LXXVIII. Doc. 19 - Preliminary Draft Convention on Harmonised Substantive Rules regarding Securities Held with an Intermediary: Explanatory Notes (December 2004) at 7~10. This document was reproduced in Uniform Law Review: Philipp Peach (the UNIDROIT Secretariat), “Explanatory Notes to the Preliminary Draft Unidroit Convention on Harmonised Substantive Rules regarding Securities Held with an Intermediary” (2005) 10 Unif. L. Rev. 36.
- 10.
See generally HCCH (Christophe Bernasconi), Prel. Doc. No 1 of November 2000, Report on the Law Applicable to Dispositions of Securities Held Through Indirect Holding Systems (hereinafter, the “Bernasconi Report”) at 27~42. Conflict of laws issues focusing on the Hague Securities Convention are discussed in PART II.
- 11.
According to the current Korean regulation, an individual investor, who invests in foreign securities outside Korea, is required to hold her securities through her intermediary and KSD. However, in the given example here KSD is omitted for brevity.
- 12.
This fact pattern is a variation of the fact pattern in the Bernasconi Report, page 37. This fact pattern assumes that it is known where the share certificates are located and with which tiers of intermediaries the Korean investor holds them. But in reality, it is not easy to know where the investor’s securities certificates are located and how the securities are held in the multi-tiered web. This reality especially depicts the difficulty of the traditional lex situs rule application in the choice of law analysis. See James Steven Rogers, “Conflict of Laws for Transactions in Securities Held through Intermediaries” 39 Cornell Int'l L.J. 285 at 295~298 for an example showing how difficult it is to find the situs of securities in the international intermediated system.
- 13.
Korea, Germany, Belgium, England, New York, New Jersey, and Delaware.
- 14.
UNIDROIT Study LXXVIII. Doc. 19 at 7.
- 15.
Ibid.
- 16.
Ibid.
- 17.
See ibid. and the accompanying text at 8~9 for more specific examples.
- 18.
Ibid. at 10.
- 19.
Especially, as the primary PIL rule of the Hague Securities Convention adopts a limited but considerably mitigated party autonomy, it may be possible for an investor to choose a different law from the law of the place where she opens her securities account with her intermediary.
- 20.
UNIDROIT Study LXXVIII. Doc. 19 at 10. For instance, German Depotgesetz and the Korean intermediated system rules under CMFIBA are, in principle, applicable to securities certificates held with CBF and KSD respectively. Under the new Japanese dematerialised intermediated system, foreign shares listed on Japanese stock exchanges are not subject to the new legal framework which is applicable only to fully dematerialised securities.
- 21.
Ibid. See also Kanda Hideki, “Legal Rules on Indirectly Held Investment Securities: The Japanese Situation, Common Problems, and the UNIDROIT Approach” (2005) 10 Unif. L. Rev. 271 at 276.
- 22.
Countries, such as Germany, Korea and Japan, which grant investors direct rights with respect to securities, typically have two different regimes for intermediated securities, one for domestic and the other for international holdings, as explored in the following Chapters. By contrast, countries such as the U.S. where the legal nature of intermediated securities is analysed as segregated from the underlying securities, have a unitary legal regime for intermediated securities. Therefore, in the example here, it is natural that Depotgesetz is not applicable. The new Swiss intermediated system, however, provides a unitary legal regime, despite the fact that investors may still have a direct relationship with the issuers. This new Swiss regime does not, however, always grant investors a direct relationship with the issuers of foreign securities, and investors’ rights are subject to the law applicable to their intermediary’s account opened with the intermediary’s relevant intermediary. See Chapter 7. II. D for further information on the Swiss intermediated system for cross-border transactions.
- 23.
The personal application scope of the Financial Collateral Directive is somewhat restrictive; thus it may not apply to the assumption. See Chapter 2. III. B for further discussion of the Financial Collateral Directive.
- 24.
UNIDROIT, the International Institute for the Unification of Private Law (l'Institut international pour l'unification du droit privé) was established in 1926 as an auxiliary organ of the League of Nations, and re-established in 1940 after the dissolution of the League as an independent intergovernmental organization, with its seat in Rome, Italy, for the purpose of studying needs and methods for modernising, harmonising and co-ordinating private and commercial law among Member States. Currently, there are 63 Member States.
- 25.
UNIDROIT Study LXXVIII, Doc. 08 - Position Paper of the UNIDROIT Study Group on Harmonised Substantive Rules Regarding Indirectly Held Securities (August 2003). See also Philipp Peach, “Harmonising Substantive Rules for the Use of Securities Held with Intermediaries as Collateral: the Unidroit Project” (2002) 7 Unif. L. Rev. 1140.
- 26.
Before the first session of a committee of governmental experts which was held in May 2005, there were several study group meetings. The second session was in March 2006, the third in November 2006, and the fourth in May 2007. The first and second Diplomatic Conferences were held in September 2008 and October 2009, respectively. See UNIDROIT Study LXXVIII. Doc. 19 at 1~4; UNIDROIT 2008 CONF. 11 - Doc. 4 - Explanatory Report to the Draft Convention on Substantive Rules Regarding Intermediated Securities together with an Overview (February 2008) at 3~4 for the details of the project history.
- 27.
The Convention’s short title, the Geneva Securities Convention was made during the second session of the Diplomatic Conference. See UNIDROIT 2009 CONF. 11/2 - Doc. 36 rev. - Resolution No. XX Expressing the Gratitude of the Conference to the Swiss Government for Organising the Two Sessions of the Conference (October 2009).
- 28.
The official text of the Convention came to be finalised after 120 days of the date of adoption for verification of the consistency of the original English and French texts.
- 29.
The preamble uses the expression “to protect persons that acquire or otherwise hold intermediated securities.”
- 30.
UNIDROIT Study LXXVIII. Doc. 19 explains that the Convention aims to promote legal certainty and economic efficiency with respect to the cross-border holding and disposition of intermediated securities, by harmonising certain key legal aspects which all the intermediated systems should contain (see at 4).
- 31.
The 2001 Cape Town Convention on International Interest in Mobile Equipment is known to take a functional approach. The Hague Securities Convention also took a functional approach in order to escape any misconception of terminology. See UNIDROIT Study LXXVIII. Doc. 08 at 14.
- 32.
UNIDROIT Study LXXVIII. Doc. 19 at 19.
- 33.
See Ralf Michaels, “The Functional Method of Comparative Law” in Mathias Reimann & Reinhard Zimmermann eds., The Oxford Handbook of Comparative Law (New York: Oxford University Press, 2008) for various types of functionalism and its limits.
- 34.
UNIDROIT Study LXXVIII. Doc. 19 at 19; UNIDROIT 2008 CONF. 11 - Doc. 4, supra note 26 at para. 19. The position paper explains that “a function approach is the one which uses language which is as neutral as possible and formulates rules by reference to their results” (UNIDROIT Study LXXVIII, Doc. 08 at 14). See also Herbert Kronke, “Das Genfer UNIDROIT-Übereinkommen über materiellrechtliche Normen für intermediär-verwahrte Wertpapiere und die Reform des deutschen Depotrechts” (2010) 35 WM 1625 at 1626 (indicating that it is wrong to hold the opinion that neutrality over legal doctrines is against or for a specific intermediated system resting on property law, etc.); Charles Mooney, “The (UNIDROIT) Geneva Securities Convention on Intermediated Securities” (2009) 24(10) B.J.I.B. & F.L. 596 at 596~597 (explaining that “[t]his approach means that the Convention normally provides for the results that arise in transactions and settings within its scope, but it does not seek to harmonise among Contracting States more generally the underlying domestic legal doctrine that is the vehicle for producing those results.”). In a recent article, Mooney and Kanda point out the same effect that the functional approach of the Convention is neutral and “result-oriented” (see Charles W Mooney, Jr & Hideki Kanda, “Core Issues under UNIDROIT (Geneva) Convention on Intermediated Securities: Views from the United States and Japan” in Louise Gullifer & Jennifer Payne, ed., Intermediated Securities: Legal Problems and Practical Issues (Portland: Hart Publishing, 2010) at 74~76).
- 35.
UNIDROIT 2008 CONF. 11 - Doc. 4 at para. 20.
- 36.
See Sjef van Erp, “Comparative Property Law” in Mathias Reimann & Reinhard Zimmermann eds., The Oxford Handbook of Comparative Law (New York: Oxford University Press, 2008) at 1044 (showing that property law is a highly technical area of law and traditionally and historically nationalised (localised) in contrast to obligations law. van Erp also explains that property law is generally thought of as “a set of national, fairly rigid, and technical legal rules, either in statutory or case law format, which are largely of a mandatory character, thus limiting the parties’ freedom to shape their legal relations, at least as far as these relations may have an effect vis-à-vis third parties.”).
- 37.
See Ralf Michaels, supra note 32 at 376~378 for a further critical argument of the function to unify law (maintaining that the functionalism is a bad means for legal unification as well as a tool even providing strong arguments for persisting differences).
- 38.
Ibid. at 377.
- 39.
UNIDROIT Study LXXVIII. Doc. 86 - Comments by Governments and International Organisations (submitted by the Government of France) (May 2007).
- 40.
UNIDROIT 2008 CONF. 11 - Doc. 4 at para. 28.
- 41.
Non-convention law is the domestic law in force in the Contracting States other than the Convention law rules (Art. 1(m)). In the whole text of the Convention, the term non-convention is used 44 times besides the definition clause. The term uniform rules is employed 17 times besides the definition clause (Art. 1(p)).
- 42.
The text of Art. 2 is: “This Convention applies whenever: (a) the applicable conflict of laws rules designate the law in force in a Contracting State as the applicable law; or (b) the circumstances do not lead to the application of any law other than the law in force in a Contracting State.”
- 43.
See José Angelo Estrella Faria, “Sphere of Application of the UNIDROIT Convention on Substantive Rules for Intermediated Securities and Future Work by UNIDROIT on a Legislative Guide for Emerging Financial Markets” UNCITRAL - Third International Colloquium on Secured Transactions Presentation Paper, for more details as to the scope of the Convention. This papter is available at http://www.uncitral.org/pdf/english/colloquia/3rdSecTrans/Jose_Angelo_Estrella_Faria_Edited.pdf. See also Francisco J. Garcimartin Alférez, “The Geneva Convention on Intermediated Securities: a Conflict-of-Laws Approach” (2010) 15 Unif. L. Rev. 751 for the territorial scope of the Convention and the role of the conflict of laws rules of a forum state with respect to the Convention’s applicability.
- 44.
José Angelo Estrella Faria, ibid. at 1.
- 45.
The Zentraler Kreditausschuss and Bundesverband Investment und Asset Management once expressed a negative opinion on Article 2(2) due to its redundancy. (UNIDROIT Study LXXVIII. Doc. 95 - Report (August 2007), Appendix 8 at 1, stating that “letter (b) does not provide any new rule, but consistently leads to the same result as letter (a) in that in the absence of a choice in favour of any law other than that of the forum state and if the forum state is a Contracting State (i.e. the two criteria of letter (b), the law of the latter shall be applicable.” (here, letter (a) and (b) correspond to Arts. 2(1) and 2(2), respectively)). The same opinion is expressed by Mooney (Charles W. Mooney, Jr., “Law and Systems for Intermediated Securities and the Relationship of Private Property Law to Securities Clearance and Settlement: United States, Japan, and the UNIDROIT Draft Convention” (2008) IMES Discussion Paper Series 2008-E-7 at n. 201). In this regard, it appears that Art. 2(2) has a declaratory effect that the Convention applies even to domestic transactions of intermediated securities.
- 46.
UNIDROIT 2009 CONF. 11/2 - Doc. 5 - Draft Official Commentary on the Draft Convention on Substantive Rules Regarding Intermediated Securities (July 2009) (hereinafter, “Draft Official Commentary”) at para. 28-13 (stressing that “if a provision of the non-Convention law, account agreement, or uniform rule relating to the subject of a Convention obligation is so contradictory of the Convention obligation, or is so minimal that it amounts to no obligation in substance, then such a provision would not be one that addresses “the substance of any such [Convention] obligation” within the meaning of the second sentence of Article 28(1).”).
The Draft Official Commentary was prepared for the second Diplomatic Conference based on the draft Convention as of 10 October 2008 (“2008 Draft Convention”). The finalised official commentary, including the results of the second Diplomatic Conference, was scheduled to be released by the first quarter of 2011, but is not yet publicly available. Instead, on 12 August 2010, UNIDROIT privately circulated to Contracting States and participating observers a revised draft version of the Official Commentary for comments, which was prepared based upon the finally adopted Convention text (hereinafter, “2010 Official Commentary”). As the 2010 Official Commentary is not available to the public, the following discussion cites the Draft Official Commentary, unless otherwise necessary to introduce the 2010 Official Commentary.
- 47.
The Draft Official Commentary at paras. 2-5 & 2-7; Herbert Kronke, supra note 34 at 1627.
- 48.
Ibid. at para. 2-7. In the early preliminary draft Convention, there was a provision that stipulates the doctrine of renvoi (UNIDROIT Study LXXVIII. Doc. 18 - Preliminary Draft Convention on Harmonised Substantive Rules Regarding Securities Held with an Intermediary (November 2004), Art. 1(5), setting out that “[f]or the purposes of the application and interpretation of this Convention by the courts of a Contracting State, references to the applicable law are to the domestic rules of the law applicable by virtue of the rules of private international law of the forum State.”). Since the June 2005 draft Convention, adopted after the first session of the CGE, the renvoi provision has been deleted (UNIDROIT Study LXXVIII. Doc. 24 - Preliminary Draft Convention on Harmonised Substantive Rules Regarding Securities Held with an Intermediary (June 2005); “Applicable Law” - Report on the Meaning and the Objectives in the Preliminary Draft UNIDROIT Convention, Appendix 6 in UNIDROIT Study LXXVIII. Doc. 23 rev - Final Report (August 2005)). However, Deschamps explains that the Convention implicitly excludes the renvoi doctrine through the combined purport of Article 2 and the meaning of non-Convention law in Article 1(m), plus in particular, the phrase law in force in a Contracting State as the applicable law in Article 2 (Michel Deschamps, “The Geneva Securities Convention - Selected Issues Left to Law Outside the Convention” (2010) 15 Unif. L. Rev. 703 at 704).
- 49.
Arts. 43(1) & (3). Under the Convention, a declaration formally notified to the Depositary prior to the effective date of the Convention for the declaring state takes effect at the same time as the effective date of the Convention for the state (the first sentence of Art. 45(3)). A declaration formally notified to the Depositary after such effective date of the Convention for the declaring state takes effect on the first day of the month following the expiration of six months after the date of the notification receipt by the Depositary (the second sentence of Art. 45(3)).
- 50.
Art. 45(1) of the Convention.
- 51.
Art. 43(1) of the Convention. Under the Convention, modification of declaration takes effect on the first day of the month following the expiration of six months after the date of the notification receipt by the Depositary (Art. 45(4)(s.2)).
- 52.
Under the Convention, securities mean “any shares, bonds or other financial instruments or financial assets (other than cash) which are capable of being credited to a securities account and of being acquired and disposed of in accordance with the provisions of [the] Convention (Art. 1(a)).”
- 53.
The Draft Official Commentary at para. 1-4.
- 54.
The Financial Collateral Directive includes cash in the definition of securities. Though the Convention and the Draft Official Commentary do not make it clear what cash is, cash should refer to not only physical monies, but also bank deposits in a broad sense, as the Explanatory Report of the Hague Securities Convention (“HSC Explanatory Report”) mentions (Roy Goode, Hideki Kanda & Karl Kreuzer with the Assistance of Christophe Bernasconi (Permanent Bureau), Explanatory Report on Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary: Hague Securities Convention (Hague: Martinus Nijhoff, 2005) at para. 1-5).
- 55.
The Draft Official Commentary at para 1-3.
- 56.
The HSC Explanatory Report at para. 1-1.
- 57.
See Article 68(2) of the German Stock Corporations Act (Aktiengesetz vom 6. September 1965).
- 58.
The German government commented similarly during the second session of the Diplomatic Conference (UNIDROIT 2009 CONF. 11/2 - Doc. 11 - Comments (August 2009) at para. 15).
- 59.
Art. 1(j) of the Convention. See also the Draft Official Commentary at para 1-43.
- 60.
Ibid. at para 1-42.
- 61.
Article 1(c) of the Convention defines a securities account as “an account maintained by an intermediary to which securities can be credited or debited.” See also ibid.at para. 1-15.
- 62.
See Art. 1(1)(b) of the Hague Securities Convention.
- 63.
The Draft Official Commentary at para. 1-17.
- 64.
See ibid. at paras. 5-5~5-11 for more detailed analysis of this issue. Since only reconciliation of securities against the issuer is excluded from the scope of the Convention, any reconciliation functions between a CSD and its lower positioned intermediaries are of course not excluded from the Convention (UNIDROIT Study LXXVIII. Doc. 70 - Report of the Transparent Systems Working Group (April 2007) at 15).
- 65.
See the Draft Official Commentary at paras. 11-3 & 11-9. See also Article 12 in the 2007 Draft Convention (as in UNIDROIT Study LXXVIII. Doc. 94), providing that “[t]he non-Convention law determines the evidential requirements in respect of the matters referred to in Articles 9 and 10.” A short comment on this provision unveils the same purport (UNIDROIT 2008 CONF. 11 - Doc. 4 at para. 64). When taking the position that a credit or a debit is a factual activity to increase or decrease the balance record in a securities account, it can be an issue whether a credit exists, even though the securities account describes no record in fact, but in spite of this the applicable law gives the account holder the status of a credit. If a narrow approach is taken, there is no credit at all and the application of the Convention would stop at that moment. However, it is quite reasonable to take a broader definition of a credit, and to apply the non-Convention law so as to determine whether a credit is constituted and when the credit was made (Law Commission, The UNIDROIT Convention on Substantive Rules regarding Intermediated Securities: Further Updated Advice to HM Treasury (May 2008) at para. 4.52, taking the same position).
- 66.
An account holder is “a person in whose name an intermediary maintains a securities account, whether that person is acting for its own account or for others (including in the capacity of intermediary) (Art. 1(e)).” From the viewpoint of most civil law jurisdictions, where investors still hold a direct relationship with the issuer even in the intermediated system, account holders mean the holders of securities in principle. However, in the international intermediated system, the determination as to who are securities holders is made by applicable private international law rules.
- 67.
The Draft Official Commentary at para. 1-44.
- 68.
UCC Ss. 8-106(d)(2) & 9-314.
- 69.
In the U.S., a two-party control agreement is also legallly possible under UCC Article 8 (S. 8-106(d)(2); William D. Hawkland, James S. Rogers & Carl S. Bjerre, 7A Hawkland’s Uniform Commercial Code Series (Database updated in Oct. 2010) at S. 8-106:04). In accordance with the definition under Article 1(k) of the Convention, in addition to a tri-party control agreement, a control agreement between the account holder (i.e. the collateral provider) and her intermediary or between the account holder and the collateral taker (in this case, the relevant intermediary of the account holder must be notified of the agreement) is also recognised. However, unlike in the U.S. where it is interpreted that a control agreement between the collateral taker and the collateral provider’s intermediary without the collateral provider is possible, Article 1(k) of the Convention does not expressly specify this type of control agreement. This seems to be a policy decision with a view to protecting account holders from unauthorised disposition by the relevant intermeday. Therefore, it seems that under the Convention, a control agreement between the collateral taker and the collateral provider’s intermediary is not permitted, even if the collateral provider consents to that control agreement at a later time.
- 70.
Art. 12(5)(a). The method of a designating entry also requires such declaration. Article 12(5)(a) is one of the opt-in declarations under the Convention.
- 71.
Arts. 1(k) and 1(l). See also the Draft Official Commentary at paras. 12-22~12-31 for more information on both methods to encumber a security interest to intermediated securities. In the positive control, it appears that the collateral provider still has an ability to dispose of the subject-matter collateral (Law Commission, supra note 65 at para. 4.76).
- 72.
Art. 1(d) of the Convention.
- 73.
The Draft Official Commentary at para. 1-22.
- 74.
Art. 5 of the Convention. Under the Hague Securities Convention, the definition of an intermediary has no restriction of regulation at all. Because Article 5 of the Convention imposes two requirements of authorisation, etc. and the activity of maintaining securities accounts, an insurance broker, for instance, cannot be an intermediary under the Convention, even though it is subject to authorisation, regulation, supervision, or oversight by a government or public authority (UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. - Memorandum regarding Suggestions for Revision of the Text of the Draft Convention (July 2009) at 1).
- 75.
The Draft Official Commentary at paras. 4-4~4-5.
- 76.
See the comments from France (UNIDROIT 2009 CONF. 11/2 - Doc. 8 at 2~3), Spain (UNIDROIT 2009 CONF. 11/2 - Doc. 9 at para. 4(c)), the European Banking Federation (“EBF”) (UNIDROIT 2009 CONF. 11/2 - Doc. 14 at para. 13, pointing out the causes of the financial crisis in 2008 which was mainly initiated by the failure of proper regulation over financial entities in the U.S.), and Italy (UNIDROIT 2009 CONF. 11/2 - Doc. 16 at 1~3). In response to these comments, the U.S. expressed a negatively neutral opinion (UNIDROIT 2009 CONF. 11/2 - Doc. 23 at 3, mentioning that the current declaration mechanism which was reached by compromise at the first Diplomatic Conference directly and adequately deals with these concerns. However, the U.S. would accept the proposals for the regulated intermediary, if there is strong support for them).
- 77.
It reads “MINDFUL of the importance of the role of intermediaries in the application of this Convention and the need of Contracting States to regulate, supervise or oversee their activities.” Accordingly, it is expected that most Contracting States will make the declaration of Article 5.
- 78.
UNIDROIT 2009 CONF. 11/2 - Doc. 22 - Report of the Meeting of the Filtering Committee (September 2009) at 2.
- 79.
UNIDROIT 2009 CONF. 11/2 - Doc. 25 - Proposal on the Preamble, Article 10, 15, 24(1) and 28(1) and (2) (October 2009) at 1.
- 80.
The term intermediated securities was first adopted at the first session of the CGE in 2005. Before the first session, the term securities held with an intermediary’ which is the official terminology under the Hague Securities Convention, was employed. UNIDROIT Study LXXVIII. Doc. 23 rev. at para. 182; the Draft Official Commentary at para. 1-10. The current definition of intermediated securities in Article 1(b) was specified in the third session of the CGE (UNIDROIT Study LXXVIII. Doc. 57 - Preliminary Draft Convention on Substantive Rules regarding Intermediated Securities (November 2006)).
- 81.
See Subsections III. A. 2 and 3 in the General Introduction.
- 82.
Arts. 9(1)(a), (b), and (c) of the Convention.
- 83.
Art. 9(1)(d) of the Convention.
- 84.
Art. 9(2)(a) of the Convention. It is not clear as to the scope of the third party. If the issuer is included in the term third party, there might be a conflict between the applicable lex societatis, or lex contractus, the law under which securities were issued, and the Convention. Since Article 8(1) excludes the Convention’s scope from issues in relation to the issuer, it is thought that the issuer is not included in the third party in Article 9(2)(a). (see UNIDROIT 2009 CONF. 11/2 - Doc. 7 - Comments (August 2009) at 3~5 for further debates on this direction).
- 85.
Art. 9(1)(a)(i) of the Convention.
- 86.
Ibid.
- 87.
Art. 9(1)(a)(ii) of the Convention.
- 88.
Art. 9(1)(b) of the Convention. In the 2008 Draft Convention, there was the phrase “by the instructions to the relevant intermediary” between the words, the right and to effect…, but it was deleted in the second Diplomatic Conference in order to eliminate any unnecessary confusion regarding the meaning of instruction. Since in a strict sense, an agreement to grant an interest to the relevant intermediary and control agreement in favour of other persons under Article 12(1) and 12(3)(a) are not instructions to the relevant intermediary, by deleting that phrase the final text had a disposition and interest granting made simply according to the provisions of Articles 11 and 12. See UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. at 4 for the draft suggestion by the editors of the Draft Official Commentary.
- 89.
The relevant intermediary is “in relation to a securities account, the intermediary that maintains that securities account for the account holder” (Art. 1(g)). With regard to the so-called transparent system, it is not easy to determine who the relevant intermediary is. Article 7 addresses this issue.
- 90.
An account agreement is “in relation to a securities account, the agreement between the account holder and the relevant intermediary govern the securities account” (Art. 1(f)).
- 91.
Uniform rules refer to “in relation to a securities settlement system or securities clearing system, rules of that system (including system rules constituted by the non-Convention law) which are common to the participants or to a class of participants and are publicly accessible.”
- 92.
This is the so-called no-look-through principle.
- 93.
The Draft Official Commentary at para. 9-27.
- 94.
Art. 9(3) of the Convention.
- 95.
UNIDROIT 2009 CONF. 11/2 - Doc. 8 at 3~4 (the comment by France, explaining that the core duties would create minimum basic global standards, and these are an essential condition to guarantee the integrity of the cross-border intermediated system and the protection of investors’ rights); UNIDROIT 2009 CONF. 11/2 - Doc. 14 at 2~3 (the comment by the EBF); UNIDROIT 2009 CONF. 11/2 - Doc. 16 at 3 (the comment by Italy); UNIDROIT 2009 CONF. 11/2 - Doc. 25 at 2 (the proposal by the ECB). See also UNIDROIT 2009 CONF. 11/2 - Doc. 23 at 3~4 for the opposing comment of the U.S.
Meanwhile, from a fundamental viewpoint, the core duties provided in the Convention also aim at regulating conflicts of interest between investors and their relevant intermediary. For a deeper analysis of the issue of conflicts of interest involving financial intermediaries, see Christoph Kumpan & Patrick C. Leyens, “Conflicts of Interest of Financial Intermediaries - Towards a Global Common Core in Conflicts of Interest Regulation (2008) 1 ECFR 72.
- 96.
Art. 10(3). See the Draft Official Commentary at ex. 10-1 for the situation of Article 10(3).
- 97.
Law Commission, supra note 65 at para. 4.41.
- 98.
From the legal perspective, issuers can issue bearer shares in Korea but practically, only registered shares are issued in Korea. No bearer shares of listed companies are reported in Korea. In Japan, only registered shares are allowed.
- 99.
The Draft Official Commentary at para. 1-13. See also José Angelo Estrella Faria, supra note 43 at 4, which copies the statement of the Draft Official Commentary.
- 100.
The Draft Official Commentary at paras. 9-24~9-25.
- 101.
Section 8-102(9) of UCC defines a financial asset as follows:
“Financial asset,” except as otherwise provided in Section 8-103, means:
(i) a security;
(ii) an obligation of a person or a share, participation, or other interest in a person or in property or an enterprise of a person, which is, or is of a type, dealt in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment; or
(iii) any property that is held by a securities intermediary for another person in a securities account if the securities intermediary has expressly agreed with the other person that the property is to be treated as a financial asset under this Article.
As context requires, the term means either the interest itself or the means by which a person's claim to it is evidenced, including a certificated or uncertificated security, a security certificate, or a security entitlement.
- 102.
The Draft Official Commentary at para. 11-9.
- 103.
A similar principle was originally provided in Article 7 of the 2008 Draft Convention. During the second Diplomatic Conference, Article 7 was deleted and its substance was included in Articles 14 and 21, while its principle is emphasised in the preamble. See UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. 2 - Memorandum regarding Suggestions for Revision of the Text of the Draft Convention Rating to Insolvency Provisions (August 2009) at 2, suggesting deleting Article 7; UNIDROIT 2009 CONF. 11/2 - Doc. 30 - Outline of the Modifications Proposed by the Informal Working Group on Insolvency (October 2009) for the relevant proposals made by the Informal Working Group. See also Charles W Mooney, Jr & Hideki Kanda, supra note 34 at 119~127; Thomas Keijser & Miriam Parmentier, “Die Verabschiedung der Genfer Wertpapierkonvention (Bericht von der Diplomatischen Konferenz am 09.10.2009)” (2010) 4 WM 151 at 155 ~156; Thomas Keijser & Miriam Parmentier, “The Geneva Securities Convention: the Debates of the Diplomatic Conference” (2010) 25:4 B.J.I.B. & F.L. 230 at 231~232 for more detailed discussion on the drafting history and relevant documents (at n. 39 of the first Article written in German) with respect to the insolvency issues of the Convention.
- 104.
Article 14 concerns the horizontal situation of insolvency, while Article 21 deals with the vertical insolvency situation of the relevant intermediary. Thomas Keijser & Miriam Parmentier, ibid. at 155 in German & at 231 in English; UNIDROIT 2008 CONF. 11 - Doc. 31 - Report by the Informal Working Group on Insolvency (September 2008).
- 105.
Under the Convention, an insolvency proceeding means “a collective judicial or administrative proceeding, including an interim proceeding, in which the assets and affairs of the debtor are subject to control or supervision by a court or other competent authority for the purpose of reorganisation or liquidation” (Art. 1(h)). This definition is exactly the same as the definition of an insolvency proceeding under the Hague Securities Convention (Art. 1(1)(k)).
- 106.
Art. 14(1) of the Convention. The Draft Official Commentary makes it clear that this rule is applicable only as to the effectiveness of rights and interests itself (at para. 14-3).
- 107.
An insolvency administrator under the Convention means “a person (including a debtor in possession if applicable) authorised to administer an insolvency proceeding, including one authorised on an interim basis (Art. 1(i)).” This definition is also the same as that under the Hague Securities Convention in substance (cf. Art 1(1)(l) of the Hague Securities Convention).
- 108.
Art. 14(1) of the Convention.
- 109.
Art. 14(4) of the Convention.
- 110.
The Draft Official Commentary mentions that this provision was inspired by Article 30(3) of the Cape Town Convention (at para. 21-8). Articles 14(2)(a) and (b) are examples of substantive insolvency rules and Article 14(c) is that of a procedural insolvency rule. As to the scope of the applicable insolvency law rules, Article 14(2) adopts the phrase law applicable by virtue of an insolvency proceeding. Consequently, a rule which might be generally applicable outside of an insolvency proceeding is not the intended scope of Article 14(2) (Charles W Mooney, Jr & Hideki Kanda, supra note 34 at 122).
- 111.
UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. at 2 (this memorandum adds that Article 7 of the 2008 Draft Convention, which specified a principle regarding general precedence of insolvency law rules and was deleted in the adopted Convention, can be intended to indicate that priority or ranking among interests under Article 19 should be preserved in insolvency proceedings, if there is no additional or differing rule of insolvency law).
- 112.
The substantially corresponding provision to Article 14(4) was first inserted in Article 17(2) of the 2007 Draft Convention, stipulating that “[n]othing in this Convention impairs the effectiveness of an interest in intermediated securities against the insolvency administrator and creditors in any insolvency proceeding where that interest is effective under the non-Convention law” (UNIDROIT Study LXXVIII. Doc. 94 - Preliminary Draft Convention on Substantive Rules regarding Intermediated Securities (July 2006)). For reference, Article 21(3) also employs the term interest only.
- 113.
One possible reason could be that the Convention encourages dispositions of intermediated securities under the methods of the Convention.
- 114.
It seems to be a drafting mistake, but the comment made by the Commission of the European Community signifies that the wording is intentional (UNIDROIT 2008 CONF. 11 - Doc. 14 - Comments (July 2008) at 3).
- 115.
Ibid. at 2; Thomas Keijser & Miriam Parmentier, supra note 103 at 155 in German & at 231 in English (explaining that the main issue of Article 21 is investor protection); Charles W Mooney, Jr & Hideki Kanda, supra note 34 at 122.
- 116.
Art. 25(2), providing that “[s]ubject to Article 20, securities and intermediated securities allocated under paragraph 1 shall not form part of the property of the intermediary available for distribution among or realisation for the benefit of creditors of the intermediary.”
- 117.
See Art. 7 and the discussion below.
- 118.
Thomas Keijser & Miriam Parmentier, supra note 103 at 156 in German & at 232 in English.
- 119.
UNIDROIT 2009 CONF. 11/2 - Doc. 15 - Comments (August 2009) at 4.
- 120.
Thomas Keijser & Miriam Parmentier, supra note 103 at 156 in German & at 232 in English.
- 121.
Ibid. Alférez also indicates the same policy reason under Article 21(2) (Francisco J. Garcimartin Alférez, supra note 43 at 766).
- 122.
See Art. 21(2) of the 2008 Draft Convention.
- 123.
The 2010 Official Commentary at paras. 21-5 & 21-14; the comments submitted by the U.K. in UNIDROIT 2009 CONF. 11/2 - Doc. 10 at 6.
- 124.
The term finality is employed with several meanings. It is most often used in a settlement system to indicate that a transfer order is legally binding and cannot be revocable. The term is used in the case that a transfer of funds, securities, or other assets can be final. Finally, finality is also employed to demonstrate that settlement or netting is final (the Draft Official Commentary at para. 27-5). Finality adopted in the Settlement Finality Directive in EU refers to the first meaning.
Recommendation 8 in Recommendations 2000 of the ISSA in 2000, Recommendation 8 in Recommendation for Securities Settlement System of CPSS/IOSCO in 2001, and Recommendation 8 in the Group of Thirty’s second report in 2003 are related to settlement finality. The G30’s second report explains the importance of settlement finality as follows: “[i]t is critical that participants in securities markets have confidence that their assets will be properly protected in the settlement process and that they then have freedom to use those assets as they wish once the settlement process has been completed. To create confidence, the key attribute that the settlement process must have is absolute assurance that a participant will not be obliged to give up ownership of an asset (cash or security) without receiving the corresponding asset that the participant is due as part of the contractual obligations that the settlement process discharges. To achieve this objective for both parties, the exchange of assets must be simultaneous. In addition, both transfers must be final and in no way conditional or capable of being revoked. This final, simultaneous transfer of assets is described by the term delivery (of securities) versus payment (of cash) and is usually abbreviated to DvP. DvP was first properly recognized as an essential risk-mitigating principle in the mid-1970s, following the collapse of the Bank Herstatt” (Group of Thirty, Global Clearing and Settlement: A Plan of Action (Washington, D.C.: Group of Thirty, 2003) at 101).
- 125.
The Draft Official Commentary at para. 27-26.
- 126.
Ibid. at para. 27-25.
- 127.
The law governing the relevant system could differ from the lex fori (the law of the forum). See ibid. at para 27-10 and ex. 27-1 for the example of Euroclear UK & Ireland Limited).
- 128.
Ibid. at para 27-11.
- 129.
There are several master agreements with respect to collateral transactions. See Thomas Rudolf Maria Pius Keijser, Financial Collateral Arrangements: The European Collateral Directive Considered from a Property and Insolvency Law Perspective (Deventer: Kluwer, 2006) at 20~24 for the various master agreements and relevant sources.
- 130.
The zero-hour rule makes the effect of an insolvency opening automatically back to the beginning of the day when the insolvency declaration is made.
- 131.
As the purpose of Article 36, the Draft Official Commentary explains that “[t]he purpose of Article 36 is to protect top-up and substitution arrangements against the “timing claw back rule” in insolvency law that is found in some jurisdictions” (at para. 36-3).
- 132.
The Draft Official Commentary at para. 36-11.
- 133.
Ibid. at para 36-23.
- 134.
UNIDROIT 2008 CONF. 11 - Doc. 14 at 6; Ibid. at 36-27 (explaining that “Article 36(1) overrides pure timing claw back rules, but not more.”).
- 135.
The Draft Official Commentary at para. 37-5.
- 136.
Ibid. at para. 37-6.
- 137.
UNIDROIT 2008 CONF. 11 - Doc. 14 at 5. See also Subsection VII. Special Provisions for Collateral Transactions of this Chapter for more detailed discussion of insolvency issues associated with collateral transactions.
- 138.
The Draft Official Commentary at para. 30-1.
- 139.
Ibid. at para.1-49.
- 140.
Article 1(m) does not expressly exclude the conflict of laws rules of a Contracting State designated by the lex fori; but according to the Draft Official Commentary, it is interpreted that the renvoi is excluded by the context in which the term is used in the Convention (ibid. at para. 1-52).
- 141.
Ibid. at para. 1-51.
- 142.
Ibid. at para. 1-53.
- 143.
Art. 1(p) of the Convention.
- 144.
For instance, Uncertificated Securities Regulations 2001 in the U.K. See Law Commission, supra note 65 at para. 4.35.
- 145.
The Draft Official Commentary at para. 1-97.
- 146.
Ibid. at para. 1-98.
- 147.
Ibid. at para. 1-99.
- 148.
Art. 1(n) & (o) of the Convention.
- 149.
For further information on an SCS and SSS, see supra note 3 in the General Introduction; the Draft Official Commentary at paras. 1-66 (for clearing) & 1-68 (for settlement).
- 150.
The second-to-last recital of the preamble reiterates this point, stating that “RECOGNISING that this Convention does not limit or otherwise affect the powers of Contracting States to regulate, supervise or oversee the holding and disposition of intermediated securities or any other matters expressly covered by the Convention, except in so far as such regulation, supervision or oversight would contravene the provisions of this Convention.”
- 151.
EuropeanIssuers strongly criticised the fact that the notion of a shareholder becomes subordinate to that of an account holder, and for the benefit and convenience of the securities industry, all rights would be derived from being a securities account holder. They further maintain that “[i]t is then easy to understand that the draft Convention aims at laying all weight with account holders, read the securities industry, as most of the account providers in the chain are also account holders. This is an absolute assault on the core of corporate rights as well as on basic corporate governance principles.” See UNIDROIT 2009 CONF. 11/2 - Doc. 7 at 2.
- 152.
This is the generally accepted rule. See Adam Johnson, “The Law Applicable to Shares” in Hans van Houtte, ed., The Law of Cross-Border Securities Transactions (London: Sweet & Maxwell, 1999), Stefan Weber, “The Law Applicable to Bonds” in Hans van Houtte, ed., The Law of Cross-Border Securities Transactions (London: Sweet & Maxwell, 1999).
- 153.
The Draft Official Commentary at para. 9-12.
- 154.
The Draft Official Commentary states that “Article 8(1) is not intended to deny or otherwise limit the right resulting from the credit under Article 9(1)(a) (at para. 8-13).” This does not, however, seem to be conflicting, if accessing the statement from this understanding.
- 155.
An exchange or regulated market is understood in a broad notion, including OTC trading systems, multilateral trading facilities, alternative trading systems, and other electronic communication networks (ibid. at para. 29-13).
- 156.
The proviso of Article 29(1) of the Convention.
- 157.
The Draft Official Commentary at para. 29-17.
- 158.
Ibid. at para. 29-19.
- 159.
See ibid. at para. 29-21. See also UNIDROIT 2008 CONF. 11 - Doc. 14 at 4; UNIDROIT 2009 CONF. 11/2 - Doc. 7 at 6.
- 160.
See Chapter 5 for more details of the regulatory regime and background. This author is dubious as to why no Korean delegation brought up this issue during the several CEG sessions and the two Diplomatic Conferences. The first version of this provision was drafted in Article 17 (with respect to the nominee scheme, Art. 17(2)(c)) of the 2004 preliminary draft Convention (UNIDROIT Study LXXVIII. Doc. 18 - Preliminary Draft Convention on Harmonised Substantive Rules regarding Securities Held with an Intermediary (November 2004)).
- 161.
UNIDROIT 2008 CONF. 11 - Doc. 14 at 4.
- 162.
The Draft Official Commentary states that “[i]n any case, a Contracting State must recognise a mechanism by which such nominee holds intermediated securities in its own name and on behalf of the beneficiaries” and “[a] Contracting State must recognise nominee holding [and] split voting for its domestic securities if they are held by foreign investors in another State” (Italics added and or is replaced by and between nominee holding and split voting, see ibid. at 29-20 & 29-25).
- 163.
Note that only Article 8(1) is subject to Article 29(2).
- 164.
UNIDROIT 2009 CONF. 11/2 - Doc. 7 at 6.
- 165.
UNIDROIT 2009 CONF. 11/2 - Doc. 11 at 4. The 2010 Official Commentary includes the same effect of the German position (see at para. 8-8). For more details of interaction between Articles 8 and 29 of the Convention and German law (especially, AktG), see Herbert Kronke, “Das Gesellschaftsrecht im Genfer UNIDROIT-Abkommen über intermediär-verwahrte Effekten” (2010) 43 WM 2009 at 2011~2012.
- 166.
UNIDROIT 2009 CONF. 11/2 - Doc. 23 at 2.
- 167.
The Draft Official Commentary at para. 3-11.
- 168.
Ibid.
- 169.
Ibid. at para. 3-10.
- 170.
Recently, the UNIDROIT Secretariat has published a document including declaration forms, with a view to helping Contracting States understand practical issues and mechanisms of the Convention’s declarations in connection with ratification, acceptance, approval of, or accession to, the Convention. For fuller explanation of the Convention’s declarations, see UNIDROIT 2011 - DC11/DEP/Doc. 1 prov. - Accession Kit to the UNIDROIT Convention on Substantive Rules for Intermediated Securities (“Geneva Securities Convention”): Information for Contracting States in Respect of the Convention’s Declarations (draft prepared by the Secretariat) (April 2011).
- 171.
José Angelo Estrella Faria, supra note 43 at 9.
- 172.
See UNIDROIT Study LXXVIII. Doc. 23 rev. - Final Report (August 2005) at 13.
- 173.
Mainly see UNIDROIT Study LXXVIII. Doc. 44 - Working Paper Regarding So Called “Transparent Systems” (October 2006); UNIDROIT Study LXXVIII. Doc. 70 for more information on this issue.
- 174.
UNIDROIT Study LXXVIII. Doc. 44 at 1. An upper-tier attachment is to freeze or attach securities not in the investor’s account maintained by her relevant intermediary, but securities in another securities account in the holding hierarchy maintained by other intermediaries. See the Draft Official Comment at 99~104 for the rules on the prohibition of upper-tier attachment.
- 175.
Ibid. at 1~2.
- 176.
The examples of the shared function(s) are sending account statements, opening an account between the relevant intermediary and its account holder, receiving instructions, providing for IT services, distributing dividends or interests, or relay of information from the issuer, etc. (the Draft Official Commentary at para. 6-13). All functions of the relevant intermediary cannot be outsourced, however (ibid. at para. 6-15).
- 177.
UNIDROIT Study LXXVIII. Doc. 44 at 2.
- 178.
Ibid. at 3.
- 179.
See ibid. at 5~12; UNIDROIT Study LXXVIII. Doc. 70 at 3~6 for brief explanations of the major transparent systems. See also Ignacio Gómez-Sancha Trueba, “Indirect Holdings of Securities and Exercise of Shareholder Rights (a Spanish Perspective)” (2008) 3:1 Capital Markets Law Journal 32 for details of the Spanish and Chinese transparent systems; Ansheng Dong & Liyu Han, “How Law Reform Enhances Trading on the Chinese Capital Market” (2005) 10 Unif. L. Rev. 225 for the Chinese system.
- 180.
The Draft Official Commentary at para. 6-11.
- 181.
Ibid.
- 182.
Ibid. at para. 6-16.
- 183.
See Art. 7(2)(c) of the Convention.
- 184.
The Draft Official Commentary at para. 6-18.
- 185.
See Subsection II. B. 2. e in this Chapter for the interpretative problem related to a credit of securities.
- 186.
A further step is taken as an additional, subsequent formality, required to perfect a credit to a transferee’s securities account (the Draft Official Commentary at para. 11-11). “No further step” is not, however, specified for a debit due to the minimum harmonisation policy, and thus a further step for a debit may be required according to the non-Convention law (ibid. at para 11-16).
- 187.
A floating charge under English or Irish law is a good example of the additional or subsequent requirement or formality in accordance with insolvency law in order to make the floating charge effective against third parties. Under English and Irish law, public registration is an important requirement to make a floating charge effective against third parties but according to Article 11(2) of the Convention this kind of formality is no longer required for the perfection of an English or Irish floating charge. See UNIDROIT 2009 CONF. 11/2 - Doc. 10 at paras. 9~11.
- 188.
Under the German property law (Sachenrecht), rights in rem take effect against the world (the erga omnes effect) all the time. In other words, the German Sachenrecht make no distinction between legal effects against third parties and legal effects inter partes. The phrase under Article 11(2) “no further step is…to render…effective against third parties” can be disruptive from the viewpoint of the German property law. In this regard, the German government requested insertion of the following statement in the official commentary: “Article 11(2) shall have no effect in a legal system where rights in rem always take effect erga omnes.” See UNIDROIT 2009 CONF. 11/2 - Doc. 11 at para. 13. See also Herbert Kronke, supra note 34 at 1629; the 2010 Official Commentary at para. 11-18 concerning some accounts for this matter.
- 189.
The Draft Official Commentary at para. 11-9.
- 190.
Ibid. at para. 11-10.
- 191.
The meaning of further step differs somewhat between Articles 11(2) and 12(2). For more details, see the following Subsection III. A. 2. d.
- 192.
Originally this Article was intended to cover consensual security interests (the Draft Official Commentary at para. 12-13).
- 193.
Ibid.
- 194.
Ibid. at para. 12-14. Consensual interests should not be confused with consensual security interests, although they are conspicuous.
- 195.
The Draft Official Commentary at para. 12-17.
- 196.
Ibid. at para. 12-18.
- 197.
As discussed below, the methods of an automatic perfection and a control agreement under Article 12, however, are not subject to Article 16.
- 198.
The Draft Official Commentary at para. 11-21.
- 199.
Ibid.
- 200.
Ibid. at para. 19-8.
- 201.
See supra note 186.
- 202.
Under Section 53(1)(c) of the English Property Act 1925, a written instrument is required for a disposition of an equitable interest, but according to Article 11(2), this is no longer required as long as the transaction is involved in a credit of intermediated securities (Law Commission, supra note 65 at para. 4.53).
- 203.
UNIDROIT 2008 CONF. 11 - Doc. 4 at para. 64; the Draft Official Commentary at paras. 12-10 & 12-18. Before the first session of the Diplomatic Conference, Article 12 of the 2007 Draft Convention provided that in relation to the matters referred to in current Articles 11 and 12, the evidential requirements are determined by the non-Convention law, but that provision was deleted after the first Diplomatic Conference, because it was considered that the rule was confusing and so obvious that it is unnecessary in the end (the Draft Official Commentary at paras. 12-10 & 12-18).
- 204.
The Draft Official Commentary at para. 13-5.
- 205.
See Arts. 14(4) & 21(3). The Non-Convention Interest can be preserved in any insolvency proceedings, if the interest becomes effective under that non-Convention law.
- 206.
The Draft Official Commentary at para. 13-6.
- 207.
Ibid.
- 208.
Although Article 15(1) provides for only dispose of intermediated securities, it should be understood as including an interest in intermediated securities. Articles 15(1)(a) and 15(1)(d) clearly indicate the situations of the disposition of an interest in intermediated securities.
- 209.
The Convention does not define the meaning of authorisation, but it should be broadly understood in Article 15, without regard to the form or the wording. The Draft Official Commentary refers to as examples of authorisation any consent, instruction, direction, request or ratification (at para. 15-15).
- 210.
In the 2008 Draft Convention after the first Diplomatic Conference, Article 15(1)(a) provided that “in respect of a debit, by the account holder and, if applicable, the person in whose favour a designating entry has been made.” However, as pointed out in the Draft Official Commentary (at para. 15-18), since that text has no reference to a control agreement or automatic perfection, the finally adopted text changed Article 15(1)(a) to “in relation to a debit, by the account holder and, if applicable, to person to whom an interest in the relevant intermediated securities has been granted under Article 12” (italics added), and inserted current Article 15(1)(d) to include any unauthorised disposition of an interest, as well as an interest granted under Article 12, providing that “in relation to any other disposition, by the account holder and, if applicable, the person to whom an interest in the relevant intermediated securities has been granted under Article 12[.]”
- 211.
The term removal of a designating entry was first employed in the Convention during the first Diplomatic Conference, and is used only in Articles 15 and 16 (the Draft Official Commentary at para. 15-21).
- 212.
This was inserted during the second session of the Diplomatic Conference in 2009.
- 213.
In the first Diplomatic Conference, it was recognised that harmonisation of the consequences of unauthorised disposition was not possible (the Draft Official Commentary at para. 15-12).
- 214.
Ibid. at para. 15-14.
- 215.
Ibid. at para. 16-11.
- 216.
Ibid. at para. 16-10.
- 217.
More exactly speaking, the validity of the interests created by the two methods under Articles 12(3)(a) and 12(3)(c) is also addressed not by the Convention, but by the relevant agreement of an automatic perfection or a control agreement.
- 218.
The Draft Official Commentary at para. 16-13.
- 219.
Ibid. at para. 16-20.
- 220.
“Liable to be reversed” means an invalid transaction remains in effect until it is reversed by a counter-entry (ibid. at para. 16-15).
- 221.
Ibid. at para. 16-21.
- 222.
Ibid. at para. 16-17.
- 223.
The DvP settlement is a well-known method to eliminate principle risk, which is a risk that the counterparty (e.g. buyer) of a securities transaction does not fulfil her obligation but the other party (e.g. seller) performs her obligation to deliver the subject securities to the counterparty buyer without receiving the funds concerned, whereby the seller is exposed to the risk of losing her full principle securities. In the securities settlement system, principle risk can occur if there is a time lag in relation to securities delivery and funds payment. The DVP settlement system is a technical and legal scheme to get rid of this risk, and to ensure the delivery of securities or payment of funds, only if the delivery or payment is done through the synchronised linkage between a securities transfer system and a payment system. See BIS, Delivery versus Payment in Securities Settlement Systems (Basel: BIS, 1992) for more details of the various risks related to securities settlements, and the three types of DvP models.
- 224.
See Jürgen Than, “The Preliminary Draft Unidroit Convention and Capital Market Practice in Germany” (2005) 10 Unif. L. Rev. 271 at 268~269.
- 225.
The condition is the condition precedent (aufschiebende Bedingung), because the legally binding settlement is belated, and occurs only if the condition is fulfilled.
- 226.
Jürgen Than, supra note 224 at 269.
- 227.
Since the German intermediated system is based upon property law, strictly matching credits and debits are required. Thus, if a corresponding credit is invalid, the matching debit has also no legal effect. The buyer, however, could purchase the subject securities if she satisfies the requirements of innocent acquisition (gutgläubiger Erwerb) in spite of an invalid debit. The Korean intermediated system and the new fully dematerialised Japanese intermediated system also require strictly matching book-entries. The new Swiss intermediated system also requires matching book-entries.
- 228.
See the Draft Official Commentary at ex. 16-3, which illustrates the German practice in more detail.
- 229.
See Art. 24(4) and the accompanying Draft Official Commentary at para. 24-22.
- 230.
Under the Convention, an acquirer is “an account holder whose securities account securities are credited, or a person to whom an interest in intermediated securities is granted under Article 12” (Art. 17(a)).
- 231.
Thomas Keijser & Miriam Parmentier, supra note 103 at 232 in English & at 153 in German; UNIDROIT 2008 CONF. 11 - Doc. 8 at paras. 6~7.
- 232.
UNIDROIT Study LXXVIII. Doc.19 at 31; UNIDROIT 2008 CONF. 11 - Doc. 8 at para. 8.
- 233.
See Art. 18(4). In the respect that an innocent acquirer may still enjoy the innocent acquisition protection under Convention, even if she does not meet the requirements of innocent acquisition under the applicable non-Convention law, the Convention protection for an innocent acquirer is a safe harbour (the Draft Official Commentary at para. 18-15).
- 234.
Thomas Keijser & Miriam Parmentier, supra note 103 at 232 in English. See also UNIDROIT Study LXXVIII. Doc. 96 - Informal Working Group on Article 14 of the Draft Convention: Preliminary Note (November 2007); UNIDROIT 2008 CONF. 11 - Doc. 8 - Informal Working Group on Article 14 of the Draft Convention: Summary Report (March 2008) for a richer discussion and summary with respect to the standard of care for innocent acquisition which was considered and debated before the first session of the Diplomatic Conference. Briefly, a national law test, an autonomous Convention test, and a combination solution were debated; the adopted final test is the autonomous test, which functions as a safe harbour, while recognising any similar protection pursuant to the applicable law (the combination solution).
- 235.
Thomas Keijser & Miriam Parmentier, ibid. See UNIDROIT 2008 CONF. 11 - Doc. 8 at n. 12 for the governments supporting this position.
- 236.
See the Draft Official Commentary at paras. 17-3, 17-4 & 18-3 for the amendments on the innocent acquisition rule made during the first session of the Diplomatic Conference.
- 237.
More specifically, in order to correct the narrowness of Article 18(1)(c), the sentence “the credit, designating entry or interest granted violates the rights of that other person” was inserted, while deleting the previous one, coupled with some other technical and conforming revisions in Paragraphs 1 and 2. Second, in Article 18(6), “or Article 20(2)” was added to clarify the priority rule. See UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. at 5~6.
- 238.
See UNIDROIT Study LXXVIII. Doc. 94. Subparagraph (ii) was put in square brackets due to the absence of a consensus.
- 239.
UNIDROIT 2008 CONF. 11 - Doc. 3 - Draft Convention on Substantive Rules Regarding Intermediated Securities (February 2008). In this draft, the square brackets were uplifted.
- 240.
UCC Section 8-105(a)(2) specifies that “the person is aware of facts sufficient to indicate that there is a significant probability that the adverse claim exists and deliberately avoids information that would establish the existence of the adverse clai[m].”
- 241.
In Germany, Korea, Japan, and Switzerland, traditionally two elements are required to enjoy innocent acquisition protection in respect of securities: good faith and no gross negligence. Good faith means that the acquirer of securities had confidence in the seller’s ownership with respect to the securities through the seller’s possession, without knowing that her acquisition violated another person’s interest with respect to the securities at the moment of the acquisition. Absence of gross negligence refers to the fact that there is no gross negligence of the acquirer in that confidence.
- 242.
Charles W. Mooney, Jr., supra note 45 at 59.
- 243.
Ibid.
- 244.
It seems that this was mainly due to the strong opposition by France. Among others, see UNIDROIT Study LXXVIII. Doc. 95, Appendix 4; UNIDROIT Study LXXVIII. Doc.107 Rev. - Informal Working Group on Article 14 of the Draft Convention: Response to the Questionnaire Concerning Acquisition by an Innocent Person (January 2008). The Draft Official Commentary, however, properly states that the disagreement on the knowledge test was not with its actual substance or result, but with the matter of the appropriate Convention text (ibid. at 17-3).
- 245.
See Legal Certainty Group, Second Advice of the Legal Certainty Group: Solutions to Legal Barriers Related to Post Trading within the EU (2008) at 57~62 (especially, Recommendation 7.b states that “[a]n account holder should be protected against reversal of a credit unless it knew or ought to have known that the account should not have been credited.” (emphasis added))
- 246.
UNIDROIT 2008 CONF. 11 - Doc.16 - Comments (July 2008) at 4, Annex 1: Good Faith Acquisition.
- 247.
The Draft Official Commentary at para. 17-3.
- 248.
With respect to Article 17(b)(i), the Draft Official Commentary at paragraph 17-8 describes that “[s]ub-paragraph (b)(i) makes clear that the “ought to know” element is to be applied in light of the unique circumstances applicable to intermediated securities. Traditional notions of “good faith” or “innocence” are inappropriate in the sui generis context of intermediated securities systems. Courts should not seek guidance from the applicable law with respect to the good faith purchase of movables more generally.” As pointed out by the French government, this statement, however, seems too definitive for a court to consider the traditional concept of good faith (see UNIDROIT 2008 CONF. 11 - Doc. 8 at paras. 4.3.4~4.3.5 for the comment by the French government).
- 249.
Note that it is normal that information of a securities account is protected by the secrecy law, and is not disclosed to other persons than the account holder. The expected reliance, thus, can be found from the relevant intermediary’s activity of the acquirer (cf. UNIDROIT 2008 CONF. 11 - Doc. 8 at n. 1). In this respect, the Convention’s innocence test can be reasonable.
- 250.
See UNIDROIT 2008 CONF. 11 - Doc. 10 at paras 16~17 for the same point made by the U.K. government.
- 251.
The Draft Official Commentary at para. 17-14.
- 252.
Ibid. at para. 17-19
- 253.
Ibid. at para. 17-16.
- 254.
Ibid. at para. 17-17.
- 255.
UNIDROIT Study LXXVIII. Doc. 106 - Informal Working Group on Article 14 of the Draft Convention: Response to the Questionnaire Concerning Acquisition by an Innocent Person (January 2008) at 5; Law Commission, supra note 65 at para. 4.125.
- 256.
The Draft Official Commentary at para. 23-9.
- 257.
UNIDROIT 2008 CONF. 11 - Doc. 8 at para. 18.
- 258.
The Draft Official Commentary at para. 18-12.
- 259.
Ibid. at para. 18-13; Thomas Keijser & Miriam Parmentier, supra note 103 at 154 in German.
- 260.
The Hague Securities Convention is also silent on this issue.
- 261.
See Albert V. Dicey, J.H.C. Morris & Lawrence Collins, Dicey, Morris and Collins on the Conflict of Laws, 14th ed. (London: Sweet & Maxwell, 2006) at para. 7-003; James J. Fawcett & Janeen M. Carruthers (Peter North, Consultant Editor), Cheshire, North & Fawcett Private International Law, 14th ed. (New York: Oxford University Press, 2008) at 88~89. It is a universally admitted rule that procedure is governed by the lex fori (Albert V. Dicey, J.H.C. Morris & Lawrence Collins, ibid. at para. 7-002).
- 262.
Albert V. Dicey, J.H.C. Morris & Lawrence Collins, ibid. at para. 7-027.
- 263.
See UCC S. 8-110(e)(1).
- 264.
The official title is Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
- 265.
The official title is Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non- contractual obligations (Rome II).
- 266.
See Ulrich Spellenberg, “Art. 18 Rom I-VO” in Franz Jürgen Säcker & Roland Rixecker eds., Münchener Kommentar zum Bürgerlichen Gesetzbuch, vol. 10, 5th ed. (Müchen: C.H. Beck, 2010) for information on the rule for the burden of proof under Rome I Regulation.
- 267.
Relevant time means the time that a credit is made or the time specified in Article 19(3) (Art. 17(e)).
- 268.
See Art. 16 for invalidity, reversal, and condition which are determined by the non-Convention law.
- 269.
This is quite opposite to the traditional bona fide acquisition rule for movables. Under the traditional rule, in this case the transferor may cancel the contract based on the minority, and the transferee cannot acquire the subject movables (UNIDROIT 2008 CONF. 11 - Doc. 8 at para. 23).
- 270.
The Draft Official Commentary at para. 18-9; UNIDROIT 2008 CONF. 11 - Doc. 8 at para. 25.
- 271.
UNIDROIT 2008 CONF. 11 - Doc. 8, ibid.
- 272.
The Draft Official Commentary at para. 18-6.
- 273.
Ibid. at para. 18-7.
- 274.
Ibid. at para. 18-9.
- 275.
UNIDROIT 2008 CONF. 11 - Doc. 8 at para. 30.
- 276.
The Draft Official Commentary at para. 15-26; Herbert Kronke, supra note 34 at 1629.
- 277.
Providing high transferability can be thought of as a way of investor protection, since an investor may easily leave the securities market by selling her securities and collecting her funds, whenever she wants.
- 278.
The Draft Official Commentary at para. 18-11 (underlining that without this principle, “the rights and interests of the innocent acquirer in free transferability would be seriously damaged.”).
- 279.
From the viewpoint of the issuer’s side, the total number of securities in securities accounts may outnumber the original securities due to innocent acquisition; thus can be seen as inflation. On the other side of the coin, from the viewpoint of the CSD or the relevant intermediary, securities can be short of the total valid entitlements.
- 280.
UNIDROIT 2009 CONF. 11/2 - Doc. 10 at para. 21; Law Commission, supra note 65 at paras. 4.82 & 4.83.
- 281.
Note that the priority issue between the Article 11 interest and other interests created under Articles 12 and 13 is not within the scope of Article 19. It is eventually determined by the non-Convention law, coupled with the innocent acquisition rule under Article 18.
- 282.
UNIDROIT 2009 CONF. 11/2 - Doc. 10 at para. 21.
- 283.
The main reason for the super priority of Article 12 interests over Article 13 interests seems to be that the non-Convention interests perfected under Article 13 might be unknown to a possible second grantee. As the methods of a control agreement, and granting interests to the relevant intermediary under Article 12, are also non-public, the policy reason does not seem to be strongly persuasive. Rather, it seems that the drafters wanted to facilitate the Convention methods indirectly through Article 19(2). At any rate, from the viewpoint of a grantee, Article 19(2) positively operates, because she may need to investigate only whether there is a pre-established interest over the same securities according to Article 12, without considering any of the non-Convention methods.
- 284.
Since the Convention provides no priority rule for the competing interests created under the non-Convention law (the Article 13 interests), priority issues among the competing Article 13 interests are determined by the non-Convention law.
- 285.
See Chapter 6 for more details as to the new Japanese intermediated system.
- 286.
The Draft Official Commentary at para. 19-10.
- 287.
Ibid. at para. 19-13.
- 288.
It provides that “[a] security interest held by a securities intermediary in a security entitlement or a securities account maintained with the securities intermediary has priority over a conflicting security interest held by another secured party.”
- 289.
It provides that “[a] securities intermediary as purchaser has priority over a conflicting purchaser who has control unless otherwise agreed by the securities intermediary.” This is a consistent rule of Section 9-328(3), and applies where the priority rule under UCC Article 9 does not apply (Charles W. Mooney, Jr., supra note 45 at n. 312).
- 290.
The Draft Official Commentary at para. 19-16.
- 291.
As explained, it is possible to grant full interests under Article 12.
- 292.
See the Draft Official Commentary at para. 19-11 & ex. 19-2 for an exemplary case. But see Hans Kuhn, Hans Kuhn, “Art. 30 FISA” in Hans Kuhn, Barbara Graham-Siegenthaler & Luc Thévenoz, eds., The Federal Intermediated Securities Act (FISA) and the Hague Securities Convention (HSC) (Berne: Stäpfli, 2010) at 473, para. 17 (objecting to this interpretation in the Draft Official Commentary due to the reason that the Commentary’s interpretation is too formalistic, and, instead, favouring the principal, temporal priority rule).
- 293.
See ibid. at ex. 19-8 for a similar consideration.
- 294.
See Art. 34(1) of the Convention and the relevant discussion below in Section G. Special Provisions for Collateral Transactions.
- 295.
The Draft Official Commentary at paras. 20-1~20-2.
- 296.
Ibid. at para. 20-3.
- 297.
The Convention has no definition of an instruction; but it is broadly understood to include any order, directions or request to the relevant intermediary, irrespectively of its contents or forms (ibid. at para. 23-11).
- 298.
For this reason, the Draft Official Commentary mentions that the focus of Article 9 is on the positive aspect of the account holder’s rights, while that of Article 23 is on the negative aspect and therefore Article 23 is a corollary of Article 9 (ibid. at para. 23-1).
- 299.
Ibid. at para. 23-9, recognising an agent relationship in relation to instructions.
- 300.
The Draft Official Commentary relates that in this case the intermediary is immune from liability for such actions and this immunity is implicit in Article 23(1) (ibid. at para. 23-15). As to this statement, the U.K. government objects to the Draft Official Commentary’s affirmative statement, writing that no liability is given to an intermediary (see UNIDROIT 2009 CONF. 11/2 - Doc. 10 at para. 27 for more detailed explanation). For reference, the issue of the duty of whether an intermediary should observe a third person’s adverse claim or not is also one of the issues of the Hague Securities Convention (Art. 2(1)(e)).
- 301.
Ibid. at para. 23-12.
- 302.
See Art. 28(2); ibid. at para. 23-14. See also Art. 15(2) for the case of unauthorised dispositions.
- 303.
The matter in which a court has competency is determined by the lex fori. The Draft Official Commentary sets out that the determination of the competent court or authority should be governed by the jurisdiction rules of each State (ibid. at para. 23-23).
- 304.
Ibid. at para. 23-16.
- 305.
Upper-tier attachment is attachment of intermediated securities of an account holder made against, or so as to affect a) any other person’s securities account than that account holder’s securities account, b) the issuer of any securities which that account holder has in her securities account, or c) any person other than the relevant intermediary and the account holder (Art. 22(1)). Under Article 22, attachment of intermediated securities means any judicial, administrative or other act or process to freeze, restrict or impound intermediated securities the account holder has, for the purposes of civil enforcement (Art. 22(2)).
- 306.
See the Draft Official Commentary at para. 23-1 for the main purpose of Article 23.
- 307.
Ibid. at para. 23-27.
- 308.
Ibid. at para. 23-28.
- 309.
The Geneva Securities Convention does not employ the term duty except for Article 17(b)(ii). Instead, it uses the terminology of an obligation.
- 310.
Article 28(2) was originally integrated in Article 28(1) in the 2008 Draft Convention, which is the result of the first session of the Diplomatic Conference; the second part of the previous Article 28(1) became separated as Paragraph 2 during the second session of the Diplomatic Conference.
- 311.
UNIDROIT 2008 CONF. 11 - Doc. 4 at para. 115. For more information on Article 28(2) and its application from the perspective of U.S. law, see Charles W. Mooney, Jr., “Private Law and the Regulation of Securities Intermediaries: Perspectives under the Geneva Securities Convention and United States Law” (2010) 15 Unif. L. Rev. 801 at 809~813.
- 312.
Thomas Keijser & Miriam Parmentier, supra note 103 at 157 in German & at 231 in English.
- 313.
Ibid.
- 314.
Ibid. at 157~158 in German & at 231 in English. However, the 2010 Official Commentary does not include more explantation than the Draft Official Commentary.
- 315.
Ibid. at 158 in German & at 231 in English.
- 316.
Since the prior Article 28(1) was divided into two Paragraphs as mentioned above, Article 28(2) here is stated as Article 28(1) in the Draft Official Commentary at para. 28-13.
- 317.
See UNIDROIT Study LXXVIII. Doc. 57.
- 318.
See Charles W. Mooney, Jr., supra note 45 at 61~64 for a discussion of the previous provisions, and the defense of such provisions. More specifically, Paragraphs 2 through 4 of Article 20 set forth this issue as follows:
2. [An intermediary, including the] [The] operator of a securities settlement system, who makes a debit, credit, or designating entry (an “entry”) to a securities account maintained by the [intermediary] [operator] for an account holder is not liable to a third party who has an interest in intermediated securities and whose rights are violated by the entry unless –
(a) the [intermediary] [operator] makes the entry after the [intermediary] [operator] has been served with legal process restraining it from doing so, issued by a court of competent jurisdiction, and has had a reasonable opportunity to act on that legal process; or
(b) the [intermediary] [operator] acts wrongfully and in concert with another person to violate the rights of that third party.
3. Paragraph 2 does not affect any liability of the [intermediary] [operator] -
(a) to the account holder or a person to whom the account holder has granted an interest that has become effective against third parties under Article 8; or
(b) that arises from an entry which the [intermediary] [operator] is not entitled to make under Article 18.
4. The operator of a securities settlement system or securities clearing system to whose securities account securities are credited and who authorises a matching debit of those securities to its securities account is not liable to a third party who has an interest in intermediated securities and whose rights are violated by that credit or debit unless -
(a) the operator receives the credit or authorises the debit after the operator has been served with legal process restraining it from doing so, issued by a court of competent jurisdiction, and has had a reasonable opportunity to act on that legal process; or
(b) the operator acts wrongfully and in concert with another person to violate the rights of that third party.
- 319.
See UNIDROIT Study LXXVIII. Doc. 95 at 28~30 for detailed report of the discussion in the fourth session of the CGE.
- 320.
See UNIDROIT 2009 CONF. 11/2 - Doc. 8 (France) at 5; Doc. 16 (Italy) at 3; Doc. 19 (Austria); Doc. 25 at 3 (proposals submitted by the Member States of the European Community, and the European Community itself). In connection with the addition of the concept of gross negligence, the U.S. raised some concern that some jurisdictions might not be acquainted with the concept, and thus requested clear guidance on the concept in the coming Official Commentary (UNIDROIT 2009 CONF. 11/2 - Doc. 23 at para. 23).
- 321.
Articles 24, 25, and 26 employ the phrase securities and intermediated securities instead of securities or intermediated securities. It seems that the and here should be understood as or, given that an intermediary can comply with its obligation to hold sufficient securities by any of the methods provided in Article 24(2), and hence it may hold securities or intermediated securities as the case may apply. The current phrase securities and intermediated securities could literally mean securities plus intermediated securities. The relevant parts of the Draft Official Commentary, however, use securities or intermediated securities (for instance, at paras. 24-1, 9, 11, 12, 15, 20, 21, and 25-1, 11, 12, 16, 18).
- 322.
The phrase have available was inserted during the first session of the CGE so as to accommodate the intermediated systems of such jurisdictions as Germany, Korea, and Japan where an intermediary has no proprietary interest in the securities of its account holders at all, but merely has power to maintain them for the account holders of the securities (the Draft Official Commentary at para. 24-13).
- 323.
Securities of the same description are defined in Article 1(j); the issue of whether securities are of the same description is determined by the lex causae (the law which does apply) of the securities (ibid. at para. 24-12).
- 324.
Subparagraph (e) is to accommodate any proper method which may develop in the future (ibid. at para. 24-17).
- 325.
Ibid. at paras. 24-18~24-19.
- 326.
See UNIDROIT 2009 CONF. 11/2 - Doc. 8 (France) at para. 3.4; Doc. 14 (EBF) at para. 18; Doc. 16 (Italy) at para. 8; Doc. 19 (Austria) at para. 3; Doc. 25.
- 327.
As to this inclusion, some governments commented that since the Convention only addresses private law issues, and the extension of the sufficient holding obligation to an intermediary’s house account seems to have a regulatory aspect, the extension is inappropriate and unnecessary. They, however, made a reservation that they do not oppose it, because it causes no harm (UNIDROIT 2009 CONF. 11/2 - Doc. 9 (Spain) at para. 4; Doc. 23 (U.S.) at paras. 24~26).
- 328.
See the Draft Official Commentary at para. 24-15 for the previous interpretation regarding other than itself.
- 329.
Therefore, the basis for the sufficient holding obligation under Article 24 is securities credited to the account holders’ securities accounts maintained by the relevant intermediary, and the basis for the allocation rule under Article 25 is securities or intermediated securities held by the relevant intermediary as provided in Article 24(2).
- 330.
This subjection is to keep the priority of the intermediary’s creditor as determined in accordance with Article 20.
- 331.
The Draft Official Commentary at para. 25-14.
- 332.
Ibid. at paras. at 25-16 & 25-17.
- 333.
See ibid. at ex. 25-5 for the example of this case. The U.S. and Swiss intermediated systems adopt this allocation scheme. Therefore, these two countries are expected not to make the declaration of Article 25(5), while Germany, Korea, and Japan are highly likely to declare that relevant intermediary’s own segregated (intermediated) securities are not allocated to its account holders.
- 334.
Law Commission, supra note 65 at para. 4.171.
- 335.
The Convention is silent on the issue of whether creditors may attach an omnibus account. In other words, it seems that the Convention’s position on this matter is neutral. If, hence, the non-Convention law does not prohibit it, the creditor of an intermediary may attach an omnibus account, if the intermediary holds its own property with that omnibus account.
- 336.
UNIDROIT Study LXXVIII. Doc. 95 at para. 193; the Draft Official Commentary at para. 26-8.
- 337.
The Draft Official Commentary at para. 26-9.
- 338.
Ibid.
- 339.
Ibid. at para. V-1. For a comparative review of the Convention and the Financial Collateral Directive, see Antony Zacaroli, “Taking Security over Intermediated Securities: Chapter V of the UNIDROIT (Geneva) Convention on Intermediated Securities” in Louise Gullifer & Jennifer Payne, ed., Intermediated Securities: Legal Problems and Practical Issues (Portland: Hart Publishing, 2010) at 168~180.
- 340.
Unlike the Convention, in the Financial Collateral Directive, the term collateral arrangement is employed.
- 341.
See Art. 31(3)(e) for the definition of collateral securities. Under the Financial Collateral Directive, cash and credit claims are eligible collateral (preamble (18) & Art. 1(4)(a) of the Financial Collateral Directive).
- 342.
In relation to the definition of an account agreement, the Draft Official Commentary explains that formal requirements for an account agreement are not provided in the Convention and the agreement may be in writing or oral or in any other form. It further mentions that formal requirements are subject to the non-Convention law (the Draft Official Commentary at para. 1-36). It is thought that the same applies to a collateral agreement, because there is no specific requirement of writing under Chapter V, unlike Article 1(5) of the Financial Collateral Directive, which specifies that the Directive applies to collateral arrangements where that arrangement can be evidenced in writing or in a legally equivalent manner, such as electronic means.
- 343.
Unlike Subparagraphs (a) and (c) of Article 38(2), Article 38(2)(b) does not permit a Contracting State to make any further specification in its declaration. Only securities not traded on an exchange or regulated market can be excluded from the scope of Chapter V’s special provisions. This is different from the position of the Financial Collateral Directive (Art. 1(4)(b) of the Directive).
- 344.
Relevant obligations refer to “any existing, future or contingent obligations of a collateral provider or another person” (Art. 31(3)(d)).
- 345.
The Draft Official Commentary at para. 38-9.
- 346.
Ibid. at 38-8.
- 347.
The alphabets in brackets refer to Subparagraphs of Article 31(3). For more detailed explanation of the terms, see the Draft Official Commentary at 143~145.
- 348.
The Convention recongises bilateral close-out netting only. Multilateral or cross-affiliate netting is not covered by the Convention.
- 349.
See Thomas Rudolf Maria Pius Keijser, supra note 129 at 341~350 for more discussion as to the traditional security regime in comparison with the Financial Collateral Directive, which takes the same position with the Chapter V rules in its essence.
- 350.
German law is, however, quite liberal in creation and enforcement of a security interest by developing a fiduciary title transfer (Sicherungsübereignung). See generally Dietrich Reinicke & Klaus Tiedtke, Kreditsicherung, 5th ed. (Neuwied: Luchterhand, 2006); Julia Rakob, “Germany” in Harry C. Sigman & Eva-Maria Kieninger, Cross-Border Security over Tangibles (München: Sellier, 2007) at 63~100; Julia Klauer Rakob, “Germany” in Harry C. Sigman & Eva-Maria Kieninger, Cross-Border Security over Receivables (München: Sellier, 2009) at 91~122.
- 351.
The Draft Official Commentary at para. 33-13.
- 352.
Ibid. at para. 33-15. Accordingly, appropriation is not allowed, unless expressly agreed between the collateral taker and provider. The Financial Collateral Directive also provides the same rule (Art. 4(2)).
- 353.
Ibid. at para. 33-18.
- 354.
In the second session of the Diplomatic Conference, the phrase in respect of the collateral provider or the collateral taker at the end of Article 33(3)(b) was deleted for this reason.
- 355.
The Draft Official Commentary at para. 35-8.
- 356.
Cf. the Draft Official Commentary at para. 34-11.
- 357.
Thomas Rudolf Maria Pius Keijser, supra note 129 at 344.
- 358.
The Convention and the Financial Collateral Directive call it a right of use. More precisely, however, it should be called a right of disposal, as the right is mainly given and exercised for disposal of the collateral. Keijser also pinpoints this, and recommends naming it as a general right of disposal (ibid. at 363).
- 359.
See e.g. the Global Master Repurchase Agreement (Arts. 4 & 8) and the Global Master Securities Lending Agreement (Art. 5), which are available at http://www.icmagroup.org/legal1/global.aspx and http://www.isla.co.uk/dynamic.aspx?id=58, respectively.
- 360.
Simply put, mark-to-market is an evaluation mechanism of subject collateral securities based on market prices. The BIS Glossary defines it as “the practice of revaluing securities and financial instruments using current market prices. In some cases unsettled contracts to purchase or sell securities are marked to market, and the counterparty with an as yet unrealised loss on the contract is required to transfer funds or securities equal to the value of the loss to the other counterparty.”
- 361.
The Draft Official Commentary at para. 36-24.
- 362.
This is an opposite position to that the Financial Collateral Directive takes under Article 8(2) thereof which adopts an innocent test. It seems that the Convention intends to limit protection for the collateral taker by rejecting her subjective assertion.
- 363.
The Draft Official Commentary at para. 36-28.
- 364.
Article 37 was added in the first session of the Diplomatic Conference by the comments and proposal of the European Commission (UNIDROIT 2008 CONF. 11 - Doc. 14 at para. 8; Doc. 41).
- 365.
UNIDROIT Study LXXVIII. Doc. 95 at paras. 83~97.
- 366.
UNIDROIT Study LXXVIII. Doc. 84.
- 367.
UNIDROIT Study LXXVIII. Doc. 95 at para. 97.
- 368.
In the second session of the Diplomatic Conference, Article 39 was slightly changed as to definition of pre-existing interest under Article 39(3)(a). See UNIDROIT 2009 CONF. 11/2 - Doc. 6 Corr. at para. 8 for the reason of the change.
- 369.
UNIDROIT Study LXXVIII. Doc. 95 at paras. 87 & 91.
- 370.
UNIDROIT Study LXXVIII. Doc. 95 at paras. 87 & 92.
- 371.
The Draft Official Commentary states that the opt-in mechanism was inspired by Article 60 of the 2001 Cape Town Convention on International Interests in Mobile Equipment (ibid. at para. 39-9).
- 372.
UNIDROIT Study LXXVIII. Doc. 95 at para. 94.
- 373.
Ibid.
- 374.
Ibid. at para. 96.
- 375.
The Draft Official Commentary at para. 39-15.
- 376.
Ibid. at para. 39-14.
- 377.
See UNIDROIT Study LXXVIII. Doc. 19 at 1 for the project history.
- 378.
See UNIDROIT Study LXXVIII. Doc. 95 at para. 79 for the debate on the nature of the Convention.
- 379.
Charles Mooney, supra note 34 at 598 (concluding that “[t]he Convention represents the first internationally negotiated baseline set of private law rules for intermediated securities holding systems…Whether its principles are applied directly after coming into force or indirectly as an influential contributor to reforms in domestic legislation, the Convention will be a success by either measure.”). See also Thomas Keijser & Miriam Parmentier, supra note 103 at 232 in English (remarking that “[t]he Convention…can also function as a benchmark for the development of a sound legal framework for intermediated securities that is internationally compatible.”).
- 380.
For critiques, see Thiebald Cremers, “Reflexions on ‘intermediated securities’ in the Geneva Securities Convention” (2010) 2010/1 Euredia 93; Peter O. Mülbert, “Vom Ende allen sachenrechtlichen Denkens im österreichischen und deutschen Depotrecht durch UNIDROIT und die EU” in Peter Apathy et al., Festschrift für Helmut Koziol zum 70. Geburtstag (Wien: Jan Sramek, 2010) at 1064~1070; unknown (Wikipedia), “Unidroit Convention on Substantive Rules for Intermediated Securities” available at http://en.wikipedia.org/wiki/Unidroit_convention_on_substantive_rules_for_intermediated_securities (last visited on 9 May 2011); but for a counterargument to these critiques, see Luc Thévenoz, “Who Holds (Intermediated) Securities? Shareholders, Account Holders, and Nominees” (2010) 15 Unif. L. Rev. 845 at 850~859; Herbert Kronke, “Das Genfer UNIDROIT-Übereinkommen über materiellrechtliche Normen für intermediär-verwahrte Wertpapiere und die Reform des deutschen Depotrechts” (2010) 35 WM 1625 at 1629~1632.
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Chun, C. (2012). Chapter 1. The Geneva Securities Convention. In: Cross-border Transactions of Intermediated Securities. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-27853-2_2
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