Model examples for the UNIDROIT Legislative Guide on Intermediated Securities

 
As contemplated in the UNIDROIT Legislative Guide on Intermediated Securities, this webpage sets forth model examples of legislative or regulatory texts or related descriptions to be considered in conjunction with the relevant paragraphs of the Legislative Guide. The examples are ordered by the paragraph to which they relate (i.e. Example 99-2 below relates to paragraph 99 of the Legislative Guide).

 

It must be noted, however, that inclusion of an example does not indicate UNIDROIT’s agreement or approval of it.

 

 

III.A:    Rights of account holders

 

Example 99-2: Statutory provision of a European civil law State

2    If the custody of securities with a sub-custodian is not governed by this Act, the credit confers upon the account holder rights that are at least equal to the rights acquired by the custodian with the sub-custodian.

 

Notably, the system in example 99-2 uses the terms “custodian” to designate an intermediary, and “sub-custodian” to designate the intermediary at the next step in the holding chain, which maintains a securities account in the name of the “custodian.”

 

 

III.B:    Measures to enable the exercise of rights of account holders

 

Example 102-1: Statutory provision of European civil law State

 

The securities intermediary shall inform the client of his classification as a retail client, a professional client or as an eligible counterparty.

 

The securities intermediary shall inform the client of his right to request a change in the client classification and present an account of the effects of the changing of the classification on the position of the client. The information shall be given so that it is directed at the client personally either in writing or in another permanent manner so that the client may keep, store or copy it unchanged or so that the information is available from the Internet website of the securities intermediary for an appropriate period. The information may be given in another permanent manner than in writing only if the submission of information in that manner is appropriate in connection with the execution of a transaction between the securities intermediary and the client and the client has chosen this manner of informing.

 

A securities intermediary may treat a professional client referred to in chapter 1, section 4 (4) (1) - (5) as a retail client upon his request. A contract shall be concluded in writing on the treatment of a client as a retail client indicating its application to one or several services or transactions or to one or several securities or transactions of different types.

 

The securities intermediary shall inform its client referred to in chapter 1, section 4 (4) (2) prior to the provision of investment services that, on the basis of the information available, he shall be treated as a professional client unless otherwise agreed upon with the client.

 

A client who wishes to be treated as a professional customer referred to in chapter 1, section 4 (4) (6) in general or with regard to a certain investment service or transaction or type of a transaction or security shall request from the securities intermediary in writing that he be treated as a professional client. The securities intermediary shall inform the client in writing that, as a professional client, he does not benefit from the protection of all the conduct of business rules referred to in chapter 4 nor is covered by the investor-compensation fund scheme referred to in the Act on Investment Firms. The client shall inform the securities intermediary in writing that he is aware of loss of the protection of the conduct of business rules and compensation fund cover.

 

The securities intermediary shall have internal rules for the classification of clients and the procedure to be complied with therein.

 

 

Example 109-1: Excerpt of a Directive of a regional economic integration Organisation

 

2.    An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under the provisions of this Directive as well as appropriate rules governing personal transactions by such persons.

 

3.    An investment firm shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest as defined in Article 18 from adversely affecting the interests of its clients.

 

4.    An investment firm shall take reasonable steps to ensure continuity and regularity in the performance of investment services and activities. To this end the investment firm shall employ appropriate and proportionate systems, resources and procedures.

 

5.    An investment firm shall ensure, when relying on a third party for the performance of operational functions which are critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis, that it takes reasonable steps to avoid undue additional operational risk. Outsourcing of important operational functions may not be undertaken in such a way as to impair materially the quality of its internal control and the ability of the supervisor to monitor the firm's compliance with all obligations.

 

An investment firm shall have sound administrative and accounting procedures, internal control mechanisms, effective procedures for risk assessment, and effective control and safeguard arrangements for information processing systems.

 

6.    An investment firm shall arrange for records to be kept of all services and transactions undertaken by it which shall be sufficient to enable the competent authority to monitor compliance with the requirements under this Directive, and in particular to ascertain that the investment firm has complied with all obligations with respect to clients or potential clients.

 

7.    An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the investment firm's insolvency, and to prevent the use of a client's instruments on own account except with the client's express consent.

 

8.    An investment firm shall, when holding funds belonging to clients, make adequate arrangements to safeguard the clients' rights and, except in the case of credit institutions, prevent the use of client funds for its own account.

 

9.    In the case of branches of investment firms, the competent authority of the Member State in which the branch is located shall, without prejudice to the possibility of the competent authority of the home Member State of the investment firm to have direct access to those records, enforce the obligation laid down in paragraph 6 with regard to transactions undertaken by the branch.

 

 

Example 109-2: Excerpt of a regulatory provision of a regional economic integration Organisation

 

1.    For each securities settlement system it operates, a CSD shall keep records and accounts that shall enable it, at any time and without delay, to segregate in the accounts with the CSD, the securities of a participant from those of any other participant and, if applicable, from the CSD’s own assets.

 

2.    A CSD shall keep records and accounts that enable any participant to segregate the securities of the participant from those of the participant’s clients.

 

3.    A CSD shall keep records and accounts that enable any participant to hold in one securities account the securities that belong to different clients of that participant (‘omnibus client segregation’)

 

4.    A CSD shall keep records and accounts that enable a participant to segregate the securities of any of the participant’s clients, if and as required by the participant (‘individual client segregation’).

 

5.    A participant shall offer its clients at least the choice between omnibus client segregation and individual client segregation and inform them of the costs and risks associated with each option.

 

However, a CSD and its participants shall provide individual clients segregation for citizens and residents of, and legal persons established in, a Member State where required under the national law of the Member State under which the securities are constituted as it stands at 17 September 2014. That obligation shall apply as long as the national law is not amended or repealed and its objectives are still valid.

 

6.    CSDs and their participants shall publicly disclose the levels of protection and the costs associated with the different levels of segregation that they provide and shall offer those services on reasonable commercial terms. Details of the different levels of segregation shall include a description of the main legal implications of the respective levels of segregation offered, including information on the insolvency law applicable in the relevant jurisdictions.

 

7.    A CSD shall not use for any purpose securities that do not belong to it. A CSD may however use securities of a participant where it has obtained that participant’s prior express consent. The CSD shall require its participants to obtain any necessary prior consent from their clients.

 

 

Example 109-3: Statutory provisions of an Asian civil law State

 

141.     Upon accepting an entrustment of securities transaction, a securities company shall, on the basis of the description of the securities, trading volume, method of bidding, price band, etc. as indicated in the power of attorney, undertake securities trading as an agent according to the trading rules and make trading records in a faithful manner. After a transaction is concluded, a securities company shall, according to the relevant regulations, formulate a transaction report and deliver it to the relevant clients. The statements in a check sheet that confirms trading acts and results in securities trading shall be authentic. Such statements shall be subject to the examination of an examiner, other than the relevant transaction handler, on a transaction-by-transaction basis, so as to guarantee the consistency between the balance of securities in book account and the securities as actually held.

 

[…]

 

160.    A securities registration and clearing institution shall provide the roster of securities holders as well as the relevant materials to a securities issuer. A securities registration and clearing institution shall, according to the result of securities registration and settlement, affirm the fact that a securities holder holds the relevant securities and provide the relevant registration materials to a securities holder. A securities registration and clearing institution shall guarantee the authenticity, accuracy and integrity of the roster of securities holders as well as records of transfer registration and may not conceal, forge, alter or damage any of the aforesaid materials.

 

 

Example 109-4: Regulatory provision of a European civil law State

 

The custody account-keeper shall in all circumstances comply with the following obligations:

 

1°    It shall take every care to carry out all the security and cash movements in line with the instructions from its clients;

 

2°    It shall take every care in the conservation of the financial securities and, in this respect, ensure the strict account-recording of these latter and their movements in compliance with the procedures in force; it shall also take every care to facilitate the exercise of the rights attached to these financial securities, in compliance with the regulations applicable to the said securities;

 

3°    It shall ensure that the assets of its clients are distinguished from its own assets in the books of third parties with which, in application of 2° of Article 322-3, it keeps the corresponding assets;

 

4°    In accordance with the provisions of Article 313-17, it may neither make use of the financial securities recorded in the account or the rights attached thereto, nor transfer the ownership thereof without the express agreement of their owner. It shall organise its internal procedures in such a way as to guarantee that any movement related to the holding of financial securities on behalf of third parties for which it is responsible is justified by a validly registered operation in an account of the holder;

 

5°    Subject to the provisions of Article 322-35, it shall have the obligation to return the financial securities which are recorded in a securities account in its books. If the securities are not represented by any medium apart from the accounting entry, it shall transfer them to the custody account-keeper which the holder of the securities account shall designate. This return shall be carried out as quickly as possible, on condition that the said holder has fulfilled his/her own obligations.

 

 

Example 109-5: Statutory provision of a North American common law State

 

If the substance of a duty imposed on a securities intermediary . . . is the subject of another statute, regulation, or rule, compliance with that statute, regulation, or rule satisfies the duty.

 

 

Example 109-6: Description from a South American civil law State

 

The law regulates the activity of the CSD, granting to the Central Bank and Securities and Exchange Commission the powers to set the regulations regarding the activities of the CSD and of custodians, which includes the duties of passing on information and distributions received to account holders and promoting the conciliation among issuers and intermediaries in the intermediated holding chain. Using their powers, the Central Bank and the Securities and Exchange Commission have both enacted regulations dealing with the role and the services rendered by the CSD.

 

 

Example 118-1: Statutory provision of a North American common law State

 

(1) A securities intermediary shall exercise rights with respect to a financial asset if directed to do so by an entitlement holder.

 

(2) A securities intermediary satisfies the duty imposed under subsection (1) if,

 

(a) the securities intermediary acts with respect to the duty as agreed to by the entitlement holder and the securities intermediary; or

 

(b) in the absence of an agreement referred to in clause (a), the securities intermediary either,

 

(i) places the entitlement holder in a position to exercise the rights directly, or

 

(ii) exercises due care in accordance with reasonable commercial standards to follow the direction of the entitlement holder.

 

 

III.C:    Liability of intermediaries

 

Example 120-1: Statutory provision of an Asian civil law State

 

Where a securities company purchases or sells any securities or handles any trading matter in violation of the entrustment of its clients or handles any other non-trading matter in violation of the true intention as expressed by its clients, it shall be ordered to correct and imposed a fine of … Where any loss has been incurred to its client, it shall be subject to the liabilities of compensation according to law.

 

 

Example 120-2: Statutory provision of an Asian common law State 

 

(1) In addition to the requirements imposed on licensed persons under this Act, the Commission may impose–

 

(a)  in the case of licensed persons generally, or any class of licensed persons; or

 

(b)  in the case of any particular licensed person, by written direction given to the person,

 

any further requirements that the Commission considers appropriate with respect to the conduct or the financial affairs of such licensed persons.

 

(2) A licensed person shall comply with any requirement imposed under subsection (1).

 

(3) A person who contravenes this section commits an offence and shall, on conviction, be liable to a fine not exceeding one million ringgit or to imprisonment for a term not exceeding five years or to both.

 

 

Example 120-3: Regulatory provision of a South American civil law State

 

The debenture holders’ trustee is liable to the debenture holders for any losses caused to them when performing his/her/its duties.

 

 

Example 121-1: Excerpt of a Directive of a regional economic integration Organisation

 

12.    The depositary shall be liable to the [alternative investment fund (AIF)] or to the investors of the AIF, for the loss by the depositary or a third party to whom the custody of financial instruments held in custody in accordance with point (a) of paragraph 8 has been delegated.

 

In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the AIF or the [manager of the alternative investment fund (AIFM)] acting on behalf of the AIF without undue delay. The depositary shall not be liable if it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.

 

The depositary shall also be liable to the AIF, or to the investors of the AIF, for all other losses suffered by them as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations pursuant to this Directive.

 

13.    The depositary’s liability shall not be affected by any delegation referred to in paragraph 11.

 

Notwithstanding the first subparagraph of this paragraph, in case of a loss of financial instruments held in custody by a third party pursuant to paragraph 11, the depositary may discharge itself of liability if it can prove that:

 

(a)    all requirements for the delegation of its custody tasks set out in the second subparagraph of paragraph 11 are met;

 

(b)    a written contract between the depositary and the third party expressly transfers the liability of the depositary to that third party and makes it possible for the AIF or the AIFM acting on behalf of the AIF to make a claim against the third party in respect of the loss of financial instruments or for the depositary to make such a claim on their behalf; and

 

(c)    a written contract between the depositary and the AIF or the AIFM acting on behalf of the AIF, expressly allows a discharge of the depositary’s liability and establishes the objective reason to contract such a discharge.

 

 

Example 121-2: Statutory provision of a European civil law State

 

2    A custodian who is authorised to hold intermediated securities with a sub-custodian shall be liable for due care in the selection and instruction of the sub-custodian and for verifying its continued compliance with the selection criteria.

 

3    A custodian may waive its liability under paragraph 2 if the account holder has expressly designated the sub-custodian contrary to the custodian’s advice.

 

4     A custodian shall be liable, as if they were its own, for the acts of a sub-custodian which:

 

a)    independently and over a long period of time administers and settles all securities transactions on behalf of the custodian; or

 

b)    is part of the same economic entity as the custodian.

 

 

Example 121-3: Statutory provision of a European civil law State

 

In case of the loss of financial instruments in custody, unless the custodian can prove that the default was caused by accident or by force majeure, it shall be held to return, without undue delay, financial instruments of the same kind or a sum of the corresponding amount, and shall be held liable for any other loss sustained by the UCI or the investors consequent to failure to respect its obligations, whether intentional or due to negligence.

 

 

Example 122-1: Regulatory provision of a European civil law State

 

When it makes use of a third party, in application of Article 322-33, and apart from cases where it retains the assets corresponding to the securities of its clients in one or more accounts opened with a central depository or issuer, the custody account-keeper shall apply the provisions of Articles 313-14 to 313-16 and 313-72 to 313-75.

 

The responsibility of the custody account-keeper to the holder of the securities account shall not be affected by the fact that it makes use of a third party mentioned in Article 322-33.

 

However, where a custody account-keeper retains, on behalf of a professional client, financial securities issued on the basis of a foreign right, it may agree on a clause which exempts it totally or partially from its liability to this professional client.

 

 

 

IV.A:    Acquisition and disposition of intermediated securities

 

 

Example 128-1: Statutory provision of a South American civil law State

 

a) The creation, issue, transfer or establishment of security interests, liens, injunctions and any other restraining of the rights conferred by the security shall be made through entries in special registers to be carried out by the issuer itself, or acting on its behalf, by authorized collective depositories or commercial banks or investment banks or designated registrars, and shall have legal effect and be effective against third parties from the date of such registration.

 

 

Example 131-1: Statutory provision of a European civil law State

 

Ownership transfer of financial instrument … results from their registration to the credit of the security account[.] Contrary to the previous paragraphs, when the securities settlement system assures the irrevocable settlement of the securities … this transfer occurs only when the buyer settled the price of the transaction. As long as the buyer did not settle the price, the intermediary who received the financial instruments is the owner.

 

 

Example 131-2: Statutory provision of a North American common law State

 

Except as otherwise provided in subsections (3) and (4), a person acquires a security entitlement if a securities intermediary,

 

(a) indicates by book entry that a financial asset has been credited to the person’s securities account;

 

(b) receives a financial asset from the person or acquires a financial asset for the person and, in either case, accepts it for credit to the person’s securities account; or

 

(c) becomes obligated under another statute, law, regulation or rule to credit a financial asset to the person’s securities account.

 

(2) If a condition of subsection (1) has been met, a person has a security entitlement even if the securities intermediary does not itself hold the financial asset.

 

 

Example 131-3: Statutory provision of an African mixed system State

 

(1) (a) The transfer of uncertificated securities or of an interest in uncertificated securities on the uncertificated securities register held by a central securities depository or participant must be effected in the manner provided for …, where applicable, and the depository rules, by making the debit and credit entries respectively in the central securities account or securities account of the transferor and the transferee kept by the central securities depository or the participant, as the case may be.

 

 

Example 132-1: Regulatory provision of a European civil law State

 

The custodian shall describe its accounting organisation in an appropriate document.

 

It shall maintain its securities account records in accordance with the rules of double entry accounting.

 

The nomenclature of the accounts and their rules for operation shall be fixed by an instruction from the [Financial Markets Regulator]. The purpose of this nomenclature is in particular, for the purposes of audit, to classify the financial securities in collective investment schemes in separate categories from those of the other clients and those belonging to the custody account-keeper.

 

[…]

 

The custodian shall implement continuous audit procedures relating to the accuracy of the processing procedures.

 

For each financial security, it shall verify on a daily basis:

 

1°    The balance between the total of credit entries on the accounts and the total of debit entries thereon;

 

2°     The balance between the accounts with credit balances and the accounts with debit balances.

 

It shall also organise the system of accounting for the financial securities, in such a way that it allows, by the implementation of appropriate procedures, for the audit of the data.

 

 

Example 133-1: Statutory provisions of a European civil law State

 

1     A debit to a securities account must be reversed if . . . (c) the credit of intermediated securities to the acquirer's securities account . . . is not executed within the customary settlement period.

 

[…]

 

1     A custodian may reverse a credit of intermediated securities to a securities account if: (a) the corresponding debit was reversed . . .

 

 

Example 148-1: Description

 

In some markets, both title transfer and non-title transfer collateral transactions are effected by [the Geneva Securities Convention’s] Article 12 methods. Some central banks and other intermediaries take intermediated securities in repurchase operations, known as repo transactions, without debiting the relevant securities from the transferors’ securities account.

 

 

Example 155-1: Statutory provision of a European civil law State

 

The right to a bear documentary security shall pass to the acquirer in the following cases:

 

if its certificate is found out at the owner - at the time of the transfer of this certificate to the acquirer;

 

if the certificates of bearer documentary securities are kept in the depository and/or the rights to such securities are accounted in the depository - at the time of making a book record in the special custody account of the acquirer. The right to a registered non-documentary security shall pass to the acquirer:

 

in the case of recording the rights to securities with a person conducting a depository activity - from the moment of making a credit entry in the depo account of the acquirer;

 

in the case of recording the rights to securities in the system of keeping a register - from the moment of making a credit entry in the personal account of the acquirer.

 

 

Example 159-1: Statutory provision of a European civil law State

 

1     A custodian shall be entitled to retain and foreclose on intermediated securities credited to a securities account, provided a debt owed by the account holder is due and arises from the custody of the intermediated securities or the financing of their acquisition.

 

 

Example 159-2: Statutory provision of a European civil law State

 

When an intermediary . . . shall deliver securities or settle a price in substitution for his defaulting client, he shall have full ownership of the financial securities or the money received in exchange. The [insolvency rules] shall not prevent the application of this article. No creditor of the defaulting client may have any claim whatsoever to these securities or this cash.

 

 

 

IV.B:    Unauthorised dispositions and invalidity, reversal and conditions

 

Example 165-1: Description

 

An interest may arise by an attachment order. Geneva Securities Convention, Article 12(8). The debtor’s intermediary executes the attachment order by a designating entry in the debtor’s securities account without the account holder’s authorisation.

 

 

Example 165-2: Regulatory provision of a North American common law State

 

A client’s capital shall remain his exclusive property and a representative shall only use it for trades authorized by the client.

 

 

Example 166-1: Statutory provision of an African common law State

 

(1) A broker or dealer shall not, except as permitted by subsection (3), enter into, as principal or on behalf of a person associated with him, a transaction of purchase or sale of securities that are permitted to be traded on the stock market of a stock exchange if a client of the broker or dealer, who is not associated with the broker or dealer, has instructed the broker or dealer to purchase or sell, respectively, securities of the same class and the broker or dealer has not complied with the instruction.

 

(2) A broker or dealer who contravenes this section commits an offence and is liable on conviction to a fine not exceeding two million shillings or imprisonment not exceeding one year or both.

 

(3) Subsection (1) does not apply in relation to the entering into a transaction by a broker or dealer as principal or on behalf of a person associated with him where-

 

(a) the instructions from the client of the broker or dealer required the purchase or sale of securities on behalf of the client to be effected only on specified conditions at which the securities were to be purchased or sold and the broker or dealer has been unable to purchase or sell the securities by reason of those conditions; or

 

(b) the transaction is entered into in prescribed circumstances.

 

 

Example 168-1: Statutory provision of a North American common law State

 

(1) A securities intermediary shall comply with an entitlement order if,

 

(a) the entitlement order is originated by the appropriate person;

 

(b) the securities intermediary has had a reasonable opportunity to assure itself that the entitlement order is genuine and authorized; and

 

(c) the securities intermediary has had a reasonable opportunity to comply with the entitlement order.

 

(2) If a securities intermediary transfers a financial asset under an ineffective entitlement order, the securities intermediary shall,

 

(a) re-establish a security entitlement in favour of the person entitled to it; and

 

(b) pay or credit any payments or distributions that the person did not receive as a result of the wrongful transfer.

 

(3) If a securities intermediary does not re-establish a security entitlement in accordance with subsection (2), the securities intermediary is liable to the entitlement holder for damages.

 

(4) A securities intermediary satisfies the duty imposed under subsection (1) if,

 

(a) the securities intermediary acts with respect to the duty as agreed to by the entitlement holder and the securities intermediary; or

 

(b) in the absence of an agreement referred to in clause (a), the securities intermediary exercises due care in accordance with reasonable commercial standards to comply with the entitlement order.

 

 

Example 169-1: Description for conditional/invalid entries

 

Depending on the non-Convention law, credit-entries may be conditional in case of registered shares with restricted transferability before the consent of the issuer. The credit-entries may be invalid if the consent is denied.

 

 

Example 169-2: Description for conditional entries

 

In some States, the practice is that provisional book-entries are made before the end of the settlement period. See Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, paragraph 16-22.

 

 

Example 169-3: Description for entries that are liable to be reversed

 

In the co-ownership system of a European civil law State, the law provides that debit and credit book-entries are effective but are liable to be reversed if the underlying contract is void.

 

 

Example 169-4: Excerpt of a Directive of a regional economic integration Organisation

 

(13)     Whereas nothing in this Directive should prevent a participant or a third party from exercising any right or claim resulting from the underlying transaction which they may have in law to recovery or restitution in respect of a transfer order which has entered a system, e.g. in case of fraud or technical error, as long as this leads neither to the unwinding of netting nor to the revocation of the transfer order in the system.

 

 

 

IV.C:    Protection of an innocent acquirer

 

 

Example 172-1: Statutory provision of a European civil law State

 

Any person for whom registration is performed on his or her behalf, based on entitlement and in good faith, shall not be liable for claims or action taken by previous owners.

 

 

Example 172-2: Statutory provision of an African mixed system State

 

An entry effected in terms of section 38 or 39 is valid and effective against third parties despite any fraud or illegality that may have resulted in the entry being effected, unless a transferee to the transaction resulting in the entry was a party to or had knowledge of the fraud or illegality.

 

 

Example 172-3: Statutory provision of a North American common law State

 

A legal proceeding based on the entitlement holder’s property interest with respect to a particular financial asset under subsection (1), however framed, may not be brought against any purchaser of a financial asset, or interest in it, who,

 

(a) gives value;

 

(b) obtains control or possession; and

 

(c) does not act in collusion with the securities intermediary in violating the securities intermediary’s obligations under section 98.

 

 

Example 172-4: Statutory provision of a South American civil law State

 

The third party purchaser for value consideration of securities entered in an account or in book-entry form, that according to the entries of the relevant record, is entitled to transfer them is not subject to claim except that had acted in bad faith or willful misconduct at the time of the purchase.

 

 

Example 174-1: Description

 

A debit of securities to a securities account may be unauthorised by an account holder and therefore void. The intermediated securities are transferred to the account of transferee 1 who is not an innocent acquirer. As the non-Convention law of the respective Contracting State regards the credit as void, the credit is defective. The original account holder who is affected by the unauthorised debit entry therefore still has an interest in the securities which may, however, be violated by the later innocent acquisition of transferee 2. In this case, transferee 2 may be protected under paragraph 1 and paragraph 2 of Article 18 of the Geneva Securities Convention.

 

 

Example 178-1: Statutory provision of a European civil law State

 

No one may act for recovery of any security, for any reason, whose title has been acquired in good faith by the holder of the account where such security is credited.

 

 

Example 178-2: Statutory provision of a European civil law State

 

A person who acquires intermediated securities … for value and in good faith shall be protected in respect of the acquisition even where: (a) the transferor had no power or authority to transfer the intermediated securities or (b) the credit of intermediated securities to the transferor’s securities account was reversed.

 

An acquirer who is not so protected is under a duty to make restitution of intermediated securities in the same quantity and of the same kind …

 

Where the acquirer who is bound to make restitution of the securities becomes subject to proceeding for compulsory liquidation, the beneficiary may require intermediated securities in the same quantity and of the same kind to be excluded from the acquirer’s estate to the extent that it contains such intermediated securities.

 

 

 

IV.D:    Priorities

 

 

Example 185-1: Statutory provision of an African mixed system State

 

Despite any other law, if more than one interest or limited interest is entered against the same securities, priority must be granted to the interest or limited interest entered first in time in the securities account or central securities account, as the case may be.

 

 

Example 198-1: Statutory provision of a North American common law State

 

Except as otherwise provided in subsections (2) and (3), if a securities intermediary does not have sufficient interests in a particular financial asset to satisfy both the securities intermediary’s obligations to entitlement holders who have security entitlements to that financial asset and the securities intermediary’s obligation to a creditor of the securities intermediary who has a security interest in that financial asset, the claims of entitlement holders, other than the creditor, have priority over the claim of the creditor.

 

A claim of a creditor of a securities intermediary who has a security interest in a financial asset held by a securities intermediary has priority over claims of the securities intermediary’s entitlement holders who have security entitlements with respect to that financial asset if the creditor has control over the financial asset.

 

 

 

V.A:    Prohibition of upper-tier attachment

 

 

Example 202-1: Description

 

An account holder has a securities account with intermediary 1. Intermediary 1 has a securities account with intermediary 2 which it uses as global custodian. Therefore, intermediary 1 pools all securities which it holds for account holders in its account with intermediary 2. A creditor of the account holder tries to obtain an attachment order against intermediary 2 in order to seize securities belonging to that account holder.

 

In this case, the court of a Contracting State cannot issue an attachment order against intermediary 2. Even if it is clear that all securities of intermediary 1’s account holders are part of the pool in the account with intermediary 2, there is no account maintained by intermediary 2 for the relevant account holder. Intermediary 2 usually does not have any means of knowing how many, if any, securities belong to that account holder. However, the result does not change under Article 22(1) of the Geneva Securities Convention even if intermediary 2 for some reason has a means of knowing how many securities belong to that account holder. See Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, ex. 22-2.

 

 

Example 202-2: Statutory provision of a European civil law State

 

No enforcement measure or protective measure against an intermediary . . . shall be allowed in respect of financial securities entered in an account opened in his name in the books of another intermediary . . . where they do not belong to the initial intermediary.

 

 

Example 202-3: Statutory provision of a European civil law State

 

Where intermediated securities are seized, attached or subjected to any other interim measure against the account holder, such measure shall be executed exclusively in the hands of the custodian maintaining the securities account to which the account holder’s intermediated securities are credited.

 

Any seizure, attachment, or other interim measure executed against an account holder in the hands of a sub-custodian shall be void.

 

 

Example 204-1: Description

 

In a given State, the CSD is the relevant intermediary and broker firms act as “account operators” vis-à-vis the investors (who are account holders). The sharing of functions between the CSD and the “account operators” is acknowledged by means of a declaration under Article 7. The national law prescribes that an attachment order aimed at impounding intermediated securities of an account holder has to be addressed to the account operator. See Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, ex. 22-5.

 

 

Example 204-2: Description

 

State A maintains a transparent system in which the CSD participants rather than the CSD itself are considered to be the relevant intermediaries for lower-tier account holders. The participants maintain the accounts for and have direct relationships with the account holders, have legal responsibility to the account holders and receive and act upon instructions from the account holders. However, credits, debits and designating entries to the lower-tier accounts, though performed by the participants, are recorded in the CSD’s computer systems (including in sub-accounts that fully identify the lower-tier account holders), and the intermediated securities are registered in the issuers’ books in the name of the CSD as a fiduciary. The sharing of functions between the CSD and the relevant intermediary is acknowledged by means of a proper declaration under Article 7 and Article 22(3) of the Geneva Securities Convention. The national law and regulations prescribe that an attachment order has to be addressed to the CSD. This attachment shall not be considered an upper-tier attachment under the Convention as the exemption of Article 22(3) applies. See Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, ex. 22-6.

 

 

Example 204-3: Description

 

In State B, the holding patterns in place do not involve the sharing of functions and the CSD is not the relevant intermediary. However, the law prescribes that an attachment has to be made against the CSD and identify the debtor and the debtor’s relevant intermediary. It also prescribes that the CSD has to communicate to and check with the debtor’s relevant intermediary what the debtor’s holdings are before freezing the intermediated securities in both the relevant intermediary’s and the CSD’s securities accounts simultaneously.

 

Both States would have to make a declaration under Article 22(3) of the Geneva Securities Convention in order to be able to maintain the practice described in the above examples. Without such declaration, their laws would not properly reflect the substance of Article 22. See Official Commentary on the UNIDROIT Convention on Substantive Rules for Intermediated Securities, ex. 22-7.

 

 

Example 206-1: Possible special safeguards regarding upper-tier attachment

 

Upper-tier attachment by a creditor of a debtor against an intermediary other than the debtor’s relevant intermediary (the “subject intermediary”) is permitted only if the following conditions are satisfied:

 

(a)    the relevant securities to be subject to the upper-tier attachment (the “restrained securities”) must be identified by (i) issue, (ii) quantity or amount, and (iii) account (the “restrained account”) of the subject intermediary’s account holder (the “restrained account holder”), all with sufficient specificity so as to permit the subject intermediary to block the restrained securities and the restrained account without any material adverse effect on the subject intermediary or its operations or on the restrained account holder or its operations;

 

(b)     the creditor must satisfy the burden of persuasion that the debtor has a legal, equitable or beneficial interest in the restrained securities;

 

(c)     the creditor must pay the reasonable expenses incurred by the subject intermediary in its compliance with the upper-tier attachment order, as determined by the court issuing the order, to the extent that such expenses exceed those that would have been incurred had the debtor been an account holder of the subject intermediary; provided, that the costs of compliance do not include costs of non-compliance, such as litigation costs of objecting to or contesting the attachment; and

 

(d)     the debtor’s relevant intermediary is (i) located outside the State in which the upper-tier attachment order has been rendered or issued or (ii) legal process against the debtor’s relevant intermediary (x) is not available (y) would not provide for a the practical realisation of a recovery from the restrained securities, or (z) would be unreasonably burdensome for the creditor.

 

 

 

V.B:    Prevention of shortfalls and allocation of securities

 

 

Example 212-1: Statutory provision of an Asian civil law State

 

A securities company may not incorporate any trading settlement funds or securities of its clients into its own assets. Any entity or individual is prohibited from misusing any trading settlement funds or securities of its/his clients in any form. Where a securities company goes bankrupt or goes into liquidation, the trading settlement funds or securities of its client may not be defined as its insolvent assets or liquidation assets. Under any other circumstance as irrelevant to the liabilities of its clients or under any other circumstance as prescribed by law, the trading settlement funds or securities of its clients may not be sealed-up, frozen, deducted or enforced compulsorily.

 

 

Example 212-2: Statutory provision of a European civil law State

 

In providing investment and non-core services, the financial instruments and funds of individual customers held in whatever capacity by an … investment company, asset management company, EU management companies or financial intermediary … shall be separate assets for all intents and purposes from those of the intermediary and from those of other customers. Actions in respect of such assets may not be brought by creditors of the intermediary or on behalf of such creditors, nor by creditors of the depositary or the sub-depositary, if any, or on behalf of such creditors. Creditors of individual customers may bring into actions up to the amount of the assets owned by such customers.

 

 

Example 212-3: Statutory provision of a European civil law State

 

If the intermediated securities excluded from the custodian’s estate are not sufficient to satisfy the account holders in full, intermediated securities of the same kind held by the custodian for its own account shall also be excluded insofar as necessary, even where such intermediated securities have been held separately from the account holders’ intermediated securities.

 

 

Example 219-1: Regulatory provision of a European civil law State

 

4°      [Intermediaries] must take the necessary steps to ensure that any client financial instruments deposited with a third party can be identified separately from the financial instruments belonging to the investment services provider by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection.

 

 

Example 219-2: Description from a South American civil law State

 

The securities are maintained in the name of the investor by the CSD, segregated from the CSD’s own assets or, when admitted by regulation, in the name of the investor’s intermediary. As intermediated securities in this system are regulated by the Central Bank and by the Securities and Exchange Commission, according to the latter’s regulation for securities under its authority, the securities of each investor must be maintained by the CSD in a securities account, opened by its custodian, that identifies the investor, and are transferable by means of credit or debit, in a manner totally segregated from the custodian’s own accounts, if existent. For securities under the authority of the Central Bank, according to its regulation, the CSD should maintain a securities account system that allows the identification of the investor, when that is imposed by the pertinent regulation, and when that is not the case, the securities accounts system of the CSD must segregate the position on securities held by the intermediary from the position held by the intermediary clients.

 

 

Example 219-3: Statutory provision of an African mixed system State

 

(1) Every authorised user must deposit securities held for its own account and for or on behalf of its clients in separate securities accounts or other accounts, maintained by the person who holds or otherwise safeguards such securities on behalf of the authorised user, and must ensure that securities held for or on behalf of its clients are identifiable as belonging to specific persons.

 

 

 

V.C:    Securities clearing and settlement systems

 

 

Example 222-1: Statutory provision of an Asian civil law State

 

In connection with the payments for dealing in securities the organisations that carry out the clearing of securities shall accept for execution the accounting records prepared during the definition of mutual obligations, on the basis of their contracts with the securities market-makers for whom payments are made.

 

The clearing organisation which makes payments for deals with securities shall be obliged to form special funds for reducing the risk of the non-fulfilment of deals with securities. A minimum size of special funds of clearing organisations shall be established by the Federal Commission for the Securities Market by agreement with the Central Bank ….

 

A clearing organisation shall be obliged to endorse the rules of exercising clearing activity.

 

A clearing organisation shall be obliged to register the rules of exercising clearing activity, as well as amendments and additions to be introduced thereto, with the federal executive body for the securities market.

 

 

Example 224-1: Statutory provision of a South American civil law State

 

Markets shall be able to organize settlement and clearing agencies for the settlement of trading transactions.

 

Also, markets shall be able to carry out financial transactions for purposes of facilitating stock exchange trades in accordance with their respective bylaws and regulations.

 

 

Example 227-1: Statutory provision of a North American common law State

 

A rule adopted by a clearing corporation governing rights and obligation among the clearing corporation and its participants in the clearing corporation is effective even if the rule conflicts with this (Act) and effects another party who does not consent to the rule.

 

 

Example 227-2: Statutory provision of an Australian common law State

 

Every specified participant is exempted from … the Act in respect of any relevant interest in a financial product that the specified participant has as a result of both of the following:

 

(a) being a party to a settlement transaction on the clearing house under the [] Rules; and

 

(b) the performance of its functions in connection with that settlement transaction in the ordinary course of its business as a clearing participant under the [] Rules or as a depository participant under the depository operating rules.

 

 

Example 229-1: Excerpt of a Directive of a regional economic integration Organisation

 

1.    Transfer orders and netting shall be legally enforceable and binding on third parties even in the event of insolvency proceedings against a participant, provided that transfer orders were entered into the system before the moment of opening of such insolvency proceedings as defined in Article 6(1). This shall apply even in the event of insolvency proceedings against a participant (in the system concerned or in an interoperable system) or against the system operator of an interoperable system which is not a participant.

 

Where transfer orders are entered into a system after the moment of opening of insolvency proceedings and are carried out within the business day, as defined by the rules of the system, during which the opening of such proceedings occur, they shall be legally enforceable and binding on third parties only if the system operator can prove that, at the time that such transfer orders become irrevocable, it was neither aware, nor should have been aware, of the opening of such proceedings.

 

2.    No law, regulation, rule or practice on the setting aside of contracts and transactions concluded before the moment of opening of insolvency proceedings, as defined in Article 6(1) shall lead to the unwinding of a netting.

 

3.    The moment of entry of a transfer order into a system shall be defined by the rules of that system. If there are conditions laid down in the national law governing the system as to the moment of entry, the rules of that system must be in accordance with such conditions.

 

4.    In the case of interoperable systems, each system determines in its own rules the moment of entry into its system, in such a way as to ensure, to the extent possible, that the rules of all interoperable systems concerned are coordinated in this regard. Unless expressly provided for by the rules of all the systems that are party to the interoperable systems, one system's rules on the moment of entry shall not be affected by any rules of the other systems with which it is interoperable.

 

 

Example 229-2: Statutory provision of a European civil law State

 

III - Notwithstanding any statutory provision to the contrary, payments and deliveries of financial instruments made within the framework of interbank payment systems or systems used for settlement and delivery of financial instruments cannot be cancelled in the event of an order to commence court-ordered reorganisation or liquidation proceedings being made against an institution participating directly or indirectly in such a system until the close of the day on which said order is made, even on the grounds of such an order being made.

 

IV - These provisions shall also apply to payment instructions and delivery instructions for financial instruments, once they have acquired irrevocable status in one of the systems referred to in paragraph II. The time and conditions that determine whether an instruction is considered irrevocable in a system are defined by said system's operating rules.

 

 

Example 229-3: Statutory provision of a European civil law State

 

The account holder may revoke an instruction until the point in time provided in the contract with the custodian or in the applicable rules of the securities clearing and settlement system. An instruction shall in any case become irrevocable once the custodian has debited the account holder’s securities account.

 

 

Example 229-4: Statutory provision of an Asian civil law State

 

A securities registration and clearing institution shall establish a clearing risk fund so as to pay in advance or make up any loss of the securities registration and clearing institution as incurred from default delivery, technical malfunction, operational fault or force majeure. The securities clearing risk fund shall be withdrawn from the business incomes and proceeds of a securities registration and clearing institution and may be paid by clearing participants according to a specified percentage of securities trading volume. The measures for raising and managing the securities clearing risk fund shall be formulated by the securities regulatory authority under the State Council in collaboration with the fiscal department of the State Council.

 

 

 

V.D:    Issuers

 

 

Example 248-1: Excerpt of a Directive of a regional economic integration Organisation

 

2.     Where the applicable law imposes disclosure requirements as a prerequisite for the exercise of voting rights by a shareholder referred to in paragraph 1 [an intermediary], such requirements shall not go beyond a list disclosing to the company the identity of each client and the number of shares voted on his behalf.

 

3.     Where the applicable law imposes formal requirements on the authorisation of a shareholder referred to in paragraph 1 [an intermediary] to exercise voting rights, or on voting instructions, such formal requirements shall not go beyond what is necessary to ensure the identification of the client, or the possibility of verifying the content of voting instructions, respectively, and is proportionate to achieving those objectives.

 

 

Example 248-2: Statutory provision of a North American common law State

 

(a) Before due presentment for registration of transfer of a certificated security in registered form or of an uncertificated security, the issuer or indenture trustee may treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all the rights and powers of an owner.

 

 

Example 248-3: Statutory provision of an Australian common law State

 

(1)  A member of a company who is entitled to attend and cast a vote at a meeting of the company's members may appoint a person as the member's proxy to attend and vote for the member at the meeting.

 

(1A)  The person appointed as the member's proxy may be an individual or a body corporate.

 

Note:  A body corporate may appoint a representative to exercise the powers that the body corporate may exercise as the member's proxy …

 

(2)  The appointment may specify the proportion or number of votes that the proxy may exercise.

 

(3)  Each member may appoint a proxy. If the member is entitled to cast 2 or more votes at the meeting, they may appoint 2 proxies. If the member appoints 2 proxies and the appointment does not specify the proportion or number of the member's votes each proxy may exercise, each proxy may exercise half of the votes.

 

 

Example 249-1: Excerpt of a Directive of a regional economic integration Organisation

 

5.    Where the applicable law limits the number of persons whom a shareholder may appoint as proxy holders . . . such limitation shall not prevent a shareholder referred to in paragraph 1 of this Article [an intermediary] from granting a proxy to each of his clients or to any third party designated by a client.

 

 

Example 250-1: Statutory provision of a European civil law State

 

In order to identify a security holder of bearer securities, by-laws of a company may provide that the issuer may request at any time the CSD in charge of the holding of the relevant securities, with proper compensation, the name, place and date of birth or incorporation and mail and email address of such security holder with the amount of securities held by each security holder.

 

This information is gathered by the CSD from the intermediaries holding accounts with it in a time frame provided for in implementing rules. The CSD shall forward this information to the requesting issuer within five business days from their reception from the intermediaries.

 

Based on the information so forwarded by the CSD, the issuer may request either the CSD or directly the person whose name as security holder has been disclosed by an intermediary to the CSD, whether the security holder is acting for its own account or for the account of a third party, and in this latter case, the name, place and date of birth or incorporation and mail and email address of the person on behalf of which this person is acting on behalf of.

 

 

 

VI:    Insolvency protection

 

 

Example 268-1: Statutory provision of a European civil law State

 

[T]he fund for the protection of account holders manages the mechanism of guarantee of the securities… the mechanism of guarantee of the securities is implemented… as soon as… one of the intermediaries mentioned … is not any more capable of restoring immediately the financial instruments.

 

 

Example 268-2: Statutory provision of a North American common law State

 

A financial services compensation fund is hereby established under the name “Fonds d’indemnisation des services financiers”.

 

The fund shall be assigned to the payment of indemnities payable to victims of fraud, fraudulent tactics or embezzlement for which a firm, an independent representative, an independent partnership or a mutual fund dealer or scholarship plan dealer registered in accordance with … the Securities Act … is responsible.

 

 

Example 268-3: Statutory provision of an African common law State

 

(1) There shall be established a fund to be known as the Investor Compensation Fund for the purposes of granting compensation to investors who suffer pecuniary losses resulting from the failure of a licensed broker or dealer to meet his contractual obligations.

 

 

Example 268-4: Statutory provision of a South American civil law State

 

Markets shall establish a guarantee fund that may be organized as a trust or in any other manner approved by the [Commission] for the purpose of meeting any unfulfilled commitments of market agents resulting from guaranteed trades, which shall be funded with not less than fifty per cent (50%) of the annual liquid and realized profits of the respective market.

 

 

Example 271-1: Statutory provision of a European civil law State

 

The following acts entered into after the day of suspension of payments, are void: … (6) Any conventional mortgage, any judicial mortgage as well as the legal mortgage of the spouses and any rights of pledge or securities interests established on properties of the debtor for previous contracted debt.

 

 

Example 273-1: Statutory provision of an African mixed system State

 

Any issuance, deposit, withdrawal, transfer, attachment, pledge, cession in securitatem debiti or other instruction in respect of securities or an interest in securities that has become effective against third parties, is effective against the insolvency administrator and creditors in any insolvency proceeding.

 

 

 

VII:    Special provisions in relation to collateral transactions

 

 

Example 282-1: Excerpt of a Directive of a regional economic integration Organisation

 

1.    When applying the resolution tools and exercising the resolution powers, resolution authorities shall have regard to the resolution objectives, and choose the tools and powers that best achieve the objectives that are relevant in the circumstances of the case.

 

2.    The resolution objectives referred to in paragraph 1 are:

 

(a)    to ensure the continuity of critical functions;

 

(b)     to avoid a significant adverse effect on the financial system, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline;

 

(c)    to protect public funds by minimising reliance on extraordinary financial support;

 

(d)     to protect depositors . . . and investors . . . ;

 

(e)     to protect client funds and client assets.

 

When pursuing the above objectives, the resolution authority shall seek to minimise the cost of resolution and avoid destruction of value unless necessary to achieve the resolution objectives.

 

3.   Subject to different provisions of this Directive, the resolution objectives are of equal significance, and resolution authorities shall balance them as appropriate to the nature and circumstances of each case.

 

 

Example 286-1: Statutory provision of an Asian civil law State

 

214.    During the existence of the pledge, with the consent of the pledgor, the pledgee may transfer the right of pledge. However, the pledgee shall bear civil liability for any loss or destruction of or damage to the pledged property.

 

 

Example 286-2: Statutory provision of a European civil law State

 

(1) Netting agreements and financial collateral arrangements entered into, as well as the provision of collateral in accordance with a financial collateral arrangement, on the day of commencement of a reorganisation measure or winding-up proceeding, but before the Court decision ruling the opening of such proceedings or before such measure becomes effective, are valid and enforceable against third parties, commissioners, liquidators, receivers or other similar persons.

 

(2) Where a netting agreement or a financial collateral arrangement has been entered into or where a relevant financial obligation has come into existence, or financial collateral has been provided on the day of, but after the moment of the commencement of, winding-up proceedings or reorganisation measures, it shall be legally binding and enforceable against third parties, commissioners, receivers, liquidators and similar persons if the collateral taker can prove that he was not aware, nor should have been aware, of the commencement of such proceedings or measures.

 

 

Example 286-3: Statutory provision of European civil law State

 

(5) In the event that a decision on the restructuring of assets or a similar decision or a liquidation decision is taken by judiciary or administrative authorities concerning the guarantee taker or the guarantee provider, the capital market instruments underlying the guarantee as well as the rights of the guarantee taker and the guarantee provider shall not be affected by this decision and shall also be valid for the related restructuring or liquidation authority. This provision shall also be valid for transactions realised the same day after such decisions have been taken, provided that the guarantee has been provided before the related decision and that the guarantee taker is good faith.

 

 

Example 288-1: Excerpt of a Directive of a regional economic integration Organisation

 

7.     An investment firm shall, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the investment firm's insolvency, and to prevent the use of a client's instruments on own account except with the client's express consent.

 

 

Example 288-2: Excerpt of a Directive of a regional economic integration Organisation

 

3.    Where the [manager of an alternative investment fund (AIFM)] on behalf of an [alternative investment fund (AIF)] uses the services of a prime broker, the terms shall be set out in a written contract. In particular any possibility of transfer and reuse of AIF assets shall be provided for in that contract and shall comply with the AIF rules or instruments of incorporation. The contract shall provide that the depositary be informed of the contract.

 

AIFMs shall exercise due skill, care and diligence in the selection and appointment of prime brokers with whom a contract is to be concluded.

 

[…]

 

4.    AIFMs shall set a maximum level of leverage which they may employ on behalf of each AIF they manage as well as the extent of the right to reuse collateral or guarantee that could be granted under the leveraging arrangement, taking into account, inter alia:

 

(a)    the type of the AIF;

 

(b)    the investment strategy of the AIF;

 

(c)    the sources of leverage of the AIF;

 

(d)    any other interlinkage or relevant relationships with other financial services institutions, which could pose systemic risk;

 

(e)    the need to limit the exposure to any single counterparty;

 

(f)    the extent to which the leverage is collateralised;

 

(g)    the asset-liability ratio;

 

(h)    the scale, nature and extent of the activity of the AIFM on the markets concerned.

 

[…]

 

10.    In the context of their respective roles, the AIFM and the depositary shall act honestly, fairly, professionally, independently and in the interest of the AIF and the investors of the AIF.

 

A depositary shall not carry out activities with regard to the AIF or the AIFM on behalf of the AIF that may create conflicts of interest between the AIF, the investors in the AIF, the AIFM and itself, unless the depositary has functionally and hierarchically separated the performance of its depositary tasks from its other potentially conflicting tasks, and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF.

 

The assets referred to in paragraph 8 shall not be reused by the depositary without the prior consent of the AIF or the AIFM acting on behalf of the AIF.

 

[…]

 

11.    The depositary shall not delegate to third parties its functions as described in this Article, save for those referred to in paragraph 8.

 

The depositary may delegate to third parties the functions referred to in paragraph 8 subject to the following conditions:

 

(a)    the tasks are not delegated with the intention of avoiding the requirements of this Directive;

 

(b)    the depositary can demonstrate that there is an objective reason for the delegation;

 

(c)    the depositary has exercised all due skill, care and diligence in the selection and the appointment of any third party to whom it wants to delegate parts of its tasks, and keeps exercising all due skill, care and diligence in the periodic review and ongoing monitoring of any third party to whom it has delegated parts of its tasks and of the arrangements of the third party in respect of the matters delegated to it; and

 

(d)    the depositary ensures that the third party meets the following conditions at all times during the performance of the tasks delegated to it:

 

(i)    the third party has the structures and the expertise that are adequate and proportionate to the nature and complexity of the assets of the AIF or the AIFM acting on behalf of the AIF which have been entrusted to it;

 

(ii)    for custody tasks referred to in point (a) of paragraph 8, the third party is subject to effective prudential regulation, including minimum capital requirements, and supervision in the jurisdiction concerned and the third party is subject to an external periodic audit to ensure that the financial instruments are in its possession;

 

(iii)    the third party segregates the assets of the depositary’s clients from its own assets and from the assets of the depositary in such a way that they can at any time be clearly identified as belonging to clients of a particular depositary;

 

(iv)    the third party does not make use of the assets without the prior consent of the AIF or the AIFM acting on behalf of the AIF and prior notification to the depositary; and

 

(v)    the third party complies with the general obligations and prohibitions set out in paragraphs 8 and 10.

 

[…]

 

1.    AIFMs shall for each of the EU AIFs that they manage and for each of the AIFs that they market in the Union make available to AIF investors, in accordance with the AIF rules or instruments of incorporation, the following information before they invest in the AIF, as well as any material changes thereof:

 

(a)    a description of the investment strategy and objectives of the AIF, information on where any master AIF is established and where the underlying funds are established if the AIF is a fund of funds, a description of the types of assets in which the AIF may invest, the techniques it may employ and all associated risks, any applicable investment restrictions, the circumstances in which the AIF may use leverage, the types and sources of leverage permitted and the associated risks, any restrictions on the use of leverage and any collateral and asset reuse arrangements, and the maximum level of leverage which the AIFM are entitled to employ on behalf of the AIF;

 

[…]

 

(o)     the identity of the prime broker and a description of any material arrangements of the AIF with its prime brokers and the way the conflicts of interest in relation thereto are managed and the provision in the contract with the depositary on the possibility of transfer and reuse of AIF assets, and information about any transfer of liability to the prime broker that may exist;

 

[…]

 

5.    AIFMs managing EU AIFs employing leverage or marketing in the Union AIFs employing leverage shall, for each such AIF disclose, on a regular basis:

 

(a)    any changes to the maximum level of leverage which the AIFM may employ on behalf of the AIF as well as any right of the reuse of collateral or any guarantee granted under the leveraging arrangement;

 

(b)    the total amount of leverage employed by that AIF.

 

[…]

 

4.    An AIFM managing AIFs employing leverage on a substantial basis shall make available information about the overall level of leverage employed by each AIF it manages, a break-down between leverage arising from borrowing of cash or securities and leverage embedded in financial derivatives and the extent to which the AIF’s assets have been reused under leveraging arrangements to the competent authorities of its home Member State.

 

That information shall include the identity of the five largest sources of borrowed cash or securities for each of the AIFs managed by the AIFM, and the amounts of leverage received from each of those sources for each of those AIFs.

 

 

Example 288-3: Excerpt of a Directive of a regional economic integration Organisation

 

1.    The assets held in custody by the depositary shall not be reused by the depositary, or by any third party to which the custody function has been delegated, for their own account. Reuse comprises any transaction of assets held in custody including, but not limited to, transferring, pledging, selling and lending.

 

The assets held in custody by the depositary are allowed to be reused only where:

 

(a)    the reuse of the assets is executed for the account of the [undertakings for collective investment in transferable securities (UCITS)];

 

(b)    the depositary is carrying out the instructions of the management company on behalf of the UCITS;

 

(c)    the reuse is for the benefit of the UCITS and in the interest of the unit holders; and

 

(d)    the transaction is covered by high-quality and liquid collateral received by the UCITS under a title transfer arrangement.

 

The market value of the collateral shall, at all times, amount to at least the market value of the reused assets plus a premium.

 

 

Example 288-4: Excerpt of a regulatory provision of a regional economic integration Organisation

 

8.    A [central counterparty (CCP)] shall have a right of use relating to the margins or default fund contributions collected via a security financial collateral arrangement . . . provided that the use of such arrangements is provided for in its operating rules. The clearing member shall confirm its acceptance of the operating rules in writing. The CCP shall publicly disclose that right of use, which shall be exercised in accordance with Article 47.

 

[…]

 

1.    CCPs that enter into an interoperability arrangement shall:

 

[…]

 

(d)    identify, monitor and address potential interdependences and correlations that arise from an interoperability arrangement that may affect credit and liquidity risks relating to clearing member concentrations, and pooled financial resources.

 

[…]

 

For the purposes of point (d) of the first subparagraph, CCPs shall have robust controls over the re-use of clearing members’ collateral under the arrangement, if permitted by their competent authorities. The arrangement shall outline how those risks have been addressed taking into account sufficient coverage and need to limit contagion.

 

[…]

 

2.     If a CCP that enters into an interoperability arrangement with another CCP only provides initial margins to that CCP under a security financial collateral arrangement, the receiving CCP shall have no right of use over the margins provided by the other CCP.

 

 

Example 288-5: Excerpt of a regulatory provision of a regional economic integration Organisation

 

1. Any right of counterparties to reuse financial instruments received as collateral shall be subject to at least both of the following conditions:

 

(a) the providing counterparty has been duly informed in writing by the receiving counterparty of the risks and consequences that may be involved in one of the following:

 

(i) granting consent to a right of use of collateral provided under a security collateral arrangement in accordance with Article 5 . . . ;

 

(ii) concluding a title transfer collateral arrangement;

 

(b) the providing counterparty has granted its prior express consent, as evidenced by a signature, in writing or in a legally equivalent manner, of the providing counterparty to a security collateral arrangement, the terms of which provide a right of use in accordance with Article 5 . . . , or has expressly agreed to provide collateral by way of a title transfer collateral arrangement.

 

With regard to point (a) of the first subparagraph, the providing counterparty shall at least be informed in writing of the risks and consequences that may arise in the event of the default of the receiving counterparty.

 

2. Any exercise by counterparties of their right to reuse shall be subject to at least both of the following conditions:

 

(a) reuse is undertaken in accordance with the terms specified in the collateral arrangement referred to in point (b) of paragraph 1;

 

(b) the financial instruments received under a collateral arrangement are transferred from the account of the providing counterparty.

 

By way of derogation from point (b) of the first subparagraph, where a counterparty to a collateral arrangement is established in a third country and the account of the counterparty providing the collateral is maintained in and subject to the law of a third country, the reuse shall be evidenced either by a transfer from the account of the providing counterparty or by other appropriate means.

 

3. This Article is without prejudice to stricter sectoral legislation . . . and to national law that aims to ensure a higher level of protection for providing counterparties.

 

4. This Article shall not affect national law concerning the validity or effect of a transaction.

 

 

 

VIII: Conflict of laws aspects

 

 

Example 302-1: Statutory provision of a European civil law State

 

Any question with respect to any of the matters specified in paragraph 2 here below arising in relation to “financial collateral” on financial instruments transferable by book entry shall be governed by the law of the country in which the relevant account is maintained. The reference to the law of a country is a reference to its domestic law, disregarding any rule under which, in deciding the relevant question, reference should be made to the law of another country.