Consultation on conflict of laws rules for third party effects of transactions in securities and claims

The European Commission launched consultation on the conflict of laws rules for third party effects of transactions in securities and claims. The Commission emphasized that there are challenges in relation to the laws applicable to transactions in securities and claims. Although certains aspects of applicable law are already regulated, there are problems in relation to the interpretation of the existing rules and there are still missing elements in the regulation. Given the persistent differences between substantive laws governing securities and claims transactions, the validity of acquisition depends on which national substantive law is applicable. It is, therefore, very important for the parties to know which law will be applicable to which element of the transaction.

Although the existing regulation formally takes into account the fact that securities are to a large extent issued in immobilised or dematerialised form, the applicable law is still hard to find. The conflict of laws rules are based on the PRIMA-rule, i.e. they use the location of the book-entry securities as a connecting factor. However, it remains unclear where the register/account/centralised deposit system is ’located’ or ’maintained’, as data may be stored in one country, the client relationship managed from another and electronic records accessible through multiple locations. A further question relates to multi-tier structures, namely, whether there is a single legal system applicable or whether more governing laws could apply to a given legal issue.

In case of receivables, the Rome I regulation regulates two aspects. It provides that the relationship between assignor and assignee shall be governed by the law that applies to the contract between the assignor and assignee, and that the law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor's obligations have been discharged. However, there are no rules on effects of assignment on third parties, e.g. which law governs the effectiveness of an assignment against third parties, questions of priority between competing assignees or assignees and other right holders.

The Commission outlined in its consultation document several proposals for solving these problems, and is expecting feedback from market participants. The questionnaire is available at https://ec.europa.eu/info/finance-consultations-2017-securities-and-claims_en.

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