EUROPEAN COMMISSION Brussels,28.3.2018 SWD(2018) 52 final/2 COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL



on the law applicable to the third-party effects of the assignment of claims



COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS



on the applicable law to the proprietary effects of transactions in securities {COM(2018) 96 final}



{COM(2018) 89 final}

{SWD(2018) 53 final}



Table of Contents Table of Contents 1 Introduction: political, market and legal context 1.1 Political context 1.2 Market context: significant markets for claims and securities but large variations in the cross-border dimension of transactions 1.2.1 Transactions and assets concerned 1.2.2 Factoring, which relies on claims, is an important source of financing for firms in the real economy 1.2.3 Significant markets in collateralisation and securitisation, both relying on claims and securities, allow better access to finance for firms and consumers 1.2.4 Transactions in securities are sizeable, with an important cross-border dimension 1.3 Legal context: no EU rules on claims, three EU directives on securities 1.3.1 Conflict of laws rules relating to the assignment of claims 1.3.2 Conflict of laws rules relating to securities transactions 1.4 International context: The Hague Securities Convention and the UN Convention on the Assignment of Receivables in International Trade 1.4.1 The Hague Securities Convention and past attempt to ratify it 1.4.2 UN Convention on the Assignment of Receivables in International Trade

2 The problem drivers: rules designating the applicable law are inconsistent 2.1 National conflict of laws rules on the third-party effects of assignments of claims are divergent and unclear, leading to legal uncertainty 2.2 EU conflict of laws rules relating to securities are interpreted differently across Member States 2.3 Scope and methodology 2.3.1 Which legal issues are unclear? 2.3.2 Transactions and assets concerned 2.3.3 Methodology and access to data 3 The problem: cross-border transactions are inherently riskier than domestic ones 3.1 The legal risk in cross-border transactions leads to potential losses (with stability risks), higher costs and reduced market integration 3.2 Proprietary effects of assignments of claims: absence of EU conflict of laws rules and inconsistent national conflict of laws solutions 3.3 Proprietary effects of transactions in securities: residual legal uncertainty 3.4 Ignoring the risks can lead to losses 3.4.1 Important risks relating to the assignment of claims 3.4.2 Theoretical risks of losses with no material evidence for transactions in securities 3.5 Mitigating risks means higher costs for cross-border transactions 3.5.1 The significant cost of cross-border assignments of claims 3.5.2 Residual legal risk relating to transaction in securities 3.6 Avoiding the legal risk leads to less cross-border activity 3.7 Various market participants are affected negatively 3.7.1 Companies, including SMEs

3.7.2 Factoring and securitisation industry 3.8 How would the problem evolve, all things being equal? 4 Why should the EU act? Legal basis, subsidiarity and added value 5 What should be achieved? 5.1 The policy objectives 5.2 Consistency with other EU policies and the Charter for fundamental rights 6 Claims: options, impacts and who will be affected 6.1 Baseline: no EU intervention 6.2 Harmonising conflict of laws rules 6.3 Options on the conflict of laws rule 6.3.1 Option 1: Law applicable to the assignment contract 6.3.2 Option 2: Law of the assignor's habitual residence 6.3.3 Option 3: Law governing the assigned claim 6.3.4 Option 4: Mixed approach combining the law of the assignor’s habitual residence and the law of the assigned claim 6.3.5 Option 5: Mixed approach combining the law of the assigned claim and the law of the assignor’s habitual residence 6.4 Analysis of impacts 6.4.1 Impacts of Option 1: Law applicable to the assignment contract 6.4.2 Impacts of Option 2: Law of the assignor's habitual residence 6.4.3 Impacts of Option 3: Law of the assigned claim 6.4.4 Impacts of Option 4: Mixed approach combining the law of the assignor’s habitual residence with the law of the assigned claim

6.4.5 Impacts of Option 5: Mixed approach combining the law of the assigned claim with the law of the assignor’s habitual residence 6.5 Issues raised by stakeholders 6.6 How do the options compare? 6.6.1 Stakeholder preferences 6.6.2 Effectiveness comparison 6.6.3 Comparison of impacts on the parties concerned 6.6.4 Cost and coherence comparison 6.6.5 Overall comparison 6.6.6 Legal form of intervention 7 Book-entry securities: options, impacts and who will be affected 7.1 Screening of options: non-legislative and legislative solutions 7.2 Descriptions of options retained for analysis 7.2.1 Baseline: no EU intervention 7.2.2 Option 1: Choice of law 7.2.3 Option 2: PRIMA – where the account was opened 7.2.4 Option 3: PRIMA – where the account is maintained 7.3 Analysis of impacts 7.3.1 Baseline 7.3.2 Impacts of Option 1: Choice of law 7.3.3 Impacts of Option 2: PRIMA – where the account is opened

7.3.4 Impacts of Option 3: PRIMA – where the account is maintained 7.4 How do the legislative options compare? 7.4.1 Stakeholder preferences 7.4.2 Effectiveness comparison 7.4.3 Cost comparison 7.4.4 How do the legislative and non-legislative options compare? 8 Impacts of the package of options on claims and securities 9 How would actual impacts be monitored and evaluated? 10 Glossary of terms Annex 1: Procedural information Annex 2: Stakeholder consultation strategy Annex 3. Who is affected by the initiative and how? Annex 4. Data sources and quantification of impacts and costs Annex 5. Evaluation of existing Directives 1Introduction: political, market and legal context 1.1Political context The Capital Markets Union Action Plan (CMU Action Plan) adopted in 2015 aims to further integrate European capital markets. In line with this objective, this impact assessment examines possible EU action to address the lack of legal certainty in determining the proprietary effects of a transaction in claims or securities, that is, who the owner is of a claim or security further to a cross-border transaction. In purely domestic transactions it is clear that domestic law applies to determine the proprietary effects of the transaction. In cross-border transactions, however, it is not clear which country's law applies to determine who owns the underlying assets of the transaction. The legal uncertainty in cross-border transactions over who owns the asset results in legal risks. Depending on which Member State's courts or authorities assess a dispute concerning the ownership of a claim or a security, the cross-border transaction may be enforceable or not, or might confer the expected legal title on the parties or not. In case of insolvency, when the questions of ownership and enforceability of transactions are put under judicial scrutiny, legal risks stemming from legal uncertainty may result in unexpected losses. Given the size of markets and the degree of market integration, legal uncertainty in cross-border transactions is a significant issue when it comes to the enforcement of rights. For individual businesses, compared to domestic transactions, there is an element of legal risk in cross-border transactions. Faced with this legal risk, businesses can choose to ignore it, mitigate it or avoid it, but none of these alternatives will offer an optimal solution to the problem. If businesses decide to ignore the legal risk, they may end up facing unexpected losses. If businesses choose to mitigate the legal risk, they are likely to incur higher costs in cross-border transactions and having to price the risk into the transaction. If businesses choose to avoid the legal risk, they may forego profitable businesses opportunities and hamper capital markets integration.

This problem was identified in 2001 in the Giovannini Report. The European Commission has been monitoring the markets and exploring different ways to address the problem since then. On claims, there are no common conflict of laws rules at EU level designating the national law that should apply to the proprietary effects of an assignment of claims. As a result, each Member State authority applies its own conflict of laws rules when faced with a dispute over such third-party effects. However, the conflict of laws rules of the Member States are inconsistent and unclear, which leads to the parties involved in the assignment not knowing which national law should govern the third-party effects of the assignment. Given this legal uncertainty, cross-border assignments of claims bear the risk of losses and imply risks for financial stability, or have a higher cost because parties must comply with the requirements of all possibly applicable laws to ensure legal title over the claim and its enforceability. As a result, assignments of claims such as factoring, collateralisation and securitisation are often made on a national rather than on a cross-border basis. On securities, three directives address the conflict of laws issues on securities: the Financial Collateral Directive, the Settlement Finality Directive and the Winding-up Directive. These directives include conflict of laws rules that cover the most important aspects of securities transactions. These rules were subject to an evaluation, which revealed that their wording is not always clear and gives rise to different interpretations. The purchase and sale of securities as well as their use as collateral take place each day across the EU in huge volumes, and a significant part of these transactions involve a cross-border element. The issue is not therefore the lack of cross-border transactions but the residual legal uncertainty that stems from different national interpretations of the EU rules. In 2003 the Commission proposed the ratification of an international convention on conflict of laws in securities (The Hague Securities Convention), but given the lack of political support this proposal was withdrawn in 2009. This policy initiative aims at helping to increase cross-border transactions in claims by reducing the legal risks and costs that stem from the current lack of legal certainty. It also aims at addressing the residual legal uncertainty for the very common cross-border transactions in securities. This is in line with the CMU Action Plan, which targets further integration of European capital markets. This impact assessment analyses the impacts of EU action, in line with the CMU Action Plan, to tackle the legal uncertainty over the proprietary effects of cross-border transactions in claims and securities. The analysis and evidence presented in this impact assessment as well as the conclusions on the preferred options are based on various sources, including feedback from Member States, a Public Consultation with stakeholders, the Expert Group on conflict of laws regarding claims and securities and the European Post Trade Forum (EPTF). 1.2Market context: significant markets for claims and securities but large variations in the cross-border dimension of transactions 1.2.1Transactions and assets concerned This impact assessment deals with transactions in claims and securities. 'Transactions' refers to the sale and purchase of securities and the assignment of claims. The list of financial instruments in Directive 2014/65/EU on markets in financial instruments ('MiFID II') includes securities (such as shares and bonds), derivatives (such as options or futures) and emission allowances. 'Claims' refers to any right to payment of a sum of money (e.g. receivables) or to performance of an obligation (e.g. delivery obligation of the underlying assets under derivatives contracts). Claims can be classified into two categories: 'traditional claims' (or receivables, such as money to be received for unsettled transactions) and so-called 'financial claims', that is, claims arising from contracts traded on financial markets, such as derivative contracts. 1.2.2Factoring, which relies on claims, is an important source of financing for firms in the real economy Factoring is a crucial source of liquidity for many firms. It relies on the assignment of claims: the assignment of receivables by an assignor (for example, an SME) to the assignee (the ‘factor', often a bank) at a discount price as a means for the assignor to obtain immediate cash for the receivables it has generated. The majority of users of factoring by number are SMEs: Small represented 76% of numbers, Medium 11% and Large 13%. Factoring for SMEs is thus regarded by the industry as a basis for economic growth, as SMEs may find sourcing traditional lending more challenging. Figure 1: Types of factoring clients Source: EUF The dominant type of factoring is domestic and, in 2016, it represented around 78% of total turnover. The long-term trend shows an increase in the proportion of international factoring, although it remains significantly the minority product. Figure 2: Domestic and international factoring

Source: EUF Europe is the largest factoring market world-wide, with EUR 1557 billion in 2015, 66% of the world figure. Internationally, domestic factoring accounted for 78% of the total market and international factoring stood at 22% in the same year, which applied to the EU figure would be EUR 342.5 billion. The top European markets are the UK, France, Germany, Italy and Spain. 1.2.3Significant markets in collateralisation and securitisation, both relying on claims and securities, allow better access to finance for firms and consumers Claims can also be assigned for other purposes, either as financial collateral or as underlying assets in securitisation. Collateralisation and securitisation transform claims into financial collateral or assets, creating an important link between the real economy and finance. With the help of collateralisation and securitisation, firms in the real economy as well as consumers can get access to cheaper finance. Both areas are therefore of great relevance to financial markets and the real economy. Ensuring that the cross-border element does not contain additional risks is important for these markets to grow in a safe and efficient way. In collateralisation, claims such as cash credited to an account in a credit institution (such as a bank, where the customer is the creditor and the credit institution is the debtor), securities or credit claims (i.e. bank loans) can be used as financial collateral to secure a loan agreement (for example, a consumer can use cash credited to a bank account as collateral to obtain credit, and a bank can use a credit loan as collateral to obtain credit). The collateralisation of credit claims for the financial industry is very important: about 22% of the Eurosystem refinancing operations are secured by credit claims as collateral, amounting to some EUR 380 billion as at Q2 2017, of which about EUR 100 billion represented credit claims mobilised on a cross-border basis. Overall, the Eurosystem had mobilised some EUR 450 billion in cross-border collateral as at end-June 2017. Securitisation enables the assignor, called ‘originatorʼ (e.g. a business or a bank) to refinance a set of its claims (e.g. motor vehicle rents, credit card receivables, mortgage loan payments) by assigning them to a ‘special purpose vehicleʼ. The special purpose vehicle (assignee) then issues debt securities in the capital markets reflecting the proceeds from these claims. As payments are made under the underlying claims, the special purpose vehicle uses the proceeds it receives to make payments on the securities to the investors. Securitisation can lower the cost of financing because the special purpose vehicle is structured in such a way as to make it insolvency-remote. For corporates, securitisation can provide access to credit at lower cost than bank loans. For banks, securitisation is a way to put some of their assets to better use and free up their balance sheets to allow for further lending to the economy. The market volume of securitisation issuance was EUR 237.6 billion within the EU in 2016, with EUR 1.27 trillion outstanding at the end of 2016. Figure 3: ECB data on the use of collateral and outstanding credit Source: ECB Cross-border trade in the EU is also substantial in another specific instrument: the EU Emission Trading System (EU ETS) allowances. EU ETS allowances are financial instruments pursuant to MiFID II, as they are included in Annex I, section C, point (11) of this Directive. The EU ETS was established in 2005 as a 'cap and trade' market-based system for the EU Member States and the EEA-EFTA States. Its aim is to reduce emissions of carbon dioxide and other greenhouse gases from the power and industry sector and, since 2012, also from the aviation sector. The EU ETS is the first and still by far largest system for trading greenhouse gas emission allowances. Currently it covers more than 11,000 power stations and industrial plants in 31 countries. The main categories of traders in EU ETS allowances are energy companies and industrial companies that have obligations under the EU ETS, as well as financial intermediaries such as banks which act on behalf of smaller companies and emitters. Today, more than 1,600 intermediaries, traders, organisations and individuals voluntarily participate in the EU ETS. For the period 2005 - 2012, the carbon market grew from around EUR 6 billion annual turnover to up to EUR 90 billion. As of 15 May 2017, the total number of EU ETS allowances in circulation amounted to roughly 1.69 billion allowances. The largest share of transactions in EU ETS emission allowances is in the form of derivatives (futures, forwards, options), which were already subject to EU financial markets rules prior to MiFID II, but emission allowances are also traded through spot contracts. Emission allowance contracts are concluded either in market venues covered by MiFID II or over the counter. Market venues trading emission allowances tend to be commodity exchanges, which differ from securities-only exchanges in that their participants are not only financial entities but include non-financial entities, that is, industrials or energy companies, which participate directly in the exchange. Equally, since emission allowances may be kept in a Union registry under the ETS Directive, they may be traded bilaterally by non-financials without intermediation by financial entities. They may also be held in custody by financial intermediaries. Emission allowance contracts may be cleared and settled through CCPs or CSDs. Emission allowances (as credits) can be used as collateral and in securitisation arrangements. The definition, purpose, initial issuance and transferability of EU emission allowances are defined by Directive 2003/87/EC (ETS Directive), complemented by Commission Regulation 389/2013/EU ('Registry Regulation') and Commission Regulation 1031/2010/EU ('Auctioning Regulation'). The classification of EU emission allowances as financial instruments is made for the purposes of the application of EU financial markets rules and is not aimed at dealing with the legal nature of emission allowances (from the viewpoint of private law) or their accounting treatment.https://www.ecb.europa.eu/paym/coll/charts/html/index.en.html 1.2.4Transactions in securities are sizeable, with an important cross-border dimension Securities markets are sizeable and their cross-border dimension is significant. Securities held in Central Securities Depositories ("CSD") accounts across the EU amounted to some EUR 52 trillion at the end of 2016, whilst transactions in securities settled through EU CSDs reached the value of EUR 1128 trillion. ECB data suggests that the estimated volume of cross-border investments, by residence of the investor, stood at EUR 10.6 trillion in 2016. Compared to the overall size of securities markets (EUR 52 trillion of securities held on the accounts of EU CSDs, this would imply that one in five securities are held by an investor resident in a Member State other than where the securities were issued, not taking into take account of the possible cross-border elements in holding chains. When it comes to country-specifics the situation may vary depending on how attractive the respective market is for investors but in 2014, for example, an estimated 54% of the securities of UK domiciled quoted companies were held by foreign investors. There are some estimates as to the size of cross-border transactions in securities. These range from 40% to almost all transactions. The Giovannini Report argues that "almost all transactions involve some cross-border element, the laws of more than one jurisdiction are almost always relevant, and therefore an examination is required of the extent to which each legal system recognises the validity of the laws of the other. A more recent study estimates that, on average, about 40% of all holding, trading and collateral operations by EU market participants involve a cross-border element. Using the latter estimate and applying it to the EUR 1128 trillion of transactions in securities that were settled in 2016 across the EU means that at least some EUR 450 trillion worth of transactions in securities had a cross-border element in 2016. In terms of the value of securities held on CSD accounts in the EU at the end of 2016, securities involving a cross-border element can also be approximated in the value of some EUR 20 trillion. With continuing market integration the relevance of cross-border transactions is expected to grow even further. 1.3Legal context: no EU rules on claims, three EU directives on securities

Private law, i.e. the law of contract and property, as well as securities law have developed along national lines. Therefore, Member States have different legal solutions to address transactions in claims and securities. When the transaction has a cross-border element, conflict of laws rules apply to determine which national law of all those potentially applicable should apply. In cross-border transactions in claims and securities two elements are governed by conflict of laws rules: (1) the contractual element, which refers to the parties’ obligations towards each other under the transaction; and (2) the proprietary element, which refers to the transfer of rights in property and which therefore affects third parties. EU conflict rules relating to the contractual element exist in relation to claims. EU conflict rules relating to the contractual and proprietary elements exist in certain areas relating to securities. However, no EU conflict of laws rules exist on the proprietary aspect of assignment of claims. The main difference between the areas of claims and securities is that, while there are no EU conflict of laws rules on the proprietary element of assignments of claims, three Directives include conflict of laws rules on the proprietary element of transactions in securities which, however, are not identically worded. 1.3.1Conflict of laws rules relating to the assignment of claims A claim is a right to the payment of a sum of money (for example, receivables) or to the performance of an obligation (for example, a delivery obligation of the underlying assets under derivatives contracts). The assignment of a claim is a legal mechanism whereby a creditor ("assignor") transfers his right to claim a debt against a debtor to another person ("assignee"). Assignee (new creditor) Assignment contract (transfer of the claim) Debtor Assignor (original creditor) Original contract (claim) An assignment of claims enables both simple transfers of claims from one person to another and complex financial operations used to finance the business activity of firms, such as factoring, financial collateral arrangements and securitisation.

Example 1: Outright transfer of a single claim Creditor C (assignor) assigns his claim against a debtor to assignee A. A may notify the debtor of the assignment, for instance because the national law of C's place of habitual residence requires notification of the assignment to the debtor to make the assignment effective. A then re-assigns the same claim to assignee B. B may decide not to notify the assignment to the debtor, for instance because, under the law that governs the underlying claim, notification to the debtor is not required to make the assignment effective. C subsequently becomes insolvent and his insolvency administrator tries to ascertain whether assignee A or assignee B is the valid owner of the claim. Example 2: Factoring An SME supplier C (assignor) wishes to assign the bulk of his current and future claims against clients in several Member States to factor A (a bank) which, in return for a discount on the purchase price of the claims, agrees to provide cash flow finance, collect the debts and accept the risk of bad debts. When considering the discount to propose to C, A would need to know whether the assignment will be effective against third parties in the event of C's insolvency. A may also be worried that, while under the law of the assignment contract which governs the proprietary effects between A and C, all claims are assignable, under the law governing some of the claims included in the assignment, bulk assignments may be prohibited. Example 3: Assignment of a claim as security An SME supplier C (assignor) wants to use its claims against the buyers of its products to obtain credit from assignees A and B (banks) using the claims as security. In order to extend credit to C, A and B would need to know who would have priority over the security rights in case of conflict about the title over the same claims. C may also fraudulently assign the same claims to A and subsequently to B without their knowledge. In the event of C's insolvency, the insolvency administrator would need to ascertain whether A or B has priority over the claims. Example 4: Securitisation A large retail chain C assigns its receivables arising from the use by customers of its in-house credit card to a special-purpose vehicle (A). A then issues debt securities to investors in the capital markets. These debt securities are secured by the income stream flowing from the credit card receivables that have been transferred to A. As payments are made under the receivables, A will use the proceeds it receives to make payments on the debt securities. The 1980 Rome Convention and the Rome I Regulation harmonised conflict of laws rules with regard to the contractual obligations stemming from an assignment of claims. The Rome I Regulation thus contains uniform conflict of laws rules with regard to (i) the relationship between the parties to the assignment contract - the assignor and the assignee, and (ii) the relationship between the assignee and the debtor. The Rome I Regulation, however, does not include conflict of laws rules with regard to the proprietary effects of the assignment of the claim, that is, the effects on third parties of such assignment. Conflict of laws rules on the proprietary aspects of assignments of claims are currently laid down in Member State law and not all Member States have actually enacted such rules. The question of the effects on third parties of assignments of claims was first considered when the Rome Convention was being transformed into the Rome I Regulation and then during the legislative negotiations leading to the adoption of the Rome I Regulation. The Commission proposal for the Rome I Regulation established the law of the assignor's habitual residence as the conflict of law rule applicable to the third-party effects of the assignment. In the legislative process leading to the adoption of the Rome I Regulation, several Member States such as the United Kingdom, the Netherlands, Spain, Portugal and Hungary presented proposals on the law applicable to the third-party effects of the assignment of claims. These proposals included the law of the assignment contract between the assignor and the assignee, the law of the assigned claim or mixed proposals combining the law of the assignor’s location as the general rule and the law of the assigned claim as the special rule. Ultimately, no provision on the law applicable to the third-party effects of assignments was included in the final text of the Regulation due to the complexity of the matter and the lack of time to deal with it in the required level of detail. However, the adopted Regulation specifically acknowledged the significance of this unresolved issue by requiring the Commission to present a report on the question of the effectiveness of assignments of claims against third parties accompanied, if appropriate, by a proposal to amend the Regulation. To this end, the Commission contracted an external study and, in 2016, adopted a report presenting possible approaches to the matter . As observed by the Commission in its report, the absence of uniform conflict of laws rules determining which law governs the effectiveness of an assignment of a claim against third parties and the questions of priority between competing assignees or between assignees and other right holders undermines legal certainty, creates practical problems and results in increased legal costs. 1.3.2Conflict of laws rules relating to securities transactions The Rome I Regulation has harmonised conflict of laws rules with regard to contractual obligations of securities transactions. The Rome I Regulation generally allows parties to choose the law applicable to their contractual obligations. This chosen law governs, for example, the interpretation and performance of the contract, the consequences of the breach of obligations, ways of extinguishing obligations and the consequences of nullity of the contract. As for the proprietary element dealing with the transfer of rights in property, three EU Directives contain conflict of laws rules applicable to a subset of transactions in book-entry securities. These Directives use similar but not identical rules. As a result, Member States have implemented and interpreted the rules differently. In contrast with the contractual aspects of securities transactions, no identical conflict of laws rules exist across the EU to determine which national law should govern the proprietary aspects of securities transactions. The first one of the three Directives is the Settlement Finality Directive (SFD), applicable since 1999. This Directive seeks to ensure that harmonised rules are applied where multiple settlement and payment systems are in operation to avoid difficulties arising from incompatible national regulations. The Winding-up Directive (‘WUD’), applicable since 2004, contains a conflict of laws rule to govern the enforcement of certain rights in financial instruments, namely those proprietary or other rights the exercise or transfer of which presupposes the recoding of such rights. The SFD and WUD designate the law of the Member State in which the rights are recorded in a “register, account or centralised deposit system” as the applicable law. Finally, the Financial Collateral Directive (FCD), applicable since 2003, applies to financial collateral including cash and financial instruments i.e. shares and bonds. As part of the legal framework which it establishes for financial collateral, the Directive contains a provision on conflict of laws: for cases falling within its scope, the applicable law is that of the country where the relevant account is maintained. The FCD defines the ‘relevant account’ as “the register or account - which may be maintained by the collateral taker - in which the entries are made by which that book entry securities collateral is provided to the collateral taker”. Outside the harmonised fields described above, national conflict of laws rules govern the proprietary aspects of transactions in securities. These national rules designate which law is applicable to the proprietary effects of a cross-border transaction in securities to which none of the above-mentioned EU legislation is applicable. 1.4International context: The Hague Securities Convention and the UN Convention on the Assignment of Receivables in International Trade 1.4.1The Hague Securities Convention and past attempt to ratify it The Hague Securities Convention is an international multilateral treaty intended to remove, at a global scale, legal uncertainties for cross-border securities transactions . The text was originally agreed in 2002 and concluded in its current form in 2006. It offers a set of conflict of laws rules principally based on the 'choice of law'. Parties to the account agreement can expressly agree on the applicable law out of the laws of those states where the account provider has an office. In the absence of a valid choice of law, it is the law of the state where the account is maintained that shall govern questions of ownership in book-entry securities. The Commission proposed in 2003 to ratify the Hague Securities Convention. In 2006, in an Opinion, the European Central Bank raised concerns about the Convention's ratification and called for a comprehensive prior assessment of the Convention's impact on the European Union, considering that the existing Community regime was sufficiently satisfactory and did not require an urgent or compelling signature of the Convention. The same year, the European Parliament called in a Resolution for a detailed impact assessment on the implications of accession to the Hague Securities Convention for the law and economy of the European Union. It further requested the impact assessment to specify the fiscal consequences of acceding to the Convention, the implications of the transfer of risks between entities resulting from the abandonment of the PRIMA principle ("place of relevant intermediary approach"), the implications for the exercise of voting rights attached to securities, the effects on the remuneration of the ultimate owner of securities, on combating market abuses, on combating money-laundering and on the funding of terrorism, the effectiveness of clearing and settlement systems and the identification of risks of the insolvency of credit institutions. In Council negotiations a number of Member States expressed concerns about ratification as well. The concerns that had been raised were analysed in detail in a 2006 Staff Working Document. The Commission's proposal to ratify the convention was eventually withdrawn in 2009, due to lack of political support and because of the sharp contract between the approach within the Hague Securities Convention and the EU acquis. The Hague Securities Convention entered into application in April 2017 in the three states that ratified it, namely the United States, Switzerland and Mauritius. In the near future it is not excluded that further states would ratify the Convention. There is however no clear/concrete evidence on whether this convention will become an international standard in the near future. 1.4.2UN Convention on the Assignment of Receivables in International Trade

The 2001 UN Convention on the Assignment of Receivables in International Trade contains a conflict of law rule on the third-party effects of the assignment of claims. Article 22 of the Convention provides that the law of the State in which the assignor is located governs the priority of the right of an assignee in the assigned receivable over the right of a competing claimant. This rule is subsidiary to matters settled elsewhere in the Convention and is subject to public policy and mandatory rules as well as special rules on proceeds under the Convention. This conflict of law rule must be read in conjunction with Article 4 of the Convention, which excludes from its scope a number of transactions such as transactions on a regulated exchange, financial contracts governed by netting agreements (except a receivable owed on the termination of all outstanding transactions), inter-bank payment systems, financial assets or instruments held with an intermediary and bank deposits. The Convention is not yet in force. Luxembourg is the only Member State which has signed it. The Convention has also been signed by the USA, Liberia and Madagascar. 2The problem drivers: rules designating the applicable law are inconsistent Currently there are no Union conflict of laws rules applicable to the effects on third parties of cross-border assignments of claims. Member State conflict of laws rules thus apply in this area. However, national conflict of laws rules are inconsistent and unclear, thereby creating legal uncertainty. With regard to securities, three EU Directives contain conflict of laws rules applicable to the proprietary effects of transactions in securities. However, an evaluation of conflict of laws rules relating to securities transactions showed that the rules can be interpreted in ways that are not fully consistent with one another, with a lack of clarity leading to divergent application of the rules of even the same directive. 2.1National conflict of laws rules on the third-party effects of assignments of claims are divergent and unclear, leading to legal uncertainty At Member State level, the substantive rules governing the third-party effects of assignments of claims differ greatly. For example, they lay down divergent rules on the following issues: (i) the requirement to notify the debtor to make the assignment effective; (ii) the registration requirements to perfect the assignment; (iii) the assignability of claims; (iv) the order of priority between competing assignees; (v) the determination of the existence of fraud by the assignor if he assigned the same claim more than once without informing the subsequent assignees; (vi) the determination of the moment as of which the debtor should start paying the assigned debt to the assignee; (vii) the resolution of a situation in which the debtor faces payment claims from multiple assignees. In the absence of harmonisation of substantive law, private international law solutions in the form of conflict of laws rules are of crucial importance to resolve cross-border disputes. However, in order to determine the law applicable to the effects on third parties of a claim assignment, Member States also adopt different approaches. For example, the Netherlands has chosen the law of the contract between the assignor and the assignee to apply to the proprietary aspects of a claim assignment. In order to solve the question of priority in case of competing assignments, the law governing the second assignment governs the protection of good faith second acquirers. The law of the assignor's habitual residence governs the third-party effects of a claim assignment in Belgian law. In Luxembourg, in the specific sector of securitisation, the law applicable to the third-party effects of the assignment is also the law of the country in which the assignor is established. The law of the assignor’s habitual residence also applies in Switzerland and the US. The law governing the assigned claim is favoured in Spain and Poland. In the absence of a statutory provision, case law and doctrine support this solution in the UK. Other solutions applied in the Member States are the lex rei sitae, that is, the law of the country where the obligation, as an intangible thing, is located or deemed to be located (Czech Republic and Sweden) and the law of the habitual residence of the debtor (France). In other Member States, such as Germany, Italy and Finland, there is no clear rule. The above overview shows how divergent Member States' conflict of laws rules are. As Member States designate different substantive laws to apply to the proprietary effects of a cross-border claim assignment, depending on which court is seized to decide on the matter, the outcome of the case may be quite different. This was also the conclusion of the Expert Group on conflict of laws when examining different national conflict of laws rules on the proprietary effects of assignments of claims. Different substantive rules on the proprietary effects of claim assignments may also lead market participants to forum shopping in an attempt to have the national substantive rules most favourable to their interests apply to their cross-border assignment. Example of legal uncertainty in a situation of collateralisation involving claims in a cross-border context There may be legal uncertainty as to the law applicable to the proprietary effects of an international claim assignment where a Belgian credit claim is provided as collateral by a Spanish collateral giver (the assignor) to the Belgian central bank (the assignee). The Belgian central bank might rely on its own Belgian conflict of laws rule, under which the law of the collateral provider's habitual residence, i.e. Spanish law, applies. Based on this assessment, the Belgian central bank will comply with the formal requirements under Spanish law to ensure the enforceability of the claim against third parties (for example, a competing assignee or a creditor of the Spanish collateral giver). If the credit claim had also been wrongfully assigned by the Spanish assignor to another assignee, questions of priority would arise between the Belgian central bank and the second assignee. The Belgian central bank would assume that it has priority because formal requirements under Spanish law have been complied with, while the second assignee may base its assessment on, e.g., the Spanish conflict of laws rules under which the law governing the claim, i.e. Belgian law, is applicable. Thus, the second assignee will rely on the formal requirements of Belgian law and also believe that it has priority over the rights of the Belgian central bank. Example of legal uncertainty in a situation of factoring or securitisation of claims in a cross-border context The question as to whether an assignment of claims is enforceable against third parties is crucial in securitisation transactions, factoring and, more generally, any financing that is secured or backed by claims. The creditors of the assignor (in case of the assignor’s insolvency) need to know whether claims which could otherwise be included in the insolvency estate have been properly assigned and the legal title over the claims thus transferred. Competing assignees need to know who will have priority rights in case the same claim has been assigned more than once. 1. Assignors can be located in several jurisdictions. The determination of the law applicable to the third-party effects of the assignment of claims is conducted in each jurisdiction where an assignor is located based on the assumption that the judge dealing with the bankruptcy of the assignor is likely to be located in the same jurisdiction. This legal analysis may be costly depending on the number of jurisdictions involved.

2. Debtors can be located in several jurisdictions and therefore the assigned claims may be governed by the laws of different jurisdictions (including local laws applied for mandatory reasons, such as consumer laws). Depending on the number of jurisdictions involved, this could impair the feasibility of a bulk assignment of claims as third parties would have to look at the laws of several jurisdictions, which may be impracticable for assignees and lessen transparency for the creditors of the assignor . The examples illustrate the legal risks stemming from the diverging Member State conflict of laws rules combined with the absence of a uniform conflict of laws rule at Union level. This situation leaves market participants with high uncertainty as to which of the very different national substantive rules applies to their cross-border assignment of claims and thus as to whether their assignment is effective and can be enforced against third parties. 2.2EU conflict of laws rules relating to securities are interpreted differently across Member States The evaluation of conflict of laws rules relating to securities transactions contained in three directives (FCD, SFD and WUD) showed that these rules can be interpreted in ways that are not fully consistent with one another (see Annex 5). The lack of clarity in each of these directives leads to a divergent application of the rules of even the same directive. Although all three directives use a similar rule, the solutions differ in detail. Depending on which Member State's authorities are deciding about a proprietary issue, they might reach a different conclusion as to which law is applicable even if they are looking at the same case. The first and most apparent issue is that the wording of the directives leaves open how to determine where the account is ‘located’ (wording used by the SFD and the WUD) or ‘maintained’ (wording used by the FCD). The directives do not specify whether ‘location’ means something different than ‘maintenance’ and whether those terms refer to legal or factual connecting factors. As the Evaluation in Annex 5 also shows, Member States interpret these concepts differently. Divergences of interpretations were found not only across the different directives, but also in the case of one single Directive. For example the wording of the FCD "where the account is maintained" is interpreted in at least six different ways. Further residual differences across the three directives can be observed, namely that the wording of the SFD and the WUD leaves open which ‘record’ is relevant in case a book-entry security is recorded simultaneously in a “register, account or centralised deposit system”. The FCD uses the term ‘country’, whereas the other two directives refer to 'Member States' only. The FCD relies on the notion of ‘book-entry securities collateral’, which is based on a self-standing definition of ‘financial instruments’ , whereas the SFD and the WUD rely on the list of ‘financial instruments’ annexed to the MIFID II. Finally, whereas the FCD excludes renvoi, the other two directives do not. The above issues imply some theoretical legal uncertainty. 2.3Scope and methodology 2.3.1Which legal issues are unclear? 2.3.1.1Claims and securities: the proprietary aspects of transactions As explained above, the contractual aspects of transactions in claims and securities are governed by the Rome I Regulation and are outside the scope of this impact assessment. This analysis does not therefore deal with the question of which law should govern the original contract between the parties. In particular, this report does not examine the transfer of the contracts (such as derivative contracts), in which both rights (or claims) and obligations are included, or the novation of contracts including such rights and obligations. As this report does not cover the transfer of contracts or the novation of contracts, trading in financial instruments, as well as the clearing and the settlement of these instruments, are not examined as these are subject to the law applicable to contractual obligations as laid down in the Rome I Regulation. This law is normally chosen by the parties to the contract or is designated by non-discretionary rules applicable to financial markets. This report only examines the question of which law should govern the proprietary aspects of the assignment of claims or the transaction in securities. 2.3.1.2Claims: effectiveness of the assignment of claims and priority issues With regard to claims, the effects on third parties of an assignment of claims essentially refer to two types of issues: (a) the effectiveness of the assignment of the claim against third parties, that is, the steps that need to be taken by the assignee to be able to oppose his right over the claim to third parties – for example, registering the assignment with a public authority or registering or notifying the debtor in writing of the assignment; and (b) priority issues: that is, in case of successive assignments of the same claim, the determination of whose right has priority – for example, between competing assignees of the same claim or between an assignee and another right-holder, for example a creditor of the assignor or a creditor of the assignee in insolvency cases. 2.3.1.3Securities: different wording and interpretation across Member States With regard to securities, the three Directives address already the most relevant aspects of cross-border transactions to provide legal certainty. However, the different wording and the different application of the same rules at national level create some uncertainty as to which law applies. 2.3.2Transactions and assets concerned The transactions covered by this impact assessment are the sale and purchase of securities and the assignment of claims. The list of financial instruments in MiFID II includes securities (such as shares and bonds), derivatives (such as options or futures) and emission allowances. With regard to securities, and given that issues concerning the applicable law only arise in cross-border transactions, this impact assessment looks into those securities in which cross-border transactions are frequent. Some securities, notably securities which are not recorded in book-entry form, are not frequently subject to cross-border deals. Therefore, the scope of this analysis is limited to book-entry securities. As to claims and as explained above, they can be classified into two categories: 'traditional claims' (or receivables, such as money to be received for unsettled transactions) and so-called 'financial claims', that is, claims arising from contracts traded on financial markets, such as derivative contracts, which are financial instruments under MiFID II.

Claims arising from contracts which are financial instruments under MiFID II, such as derivative contracts, are relevant for the proper functioning of financial markets. Similarly to securities, these contracts constitute large volumes of cross-border transactions and are often recorded in book-entry form. From an economic viewpoint, markets in these assets and the interests of stakeholders dealing with these assets are similar to those in markets in securities. The form of recording trade in derivatives, that is, whether in book-entry form or otherwise, is governed by Member State law. In some Member States certain kinds of derivatives are recorded in book-entry form and are regarded as securities while, in other Member States, they are not. Depending on whether or not, under national law, a derivative is recorded in book-entry form and regarded as a security, the authority or court dealing with a dispute over the ownership of the financial instrument or of the claim arising therefrom will apply the conflict rule applicable to book-entry securities or the conflict rule applicable to claims. In view of the above, this impact assessment assesses the impact of the planned initiatives on claims and securities and, more specifically, on: (i) 'traditional claims' as well as 'financial claims' arising from contracts not recorded in book-entry form, both of which are referred to as 'claims' in this report; and (ii) securities in book-entry form and 'financial claims' arising from contracts recorded in book-entry form, both of which are referred to as 'securities' in this report. 2.3.3Methodology and access to data The analysis and evidence presented in this impact assessment is based on various sources. The most relevant include the EPTF Report, the findings of the T2S Harmonisation Steering Group, feedback received from Member States to a Questionnaire on national transposition of relevant EU rules, a Public Consultation with stakeholders, and discussions within the Expert Group on conflict of laws regarding securities and claims. Detailed information on the process can be found in the Annexes to this report. 2.3.3.1Confidentiality of the number and value of assignments of claims In practice, although the value of financial claims, that is, claims arising from contracts traded on financial markets (for example, derivatives), is recorded by trading or clearing market infrastructures, in particular trade repositories, this information is confidential. In addition, it is not possible to have information on the number of claim assignments or on whether such assignments were of a domestic or cross-border nature as this information is not recorded. As regards traditional claims, that is, receivables, the value of claims assigned with the involvement of the factoring industry is confidential. In addition, it is not possible to know the number of claims assigned or whether such assignments are cross-border or domestic as this information is not recorded. It is also not possible to have any information on the value, number or character (cross-border or domestic) of claims assigned between private parties without the involvement of the factoring industry, such as claims assigned between businesses, between businesses and consumers or between consumers only, as this information is not recorded by any public or private organisation. In the public consultation with stakeholders, both the authorities of Member States and the stakeholder associations that replied to the public consultation confirmed that a great deal of data on assignments of claims, for example on collateralisation or securitisation, is not collected either by public authorities, stakeholders or stakeholder associations. Example of lack of access to data regarding cross-border transactions in claims "[There is] no publicly available information about many of these transactions. AFME is not aware of any existing industry-wide initiative to collect this information from firms. For AFME members, claims are often used as underlying assets in securitisations. Information about public transactions can be found in AFME's Securitisation Data Report. However, it is very difficult to estimate the total number or value of transactions concerned per year, since in addition to public transactions there are many private transactions and for these there is no publicly available information". In view of the above, data on the number, value and cross-border character of claim assignments, including both recorded and non-recorded assignments, in a given year within the EU, cannot be obtained. Data of a general nature on the value of assignments of claims in the markets of factoring, collateralisation and securitisation is provided in sections 1.2.2 and 1.2.3. 2.3.3.2Unclear understanding on the interpretation of EU rules for transactions in securities With regard to securities, the public consultation revealed that, out of 39 respondents, 16 thought it was not clear how to apply EU rules, 10 considered the rules were clear, and 13 did not provide a reply. Court cases revealing actual problems in applying the existing rules are rare and stakeholders could not supply any evidence (either on court cases or out-of-court settlements) of legal uncertainty causing substantial problems in practice. Attempts to collect evidence of the impact of legal uncertainty in securities transactions only delivered a general cost estimate for legal opinions, which cover, among other things, an analysis of the applicable law. 3The problem: cross-border transactions are inherently riskier than domestic ones 3.1The legal risk in cross-border transactions leads to potential losses (with stability risks), higher costs and reduced market integration As explained above, the law that applies to cross-border transactions cannot always be clearly determined, which means that the validity and enforceability of these transactions is often uncertain. Currently, cross-border transactions are inherently riskier than purely domestic ones because, for example, the effectiveness of proprietary rights over the securities or claims may be disputed by market participants which are not party to the transaction. Matters can get more complicated where several subsequent transactions take place and certain players call previous transactions into question (for example, because registration requirements were not complied with, securities were not acquired in good faith, or bulk assignments of future claims were not effective in the assignor's insolvency). Questions of priority may also arise where competing claimants exist because the same assets were wrongfully assigned multiple times to different recipients. If a transaction takes place domestically, there is usually no problem in answering these questions based on national substantive law but, in a cross-border situation, it is frequently unclear which national substantive law applies. The problem tree below shows the main drivers, the problem and its consequences. The problem stems from the fact that the rules designating the law applicable to the proprietary effects (that is, the ownership and the rights of the owner) of cross-border transactions are unclear and inconsistent. There is legal uncertainty as to which law will be deemed applicable by a given court or authority that has to determine who has ownership rights over certain assets in a cross-border transaction. If investors, credit providers or factors are unable to determine in advance which national substantive law governs their rights, they risk not having validly acquired the claims or the securities. Cross-border transactions in claims and securities might therefore bear significant legal risk, as technical defects may emerge as to the manner in which the transaction was carried out, possibly resulting in serious financial loss for those that put money at risk in the transaction. The analysis in this impact assessment aims to examine how material this problem is in practice and how it differs in the area of claims and securities. Market participants might react to the legal risk in cross-border transactions in three different ways: by ignoring it, mitigating it or avoiding it if they are deterred by the legal uncertainty. Depending on how they choose to deal with it, the legal risk in cross-border transactions will have different consequences for market participants: (i) if they ignore the risk, it may materialise during the insolvency proceedings of a counterparty: the validity or the enforceability of a transaction might then be challenged, leading to losses, where systemic risk implications cannot be excluded with broader implications for financial stability risk; (ii) if market participants choose to mitigate the legal risk posed by legal uncertainty by seeking additional and specialised legal counsel, the transaction bears additional costs, making cross-border transactions more costly than domestic ones; (iii) if market participants are deterred by the legal risk posed by legal uncertainty and choose to avoid it, they may lose business opportunities and jeopardise the integration of capital markets under the CMU initiative. The above assumes that market participants are in fact aware of the legal risk, a condition which is in fact often not met. In these cases market participants will remain oblivious to the risk. This will, on the one hand, reduce the detrimental effect in terms of reduced market integration given that the cross-border transaction will be carried out as initially intended. On the other hand, this situation can give rise to hidden business risks for which the trading entity cannot plan or safeguard itself against.

This impact assessment does not calculate risks of losses and the likelihood of systemic impacts according to an econometric model. This would require tracing all bilateral transactions, both reported and private, and preparing a legal assessment of each of those transactions to find out what percentage of these are exposed to the legal risks of different laws being applicable and in what way each specific case could be decided differently depending on where the case is heard. Since tracing all transactions and getting specific legal assessment for all of them is impossible, this analysis instead substantiates the problems through, first, a summary of a detailed analysis of applicable laws both at EU and national levels and, second, provides quantitative estimates on cross-border transactions in claims and securities across the EU. Putting the two together, the extent to which there are legal inconsistencies and the extent to which transactions involve cross-border elements will be used as a proxy to estimate the magnitude of the problem: the legal risk in cross-border transactions. Problem tree

3.2Proprietary effects of assignments of claims: absence of EU conflict of laws rules and inconsistent national conflict of laws solutions The total absence of EU conflict of laws rules in respect of the proprietary effects of assignments of claims and the inconsistent national conflict of laws solutions create legal uncertainty as to which law applies to such third-party effects. This uncertainty means that there is a risk in cross-border transactions that the assignment may not be valid, may not confer all the rights the assignee expects or that the assignment may not be enforceable against third parties. ·Legal uncertainty in the context of cross-border transactions in both claims and securities was raised by several respondents to the public consultation on the Green Paper “Building a Capital Markets Union”, where a very broad range of stakeholders called on the European Commission to improve legal certainty in cross-border securities holdings. ·The expert group European Post Trade Forum (EPTF), in its 2017 Report, flags this issue as still one of the barriers to an efficient EU post-trade market, recognising that the issue does not relate only to conflict of laws rules applicable to transactions in securities but also to assignments of claims. ·The Expert Group on conflict of laws analysed in detail the existing legal uncertainty in cross-border transactions in both claims and securities, and proposed alternative ways of clarifying which law is applicable to the third-party effects of transactions in claims and securities. Despite the legal uncertainty reported by stakeholders and experts, court cases are quite rare in this field given the risk of reputational damage to the litigating parties in front of courts, where details of the cases are publicly disclosed. Very often parties prefer to resolve problems of legal uncertainty in out-of-court settlements, the details of which are not public, and therefore it is not possible to obtain evidence as to how often problems of legal uncertainty lead to out-of-court resolution between parties. However, in the face of financial distress, avoiding litigation is very difficult and case law concerns major frauds and insolvencies. It is therefore usually for the insolvency administrator or resolution authority to answer the question ‘who owns what’ in order to establish which claims and securities form part of the insolvent institution's estate. 3.3Proprietary effects of transactions in securities: residual legal uncertainty Experts and at least some stakeholders agree that, despite the existence of conflict of laws rules, residual legal uncertainty remains – as also evidenced in the evaluation, and the public consultation where 16 stakeholders pointed out that it was not clear how to apply EU rules. However as it is clear from the data on the size of cross-border securities transactions (see section 1.2.4.), this residual legal uncertainty did not prevent the development of significant cross-border markets. Market participants found ways to deal with the different application of EU rules, either through exhaustive legal opinions (one third of those stakeholders who answered thought that the question of applicable law was always adequately addressed in cross-border transactions), or by structuring their transactions in a way that creates legal certainty. Possibly they might also price in any remaining legal risks, however there is no evidence whether and how often this might happen. 3.4Ignoring the risks can lead to losses 3.4.1Important risks relating to the assignment of claims An example was given by the Asset Based Finance Association Limited (ABFA) outlining the risks relating to the assignment of claims: "The risks to ABFA Members when purchasing cross border receivables are: 1) that their ownership of receivables, even though valid in UK and Ireland, will not be recognised under the law of the country in which the debtor is located and thus make the debt uncollectable from the debtor; 2) that a third party may have a prior right to the debt thus making the debt uncollectable; 3) that if the assignee trader is located outside UK and Ireland the asset based finance provider's ownership of the debt may not be accepted by the assignee trader's insolvency official." Besides the concrete examples received through the public consultation, the argument is also made that market participants are often not aware of the legal risks at all. The public consultation asked stakeholders whether or not legal opinions always cover the question of the applicable law when relevant. While 20% of respondents did not provide an answer, only 25% of respondents thought that the question of applicable law was adequately addressed in all relevant situations. Almost 50% of respondents thought legal opinions do not always assess the applicable law where such question would be relevant for the transaction. Also, the Giovannini Group in its 2001 Report already notes that:

"The risks associated with legal certainty are rarely if ever acknowledged or accommodated in the transaction. [...] Participants only become aware of the risk when a problem with enforcing ownership claims actually arises." In addition, the cost of a cross-border assignment of claims may be prohibitive due to the aforementioned legal uncertainty as to the law applicable to the third-party effects, both in situations where the transaction is too small or too complex. In such cases, legal due diligence costs may be waived and risks taken or ignored. "The "legal due diligence" issues account for an average of 50 % of the lawyers' fees for a typical cross-border transaction, but can also be so prohibitive that the parties agree to take the legal risk of not carrying on a comprehensive legal due diligence. This obviously creates a legal risk that could be avoided by harmonizing the conflict-of-law rules. […] On one side, if the cost of these studies is too high, the transaction may not be carried out. On the other side, if nonetheless banks decide to carry out the transaction without running all the legal due diligence, the legal risk may be very important. […] Legal due diligence may not be followed for small and very simple deal". 3.4.2Theoretical risks of losses with no material evidence for transactions in securities In terms of risk of losses with regard to securities the literature and the public consultation did not deliver any tangible evidence. Theoretically the legal risk, if ignored, can lead to unexpected losses. Whether and how often this happens in practice is unclear. Parties would likely settle such issues out of court, and such settlements are confidential. Therefore, there is no publicly available data to quantify these risks. Given, however, that legal uncertainty in respect of securities is marginal compared to legal uncertainty in claims – due to the existence of EU conflict of laws rules on securities – risks of losses in securities transactions are also likely to be more marginal than in the case of claim assignments. 3.5Mitigating risks means higher costs for cross-border transactions If market participants choose to mitigate the legal risk posed by legal uncertainty, they will incur additional costs. 3.5.1The significant cost of cross-border assignments of claims The absence of uniform conflict of laws rules on the proprietary effects of cross-border assignments of claims leads market participants to having to obtain several legal opinions as to the requirements under all potentially applicable national laws or to structure their transactions along existing legal inconsistencies and comply with the requirements of all potentially applicable national laws. This can double or triple the cost of a cross-border transaction. Market participants that are aware of the legal risk and choose to mitigate it are likely to price it in the transaction. The costs of legal opinions can be reduced to some extent by aiming to obtain one legal opinion for several transactions that are standardised, but this is only of limited help. When asked in the Public Consultation whether problems had been encountered in practice in securing the effectiveness of cross-border assignments of claims against persons other than the assignee and the debtor in the past five years, 11 stakeholders replied that they had faced problems, 5 stakeholders responded negatively and 21 either did not know or did not respond. Nearly all stakeholders agreed that legal due diligence undertaken for cross-border assignments of claims represents important costs. Although costs vary greatly from case to case, they constitute at least 25% of the legal fees, but frequently 40% (and up to 60%) of the legal fees for banks, as transactions often involve several debtors located in different Member States. This requires the analysis of each law potentially applicable, in particular the law of the assignor's habitual residence, which is almost systematically examined to ensure protection in the event of the assignor’s insolvency. Stakeholders also mentioned that, if the costs of legal advice on the applicable law are too high, the transaction may not be carried out at all (see quote in Section 3.4.1 above). The Expert Group on conflict of laws provided examples from law firms specialised in transactions in claims about the costs that parties involved in collateralisation, securitisation and factoring need to incur to obtain legal opinions on all possibly applicable laws: "We ran through an Asset Based Loan (ABL) transaction with 28 jurisdictions obtaining 28 local opinions to ensure enforceability against third parties of the assignment of claims as security ranging from 10,000 to 15,000€ (depending on the jurisdictions)." "We recently advised on a pan-European trade receivables securitisation involving 18 jurisdictions. Although the majority of them were located in Central Europe, more than 10% of the overall transaction costs were allocated to the due diligence, advice and coordination of the foreign local lawyers (in order to obtain a local memo on the formalities to be performed locally, according to their local law, for enforceability of the assignments towards third parties). […]" "We also set up a supply chain programme for a similar number of jurisdictions and the third country enforceability analysis was the most difficult to obtain. The overall fees were in the range of more than 500.000€ (including the tax analysis) only for the local law analysis" "We recently advised a factoring company, operating in cross-border transactions, in the establishment of a trade receivables platform structured to cover more than 60 jurisdictions. The issue of the enforceability of the transfer vis-à-vis third parties was one of the main topics that we had to analyse - with the support of foreign counsels/experts - for the setting-up of the platform. This issue determined: - a significant impact in terms of timing; - a substantial amount in legal fees payable by the client for the setting-up of the platform (approx. 25/30% of the total fees were allocated to this part of the analysis (i.e. enforceability of the transfer vis-à-vis third parties)) […]." 3.5.2Residual legal risk relating to transaction in securities With regard to securities, the residual legal uncertainty can in theory have a transaction cost. One estimate puts the additional cost linked to "legal discrepancies" at 22%, noting however that this figure cannot be taken at face value, given that "there is general or residual legal risk inherent in cross-border transactions that cannot be eliminated" and which are therefore not related to the residual legal uncertainty as to which law applies. Combining the 22% estimate with EU securities settlement system data as at end-2016 and survey-based data obtained by Oxera, yields an overall annual cost estimate of some EUR 13 billion. However, as pointed out above, it cannot be established what proportion of these costs stem from the legal uncertainty that this impact assessment is focusing on. In addition, within this figure there is no detailed breakdown of transactions with EU and non-EU counterparties that would allow us a better estimate of the cost of legal uncertainty within the EU compared with non-EU counterparties. As such, the costs relating to theoretical legal uncertainty are to be considered as minimal/residual.

Mitigating residual risks in cross-border securities transactions can also take the form of commissioning legal opinions. The European Banking Federation estimates the costs of standard legal opinions to be between EUR 10 000 and EUR 50 000, however it is unclear which part of the costs are created by conflict of laws questions: "Where the questions and issues covered by the opinion are intended to address specific concerns of an institution or their specific structure, (bespoke) agreement or adjusted standard agreement, or even individual transaction, the cost may well be significantly higher. • A completely new opinion (on a new type of standard agreement and in relation to a new set of legal issues/questions) is a very time consuming and complex endeavor: the first opinion to be obtained will thus always be considerably more expensive than a revised version (update) of a previous opinion or an opinion where the relevant issuer of the opinion has already issued other opinions on similar legal questions. • Likewise, an opinion covering more complex legal issues (segregation and custodian relationship may be one example) will be more challenging and thus more expensive." As these are general figures for legal opinions that are necessary for each transaction whether or not conflict of laws are clear or unclear, there is no estimate of the specific costs of assessing conflict of laws issues. Therefore, it is not possible to give a precise cost estimate of the residual legal uncertainty in securities transactions. 3.6Avoiding the legal risk leads to less cross-border activity With regard to claims, if market participants are deterred by the legal risk and choose to avoid it, they will not enter into certain cross-border assignments, which will result in lower levels of cross-border activity in the EU. At central bank level, the Eurosystem takes credit claims as collateral for about 25% of financial market transactions (see Section 1.2.3). But clarity over which law is applicable to the third party-effects of the collateral assignment is a prerequisite for the claims to be accepted as collateral. One of the conditions for credit claims to be accepted as collateral by the Eurosystem is that there cannot be more than two different laws applicable to (a) the counterparty; (b) the creditor; (c) the debtor; (d) the guarantor (if relevant); (e) the credit claim agreement; and (f) the mobilisation agreement. Uncertainty around which law is applicable to the third-party effects of the claim assignment increases the risk of potentially more than two laws being applicable. This means that some credit claims cannot be assigned as collateral within the Eurosystem. With regard to securities, it appears that cross-border markets have developed despite the residual legal uncertainties, as evidenced in section 1.2.4. The choice of avoiding the legal risk is therefore not pertinent for securities. 3.7Various market participants are affected negatively Legal uncertainty has different consequences for different types of players. 3.7.1Companies, including SMEs Having a uniform and clear conflict of laws rule designating the national law applicable to the third-party effects of a claims assignment would make it easier for companies, including SMEs, to obtain finance in exchange for claims assigned as collateral. For example, if the national law designated as applicable by the conflict of laws rule allows companies to offer to banks future claims against non-domestic customers as collateral, or to offer such claims in bulk as collateral, companies could design their business accordingly and thereby have easier access to cheaper finance. 3.7.2Factoring and securitisation industry With regard to claims, the factoring and securitisation industries currently operate according to national conflict of laws rules on the third-party effects of assignments of claims where these exist, or try to structure transactions avoiding cross-border elements because the Member States from which they operate do not always have clear conflict of laws rules. The adoption of common and clear conflict of laws rules would have a positive impact on the conditions under which banks offer their financing and securitisation services based on claims held by domestic firms against non-domestic customers, and the conditions under which the factoring industry offers their discounting services to SMEs (that is, the purchase of the SMEs’ unpaid claims). If there was legal certainty as to which national law applies to the third-party effects of claims assignments, costs for legal due diligence for cross-border transactions could be abolished and the enforcement of cross-border claims facilitated. The factoring and securitisation industries could thus provide their services to companies, including SMEs, under more favourable terms. As for securities, the residual legal uncertainty does not seem to impede the development of cross-border transactions. It might make the structuring of transactions or legal opinions marginally more expensive, but there is no precise data as to these additional costs in either existing literature or responses from stakeholders. 3.8How would the problem evolve, all things being equal? Without any action at EU level it is unlikely that the problems posed by the legal risk derived from legal uncertainty would be resolved in the near future. Any action by Member States is likely to result in a continuation of the application of different conflict of laws rules, as Member States are unlikely to converge on one single conflict of laws rule. This means that the status quo with its current problems would remain. In respect of the proprietary effects of assignments of claims, no EU conflict rules have been adopted. This leaves cross-border assignments of claims subject to multiple potentially applicable Member State laws based on different connecting factors and covering different scopes. The legal uncertainty stemming from this situation creates a legal risk that can either be ignored by the parties to cross-border assignments, mitigated at the expense of higher transaction costs or result in missed profitable business opportunities and reduced market integration. The legal risk stemming from the current legal uncertainty is likely to remain unchanged absent any EU intervention.

With regard to securities, Member States alone cannot address the divergent application of existing EU rules. In the medium term, technological developments such as distributed ledger technology can be expected to gain further ground in financial services. Such technological advances would not resolve legal uncertainty. On the contrary: as conflict of laws rules are unclear or conflicting, legal uncertainty might stand in the way of applying these new technologies, which require clearly defined rules to facilitate the recording of transactions and the verification of whether or not a transaction is valid. 4Why should the EU act? Legal basis, subsidiarity and added value In the area of judicial cooperation in civil matters with cross-border implications, Article 81(2)(c) of the Treaty on the Functioning of the European Union (TFEU) empowers the Parliament and the Council to bring measures, where necessary, to ensure the compatibility of the rules applicable in the Member States concerning conflict of laws and of jurisdiction. Pursuant to Protocol No 22 to the TFEU, legal measures adopted in the area of freedom, security and justice, such as rules on conflict of laws, do not bind or apply in Denmark. Pursuant to Protocol No 21 to the TFEU, the UK and Ireland are also not bound by such measures. However, once a proposal has been presented in this area, these Member States can notify their wish to take part in the adoption and application of the measure and, once the measure has been adopted, they can notify their wish to accept that measure. With respect to the third-party effects of assignments of claims, each Member States currently has (i) its own substantive rules, and (ii) its own conflict of laws rules designating which substantive law applies to such third-party effects. Both the substantive rules and the conflict of laws rules of the Member States are different (and in a number of cases the conflict of laws rules are unclear or not laid down in statutory legislation), and this divergence creates legal uncertainty which results in legal risk, as the substantive laws of various countries can potentially apply to one cross-border assignment. In order to provide legal certainty, the EU could propose to harmonise the substantive rules of all Member States governing the third-party effects of assignments of claims or to harmonise the conflict of laws rules applicable to the third-party effects of assignments of claims. The solution proposed is to provide legal certainty through the harmonisation of conflict of laws rules. This is a more proportionate solution in line with the subsidiarity principle as it does not interfere with national substantive law and only applies to assignments of claims with a cross-border element. Such action relating to the third-party effects of assignment of claims would be suitable to achieve the objective of providing legal certainty for cross-border assignments and, at the same time, not go beyond what is necessary to achieve the aim of facilitating cross-border investment, access to cheaper credit and greater market integration. It would provide market operators with clear rules on the law that will apply to a certain assignment without embarking on the more intrusive path of harmonising the laws of Member States. There would be clear added value in addressing the problems described at EU level rather than through individual action by Member States. In respect of claims, this is supported by 80% of the stakeholders consulted in the study contracted by the Commission, which expressed a need for legislation on the law applicable to the third-party effects of assignments of claims. The public consultation also tested the opinion of stakeholders with regard to the added value of EU action. Out of the 39 stakeholders that responded to the question, 59% answered positively, 22% did not see any added value and 18% did not have an opinion. Member States acting individually could not satisfactorily remove legal uncertainty, the legal risks stemming from inconsistent national conflict of laws rules and the ensuing barriers to cross-border investment and access to credit, as national rules and procedures would need to be the same or at least compatible in order to work in a cross-border situation. The added value of EU action in this field would be the unification across the EU of the conflict of laws rules applicable to the third-party effects of cross-border assignments of claims. Action at EU level would ensure that, throughout the Union, the same national substantive law is designated as the law applicable to the third-party effects of a claim assignment and, thus, that the designated national law applies regardless of the Member State whose courts are seised. The legal certainty around the law applicable to the proprietary rights of the parties to cross-border assignments of claims would bolster cross-border investment and facilitate access to credit for companies and consumers. For securities, clarification of certain aspects of the existing EU conflict of laws rules is needed because Member States acting individually cannot achieve a consistent application of the rules. It is necessary to improve the transparency of the existing rules, to address the residual legal uncertainty and to improve legal certainty for cross-border transactions given the divergent implementation of these rules at national level. 5What should be achieved? 5.1The policy objectives The general objective of this initiative is, in line with the objectives of the CMU Action Plan, to foster cross-border investment in the EU and, thereby, facilitate access to finance for firms, including SMEs, and consumers. More specifically, this initiative aims to improve legal certainty in order to: (i) reduce the financial losses resulting from materialised legal risks; (ii) eliminate the costs incurred by market participants when trying to mitigate the legal risks stemming from legal uncertainty; and (iii) make it simpler and more attractive for market participants to carry out cross-border transactions in the EU. Legal certainty can be improved by ensuring that the same national substantive law is designated as the law applicable to the proprietary effects of a given cross-border transaction in claims or securities, irrespective of which Member State's authorities are competent to review the matter. The following table shows how the specific objective links to the problem identified and its drivers: PROBLEMS OBJECTIVES Driver Legal uncertainty: -no EU rules and inconsistent national rules (claims) -unclear and differently implemented EU rules (securities) Have uniform EU rules (claims) Have clarity of EU rules and their implementation (securities) Operational Problem Legal risk Improve legal certainty Specific Consequences Losses Costs Less cross-border activity Reduce losses Reduce costs Foster cross-border investment (for claims) General Size or scale of problem Significant for claims Residual for securities Substantial for claims Marginal for securities Size or scale of expected improvement 5.2Consistency with other EU policies and the Charter for fundamental rights The aims of the initiative are coherent with other EU policies, in particular financial market regulation and judicial cooperation in civil matters. By harmonising conflict of laws rules on the third-party effects of assignments of claims, this initiative would clarify the legal situation of parties involved in factoring, collateralisation and securitisation and thereby facilitate access to finance for SMEs and consumers. Regarding financial market regulation, the initiative is part of the Capital Markets Union Action Plan, which aims, among other things, to facilitate cross-border investment. With the objective to reduce the legal risk stemming from legal uncertainty that may discourage cross-border transactions or lead to additional costs, this initiative would contribute to the objective of encouraging cross-border investment. Another key objective of the current initiative is to reduce the losses that might occur when legal uncertainty is ignored. This objective is fully consistent with the objective of investor protection set out in a number of EU financial market regulations.

With regard to the Charter of Fundamental Rights of the European Union, the objectives of the initiative are in full support of the provision on the right to property (Article 17), which provides in paragraph (1) that: "Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law in so far as is necessary for the general interest." Indeed, by clarifying which law is applicable to assess the proprietary aspects of transactions in claims and securities, the current initiative would greatly contribute to upholding the Charter's right to property, as it would diminish the risk that investors or collateral takers' ownership over claims or securities might be hindered. In addition, by reducing cases of fall-outs and financial losses due to the complex and unclear provisions on the law applicable to the proprietary effects of transactions in claims and securities, this initiative would positively impact the freedom to conduct a business set out in Article 16, which provides that: "The freedom to conduct a business in accordance with Union law and national laws and practices is recognised." Finally, by unifying conflict of laws rules relating to the proprietary effects of transactions in claims and securities, this initiative would discourage forum shopping as any Member State court hearing a dispute would base its judgement on the same national substantive law. This would facilitate the right to an effective remedy set out in Article 47, which provides in its first sentence that: "Everyone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal in compliance with the conditions laid down in this Article." 6Claims: options, impacts and who will be affected 6.1Baseline: no EU intervention The baseline scenario against which all options are measured is the status quo. The expected evolution of the status quo is described in section 3.8. The special objective of this initiative is to provide legal certainty so as to eliminate the problem of legal risk and its consequences of possible losses and increased transaction costs, and thereby reach the general objective of fostering cross-border investment. Maintaining the status quo would not achieve any of these objectives. 6.2Harmonising conflict of laws rules With the increasing interconnectivity of national markets, assignments of claims often involve a cross-border element which can lead to a conflict of applicable laws. Legal certainty as to which law applies to the different relationships created by the assignment is paramount for the smooth running of assignment operations. Increased legal certainty leads to a greater number of assignments and, therefore, to an increased availability of capital and credit across borders; more affordable credit rates, particularly beneficial for small and medium-sized enterprises (SMEs) and, in the long run, to facilitating the cross-border movement of goods, services and capital. The CMU Action Plan acknowledges that developing a pan-European capitals market could benefit from reviewing the provisions related to the assignment of credit claims and the order of priority of such transfers. Given that the objective of EU intervention is to provide legal certainty in order to do away with the problems posed by legal risk, it is considered necessary for such EU intervention to take the form of a legislative instrument harmonising the conflict of laws rules applicable to the third-party effects of assignments of claims. The adoption of non-legislative action would not eliminate the current legal uncertainty as each Member State would be entitled to continue to apply and interpret its own conflict of laws rules. The harmonisation of the conflict of laws rules would not entail an additional layer of rules for market participants or Member States. Instead, it would streamline and simplify the current situation where parties to a claim assignment must look at and comply with a number of potentially applicable national laws, as the EU common conflict rules would replace the existing diverging national conflict rules. In this way, parties to a cross-border claim assignment would only need to look at the EU common conflict rules to know: (i) which national law lays down the requirements they need to comply with in order to ensure that they will acquire legal title over the claim, and (ii) which national law will apply to resolve a dispute over the legal title of the claim. 6.3Options on the conflict of laws rule In any cross-border assignment of claims, third parties must be able to identify the law applicable to the effects of the assignment so that they can ascertain their rights or obligations. The national substantive law designated by the chosen conflict of laws rule as the law applicable to the third-party effects of the assignment must govern the matters not governed by the Rome I Regulation, namely: (i) the effectiveness of the assignment of the claim against third parties: that is, the steps that need to be taken by the assignee in order to be able to oppose to third parties his right over the claim – for example, registering the assignment with a public authority or registry, or notifying the debtor in writing of the assignment; and (ii) priority issues: that is, in case of successive assignments of the same claim, the determination of whose right has priority – for example, between competing assignees of the same claim or between an assignee and another right-holder, for example a creditor of the assignor or the assignee in insolvency cases. The term ‘third parties’ should be understood as third parties other than the debtor, as all aspects affecting the debtor are, pursuant to Article 14(2) of the Rome I Regulation, governed by the law that governs the assigned claim.

The study contracted by the Commission shows that the laws most commonly applied today to resolve conflicts of laws on the effects on third parties of assignments of claims are the following: the law of the contract between the assignor and the assignee (for example, the Netherlands), the law of the assignor's habitual residence (for example, Belgium, Luxembourg in respect of securitisation) and the law governing the assigned claim (for example, Spain, Poland). These options will be analysed hereafter together with two mixed options which combine the law of the assignor’s habitual residence and the law of the assigned claim. The mixed options, which consist of a law applicable as a general rule and another law applied to some situations as an exception, aim at taking into account the specific needs of market participants. 6.3.1Option 1: Law applicable to the assignment contract Under this connecting factor, the law that governs the contract of assignment between the assignor and the assignee would also govern the proprietary effects of the claim assignment . The assignor and the assignee can choose any law to govern their assignment contract. 6.3.2Option 2: Law of the assignor's habitual residence Under this connecting factor, the third-party effects of the assignment of claims would be governed by the law of the country in which the assignor has his habitual residence. 6.3.3Option 3: Law governing the assigned claim Under this connecting factor, the third-party effects of a claim assignment would be governed by the law that governs the assigned claim, that is, the credit in the original contract between the creditor and the debtor which is subsequently assigned by the creditor (assignor) to a new creditor (assignee). The parties to the original contract can choose any law to govern the contract which includes the claim subsequently assigned. 6.3.4Option 4: Mixed approach combining the law of the assignor’s habitual residence and the law of the assigned claim This mixed option combines the application of the law of the assignor's habitual residence as a general rule and the application of the law of the assigned claim to certain exceptions, namely (i) the assignment of cash credited to an account in a credit institution (such as a bank, where the consumer is the creditor and the credit institution is the debtor), and (ii) the assignment of claims arising from financial instruments such as, for example, derivative contracts. This mixed option also lays down the possibility for the assignor and the assignee to choose the law of the assigned claim to apply to the third-party effects of assignments of claims in the context of a securitisation. The possibility for parties in a securitisation to remain subject to the general rule based on the law of the assignor’s habitual residence or choose the law of the assigned claim aims at catering for the needs of both large and smaller securitisation operators. 6.3.5Option 5: Mixed approach combining the law of the assigned claim and the law of the assignor’s habitual residence This mixed option combines the application of the law of the assigned claim as a general rule and the application, as an exception, of the law of the assignor's habitual residence to the assignment of multiple and future claims. Under this option, the third-party effects of the assignment of trade receivables by a non-financial company (for example, an SME) in the context of factoring would remain subject to the law of the assignor’s habitual residence. The third-party effects of the assignment of multiple claims by a financial company (for example, a bank) in the context of securitisation would also be subject to the law of the assignor’s habitual residence. 6.4Analysis of impacts The options on the law applicable to the proprietary effects of cross-border assignments of claims will be analysed as to their effectiveness in reaching the specific objective of providing legal certainty. Providing legal certainty will eliminate the legal risk that may result in losses and increased transaction costs and achieve the general objective of promoting cross-border investment. Legal certainty is ensured by applying the same conflict rule throughout the EU (and, if possible, also at international level) so that the same substantive law governs the proprietary effects of a cross-border assignment irrespective of where within the EU (and preferably also at international level) a court examines a dispute. The options will also be analysed as to the cost of their implementation for the transacting parties and for the third parties affected by the cross-border assignment. In connection with the law applicable to the third-party effects of assignments of claims, the analysis of the impacts of each option from the point of view of its effectiveness and costs of implementation requires an examination of the following elements: (i) its predictability and its capacity to apply to future claims; (ii) its impacts on the parties concerned by the claim assignment (that is, the assignee, who needs to know which requirements he must satisfy to acquire legal title over the claim, and third parties such as creditors of the assignor or the assignee or competing assignees), and (iii) its costs (in particular the legal costs linked to bulk assignments of claims) and the consistency with other EU provisions and international solutions. Predictability refers to the possibility for the assignee to easily know which law sets out the formalities that he must comply with to be able to oppose his right to third parties (for example, registration of the assignment or notification to the debtor), and to the possibility for the assignee and other right-holders over the same claim to easily know which law will apply to resolve a priority conflict (for example, between two assignees when the assignor has successively assigned the same claim, or between an assignee and a creditor of the assignor in case of the assignor’s insolvency). Consistency with other EU provisions refers to the compatibility of each option with other