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
Date: 2018-03-12
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: application of the law, capital market, conflict of jurisdiction, cross-frontier data flow, financial transaction, private international law, securities, territorial jurisdiction

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 12.3.2018 COM(2018) 89 final  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 {SWD(2018) 52} - {SWD(2018) 53}  
 
 
1. 

INTRODUCTION  

The  Commission's  priority  is  to  further  strengthen  Europe's  economy  and  stimulate 
investment to create jobs and sustain growth. In order to reach this objective, there is a need 
for  stronger,  deeper  and  more  integrated  capital  markets.  Efficient  and  safe  post-trade 
infrastructures are key elements of such well-functioning capital markets. Following on from 
the Action Plan on Capital Markets Union (CMU)1, in June 2017 the Commission's Mid-term 
Review2 set out the remaining actions which will be taken to put in place the building blocks 
of  CMU  by  2019,  with  the  objective  of  removing  barriers  to  cross-border  investment  and 
lowering the costs of funding. Completing the CMU is an urgent priority. 

As  part  of  the  CMU  Action  Plan  and  the  Mid  Term  Review,  the  Commission  announced 
targeted  action  to  reduce  legal  uncertainty  on  cross-border  transactions  of  securities  and 
claims.  This  Communication  and  the  legislative  proposal  on  the  applicable  law  to  the 
proprietary  effects  of  assignment  of  claims,  also  presented  today,  implement  this 
commitment. 

The purchase and sale of securities, as well as their use as collateral, take place daily across 
the EU in large volumes. A significant part of these transactions, amounting to around EUR 
10 trillion per year, involve a cross-border element.3 

In order to promote cross-border transactions, clarity and predictability about which country's 
law applies to determine who owns the underlying assets of the transaction is of the essence. 
If  there  is  legal  uncertainty  over  who  owns  the  asset,  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.  The  objective  of  this  Communication  is  to  help  increase 
cross-border transactions in securities by providing legal certainty on the conflict of laws rules 
at  Union  level.  Enhanced  legal  certainty  will  promote  cross-border  investment,  access  to 
cheaper credit and market integration. 

On  securities,  three  directives  address  the  question  which  national  law  applies  in  case  of 
cross-border  transactions:  the  Financial  Collateral  Directive4,  the  Settlement  Finality 
Directive5 and the Winding-up Directive6. These directives include conflict of laws rules that 
cover the most important aspects of securities transactions. However, their wording gives rise 
to different national interpretations. The lack of clarity created by different interpretations of 

1 Communication on ‘Action Plan on Building a Capital Markets Union’ (‘CMU Action Plan’), COM(2015) 468 
final. 
2  Communication  on  '  on  the  Mid-Term  Review  of  the  Capital  Markets  Union  Action  Plan',  COM(2017)  292 
final. 
3 ECB data suggests that the estimated volume of cross-border investments, by residence of the investor, stood at 
EUR 10.6 trillion in 2016. Source: ECB securities settlement statistics (28.6.2017). 
4 Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral 
arrangements ('Financial Collateral Directive') OJ L 168, 27/06/2002. 
5 Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in 
payment and securities settlement systems (‘Settlement Finality Directive’) OJ L 166/45, 11/6/1998. 
6 Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and 
winding up of credit institutions ('Winding-up Directive) OJ L 125 , 05/05/2001. 

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the existing rules might make cross-border transactions more costly due to some residual legal 
uncertainty around which law is applicable.  

Given  the  volume  of  transactions  concerned,  the  Commission  is  of  the  view  that  a 
clarification  of  the  rules  is  necessary  to  help  markets  reduce  redundant  costs  and  increase 
legal certainty around the applicable law. 

This  Communication  clarifies  the  Commission's  views  on  important  aspects  of  the  existing 
EU acquis with regard to the law applicable to proprietary effects of transactions in securities.  

This Communication covers the third-party effects of the transfer of financial instruments. It 
accompanies the legislative proposal on third-party effects of assignment of claims7. Matters 
governed  by  the  Financial  Collateral  Directive,  the  Settlement  Finality  Directive,  the 
Winding-up  Directive  and  the  Registry  Regulation8  are  not,  however,  affected  by  that 
legislative proposal9. 

2.  WHAT DOES THE EU ACQUIS SAY? 

Cross-border  transactions  in  securities  are  important  building  blocks  of  the  Capital  Market 
Union. As national securities laws are not harmonised at the EU level, conflict of laws rules 
determine which national law applies for cross-border transactions.  

Two  elements  of  transactions  in  securities  are  governed  by  conflict  of  laws  rules:  (i)  the 
proprietary element, which refers to the transfer of rights in property and which affects third 
parties and (ii) the contractual element, which refers to the parties’ obligations towards each 
other under the transaction.10 While the contractual element is already regulated at EU level 
by the Rome I Regulation,11 this Communication concerns the first aspect, proprietary effects 
of securities transactions. In practice transacting parties need to rely on these rules concerning 
proprietary effects in case of an insolvency, where they need to recover assets. 

The current EU acquis includes provisions to determine in specific cases which national law 
applies  to  proprietary  effects  of  cross-border  transactions  in  securities.  These  are  set  out  in 
three Directives: the Settlement Finality Directive, the Winding-up Directive and the Financial 
Collateral Directive.  

Article  9(2)  of  the  Settlement  Finality  Directive,  adopted  in  1998,  contains  the  following 
conflict of laws provision: 

7 Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-
party effects of assignments of claims COM(2018) 96. 
8 Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 
2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of 
the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 
1193/2011. 
9 See Article 9(1) and (2) of the Financial Collateral Directive, Article 9(2) of the Settlement Finality Directive 
and Article 24 of the Winding-Up Directive, which refer to book-entry securities (FCD and SFD) or (financial) 
instruments recorded in a register or account (WUD). 
10 The contractual elements include for example the offer, its acceptance, consideration, certainty of terms of the 
contract, etc. and are subject to the conflict of laws rules of the Rome I Regulation. Regulation (EC) 593/2008 of 
17  June  2008  on  the  law  applicable  to  contractual  obligations  (Rome  I):  http://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32008R0593&from=EN 
11 Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I). 

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Where securities (including rights in securities) are provided as collateral security to 
participants and/or central banks of the Member States or the future European central 
bank as described in paragraph 1, and their right (or that of any nominee, agent or 
third party acting on their behalf) with respect to the securities is legally recorded on 
a  register,  account  or  centralised  deposit  system  located  in  a  Member  State,  the 
determination of the rights of such entities as holders of collateral security in relation 
to those securities shall be governed by the law of that Member State.  

The  Winding-up  Directive,  adopted  in  2001,  contains  the  following  conflict  of  laws  rule  in 
Article 24:  

The  enforcement  of  proprietary  rights  in  instruments  or  other  rights  in  such 
instruments  the  existence  or  transfer  of  which  presupposes  their  recording  in  a 
register, an account or a centralised deposit system held or located in a Member State 
shall  be  governed  by  the  law  of  the  Member  State  where  the  register,  account,  or 
centralised deposit system in which those rights are recorded is held or located. 

Finally,  the  Financial  Collateral  Directive,  adopted  in  2002,  formulates  its  conflict  of  laws 
provision in Article 9 (1) and (2) in the following manner: 

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

2. The matters referred to in paragraph 1 are: 
(a) the legal nature and proprietary effects of book entry securities collateral; 
(b) the requirements for perfecting a financial collateral arrangement relating to book 
entry securities collateral and the provision of book entry securities collateral under 
such  an  arrangement,  and  more  generally  the  completion  of  the  steps  necessary  to 
render such an arrangement and provision effective against third parties; 
(c)  whether  a  person's  title  to  or  interest  in  such  book  entry  securities  collateral  is 
overridden  by  or  subordinated  to  a  competing  title  or  interest,  or  a  good  faith 
acquisition has occurred; 
(d) the steps required for the realisation of book entry securities collateral following 
the occurrence of an enforcement event.  

Since  the  application  of  Directive  2014/65/EU  on  3  January  2018  (MiFID  II),  emission 
allowances  listed  as  financial  instruments  in  point  (11)  of  Section  C  of  Annex  I  of  the 
Directive have come within the scope of the Settlement Finality Directive and the Winding-up 
Directive and their provisions on conflict of laws. Notwithstanding this, the Communication 
does not take into account the specificities of such emission allowances, notably with regard 
to their being held in accounts located in the Union Registry governed by a specific conflict of 
law provision in Regulation (EU) No 389/2013 adopted under Directive 2003/87/EC12. 

12 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a 
scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 
96/61/EC. 

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The  conflict  of  laws  provisions  in  the  Settlement  Finality  Directive,  Financial  Collateral 
Directive  and  Winding-up  Directive  designate  the  applicable  law  based  on  a  common 
approach. They are similar in that they all designate an applicable law based on the place of 
the relevant register or account (and in the case of the Settlement Finality Directive and the 
Winding-up Directive, the centralised deposit system). Nevertheless, the provisions differ in 
detail and there appear to be some differences in how they are interpreted and applied across 
Member  States.  In  particular,  this  concerns  the  definition  and  determination  of  where  the 
account is 'located' or 'maintained'. 

3. 

IMPROVING CLARITY IN THE EXISTING EU ACQUIS 

3.1.  Do the terms 'maintained' and 'located' mean different things? 

The  Commission  is  of  the  view  that  the  difference  in  wording,  referring  to  the  place  of  the 
account or register, does not imply any difference in substance. 

The  Settlement  Finality  Directive,  Financial  Collateral  Directive  and  Winding-up  Directive 
define the applicable law by reference to the place of the relevant account. In accordance with 
Article 9(2) of the Settlement Finality Directive and Article 24 of the Winding-up Directive, 
the  applicable  law  is  the  law  where  the  account  or  register  is  'located',  while  the  Financial 
Collateral  Directive  refers  in  Article  9(1)  to  the  law  in  which  the  relevant  account  is 
'maintained'.  None  of  the  Directives  however  specify  whether  'located'  means  the  same  as 
'maintained'.  

The  Commission  is  of  the  view  that  ‘located’  means  the  same  as  ‘maintained’  for  the 
following reasons.  

First,  Recital  (7)  of  the  Financial  Collateral  Directive  explains  that  the  objective  of  the 
conflict of laws provision is to extend the principle already set out in the Settlement Finality 
Directive13.  

Second,  as  previously  highlighted  in  the  2007  Commission  Working  Document,  the 
difference in wording between the Financial Collateral Directive and the Settlement Finality 
Directive  reflects  recognition  –  when  adopting  the  Financial  Collateral  Directive  –  that  EU 
securities  markets  had  evolved  in  ways  that  allowed  for  a  more  suitable  expression,  i.e.  the 
place where the account is maintained – to be used to describe the same formula14.  

Third, the differences in terminology are not present in all linguistic versions of the Directive. 
While the English versions of the Settlement Finality Directive and Winding-up Directive use 
the  terms  'located'  and  the  Financial  Collateral  Directive  uses  that  of  'maintained',  several 
language versions of the Settlement Finality Directive and the Financial Collateral Directive 
refer to the exact same term, e.g. the French, Italian and Romanian versions of the Settlement 
Finality Directive and Financial Collateral Directive include the same reference to where the 
relevant account is 'located' (situé - situato - se află). In other linguistic versions, other terms 
are  used,  such  as  the  Portuguese  language  version  that  makes  a  differentiation  between 
'located' and 'situated' and the Dutch version referring to 'located' and 'held'. 

13 The principle in Directive 98/26/EC whereby the law applicable to book entry securities provided as collateral 
is the law of the jurisdiction where the relevant register, account or centralised deposit system is located, should 
be extended in order to create legal certainty. 
14 Commission staff working document 'Legal assessment of certain aspects of the Hague Securities Convention', 
p. 8, SEC(2006) 910. 

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3.2.  Determining where the account or register is 'located' or 'maintained' 

The  Commission  observes  that  under  national  implementation  there  are  different  ways  to 
determine  where  a  securities  account  is  'located'  or  'maintained'.  Without  prejudice  to 
potential future decisions of the Court of Justice of the European Union, these different ways 
of interpretation all appear to be valid under the Directives. The conflict of laws provisions in 
the three Directives do not provide clear definitions of how to determine where the securities 
account  is  located  or  maintained.  However  Recital  (8)  of  the  Financial  Collateral  Directive 
states clearly the common basis for conflict of laws across the EU: 

The lex rei sitae rule, according to which the applicable law for determining whether 
a  financial  collateral  arrangement  is  properly  perfected  and  therefore  good  against 
third  parties  is  the  law  of  the  country  where  the  financial  collateral  is  located,  is 
currently recognised by all Member States. 

Further  sources  are  not  available  to  clarify  how  maintenance  and  location  should  be 
determined, as other EU acts do not provide such definition, and so far there is no case law 
from the Court of Justice of the European Union on how these concepts should be interpreted. 

The Commission observes that many Member States, when transposing the provisions of the 
Settlement Finality Directive and the Winding-up Directive, have not included any additional 
criteria  in  their  national  legislation  that  would  prescribe  how  to  determine  the  jurisdiction 
where  the  account  or  register  is  'located'.  15    Similarly,  many  national  transpositions  of  the 
Financial  Collateral  Directive  do  not  add  any  clarifications  at  national  level  as  to  how  to 
determine where the account is 'maintained'. 16  

In those cases where national laws do provide additional guidance, approaches may differ in 
their  result.  Also,  in  those  Member  States  where  no  clarification  was  added  in  the  national 
transposition,  case  law  or  academic  literature  might  provide  elements  that  help  apply  the 
concepts  of  the  location  or  maintenance  of  the  account  in  practice.  These  non-codified 
elements might also lead to diverging results.17  

There are a number of Member States that currently interpret and apply the conflict of laws 
provisions of the Financial Collateral Directive in a way that they look at the place where the 
custody services are provided. Others look at the account agreement for information about the 
place  where  the  account  is  maintained.  The  latter  solution  might  offer  the  convenience  of 
potentially  avoiding  different  applicable  laws  internationally,  in  transactions  involving 
jurisdictions that apply a choice of law solution. Another approach that avoids different laws 
applicable  to  an  international  transaction  in  a  narrower  set  of  cases  (where  a  third-country 
choice of law clause opts for the law of a Member State), is when 'maintained' is determined 
in  a  way  that  it  allows  the  choice  of  that  Member  State's  law  to  be  valid  under  the  Hague 
Securities  Convention18.  This  is  the  case  when  'maintained'  is  defined  as  effecting  or 
monitoring  entries  to  securities  accounts,  administering  payments  or  corporate  actions,  or 

15 At least 16 Member States have not added further clarifications in their national provisions implementing the 
relevant provisions of the SFD and the WUD. Source: Evaluation in Annex 5 to the Impact Assessment 
SWD(2018)52, pp 116-117. 
16 At least 13 Member States have not added further clarifications in their national provisions implementing the 
relevant provision of the FCD. Source: Evaluation, pp 117-118. 
17 For example there are different approaches under the FCD to determine where the account is maintained. 
Source: Evaluation, pp 117-118. 
18 Convention on the law applicable to certain rights in respect of securities held with an intermediary, available 
at: https://assets.hcch.net/docs/3afb8418-7eb7-4a0c-af85-c4f35995bb8a.pdf 

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performing any other regular activity necessary for the administration of securities accounts. 
Without prejudice to any future decisions of the Court of Justice of the European Union, all of 
the above solutions appear to be valid under the relevant EU provisions.  

4. 

CONCLUSION 

This  Communication  provides  a  proportionate  response  to  the  residual  legal  uncertainty  of 
existing EU conflict of laws rules in the field of proprietary effects of securities transactions. 
A clarification of the Commission's views should shed light on existing solutions as to how 
the relevant provisions of the Settlement Finality Directive, Financial Collateral Directive and 
Winding-up Directive are applied at present, leaving freedom to the Commission to assess in 
the future – in light of international, technological or market developments – whether further 
action may be necessary. In this respect, it should be underlined that this Communication is 
without  prejudice  to  the  interpretation  that  the Court  of  Justice  of  the European  Union  may 
give  of  the  aforementioned  issues  in  the  future.  The  Court  remains  responsible  in  the  final 
instance  for  interpreting  the  Treaty  and  secondary  legislation,  or  by  future  Commission 
action, in particular of a legislative nature. This Communication is also without prejudice to 
future  Commission  action  taken  in  accordance  with  Directive  2003/87/EC  with  regard  to 
greenhouse gas emission trading allowances. 

National  authorities  and  administrations  should  take  into  consideration  the  clarifications 
provided  in  this  Communication  when  applying  the  conflict  of  laws  provisions  of  the 
Settlement  Finality  Directive,  the  Financial  Collateral  Directive  and  the  Winding-up 
Directive. Member States should continue to observe if any legal discrepancies occur at the 
level of national interpretations that might cause market disruptions, and aim to converge in 
their interpretation and application of the existing EU rules. 

The Commission will continue to monitor developments in this area and in consultation with 
stakeholders  assess  how  national  interpretations  and  market  practices  evolve,  in  light  of 
international  and  technological  developments.  Evidence  from  stakeholders  on  the  impact  of 
specific  issues  on  the  functioning  of  the  internal  market  will  be  particularly  assessed.  Any 
possible future legislative initiative will be accompanied by an impact assessment. 

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