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
Date: 2018-03-28
Institutions: Directorate-General for Justice and Consumers, European Commission
Subjects: capital market, claim, commercial law, financial instrument, financial solvency, invoicing, principle of legal certainty, private international law

EN 

  EN 

   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 

1 

Introduction: political, market and legal context ............................................................... 4 

1.1 

Political context ........................................................................................................... 4 

1.2  Market context: significant markets for claims and securities but large variations in 
the cross-border dimension of transactions ............................................................................ 5 

1.2.1

Transactions and assets concerned ....................................................................... 5 

Factoring, which relies on claims, is an important source of financing for firms 

1.2.2
in the real economy ............................................................................................................ 6 

1.2.3
Significant markets in collateralisation and securitisation, both relying on claims 
and securities, allow better access to finance for firms and consumers ............................. 7 

1.2.4
Transactions in securities are sizeable, with an important cross-border 
dimension ......................................................................................................................... 10 

1.3  Legal context: no EU rules on claims, three EU directives on securities .................. 11 

1.3.1

  Conflict of laws rules relating to the assignment of claims ............................... 12 

1.3.2

  Conflict of laws rules relating to securities transactions .................................... 14 

1.4 
International context: The Hague Securities Convention and the UN Convention on 
the Assignment of Receivables in International Trade ........................................................ 15 

1.4.1

The Hague Securities Convention and past attempt to ratify it .......................... 15 

1.4.2

  UN Convention on the Assignment of Receivables in International Trade ....... 16 

2 

The problem drivers: rules designating the applicable law are inconsistent .................... 17 

2.1  National conflict of laws rules on the third-party effects of assignments of claims are 
divergent and unclear, leading to legal uncertainty .............................................................. 17 

2.2  EU  conflict  of  laws  rules  relating  to  securities  are  interpreted  differently  across 
Member States ...................................................................................................................... 20 

2.3 

Scope and methodology ............................................................................................. 21 

2.3.1

  Which legal issues are unclear? ......................................................................... 21 

2.3.2

Transactions and assets concerned ..................................................................... 21 

2.3.3

  Methodology and access to data ......................................................................... 22 

3 

The problem: cross-border transactions are inherently riskier than domestic ones ......... 24 

3.1  The  legal  risk  in  cross-border  transactions  leads  to  potential  losses  (with  stability 
risks), higher costs and reduced market integration ............................................................. 24 

1 

 
 
 
 
 
 
 
 
 
 
 
 
Proprietary  effects  of  assignments  of  claims:  absence  of  EU  conflict  of  laws  rules 
3.2 
and inconsistent national conflict of laws solutions ............................................................. 26 

3.3 

3.4 

Proprietary effects of transactions in securities: residual legal uncertainty .............. 27 

Ignoring the risks can lead to losses .......................................................................... 28 

3.4.1

Important risks relating to the assignment of claims .......................................... 28 

3.4.2
Theoretical risks of losses with no material evidence for transactions in 
securities ........................................................................................................................... 29 

3.5  Mitigating risks means higher costs for cross-border transactions ............................ 29 

3.5.1

The significant cost of cross-border assignments of claims ............................... 29 

3.5.2

  Residual legal risk relating to transaction in securities ...................................... 30 

3.6  Avoiding the legal risk leads to less cross-border activity ........................................ 31 

3.7  Various market participants are affected negatively ................................................. 32 

3.7.1

  Companies, including SMEs .............................................................................. 32 

3.7.2

Factoring and securitisation industry ................................................................. 32 

3.8  How would the problem evolve, all things being equal? .......................................... 33 

4  Why should the EU act?  Legal basis, subsidiarity and added value ............................... 33 

5  What should be achieved? ................................................................................................ 35 

5.1  The policy objectives ................................................................................................. 35 

5.2  Consistency with other EU policies and the Charter for fundamental rights ............ 35 

6  Claims: options, impacts and who will be affected .......................................................... 36 

6.1  Baseline: no EU intervention ..................................................................................... 36 

6.2  Harmonising conflict of laws rules ............................................................................ 37 

6.3  Options on the conflict of laws rule ........................................................................... 37 

6.3.1

  Option 1:  Law applicable to the assignment contract ....................................... 38 

6.3.2

  Option 2: Law of the assignor's habitual residence ............................................ 38 

6.3.3

  Option 3: Law governing the assigned claim ..................................................... 39 

  Option 4: Mixed approach combining the law of the assignor’s habitual 

6.3.4
residence and the law of the assigned claim .................................................................... 39 

6.3.5
  Option 5: Mixed approach combining the law of the assigned claim and the law 
of the assignor’s habitual residence ................................................................................. 39 

6.4  Analysis of impacts ................................................................................................... 39 

6.4.1

6.4.2

6.4.3

Impacts of Option 1: Law applicable to the assignment contract ...................... 40 

Impacts of Option 2: Law of the assignor's habitual residence .......................... 42 

Impacts of Option 3: Law of the assigned claim ................................................ 45 

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 ..................................................... 48 

2 

 
 
 
 
 
 
 
 
 
 
Impacts of Option 5: Mixed approach combining the law of the assigned claim 

6.4.5
with the law of the assignor’s habitual residence ............................................................. 49 

6.5 

Issues raised by stakeholders ..................................................................................... 50 

6.6  How do the options compare? ................................................................................... 51 

6.6.1

6.6.2

Stakeholder preferences ..................................................................................... 51 

Effectiveness comparison ................................................................................... 52 

6.6.3

  Comparison of impacts on the parties concerned ............................................... 53 

6.6.4

  Cost and coherence comparison ......................................................................... 53 

6.6.5

  Overall comparison ............................................................................................ 55 

6.6.6

Legal form of  intervention ................................................................................ 58 

7  Book-entry securities: options, impacts and who will be affected ................................... 58 

7.1 

Screening of options: non-legislative and legislative solutions ................................. 58 

7.2  Descriptions of options retained for analysis ............................................................ 59 

7.2.1

  Baseline: no EU intervention ............................................................................. 60 

7.2.2

  Option 1: Choice of law ..................................................................................... 60 

7.2.3

  Option 2: PRIMA – where the account was opened .......................................... 60 

7.2.4

  Option 3: PRIMA – where the account is maintained ....................................... 61 

7.3  Analysis of impacts ................................................................................................... 61 

7.3.1

  Baseline .............................................................................................................. 62 

7.3.2

7.3.3

7.3.4

Impacts of Option 1: Choice of law ................................................................... 62 

Impacts of Option 2: PRIMA – where the account is opened ............................ 64 

Impacts of Option 3: PRIMA – where the account is maintained ..................... 64 

7.4  How do the legislative options compare? .................................................................. 65 

7.4.1

7.4.2

Stakeholder preferences ..................................................................................... 66 

Effectiveness comparison ................................................................................... 67 

7.4.3

  Cost comparison ................................................................................................. 67 

7.4.4

  How do the legislative and non-legislative options compare? ........................... 69 

8 

Impacts of the package of options on claims and securities ............................................ 71 

9  How would actual impacts be monitored and evaluated? ................................................ 72 

10  Glossary of terms ............................................................................................................. 73 

Annex 1: Procedural information .............................................................................................. 77 

Annex 2: Stakeholder consultation strategy ............................................................................. 80 

Annex 3. Who is affected by the initiative and how? ............................................................... 88 

Annex 4. Data sources and quantification of impacts and costs ............................................... 90 

Annex 5. Evaluation of existing Directives .............................................................................. 94 

3 

 
 
 
 
 
 
 
 
 
 
 
 
1 

INTRODUCTION: POLITICAL, MARKET AND LEGAL CONTEXT 

1.1  Political context 

The Capital Markets Union Action Plan (CMU Action Plan)1 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  Report2.  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 

1  Communication from the Commission to the European Parliament, the Council, the European Economic and 
Social  Committee  and  the  Committee  of  the  Regions  ‘Action  Plan  on  Building  a  Capital  Markets  Union’ 
(‘CMU Action Plan’), COM(2015) 468 final 
First  Giovannini  Report  ‘Cross-border  clearing  and  settlement  arrangements  in  the  European  Union  - 
Giovannini  Groupʼ  (November  2001);  available  at:  https://ec.europa.eu/info/publications/giovannini-
reports_en, Barrier 15, p. 57–59. 

2 

4 

 
 
                                                 
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). 

1.2  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 

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 instruments3 
('MiFID  II')  includes  securities  (such  as  shares  and  bonds),  derivatives  (such  as  options  or 
futures) and emission allowances.  

3   Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  on  markets  in 
financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast), OJ L 173/349 
of 12.6.2014, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0065, applicable as from 
3 January 2018. 

5 

 
 
                                                 
'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. 

1.2.2

  Factoring, 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: EUF4  

4   EUF,  Factoring  and  Commercial  Finance:  A  Whitepaper  The  EU  Federation  for  the  Factoring  and 

Commercial Finance Industry, p. 20. 

6 

 
 
 
 
                                                 
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: EUF5 

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.6 The top European markets are the UK, France, Germany, Italy 
and Spain.  

1.2.3

  Significant 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 

5   EUF Yearbook, 2016-2017, p. 13 
6 

Figures refer to Europe as a geographical region, not to the EU 28. Source: Factors Chain International FCI 
Global  Factoring  Statistics  available  at:  https://fci.nl/en/news/global-factoring-volume-reaches-all-time-
high-2015/3677  

7 

 
 
 
                                                 
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 2016.7  

7  AFME Securitisation Data Report Q4 2016 

8 

 
 
                                                 
Figure 3: ECB data on the use of collateral and outstanding credit 

Source: ECB8 

Cross-border  trade  in  the  EU  is  also  substantial  in  another  specific  instrument:  the  EU 
Emission  Trading  System  (EU  ETS)9  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  States10.  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 billion11. As of 15 
May 2017, the total number of EU ETS allowances in circulation amounted to roughly 1.69 
billion allowances12.  

8   Notes: EUR billion, after valuation and haircuts. Use of collateral: averages of end of month data over each 
time  period  shown;  Credit:  based  on  daily  data.  Since  Q1  2013,  the  category  "Non-marketable  assets"  is 
split into two categories: "Fixed term and cash deposits" and "Credit claims". 

9   EU Emission Trading System (EU ETS) is established pursuant to Directive 2003/87/EC (ETS Directive) 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, OJ L 275/32 
of 25.10.2003, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32003L0087 

10   Iceland, Lichtenstein, Norway. 
11  See: https://ec.europa.eu/clima/policies/ets/oversight_en, FAQ section, Q/A 4.4.    
12  See: https://ec.europa.eu/clima/news/commission-publishes-first-surplus-indicator-ets-market-stability-

reserve_en 

9 

 
 
 
 
 
                                                 
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.  

389/2013/EU14 

The  definition,  purpose,  initial  issuance  and  transferability  of  EU  emission  allowances  are 
defined  by  Directive  2003/87/EC  (ETS  Directive)13,  complemented  by  Commission 
Regulation 
and  Commission  Regulation 
1031/2010/EU15  ('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. 

('Registry  Regulation') 

1.2.4

  Transactions 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.16 

ECB data suggests that the estimated volume of cross-border investments, by residence of 
the investor, stood at EUR 10.6 trillion in 2016.17  

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 

13  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, OJ L 275 25.10.2003, p. 32. 

14  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, OJ L 122, 3.5.2013, p. 1. 

15  Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other 
aspects  of  auctioning  of  greenhouse  gas  emission  allowances  pursuant  to  Directive  2003/87/EC  of  the 
European  Parliament  and  of  the  Council  establishing  a  scheme  for  greenhouse  gas  emission  allowances 
trading within the Community, OJ L 302, 18.11.2010, p. 1.  

16  ECB securities settlement statistics (28.6.2017). 
17  There are some limitations to this data, for example exposures to smaller Member States are missing from 
the  data  set.  Also,  it  does  not  take  into  account  the  holding  chains  that  can  also  introduce  cross-border 
elements into a transaction. This means that the estimates based on this data are underestimating the actual 
size of the relevant market of cross-border transactions in securities. 

10 

 
 
                                                 
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.18 

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 study19 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 trillion20. With continuing market integration 
the relevance of cross-border transactions is expected to grow even further. 

1.3  Legal 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. 

18     Feedback  to  the  public  consultation  on  conflict  of  laws  rules  for  third  party  effects  of  transactions  in 
securities  and  claims;  available  at:  https://ec.europa.eu/eusurvey/publication/securities-and-claims-
2017?surveylanguage=en 

19  See Paech, P., Market needs a paradigm – breaking up the thinking on EU securities law, in Intermediated 

Securities by Conac, P.-H., Segna, U. and Thevenoz, L. (eds.), Cambridge, 2013.  

20     ECB securities settlement system data. 

11 

 
 
                                                 
1.3.1

  Conflict 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) 

Assignor  
(original creditor) 

Debtor 

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 securitisation21.  

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.  

21  Report  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Economic  and 
Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against 
third parties and the priority of the assigned or subrogated claim over the right of another person, 29.9.2016 
(COM(2016) 626 final). 

12 

 
 
 
 
 
 
 
 
 
 
                                                                                                                                                    
 
 
 
 
                                                 
 
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)22. 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 securities23. 

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 assignee24, 
and  (ii)  the  relationship  between  the  assignee  and  the  debtor25.  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.   

22  This  example  is  an  adaptation  of  the  illustration  used  in  the  UNCITRAL  Legislative  Guide  on  Secured 

Transactions, pp. 16-17. 

23   Report  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Economic  and 
Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against 
third parties and the priority of the assigned or subrogated claim over the right of another person, 29.9.2016 
(COM(2016) 626 final), p. 5-6. 

24  Article 14(1) of the Rome I Regulation.  
25  Article 14(2) of the Rome I Regulation. 

13 

 
 
                                                 
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  Regulation26  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 assignment27. 
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 Regulation28 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  Regulation29.  To  this  end,  the  Commission  contracted  an  external 
study30  and,  in  2016,  adopted  a  report  presenting  possible  approaches  to  the  matter31.  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 costs32. 

1.3.2

  Conflict of laws rules relating to securities transactions 

The  Rome  I  Regulation33  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 

26  Question 18 of the Green paper on the conversion of the Rome Convention of 1980 on the law applicable to 
contractual obligations into a Community instrument and its  modernisation,  COM(2002) 654 final, p. 39–
41. 

27   Art.  13(3)  of  the  Proposal  for  a  Regulation  of  the  European  Parliament  and  the  Council  on  the  law 

applicable to contractual obligations (Rome I), COM(2005) 650 final. 

28  Cf.  Article  13(3)  of  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  Council  on  the  law 
applicable to contractual obligations, COM(2005) 650 final and Article 14 of the Rome I Regulation.  

29   Article 27(2) of the Rome I Regulation. 
30  British Institute of International and Comparative Law (BIICL), Study on the question of effectiveness of an 
assignment  or  subrogation  of  a  claim  against  third  parties  and  the  priority  of  the  assigned  or  subrogated 
claim over a right of another person, 2011 (‘BIICL Studyʼ). 

31  Report  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Economic  and 
Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against 
third  parties  and  the  priority  of  the  assigned  or  subrogated  claim  over  the  right  of  another  person, 
COM(2016) 626 final (‘Commission Reportʼ).  

32  Commission Report, p. 12.  
33  Regulation  (EC)  No  593/2008  on  the  law  applicable  to  contractual  obligations  (Rome  I),  OJ  L  177/6  of  

4.7.2008, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32008R0593 

14 

 
 
                                                 
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)34, 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’)35,  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)36,  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  laws37:  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.  

1.4 

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 

The Hague Securities Convention is an international multilateral treaty intended to remove, at 
a  global  scale,  legal  uncertainties  for  cross-border  securities  transactions38.  The  text  was 
originally agreed in 2002 and concluded in its current form in 2006. It offers a set of conflict 

34  Directive 98/26/EC on settlement finality in payment and securities settlement systems (‘Settlement Finality 

Directive’) OJ L 166/45, 11/6/1998. 

35  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. 

36  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. 

37  Art 9(1) of the FCD 
38   Available at: https://www.hcch.net/en/instruments/conventions/full-text/?cid=72  

15 

 
 
                                                 
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 Convention39.  

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  Resolution40  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.41 

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. 

1.4.2

  UN 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 

39   See: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52003PC0783  
40  Available 

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P6-TA-2006-

at: 

0608+0+DOC+XML+V0//EN&language=EN  

41   Available at: http://ec.europa.eu/internal_market/financial-markets/docs/hague/legal_assessment_en.pdf  

16 

 
 
                                                 
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 Madagascar42.  

2  THE  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.  

2.1  National  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 assignees43. 

42   Luxembourg  adopted  the  assignor's  location  rule  in  its  law  of  22  March  2004  on  securitisation  to  align  it 

43 

with the rule in the 2001 UN Convention. 
In some Member States (for example, Belgium, the Czech Republic, Finland, Germany, Italy, Poland, the 
Netherlands,  England),  in  cases  of  competing  assignees,  priority  is given to  the  first  assignee. In  England 
and  the  Netherlands,  the  relevant  time  for  effectiveness  against  third  parties  is  the  notification  of  the 
assignment  to  the  debtor.  In  England,  assignment  of  claims  as  security  by  way  of  a  charge  or  mortgage 
needs to be registered with the Registrar of Companies. Several Member States do not require a notice or 
any  type  of  registration  for  an  assignment  to  be  effective  against  third  parties  (for  example  Belgium,  the 
Czech  Republic,  Germany,  Poland,  Spain  and  England),  while  others  require  a  notice  to  the  debtor  (for 

17 

 
 
                                                 
 
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 approaches44.  

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.45 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 

example,  France,  Luxembourg)  or  the  acceptance  by  the  debtor  in  an  authentic  act  (for  example,  Italy)  - 
Report  from  the  Commission  to  the  European  parliament,  the  Council  and  the  European  Economic  and 
Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against 
third parties and the priority of the assigned or subrogated claim over the right of another person, 29.9.2016 
(COM(2016) 626 final), p. 5-6. 

45  Minutes of the Expert Group meeting of 15-16 May 2017, available at:  

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=33452&no=2 

18 

 
 
                                                                                                                                                         
 
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 assignor46. 

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.     

46   Responses  to  the  Public  Consultation  on  conflict  of  laws  rules  for  third  party  effects  of  transactions  in 
securities  and  claims,  available  at:  https://ec.europa.eu/eusurvey/publication/securities-and-claims-
2017?surveylanguage=en  

19 

 
 
 
                                                 
2.2  EU  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”.47  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’48,  whereas  the  SFD 
and the  WUD rely  on the  list  of ‘financial  instruments’  annexed to  the MIFID II49. Finally, 
whereas the FCD excludes renvoi,50 the other two directives do not.  

The above issues imply some theoretical legal uncertainty.   

47     Although the FCD provides more guidance at first sight as it defines the ‘relevant account’, the definition 
seems circular as referring to the account in which the entry of the collateral provision has to be made and 
this  very  issue  depends  in  turn  on  national  securities  law  which  the  conflict  of  laws  rule  still  needs  to 
determine. 

48  Points (e) and (g) of Article 2(1) of the Financial Collateral Directive.   
49  Article 9(2) in conjunction with point (h) of Article 2 of the SFD; Article 24 in conjunction with indent 11 
of Article 2 of the WUD. These dynamic references have now to be read as references to section C of Annex 
I to Directive 2014/65/EU. For example, there might be varying views as to whether ‘registered sharesʼ (i.e. 
shares  which  exist  in  book-entry  form  but  the  transfer  of  which  takes  place  by  registration  in  the  issuer's 
shareholder registry) are covered by the notion of ‘book-entry securities’. In addition, market practice differs 
in respect of which financial instruments are being credited to a ‘securities account’, depending on national 
legal  and  regulatory  requirements.  In  some  Member  States  exchange-traded  derivatives  are  credited  to 
‘securities accounts’, in others they are rather being evidenced in ‘other records’ of an intermediary. As a 
result, the scope of conflict of laws rules may vary across the Union. 
'Renvoi'  is  a  legal  technique  where  a  jurisdiction's  conflict  of  laws  rule  does  not  only  designate  another 
country's substantive law to be applicable, but also the other country's conflict of laws  rules, which might 
refer back to the law of the original jurisdiction. 

50 

20 

 
 
                                                 
2.3  Scope and methodology 

2.3.1

  Which legal issues are unclear? 

2.3.1.1  Claims 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. 

2.3.1.2  Claims: 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. 

2.3.1.3  Securities: 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. 

2.3.2

  Transactions 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 

21 

 
 
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. 

2.3.3

  Methodology and access to data 

The  analysis  and  evidence  presented  in  this  impact  assessment  is  based  on  various  sources. 
The most relevant include the EPTF Report51, the findings of the T2S Harmonisation Steering 
Group, feedback received from Member States to a Questionnaire on national transposition of 
relevant  EU  rules52,  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. 

2.3.3.1  Confidentiality 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 

51  The  EPTF  Report  and  its  Annexes  are  available  at:  https://ec.europa.eu/info/publications/170515-eptf-

report_en 

52   See the results in Annex 5 containing an evaluation of the conflict of laws provisions governing proprietary 

aspects of securities transactions in three EU Directives. 

22 

 
 
                                                 
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".53  

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. 

2.3.3.2  Unclear 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. 

53  Feedback  to  the  public  consultation  on  conflict  of  laws  rules  for  third  party  effects  of  transactions  in 
securities  and  claims  available  at:  https://ec.europa.eu/eusurvey/publication/securities-and-claims-
2017?surveylanguage=en  

23 

 
 
                                                 
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  

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  transaction54.  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 

54  This is the definition of ‘legal risk’ employed by R. McCormick, Legal risk in the financial markets, Oxford 

2010, p. 21.  

24 

 
 
                                                 
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 met55. 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.  

55   Giovannini Report and Public consultation of stakeholders 

25 

 
 
                                                 
Problem tree 

Legal uncertainty  
as to which law applies 
in cross-border  
transactions 

CLAIMS:  

SECURITIES:  

- No EU rules 
- National rules differ 
(use different 
connecting factors) 

3 EU Directives, but: 

- Different wording 
across the Directives  

Unclear which 
national law applies 

- Different national 
interpretations 

Legal risk 

in cross-border transactions 

If ignored 

If mitigated 

If avoided 

Financial losses  

Additional costs  

Less cross-
border activity 

s
r
e
v
i
r
D

m
e
l
b
o
r
P

s
e
c
n
e
u
q
e
s
n
o
C

3.2  Proprietary 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 

26 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paper “Building a Capital Markets Union”56, 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 Report57, 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. 

3.3  Proprietary 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.  

56 

In  total  19  respondents  argued  for  the  need  to  improve  legal  certainty in  cross-border  securities  holdings. 
The  responses  that  are  not  anonymous  are  available  at:  https://ec.europa.eu/eusurvey/publication/capital-
markets-union-2015?surveylanguage=en 

57  The  EPTF  Report  and  its  Annexes  are  available  at:  https://ec.europa.eu/info/publications/170515-eptf-

report_en  

27 

 
 
                                                 
3.4 

Ignoring the risks can lead to losses  

3.4.1

  Important 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."58 

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."59 

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 

Ibid. 

58 
59  Giovannini Report, p. 55. 

28 

 
 
 
 
                                                 
diligence, the legal risk may be very important. […] Legal due diligence may not be followed 
for small and very simple deal".60 

3.4.2

  Theoretical 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. 

3.5  Mitigating 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.  

3.5.1

  The 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 
transaction61. 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 

60   Feedback  to  the  public  consultation  on  conflict  of  laws  rules  for  third  party  effects  of  transactions  in 
securities  and  claims;  available  at:  https://ec.europa.eu/eusurvey/publication/securities-and-claims-
2017?surveylanguage=en 

61  Minutes of the Expert Group meeting of 19-20 April 2017, available at:  

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=33066&no=2  

29 

 
 
                                                 
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)) […]." 

3.5.2

  Residual 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.62  Combining  the  22% 
estimate  with  EU  securities  settlement  system  data  as  at  end-2016  and  survey-based  data 
obtained  by  Oxera63,  yields  an  overall  annual  cost  estimate  of  some  EUR  13  billion.64  

62    See Paech, P., Market needs a paradigm – breaking up the thinking on EU securities law, in Intermediated 

Securities by Conac, P.-H., Segna, U. and Thevenoz, L. (eds.), Cambridge, 2013. 

63    See  Monitoring  prices,  cost  and  volumes  of  trading  and  post-trading  services,  Report  prepared  for  the 

European Commission by Oxera, London and Brussels, 2011. 

64   Some  EUR  6  billion  of  this  aggregate  figure  can  be  attributed  to  the  increased  cost  of  clearing  and 
settlement  of  cross-border  securities  transactions,  whilst  the  remaining  EUR  7  billion  relate  to  account 
provision and asset servicing on a cross-border basis. 

30 

 
 
                                                 
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 00065, 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. 

3.6  Avoiding 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 

65  Source: EBF written contribution to the EPTF discussions, dated 4 November 2016. "This estimate is based 
on our experience with an opinion program for four different types of master agreements and covering more 
than 20 jurisdictions (netting opinions in view of Art. 295 CRR), a set of opinions on export credit agency 
protection in view of Art. 194 CRR and legal opinions on specific legal issues in respect of custodians." 

31 

 
 
                                                 
claim  agreement;  and  (f)  the  mobilisation  agreement.66  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. 

3.7  Various market participants are affected negatively 

Legal uncertainty has different consequences for different types of players.  

3.7.1

  Companies, 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. 

3.7.2

  Factoring 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. 

66  Article  97  of  the  Guideline  (EU)  2015/510  of  the  European  Central  Bank  of  19  December  2014  on  the 
implementation  of  the  Eurosystem  monetary  policy  framework  (General  Documentation  Guideline) 
(ECB/2014/60) (recast) 

32 

 
 
                                                 
3.8  How 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 
technology67 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.  

4  WHY 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 measure68. 

67   A  distributed  ledger  is essentially a  record of  information,  or  database,  that  is shared  across  a  network. It 
may be an open, publicly accessible database or access may be restricted to a specified group of users. It can 
be  used  to  record  transactions  across  different  locations.  Individual  transactions  are  stored  in  groups,  or 
blocks,  which  are  attached  to  each  other  in  chronological  order  to  create  a  long  chain,  and  is  secured  to 
protect the integrity of the data. This chain then forms a register of transactions that its users consider to be 
the  official  record.  See  more  on  DLT  in:  ECB  "Distributed  Ledger  Technology"  In  focus  issue  1,  2016 
available at:  https://www.ecb.europa.eu/paym/pdf/infocus/20160422_infocus_dlt.pdf  

68   Protocol 21 to the TFEU, Articles 3 and 4. 

33 

 
 
                                                 
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 claims69. 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 

69   BIICL Study, p. 24. 

34 

 
 
                                                 
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. 

5  WHAT SHOULD BE ACHIEVED? 

5.1  The 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 
implemented 
(securities) 
Legal risk 

differently 
rules 

and 

EU 

Problem 
Consequences  Losses 
Costs 
Less cross-border activity 

Size  or  scale 
of problem 

Significant for claims 
Residual for securities 

Have uniform EU rules (claims) 
Have clarity of EU rules and their 
implementation (securities) 

Operational 

Improve legal certainty 
Reduce losses 
Reduce costs 
Foster  cross-border 
(for claims) 
Substantial for claims 
Marginal for securities 

investment 

Specific 
General 

Size  or  scale 
expected 
of 
improvement 

5.2  Consistency 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 

35 

 
 
 
 
 
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,70 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." 

6  CLAIMS: OPTIONS, IMPACTS AND WHO WILL BE AFFECTED 

6.1  Baseline: 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.  

70  Charter of the Fundamental Rights of the European Union, OJ C 326 of 26/10/2012, p. 391. 

36 

 
 
                                                 
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. 

6.2  Harmonising 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 
capital71.  

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. 

6.3  Options 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 

71  Report  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Economic  and 
Social Committee on the question of the effectiveness of an assignment or subrogation of a claim against 
third parties and the priority of the assigned or subrogated claim over the right of another person, 29.9.2016 
(COM(2016) 626 final), p. 2. 

37 

 
 
                                                 
applicable to the third-party effects of the assignment must govern the matters72 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  

priority  issues:  that  is,  in  case  of  successive  assignments  of  the  same  claim,  the 
(ii) 
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 shows73 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.   

6.3.1

  Option 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 assignment74. 
The assignor and the assignee can choose any law to govern their assignment contract.  

6.3.2

  Option 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.   

72   Minutes 

of 

the 

Expert  Group  meeting 

of 

13-14 

July 

2017.  Available 

at: 

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3506  

73   BIICL Study (2012), pp. 12-14. 
74  For example, Art. 10:135(2) of the Dutch Civil Code specifies that the property law regime with regard to 
the  transfer  of,  or  creation  of,  a  right  in  a  claim  is  the  law  applicable  to  the  contract  in  accordance  with 
which the assignment or establishment of the right is made. It codifies the Dutch Supreme Court decision in 
the case Hansa/Bechem, in which the Supreme Court interpreted Article 12 of the 1980 Rome Convention 
(Supreme Court (Hoge Raad), 16 May 1997, ECLI:NL:HR:1997:ZC2373).  

38 

 
 
                                                 
6.3.3

  Option 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. 

6.3.4

  Option  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. 

6.3.5

  Option 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. 

6.4  Analysis 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.  

39 

 
 
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 EU 
conflict of laws rules that apply in situations where the third-party effects of assignments of 
claims need to be ascertained, namely the Insolvency Regulation75, which applies in cases of 
insolvency of the assignor or the assignee. 

Consistency  with  international  solutions  refers  to  the  compatibility  of  each  option  with  the 
conflict  of  laws  rules  on  the  third-party  effects  of  the  assignment  of  claims  adopted  at 
international  level,  namely  the  2001  UN  Convention  on  the  Assignment  of  Receivables  in 
International Trade. 

The issues raised by stakeholders during the consultation process will also be addressed. 

6.4.1

  Impacts of Option 1: Law applicable to the assignment contract 

Effectiveness in reaching the objectives 

The law that governs the contract between the assignor and the assignee can extend also to the 
third-party  effects  of  the  assignment  and  determine  how  to  perfect  the  transfer  of  the  right 
over the claim. This allows the parties to the assignment contract to choose a legal system that 
recognises  the  particular  type  of  security  interest  they  wish  to  create,  or  to  have  one  law 
govern all transfers when they seek to assign a pool of claims governed by different laws76.  

This option provides legal certainty for the parties to the transaction through which the claim 
is transferred or the collateral created. For example, in certain financing transactions, where 
the  collateral  taker  (the  assignee,  for  example  a  bank)  intends  to  create  a  valid  collateral 
interest  in  the  claim,  the  uncertainty  regarding the  applicable  law  is  minimised  between  the 

75  Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency 

proceedings, OJ L 141, 5.6.2015, p. 19–72. 

76     F.J. Garcimartín, in Magnus/Mankowski, European Commentaries on Private International Law 2017. 

40 

 
 
                                                 
assignor  and  the  assignee  if  they  only  need  to  agree  on  the  applicable  law  between 
themselves.  In  such  situation  the  same  law  applies  to  the  contractual  aspects  and  the 
proprietary aspects of the assignment and the distinction between property aspects as between 
the parties and against third parties becomes obsolete77. 

However, this option would not provide any predictability for parties other than the assignor 
and the original assignee (for example, a creditor or a subsequent assignee) as to which law 
would govern their interests in the claim. 

Impacts on the parties concerned  

The  law  that  applies  to  the  assignment  contract  cannot  be  predicted  ex-ante  by  the  third 
parties  that  may  be  affected  by  the  assignment  because,  under  Article  14(1)  of  the  Rome  I 
Regulation, which governs the relationship between the assignor and the assignee, the parties 
can choose the law that should govern their relationship under the assignment contract. This 
option  thus  entails  a  lack  of  legal  certainty  for  third  parties  as  to  the  law  that  governs  the 
assignment contract and therefore as to the law that would also apply to them.  

In addition, choosing the law of the assignment contract to apply to the third-party effects of 
the assignment does not take into consideration the interests of third parties, such as creditors 
or competing assignees. Applying the law of the assignment contract can negatively affect the 
rights  of  third  parties  by  creating  a  possibility  of  fraud  (for  example,  in  relation  to  the 
assignor's  creditors  in  a  situation  of  insolvency  of  the  assignor)  or  by  avoiding  publicity 
requirements which may provide essential information to creditors and competing assignees. 

This  option  would  not  take  into  account  that  assignments  of  claims  arising  from  financial 
instruments such as, for example, derivative contracts, should be governed by the law of the 
assigned claim and, therefore, by the law of the financial instrument itself. 

Costs and coherence with existing EU acquis and the international solution 

A conflict of laws rule that would impose the law of the contract between the assignor and the 
assignee  as  the  law  applicable  to  the  third-party  effects  of  the  assignment  could  lead  to  an 
increase in the number of cases where the outcome of a dispute resolved under this law would 
be in conflict with (i) the public policy laws of the jurisdiction of the debtor, (ii) the property 
laws of the jurisdiction of the debtor, and (iii) the property laws of a jurisdiction under which 
the third party had acquired rights over the underlying debt. The costs linked to disputes in or 
outside court would not therefore significantly decrease under this option. 

The option of choosing the law of the assignment contract as the law applicable to the third-
party  effects  of  the  assignment  would  not  be  consistent  with  the  EU  conflict  of  laws  rules 
applicable to insolvency, laid down in the Insolvency Regulation and based on the law of the 
centre  of  main  interest  of  the  insolvent  business  (COMI).  This  option  would  also  be 
inconsistent with the conflict of laws rule contained in the 2001 UN Convention, which opts 
for the law of the assignor’s habitual residence.  

77  BIICL Study, 2011, p. 386. 

41 

 
 
                                                 
6.4.2

  Impacts of Option 2: Law of the assignor's habitual residence 

Effectiveness in reaching the objectives 

The option of applying the law of the assignor’s habitual residence to the third-party effects of 
the  assignment  provides  a  greater  degree  of  predictability  than  the  law  that  governs  that 
assignment  contract  or  the  law  that  governs  the  assigned  claim.  Indeed,  the  location  of  the 
assignor provides a connecting factor that is ascertainable in advance by all parties concerned, 
including  third  parties,  such  as  creditors  of  the  assignor  and  potential  second  assignees, 
without the need to conduct a due diligence on the law that applies to the assigned claims or 
the  contract  of  assignment.  This  option  facilitates  bulk  assignments  of  claims,  permits  the 
assignment of future claims and supports global security assignments and securitisation. 

Example  of  a  priority  conflict  between  two  assignees  and  its  solution  under  a  conflict  of 
laws rule based on the assignor’s habitual residence 

An Austrian company (A) assigns a receivable against a German customer (C) to a German 
Bank  (B)  as  security  for  a  loan  given  by  Bank  B  to  A.  One  day  later,  A  assigns  the  same 
receivable to Bank X in Austria, again as a security for a loan given by Bank X to A. A enters 
only the second but not the earlier (first) assignment into its books (so-called “Buchvermerk”, 
a  prerequisite  under  Austrian  law  for  a  security  assignment  to  be  effective  against  third 
parties).  Alternatively,  Bank  X  asks  C  (the  debtor)  whether  he  has  been  notified  of  an 
assignment and, the debtor denying it, A notifies C of the assignment to X (debtor notification 
is  an  alternative  way  of  perfecting  the  security  assignment  under  Austrian  law).  Under  the 
assignor's  habitual  residence  approach,  both  assignees  (the  two  banks)  would  have  known 
from  the  beginning  that  Austrian  law  was  applicable,  so  that  the  priority  conflict  would  be 
decided by the time of perfection (book-entry or notification, whichever comes first). The first 
bank B would have been able to comply with Austrian law and thereby make it possible for X 
to know about the first assignment78. 

The location of the assignor also provides a connecting factor ascertainable in advance where 
the  contract  out  of  which  the  receivable  is  going  to  arise  has  not  yet  been  concluded  at  the 
time  of  the  assignment.  In  other  words,  a  conflict  rule  based  on  the  assignor’s  habitual 
residence  makes  possible  the  assignment  of  future  claims.  The  assignor’s  location  rule  thus 
facilitates  financing  against  future  receivables,  such  as  global  security  assignments  and 
retention of title agreements which extend the seller’s security rights to the proceeds of sub-
sales. Both kinds of financing transactions are extremely common in Member States such as 
Germany and France.  

Example of assignment of multiple claims 

In France assignment of future receivables arising from contracts not yet concluded is very 
common  in  bank  financing  and  securitisation  deals.  The  French  Dailly  law,  for  instance, 
implemented in 1981 to facilitate credit to companies, expressly provides for the assignment 

78   Flessner/Verhagen, Assignment in European Private International Law, 2006, p. 33 et seq. 

42 

 
 
                                                 
or pledge of receivables arising from a contract that is “not yet concluded and whose amount 
or  maturity  is  not  yet  known”79.  The  French  securitisation  law  also  has  a  similar  express 
provision  to  allow  securitisation  of  future  receivables  (e.g.  arising  from  season  tickets,  cell 
phone subscription or electricity subscription, etc.)80. 

Impacts on the parties concerned  

The  law  of  the  assignor's  habitual  residence  would  increase  the  possibility  of  obtaining 
financing for enterprises, including SMEs, as it would allow them to offer their future claims 
against non-domestic clients as a security to the banks which provide them with credit. At the 
same  time,  the  law  of  the  assignor's  habitual  residence  would  be  beneficial  for  enterprises, 
including  SMEs,  wishing  to  sell  their  claims  against  non-domestic  clients  to  the  factoring 
industry  which  the  factoring industry  could,  in  turn,  treat more  easily and  with  lower  costs. 
Companies  as  well  as  the  factoring  industry  would,  thus,  be  positively  impacted  by  the 
application of the assignor's law. Also, some quarters of the banking industry believe that the 
law  of  the  assignor  would  decrease due  diligence  costs  and enable  European  banks  to  offer 
more competitive deal to their clients. 

The  securitisation  industry  is  divided  as  to  the  effects  of  applying  the  assignor's  law  to 
securitisation  activities:  certain  members  of  this  industry  consider  the  law  of  the  assignor’s 
habitual residence as the most beneficial conflict of laws rule as it would allow the expansion 
of securitisation transactions involving claims governed by laws of multiple countries. Other 
members of the securitisation industry see a negative impact of applying the assignor's law to 
securitisation  transactions  due  to  the  possible  problem  of  enforceability  resulting  from  the 
discrepancy of the law applicable to third-party effects and the law applicable to the claim and 
thus to the debtor. 

This option would ignore that assignments of claims arising from financial instruments such 
as,  for  example,  derivative  contracts,  should  be  governed  by  the  law  of  the  assigned  claim 
and, therefore, by the law of the financial instrument itself. 

Costs and coherence with existing EU acquis and the international solution 

In the case of an assignment of a high number of low value claims,  an examination of each 
individual  receivable  in  a  bulk  in  order  to  determine  the  necessary  steps  to  render  its 
acquisition  effective  against  third  parties  is  costly  and  time-consuming.  Moreover,  in 
receivables purchase programs, where the assignments are made on a large number of claims 
(usually of a small amount) and on a weekly or even daily basis (which is typically the case 
for receivables purchase programs by conduits), it is not even possible in practice to carry out 
a due diligence each time  a claim is  assigned81. The law of the assignor would enable third 
parties to look at a single law instead of having to investigate potentially a large number of 
individual  contracts  governed  by  different  laws82.  In  specific  sectors,  such  as  securitisation, 
where securitisers need to look at the laws that govern each claim assigned in a bulk, the law 

79  Art. L.313-23 of the French Monetary and Financial Code. 
80  Conflict  of  laws  rules  for  the  third  party  effects  of  transactions  in  claims,  Expert  subgroup  on  conflict  of 

laws on claims, 6 June 2017, p. 9. 
Ibid. p. 11. 

81  
82  Goode, R., Response to the European Commission’s public consultation, p. 6. 

43 

 
 
                                                 
of  the  assignor’s  habitual  residence  would  not  represent  additional  costs  as,  already  now, 
securitisers need to check the law of the assignor’s location when evaluating whether to buy a 
portfolio of claims due to possible registration requirements imposed by that law83. 

In factoring and securitisation deals, the debtors are generally not notified of the assignment. 
The assignment thus remains “silent” vis-à-vis the debtors. As a result, the debtors continue to 
validly  pay  the  claims  to  the  assignor  who  must  in  turn  pay  to  the  assignee  the  collections 
received under the assigned claims on a daily, weekly  or monthly basis,  as  applicable. This 
“silent”  assignment  enables  the  assignor  to  raise  financing  (by  way  of  the  assignment  of 
claims) without affecting its commercial relationship with the debtors. It is only if and when 
the assignor becomes insolvent that the assignee will seek for the debtors to be notified of the 
assignment in  order to receive payments directly. Therefore, due  diligence  to check the law 
that  governs  the  claim  is  generally  postponed  to  a  later  stage  and  is  only  carried  out  if  the 
assignor becomes insolvent. An enforceability assessment will usually only be done in respect 
of the non-performing claims, that is, those under which the debtor stops payment.  

In this context, it is therefore important that the law applicable to priority conflicts between 
the  assignee  and  the  creditors  of  the  assignor  coincides  with  the  law  applicable  to  the 
assignor’s insolvency, thus facilitating interaction with the Insolvency Regulation84. 

Example of relation with the Insolvency Regulation 

B is a trading company based in Germany which assigns to A, a factoring company based in 
the  Netherlands,  its  claims  against  various  customers  throughout  the  EU.  The  factoring 
agreement and the contract of assignment are governed by Dutch law. After the assignment 
has been concluded, insolvency proceedings are opened over B’s estate by a German court. 
On behalf of the insolvent estate, the administrator demands payment from the customers. A 
also demands payment. Article 8 EU Insolvency Regulation (recast) states that rights in rem 
of  third  parties  are  untouched  by  the  main  proceedings  if  those  rights  relate  to  tangible  or 
intangible  property  that  is  situated  outside  the  Member  State  in  which  proceedings  are 
opened.  

Choosing the same approach as the Insolvency Regulation, which in Article 7(1) designates as 
the law applicable to a cross-border insolvency the law of the centre of main interest of the 
insolvent business (COMI), facilitates the solution of priority conflicts in cross-border cases. 
The application of the law of the assignor’s habitual residence would lead to the application of 
a single law (COMI of the assignor) first to the preliminary question as to who the holder of 
the  claim  is  and,  second,  to  the  possible  avoidance  or  ineffectiveness  of  the  transaction  as 
between A and B as acts detrimental to the body of creditors85.  

The conflict rule based on the assignor’s habitual residence is also consistent with Article 22 
of  the  2001  UN  Convention  on  the  Assignment  of  Receivables  in  International  Trade86. 
Although, for the time being, this UN Convention is not in force and Luxembourg is the only 
Member State which has signed it, alignment with the Convention rule would bring EU law in 

Ibid. p. 6. 

83 
84   Art. 2(9) of the Insolvency Regulation. 
85   Art. 7(2)(m) of the Insolvency Regulation. 
86   http://www.uncitral.org/pdf/english/texts/payments/receivables/ctc-assignment-convention-e.pdf 

44 

 
 
                                                 
harmony with private international law in other States which would ratify this Convention in 
the future. Having a conflict of laws solution which is convergent with an international law 
instrument would also lead to a higher number of concrete converging cases in practice since 
jurisdictions of third countries would be more likely to accept the EU conflict of laws solution 
as compatible with an internationally accepted solution or with their national conflict of laws 
rules. 

Consistency between the EU conflict rules applicable to the proprietary effects of assignments 
of claims and the EU conflict rules applicable to insolvency, and between  the conflict rules 
applicable to the proprietary effects of assignments of claims in  the EU and at international 
level,  would  make  the  determination  of  the  applicable  law  more  cost-efficient  and  lower 
transaction costs of the assignments of claims governed by different laws. 

6.4.3

  Impacts of Option 3: Law of the assigned claim 

Effectiveness in reaching the objectives 

The law of the assigned claim can provide legal certainty as to the determination of the law 
applicable to the third-party effects of the assignment only if it is possible to ascertain which 
law governs the assigned claim. This can be facilitated if an express choice of law clause is 
included in the contract which includes the assigned claim. If the law of the assigned claim is 
known,  it  has  the  advantage  of  staying  stable  irrespective  of  a  possible  change  of  the 
assignor’s habitual residence.  

Conversely,  the  main  drawback  of  choosing  the  law  of  the  assigned  claim  as  the  law 
applicable to the third-party effects of the assignment is that third parties possibly affected by 
the assignment cannot know in advance which law governs their rights. Also, the application 
to the proprietary effects of the assignment of the law of the assigned claim would not be able 
to resolve priority conflicts in relation to assigned claims which have not been evidenced in 
writing. The law of the assigned claim would also not accommodate the common practice of 
assigning  future  claims,  for  which  the  applicable  law  is  not  determinable  in  advance  as  the 
transaction out of which the claim will arise has not yet been concluded87.  

If the parties to an assignment transaction have their proprietary effects governed by the law 
of the assigned claim, they will need to check the contractual documentation concerning the 
claim in order to find out by which law such claim is governed. Since the enforcement of the 
claim against the debtor will always have to comply with the conditions laid down in the law 
which governs the claim, having the same law governing the enforceability of the claim and 
the third-party effects of the assignment will facilitate enforcement of the claim as no other 
conditions under another possibly applicable law would interfere. 

Impacts on the parties concerned  

In connection with the assignment of trade receivables in the context of factoring, as the law 
of  the  assigned  claim  is  usually  the  same  as  the  law  under  which  the  claim  is  ultimately 
enforced, the application of the law governing the assigned claim to the third-party effects of 

87 

Ibid., p. 3. 

45 

 
 
                                                 
the assignment could have a beneficial effect on assigning and enforcing an individual claim 
of a higher value. On the other hand, due to the prevalence of bulk assignments in factoring 
involving multiple claims, the law of the assigned claim would increase the costs of factoring 
transactions and, thus, have a negative effect on the development of factoring activities on a 
cross-border  basis.  In  the  same  vein,  the  banking  industry  considers  that  the  law  of  the 
assigned  claim  may  lead  to  a  restriction  of  opportunities  for  assignors,  i.e.  businesses  and 
SMEs, to refinance their transactions.  

As  in  the  case  of  the  law  of  the  assignor’s  habitual  residence,  the  securitisation  industry  is 
split as to the effects of applying the law of the assigned claim to  the proprietary effects of 
securitisation transactions: some of the players who already use the law of the assigned claim 
as a connecting factor believe that the change of this connecting factor would adversely affect 
cross-border  securitisation  activities;  in  contrast,  other  players  involved  in  the  securitisation 
industry  claim  that  the  law  of  the  assigned  claim  would  render  securitisation  transactions 
more complex and would thus jeopardise their securitisation business. 

Costs and coherence with existing EU acquis and the international solution 

Parties concerned by the proprietary effects of an assignment may want the assignment to be 
primarily safeguarded against a possible insolvency of the assignor, a creditor (of the assignor 
or  the  assignee)  executing  the  receivable  or  a  possible  second  assignment.  One  of  the 
respondents  to  the  public  consultation  explained  that,  "if  the  governing  law  of  the  contract 
creating the debt, the governing law of the contract creating the assignment and the habitual 
residence  of  the  debtor  are  of  single  jurisdiction,  due  diligence  costs  will  be  less  than  if 
different  jurisdictions  are  involved,  but  it  will  always  be  necessary  to  check  the  issues  that 
relate  to  the  obligation  of  the  debtor  to  recognise  the  assignment  under  the  law  of  the 
underlying contract and, if different, the law of the habitual residence of the debtor. This is 
because  the  debt  is  the  asset  in  respect  of  which  the  assignee  is  gaining  rights  and  the 
assignee needs to know what it must do to obtain the repayment of the debt when it is made by 
the debtor."88 

However,  under  the  assigned  claim’s  law  approach,  the  choice  of  the  law  governing 
individual assigned claims would pose particular difficulties for insolvency administrators and 
the  assignor’s  attachment  creditors.  Investigation  of  individual  assigned  contracts  would  be 
complex and expensive.   

Example of costs arising in assignments of claims governed by different laws 

A  debtor  who  has  assigned  a  large  volume  of  receivables  arising  under  several  contracts, 
some of which are governed by French law, some by English law, some by German law and 
some  by  Italian  law,  becomes  insolvent.  Is  the  insolvency  administrator  to  be  required  to 
spend large sums of money investigating each of hundreds of contracts to find the applicable 
law  and  then  further  sums  to  obtain  legal  advice  from  lawyers  in  each  of  the  four 

88   Feedback  to  the  public  consultation  on  conflict  of  laws  rules  for  third  party  effects  of  transactions  in 
securities  and  claims;  available  at:  https://ec.europa.eu/eusurvey/publication/securities-and-claims-
2017?surveylanguage=en 

46 

 
 
                                                 
jurisdictions? This would generate unnecessary costs which would then have to be borne by 
the creditors, thus reducing their proceeds.  

The application of the law of the assigned claim to the proprietary effects of the assignment 
would  be  cumbersome  in  case  of  bulk  assignments  of  claims  presenting  a  cross-border 
element, such as trade receivables, which are the most common type of securitised assets for 
companies.  In  such  cases,  several  laws  would  potentially  govern  the  claims  composing  the 
assigned portfolio and, therefore, multiple local law opinions from local  law firms would be 
needed  to  know  the  local  formalities  for  the  assignment  of  the  claims  to  be  enforceable 
against third parties89. The application of the law of the assigned claim would not achieve a 
cost reduction as each claim would have to be examined individually which, as shown by the 
following  example,  may  render  the  assignment  so  costly  that  the  transacting  parties  may 
prefer not to implement it. 

Example of costs of legal opinions on applicable laws in a cross-border assignment  

A member of the expert group mentioned: “We are currently working on a cross-border trade 
receivables purchase programme for a big corporate group having an international business 
activity.  This  transaction  involves  assignors  located  in  many  jurisdictions  including  France 
and  Spain,  with  trade receivables  held  over  debtors  located  in  47  different jurisdictions for 
the French assignor, and 31 jurisdictions for the Spanish assignor (with some jurisdictions in 
common but not all). Due diligence of the underlying contracts showed that some claims are 
governed by either French law, Swiss law, UK law or US law and that, for some others, there 
is no underlying contract signed between the parties so that there is legal uncertainty on the 
law  applicable  to  these  assigned  claims.  The  costs  of  the  legal  memo  to  be  obtained  from 
local law firms on the formalities to be performed locally for the assignment of claims being 
enforceable against third parties (i.e. under the assumption that either the law of the debtor’s 
location or the law of the assigned claim governed third-party effectiveness) were estimated 
to  range between  5,000€ and 10,000€ per jurisdiction without  taking into  account the legal 
costs  for  coordination  work  on  our  side  as  transaction  lawyers.  Due  to  the  number  of  the 
jurisdictions  potentially  involved  for  this  local  law  analysis,  we  are  now  contemplating 
putting  in  place  another  financing  structure  not  based  on  assignment  of  claims  for  claims 
presenting  a  cross-border  element.  This  would  probably  increase  the  funding  costs  as  the 
credit exposure will not be the same for lenders/investors.”90 

The  option  of  applying  the  law  of  the  assigned  claim  to  the  third-party  effects  of  an 
assignment would not be consistent with the international solution laid down in the 2001 UN 
Convention  

89   Minutes of the Expert Group meeting15-16 May 2017, available at: 

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3506 

90  Expert member quote from the discussion at the Expert Group meeting 15-16 May 2017. 

47 

 
 
                                                 
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  

Effectiveness in reaching the objectives 

This mixed approach provides enhanced legal certainty by applying the most predictable law 
for third parties, that is, the law of the assignor’s habitual residence, as a general rule and, at 
the same time, subjecting two specific situations to the law of the assigned claim as the law 
that  responds  to  the expectations of market participants. This  mixed approach  also provides 
for flexibility in respect of the law applicable to the third-party effects of assignment of claims 
in  the  context  of  a  securitisation  by  laying  down  the  possibility  for  the  assignor  and  the 
assignee to choose the law of the assigned claim. The possibility to choose the assigned claim 
aims at not hindering the current practice of large operators of applying this law to the third-
party  effects  of  the  assignment  of  claims  within  a  securitisation  but,  at  the  same  time,  at 
facilitating  the  entry  or  the  strengthening  of  smaller  operators  in  the  cross-border 
securitisation market. 

Impacts on the parties concerned  

With  regard  to  assignments  subject  to  the  general  rule  of  the  law  of  the  assignor’s  habitual 
residence, the impacts of this option on third parties would not be different from the impacts 
on third parties described under Option 2.  

As to the specific assignments subject, as an exception, to the law of the assigned claim, two 
situations  must  be  distinguished.  The  first  exception  refers  to  the  assignment  by  an  account 
holder  of  cash  credited  to  an  account  in  a  credit  institution.  For  third  parties  (creditors, 
competing assignees), greater predictability is provided if the law applicable to the third-party 
effects  of  such  assignment  is  the  law  applicable  to  the  assigned  claim.  The  Expert  Group 
maintained this  view. This  is because  it is generally assumed that the claim that an account 
holder has over cash credited to an account in a credit institution is governed by the law of the 
country  where  the  credit  institution  is  located.  This  law  is  normally  chosen  in  the  account 
contract between the account holder and the credit institution91. 

The second exception refers to assignments of claims arising from financial instruments such 
as derivative contracts. The third-party effects of these assignments should be governed by the 
law  of  the  assigned  claim  and,  therefore,  by  the  law  of  the  financial  instrument  itself.  The 
Expert Group supported this view. Subjecting the third-party effects of assignments of claims 
arising from financial instruments to the law of the assigned claim rather than the law of the 
assignor’s  habitual residence is essential  to  preserve the stability and smooth functioning of 
financial  markets  as  well  as  the  expectations  of  market  participants.  These  are  preserved  as 
the law that governs the financial instrument from which the claim arises, such as a derivative 
contract,  is  the  law  chosen  by  the  parties  or  the  law  determined  in  accordance  with  non-
discretionary rules applicable to financial markets. 

The securitisation industry has expressed different needs with regard to the law applicable to 
the  third-party  effects  of  assignments  of  claims  in  the  context  of  a  securitisation.  Large 

91  Minutes of the Expert Group meeting of 13-14 July 2017. 

48 

 
 
                                                 
operators  (the  large  banks)  currently  apply  the law  of  the  assigned  claims  to  the  third-party 
effects of assignments of claims within a securitisation and have stated that the new uniform 
conflict of laws rules should not interfere with this practice. For their part, smaller operators 
(smaller banks and corporates) have stated the need for the new rules to be based on the law 
of  the  assignor’s  habitual  residence.  The  aim  of  this  initiative  is  to  promote  cross-border 
investment  and,  therefore,  the  expansion  of  the  market  for  cross-border  securitisation.  By 
laying down the possibility for the assignor and the assignee to choose the law of the assigned 
claim while, at the same time, maintaining the law of the assignor’s habitual residence as the 
default rule, both  large and smaller operators could decide, in  view of the characteristics of 
each securitisation, which of the two laws is best suited to the transaction. By adapting to the 
needs  of  all  operators,  the  flexibility  of  this  option  would  promote  cross-border  investment 
and the expansion of the securitisation market to the largest extent.  

Costs and coherence with existing EU acquis and the international solution 

To the extent that the majority of assignments of claims would remain subject to the general 
rule of the assignor’s habitual residence, the analysis of the costs of implementing this mixed 
option would not differ from the assessment of costs explained under Option 2.  

For the same reason, consistency of this mixed option with the Insolvency Regulation would 
only be marginally affected. In any event, the enhanced legal certainty provided by subjecting 
the assignment of cash credited to an account in a credit institution and of claims arising from 
financial instruments such as derivative contracts to the law of the assigned claim, as expected 
by  market  participants,  would  outweigh  the  benefits  of  consistency  with  the  Insolvency 
Regulation  in  the  less  frequent  cases  of  insolvency  of  the  assignor  or  assignee  involved  in 
these assignments. 

The consistency of the law of the assignor’s habitual residence, to which the vast majority of 
assignments  of  claims  would  be  subject  under  this  mixed  option,  with  the  international 
solution would not be affected, as the 2001 UN Convention on the Assignment of Receivables 
in International Trade excludes from its scope the assignment of receivables arising from bank 
deposits and financial contracts. 

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 

Effectiveness in reaching the objectives 

As under Option 3, under the general rule in this mixed option the lack of predictability for 
the  parties  affected  by  the  proprietary  effects  of  a  claim  assignment  as  to  which  law  will 
govern  their  interests  would  remain.  The  advantage  of  having  to  check  only  the  law  of  the 
assigned claim to  know  the conditions for the enforceability of the claim against  the debtor 
and against third parties would also apply under this mixed option. 

The  greater  legal  certainty  provided  by  the  law  of  the  assignor’s  habitual  residence  would 
only apply, as an exception, to the assignment of multiple and future claims.  

49 

 
 
Impacts on the parties concerned 

The  rationale  of  the  exception  to  the  general  rule  under  this  mixed  option  is  the  need  to 
consider the requirements of the factoring and the securitisation industries. The application of 
the  law  of  the  assignor’s  habitual  residence  instead  of  the  law  of  the  assigned  claim  to  the 
assignment  of  multiple  and  future  claims  would  address  the  difficulties  that  market 
participants involved in factoring and securitisation would face if they had to check the law 
governing  multiple  claims  in  a  bulk  assignment  or  know  the  law  governing  claims  not  yet 
constituted, often also included in a bulk assignment. 

Costs and coherence with existing EU acquis and the international solution 

The legal costs for factoring and securitisation operators of having to check and comply with 
the  requirements  under  the  laws  governing  multiple  claims  in  a  bulk  assignment  may 
significantly increase the costs of a cross-border assignment and even lead parties to abandon 
the transaction. The exception to the general rule under this mixed option would address these 
concerns  by  applying  the  law  of  the  assignor’s  habitual  residence  to  the  assignment  of 
multiple claims. 

The solution under this mixed option would only partially be consistent with the conflict of 
laws rules of the Insolvency Regulation and the solution chosen at international level by the 
2001  UN  Convention  on  the  Assignment  of  Receivables  in  International  Trade.  Only  cases 
where  multiple claims  are assigned, subject to  the rule of the law of the assignor’s habitual 
residence, would benefit from synergies with other EU and international solutions. 

6.5 

Issues raised by stakeholders 

With regard to the law applicable to the assignment contract, some stakeholders considered 
that  this  law  would  provide  clarity  and  be  consistent  with  Article  14(1)  of  the  Rome  I 
Regulation, which provides that this law applies to the relationship between the assignor and 
the assignee. 

With  regard  to  the  application  of  the  law  of  the  assignor's  habitual  residence  as  a  rule, 
stakeholders considered that this law could be determined easily and would thus provide great 
legal certainty, and that it would respect more than any other approach the economic logic of 
important trade practices. Stakeholders also positively highlighted the consistency of this rule 
with  the  Insolvency  Regulation  and  the  2001  UN  Convention  on  the  Assignment  of 
Receivables in International Trade. 

As  a  negative  aspect,  stakeholders  noted  that  the  law  of  the  assignor’s  habitual  residence 
would  require  looking  at  a  third  conflict  rule  applicable  to  the  assignment,  as  the  Rome  I 
Regulation  (Article  14)  already  lays  down  the  rule  of  the  assignment  contract  applicable 
between the assignor and the assignee and the law of the assigned claim applicable between 
the  assignor  and  the  debtor.  This  law  may  be  more  cumbersome  if  the  claim  is  assigned 
several  times  (as  the  habitual  residence  of  various  assignors  would  need  to  be  ascertained). 
Some stakeholders also argued that the use of location-based tests in modern conflict of laws 
rules  is  inappropriate  as  this  connecting  factor  is  subject  to  changes,  may  be  hard  to  define 
when the ‘nationality’ of a company differs from that of its branches and is merely a question 
of fact.  

50 

 
 
On the specific issue of the assignment of cash held in accounts, the majority of respondents 
expressed a preference for the law governing the assigned claim (7 respondents) or for the law 
of the place where the cash account is located (4 respondents). Only a minority expressed a 
preference for the law of the assignor's habitual residence.  

With regard to the assignment of cash as collateral and the assignment of credit claims as 
collateral, stakeholders mostly preferred the law governing the assigned claims92.  

On  the  specific  issue  of  the  assignment  of  claims  used  as  underlying  assets  in 
securitisation, the law governing the assigned claim and the law applicable to the assignment 
contract  were  favoured  by  4  respondents  respectively,  whereas  the  law  of  the  assignor’s 
habitual residence was preferred by 2 respondents.  

As to the application of the law governing the assigned claim as a rule, stakeholders noted 
that this law would comply with the principle of party autonomy, would guarantee consistent 
outcomes  as  between  competing  assignments  of  the  same  claim  and  potentially  lower 
transaction  costs,  as  due  diligence  with  regard  to  the  law  applicable  to  the  underlying  debt 
(that is, the assigned claim) must be carried out in any event in most cases.  

However,  stakeholders  expressed  strong  concerns  with  this  law  applying  to  claims  under 
future contracts and to bulk assignments of claims. In the first case, because the claim does 
not  yet  exist.  In  the  case  of  bulk  assignments,  as  it  may  be  unfeasible  for  the  assignee  to 
establish which law applies to each claim/receivable if each claim is subject to a different law. 
Most  of  the  stakeholders  feared  that,  due  to  the  predominance  of  bulk  assignments  in 
factoring,  the  application  of  such  law  would  lead  to  a  significant  decrease  in  cross-border 
factoring transactions.  

6.6  How do the options compare?  

The options will be hereafter compared against each other as to stakeholder preferences, their 
effectiveness, their impact on the parties concerned, their cost and their consistency with EU 
acquis and the international solution.  

Compared  to  the  baseline  scenario,  the  adoption  of  a  uniform  solution  at  EU  level, 
irrespective of the option chosen, would improve the current situation of legal uncertainty. At 
least, the parties concerned by the proprietary effects of a claim assignment would know the 
connecting factor that would designate the national law applicable to their interests. 

6.6.1

  Stakeholder preferences 

Stakeholders  were  asked  about  their  preferences  as  to  the  law  that  should  apply  to  the 
proprietary  effects  of  cross-border  transactions  in  claims  in  the  study  contracted  by  the 
Commission and also in the public consultation.  

92   Cash  collateral:  5  respondents,  compared  to  3  respondents  preferring  the  assignor's  habitual  residence;  2 
preferred the law of the contract between assignor and assignee, 1 the law of the security settlement system; 
Credit  claims:  4  respondents,  compared  to  3  respondents  preferring  the  assignor's  habitual  residence;  1 
preferred  the  law  applicable  to  the  assignment  contract,  1  the  law  of  the  country  where  to  collateral  is 
located. 

51 

 
 
                                                 
In the study contracted by the Commission, 44% of the stakeholders consulted favoured the 
law of the assignor’s habitual residence and 30% favoured the law of the assigned claim. The 
least  favoured  option  by  the stakeholders  was  the  law applicable  to  the  assignment  contract 
(11%)93. 

In the public consultation, stakeholders were asked to indicate their preferences as to the law 
that should be chosen in a Union legislative initiative in three separate sub-questions. Out of 
the stakeholders that responded to each of the three separate questions, 57% of stakeholders 
favoured the law of the assignor’s habitual residence, 43% favoured the law of the assigned 
claim and 30% preferred the law of the assignment contract94. 

The Expert Group on conflicts of laws considered that the law applicable to the assignment 
contract  between  the  assignor  and  the  assignee  was  not  suitable  to  govern  the  third-party 
effects of transactions in claims.  

A  dedicated  informal  meeting  with  Member  States  in  the  framework  of  the  public 
consultation revealed a preference of one Member State for the law of the contract between 
the  assignor  and  the  assignee  as  the  applicable  law  to  the  third-party  effects  of  claim 
assignments. Representatives of three other Member States expressed their preference for the 
law of the assigned claim while representatives of three other Member States favoured the law 
of  the  assignor's  habitual  residence.  A  number  of  Member  States  expressed  flexibility  as  to 
the law to be chosen.95 

6.6.2

  Effectiveness comparison 

Knowing that the connecting factor that would designate the applicable law is either the law 
of  the  assignment  contract,  the  law  of  the  assignor’s  habitual  residence  or  the  law  of  the 
assigned  claim,  parties  would  then  need  to  ascertain  which  country’s  that  law  is.  In  this 
connection, parties would benefit from the most predictable and transparent connecting factor. 

Only the law of the assignor’s habitual residence can be ascertained in advance by the parties 
concerned  by  the  proprietary  effects  of  the  claim  assignment.  The  law  of  the  assignment 
contract and the law of the assigned claim are in principle only known by the parties to the 
assignment contract (the assignor and the assignee) and the parties to the assigned claim (the 
original creditor/assignor and the debtor).  

The  law  of  the  assignor's  location  allows  the  parties  to  the  assignment  to  know,  before  the 
assignment  takes  place,  which  country’s  law  lays  down  the  requirements  that  need  to  be 
fulfilled to ensure the acquisition of legal title over the claim (for example, notification to the 
debtor  or  registration  of  the  assignment).  It  also  enables  third  parties  such  as  creditors  and 
competing assignees to know which country’s law would apply to resolve a possible dispute. 

In  contrast, the application of the law of the assignment contract  or  the law of the assigned 
claim  would  require  a  preliminary  step  from  the  parties  concerned,  namely  to  first  find  out 
which law was chosen by the assignor  and the assignee to govern their assignment contract 

93   BIICL Study (2012), p. 15. 
94   Statistical summary of responses to public consultation, question 26. 
95   Informal meeting with Member State experts on conflict of laws rules of 18 September 2017. 

52 

 
 
                                                 
(or which law is designated by the statutory rules in the absence of choice), or which law was 
chosen by the original creditor/assignor and the debtor to govern their claim (or which law is 
designated by the statutory rules in the absence of choice96).  

By providing predictability and thus greater legal certainty, the law of the assignor's habitual 
residence is superior to the law of the assignment contract and the law of the assigned claim. 
Predictability in all or some assignment cases would only be provided under the options based 
fully (Option 2) or partially (Options 4 and 5) on the law of the assignor’s habitual residence. 

In contrast with the law of the assigned claim, both the law of the assignment contract and the 
law of the assignor's habitual residence can apply to future claims.  

6.6.3

  Comparison of impacts on the parties concerned 

The interests of the third parties concerned by the claim assignment, namely the creditors of 
the assignor or the assignee and possible competing assignees, are least protected by the law 
of  the  assignment  contract,  which  is  chosen  by  the  assignor  and  the  assignee  to  fit  their 
assignment transaction. 

With  regard  to  the  assignee,  both  the  law  of  the  assignment  contract  and  the  law  of  the 
assignor’s  habitual  residence  can  in  principle  apply  in  the  factoring  and  securitisation 
industries as the assignee would only need to look at and comply with the requirements under 
one  law  to  acquire  legal  title  over  the  claims.  In  contrast,  the  application  of  the  law  of  the 
assigned  claim  in  these  industries  would  be  impracticable  as  the  laws  governing  the  claims 
assigned in bulk, most often of different countries, and the requirements under all such laws 
would need to be examined and respected.  

The application of the law of the assigned claim would respect the market practice of applying 
the  law  of  the  assigned  claim  to  the  assignment  of  cash  credited  to  an  account  in  a  credit 
institution and to claims arising from financial instruments such as derivative contracts. This 
would only be achieved under the options based fully (Option 3) or partially (Options 4 and 5) 
on the law of the assigned claim.  

Flexibility  as  to  the  law  applicable  to  the  third-party  effects  of  assignments  of  claims  in  a 
securitisation to maintain the current market practice of large operators and, at the same time, 
promote cross-border investment by expanding the securitisation market to smaller operators 
would only be achieved under Option 4.  

6.6.4

  Cost and coherence comparison 

Given that, pursuant to the Rome I Regulation, the law of the assignment contract applies to 
the  relationship  between  the  assignor  and  the  assignee,  and  the  law  of  the  assigned  claim 
applies to the relationship between the original creditor/assignor and the debtor, choosing one 
of these two laws (instead of a third law such as the law of the assignor’s habitual residence) 
as the law applicable to the third-party effects of the assignment would create synergies and 
thereby reduce costs. 

96 

In the EU, Article 4 of the Rome I Regulation would be applicable in most cases. 

53 

 
 
                                                 
In the case of bulk assignments of claims and assignments of future claims, both typical of the 
factoring and securitisation industries, the law of the assigned claim leads to high legal costs 
or cannot be applied if the claim does not yet exist. Both the law of the assignment contract 
and the law of the assignor’s habitual residence allow such assignments at a reasonable cost as 
the assignee only  needs to  look  at one law to  know the formalities he needs to  complete to 
acquire legal title over the claims.  

As  to  the  overall  cost-benefit  impact  of  EU  action  to  harmonise  the  conflict  of  laws  rules 
applicable  to  the  third-party  effects  of  claim  assignments,  the  introduction  of  a  uniform 
solution  will  generate  one-off  costs  for  transacting  parties  to  check  and  possibly  adapt  the 
legal documentation they currently use. The one-off costs of revision and adaptation of legal 
documentation  will  only  be  borne  by  transacting  parties  who  currently  apply  to  their 
assignment a law different from the law chosen by the initiative.  

These one-off costs must be compared to the much greater and continued costs incurred under 
the  baseline  scenario,  where  market  participants  may  incur  financial  losses  if  they  are 
unaware  of  the  legal  risk  posed  by  the  current  legal  uncertainty;  must  incur  legal  costs  for 
researching and/or complying with the requirements of all potentially applicable laws if they 
want to mitigate the legal risk; or miss profitable business opportunities if they are deterred by 
the legal risk.  

Consistency between the law applicable to the third-party effects of claim assignments and the 
law  applicable  to  the  insolvency  of  the  assignor  or  the  assignee  would  greatly  facilitate  the 
resolution of competing demands over the same claim, as it is in the context of insolvency that 
it needs to be determined who has legal title over a claim so as to determine the insolvency 
estate.  As  the  Insolvency  Regulation  bases  its  conflict  of  laws  rule  on  the  centre  of  main 
interest of the insolvent business (COMI), consistency in all or some assignment cases would 
only be achieved under the options based fully (Option 2) or partially (Options 4 and 5) on the 
law of the assignor’s habitual residence.  

Given  that  large  bulk  assignments  of  claims  often  include  claims  governed  by  the  laws  of 
third countries, consistency between the EU solution and the solution adopted at international 
level  by  the  2001  UN  Convention  on  the  Assignment  of  Receivables  in  International  Trade 
would facilitate the resolution of international disputes, lower transaction costs and increase 
the volume of international assignments. As the UN Convention bases its conflict of laws rule 
on the assignor’s habitual residence, consistency in all or some assignment cases would only 
be achieved under the options based fully (Option 2) or partially (Options 4 and 5) on the law 
of the assignor’s habitual residence. 

The adoption by the EU and the UN Convention of the same approach would enable the EU 
and the Member States to adopt the Convention if they deemed it appropriate. Even without 
such adoption, alignment with the UN Convention rule, whose substance is already accepted 
in several States, would bring EU law in harmony with the conflict of laws rules applicable in 
other parts of the world.  

To the extent that an assignor has his habitual residence in the EU, the law of the assignor’s 
habitual residence is the only law that could promote the application of the substantive law of 
Member States and reduce the scope for forum shopping. 

54 

 
 
The  application  of  the  law  of  the  assignor’s  habitual  residence  to  the  third-party  effects  of 
assignments  of  claims  as  a  general  rule,  combined  with  the  application  of  the  law  of  the 
assigned claim to the third-party effects of certain assignments of claims (that is, cash, claims 
arising  from  financial  instruments  and  assignments  of  claims  in  certain  securitisation 
structures) is the most cost-effective option as it provides legal certainty whilst adapting best 
to existing market practice and the needs of operators.  

6.6.5

  Overall comparison 

In view of the above analysis, a comparison of the options on the law applicable to the third-
party effects of assignments of claims can be summarised as follows:  

55 

 
 
 
 
LAW 
APPLICABLE 
TO THE THIRD-
PARTY 
EFFECTS OF 
THE 
ASSIGNMENT 
OF CLAIMS  

Effectiveness in 
reaching the 
objectives  

Impacts on the parties 
concerned  

Costs and coherence 
with EU acquis and 
the UN international 
solution 

Baseline scenario 

0 

0 

0 

Option 1 – Law of 
the assignment 
contract  

No predictability for 
third parties  

Permits assignment of 
future claims 

Does not take into account 
the interests of third parties 
(creditors and competing 
assignees) 

Applicable in the factoring 
and securitisation industries 

Synergies if the law of 
the assignment contract 
is chosen to be the same 
law as the law of the 
assigned claim 

No coherence with EU 
acquis or the UN 
international solution 

0/+ 

0/+ 

0/+ 

Option 2 –  Law 
of the assignor's 
habitual residence 

Predictable for third 
parties 

Permits assignment of 
future claims 

Optimal for the factoring 
industry; convenient for 
part of the securitisation 
industry  

Does not take into account 
market practice in specific 
situations (cash and claims 
arising from financial 
instruments) 

Higher costs in 
assignments of a single 
claim, but lower costs in 
assignments of multiple 
claims 

Coherence with EU 
acquis  

Coherence with the UN 
international solution 

+++ 

+ 

++ 

56 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
Option 3 – Law of 
the assigned claim  

No predictability for 
third parties  

Does not permit 
assignment of future 
claims 

Not viable for the factoring 
industry 
Inconvenient for part of the 
securitisation industry 

Takes into account market 
practice in specific 
situations (cash and claims 
arising from financial 
instruments) 

Synergies as the law 
applicable to third parties 
is the same as the law 
applicable to the assigned 
claim (the debtor) 

Significant/prohibitive 
legal due diligence costs 
in assignments of 
multiple claims 

No coherence with EU 
acquis  

No coherence with the 
UN international solution 

0 

+ 

0/+ 

Rule:  
- Predictable for third 
parties  
- Permits assignment of 
future claims 

Option 4 – Mixed 
approach: 
assignor's law 
(rule) and law of 
the assigned claim 
(exception) 

Rule: Optimal for the 
factoring industry; 
convenient for part of the 
securitisation industry  

Exception: Takes into 
account market practice in 
specific situations (cash and 
claims arising from 
financial instruments) 

Choice of law: Takes into 
account market practice for 
part of the securitisation 
industry 

Coherence with EU 
acquis  

Coherence with the UN 
international solution 

+++ 

+++ 

+++ 

Option 5 – Mixed 
approach:  
law of the 
assigned claim 
(rule) and 
assignor's law 
(exception) 

Partial predictability for 
third parties (only in 
cases covered by the 
exception) 

Partially permits 
assignment of future 
claims (only in cases 
covered by the 
exception) 

++ 

Rule: Takes into account 
market practice in specific 
situations (cash and claims 
arising from financial 
instruments) 

Exception: Takes into 
account the needs of the 
factoring and securitisation 
industries 

Partial coherence with 
EU acquis (only in cases 
covered by the 
exception) 

Partial coherence with 
the UN international 
solution (only in cases 
covered by the 
exception) 

+++ 

++ 

57 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The law of the assignor's habitual residence has a number of benefits: it is the only law that 
can be predicted and easily found by the parties concerned by the assignment; it responds to 
the  needs  of  factors  and  small  securitisers,  assignees  not  equipped  to  investigate  individual 
contracts,  assignees  of  future  claims  and  the  creditors  of  the  assignor.  It  can  facilitate  the 
resolution  of  priority  conflicts  in  situations  of  insolvency  of  the  assignor  or  the  assignee 
because it is consistent with the connecting factor used in the Insolvency Regulation. It can 
also  create  synergies  and  thereby  save  legal  due  diligence  and  litigation  costs  for  market 
participants  who  operate  on  a  global  basis  due  to  its  compatibility  with  the  2001  UN 
Convention on the Assignment of Receivables in International Trade. In addition, even when, 
currently, the parties choose to apply the law of the assigned claim to the third-party effects of 
their  cross-border  assignment,  most  of  the  times  they  also  look  at  the  law  of  the  assignor's 
habitual residence to make sure that the acquisition of legal title over the claims assigned will 
not  be  prevented  by  overriding  mandatory  rules  of  the  country  of  the  assignor's  habitual 
residence, in particular the rules laying down publicity requirements such as the obligation to 
register the assignment of claims in a public register to make it known to third parties97. 

A solution combining a general rule based on the law of the assignor’s habitual residence, an 
exception  based  on  the  law  of  the  assigned  claim  to  apply  to  certain  assignments  (of  cash 
credited to an account in a credit institution and of claims arising from financial instruments 
such as derivative contracts) typically subject to the law of the assigned claim, and a choice of 
law  possibility  to  accommodate  for  a  large  part  of  the  securitisation  industry  would 
accommodate the needs of market participants to the greatest extent.  

The preferred option is therefore Option 4. 

6.6.6

  Legal form of  intervention 

The  preferred  option  would  be  embodied  in  a  Regulation.  The  desired  uniformity  of  the 
conflict of laws rules can only be achieved through a Regulation as only a Regulation ensures 
a  consistent  interpretation  and  application  of  the  rules.  A  Directive  would  leave  room  for 
differences in the transposition of the rules into national law as well as for their interpretation 
and application. In line with previous EU instruments on conflict of laws rules, the preferred 
legal instrument is thus a Regulation. 

7  BOOK-ENTRY SECURITIES: OPTIONS, IMPACTS AND WHO WILL BE AFFECTED  

7.1  Screening of options: non-legislative and legislative solutions 

A screening of options reveals that there are both legislative and non-legislative alternatives.  

Three  non-legislative  measures  could  be  envisaged:  1.  informing  stakeholders  to  the  extent 
possible    and  where  appropriate  about  the  legal  uncertainty;  2.  providing  standardised  legal 

97   For  example,  the  German  Banking  Industry  Committee  (which  advocates  the  assignor's  law)  states  in  its 
response  to  the  public  consultation  that,  in  securitisation  transactions,  parties  need  to  check  notice  or 
registration requirements. The Association for Financial Markets in Europe (AFME) states in its response 
that parties must check whether the assignment will be effective under the law of the assignor. 

58 

 
 
 
                                                 
opinions  for  standard  transactions;  and  3.  improving  the  transparency  of  the  existing  Union 
conflict of laws rules wherever possible.  

The first non-legislative measure would not solve the residual problem in itself, as it would 
result  in  one  of  the  other  two  possible  responses  referred  to  in  the  problem  tree:  market 
participants  can  either  mitigate  legal  uncertainty,  incurring  additional  costs,  or  they  can 
refrain from entering into the transaction. Neither outcome would be optimal.  

The second non-legislative measure would seem to offer at least a partial solution. However 
industry  associations  as  well  as  individual  market  participants  are  already  commissioning 
standardised legal opinions whenever possible to save on legal costs. It is unlikely that non-
legislative  EU  intervention  could  go  beyond  what  the  industry  has  already  been  doing  in 
terms  of  cost  reduction. Also,  for  transactions  that  are  not  sufficiently  standardised  it  is  not 
cost efficient, and often not even feasible, to produce standard legal opinions. Therefore this 
measure  would  not  be  effective  at  addressing  the  problem  that  some  transactions  might  not 
take place due to the unclear legal situation and the risks this implies. A few examples where 
this might be the case include: (i) those transactions that are not standard and recurrent, (ii) 
those transactions that can be structured in a way such as to get around the risks imposed by 
legal uncertainty, as well as (iii) those transactions for which it is a requirement that not more 
than two laws are applicable to the transaction. 

The  third  non-legislative  measure  would  require  issuing  a  Communication  to  clarify  the 
Commission  views  of  the  three  existing  EU  Directives.  This  measure  could  remedy  the 
problem,  namely  divergent  national  interpretations.  Therefore  this  option  will  be  further 
analysed for its impacts. 

Legislative  options  could  also  be  envisaged.  These  could  take  different  forms  and  have 
different content. As for their form, they could be either an amendment of the conflict of laws 
rules of the existing three directives or repealing the specific provisions of the Directives and 
proposing a Regulation with new conflict of laws rules. As for their content, they could follow 
i)  the  choice  of  law  solution  as  per  the  Hague  Securities  Convention,  ii)  the  current  EU 
acquis, or iii) a compromise solution that introduces scope for choice of law within the current 
EU  acquis.  Legislative  solutions  could  also  address  the  problem  of  different  national 
interpretations of the existing rules, and will therefore also be retained for further analysis. 

7.2  Descriptions of options retained for analysis 

The three retained options on content that will be analysed are therefore (1) the choice of law 
option in line with the Hague Securities Convention, (2) the "place of relevant intermediary 
approach" (PRIMA) in line with the existing EU acquis, and (3) a legislative mixed approach 
between the existing EU acquis and The Hague Securities Convention.  

The two possible forms of EU intervention would be either legislative (an amending directive 
or  a  regulation  replacing  the  relevant  conflict  of  laws  provisions)  or  non-legislative  (a 
Communication). 

Legislative options: 

59 

 
 
1)  Choice  of  law:  Law  governing  the  account  agreement  as  expressly  agreed  by  the 
contracting  parties,  if  the  intermediary  has  an  office  in  that  state  (possibly  through 
ratification of the Hague Securities Convention);  

2)  PRIMA,  where  the  account  was  opened:  Law  of  the  intermediary  or  branch  where 
account was opened for the client (through amending Directive or a new Regulation); 

3)  PRIMA,  where  the  account  is  maintained:  Law  of  the  intermediary  or  branch  where 
account is maintained.98 The account agreement shall specify the intermediary or branch 
maintaining  the  account  through  the  legal  entity  identifier  (LEI)  (through  amending 
Directive or a new Regulation). 

Non-legislative options: 

4)  Communication  improving  clarity  in  the  existing  EU  acquis:  A  Communication 

improving clarity in the existing EU acquis, expressing the Commission's on rules.  

7.2.1

  Baseline: no EU intervention 

The  baseline  scenario,  against  which  all  options  are  measured,  consists  of  no  action  (be  it 
legislative or non-legislative) at EU level. The baseline leaves it fully to Member States and 
markets  to  address  the  issue  of  different  interpretations  without  any  further  guidance  at 
European level. 

7.2.2

  Option 1: Choice of law  

Option  2  would  put  in  place  rules  that  follow  the  choice  of  law  solution  of  the  Hague 
Securities Convention.  

This  option  could  take  the  form  of  proposing  the  ratification  of  the  Convention itself,  or,  if 
specific legal issues need to be addressed, this option could take the form of a Regulation that 
lays down rules that follow closely the rules of the Convention. It is not feasible to achieve 
this  option  through  a  non-legislative  option  such  as  an  interpretation  of  the  existing 
Directives. 

7.2.3

  Option 2: PRIMA – where the account was opened 

PRIMA  exists  in  EU  law,  but  as  Annex  2  shows,  it  is  given  different  interpretations  in 
different Member States and it is therefore not applied in a uniform way across all Member 
States. This option proposes to define what is meant by PRIMA, designating as governing law 
the law of the state of the intermediary or branch that opened the account for the client. 

98   Maintaining  the  account  would  be  defined  as  effecting  or  monitoring  entries  into  securities  accounts, 
administering  payments  or  corporate  actions  or  other  regular  activity  necessary  for  administration  of 
securities accounts. This definition is in line with the Hague Securities Convention's fall-back option, which 
determines the applicable law in cases where there was no valid choice of law in the account agreement. 

60 

 
 
                                                 
This option could take the form of a Regulation, an amending Directive, or a Communication. 
Each  of  these  tools  could  clarify  the  concepts  of  the  existing  Directives  that  are  subject  to 
interpretation. 

7.2.4

  Option 3: PRIMA – where the account is maintained 

This option was put forward by the Expert Group99 as an alternative solution to address the 
problem through a clarified PRIMA concept. This option designates as governing law the law 
of the state of the intermediary or branch that maintains the securities account.100  

This option could take the form of a Regulation, an amending Directive, or a Communication 
could also clarify those concepts of the existing Directives that are subject to interpretation. 

7.3  Analysis of impacts  

The options will be analysed as for their effectiveness in reaching the objectives of reducing 
costs  and  reducing  losses.  Improving  legal  certainty  is  the  specific  objective,  and  ensuring 
clear rules and their consistent implementation is the operational objective. To have the same 
substantive law applicable irrespective of where the competent authority or court examines a 
case within the EU achieves legal certainty.  

The options will also be analysed as to their cost of implementation. This consists of the cost 
incurred by the state, the courts, the transacting parties and third parties in applying the rule of 
a given option instead of the currently applicable rules (baseline scenario).  

Considerations  also  take  into  account  the  specific  issues  raised  by  stakeholders  during  the 
consultation process. These are the following: 

Impacts on all stakeholders:  
Would the rules deviate from existing EU acquis? 
Would the rules lead to the applicability of non-EU law? 
Would the rules be technology proof?  
Impact on Member States:  
Would the rules lead to any negative fiscal impacts? 
Impact on account holders:  
Does the account holder have an influence on, and understanding of, the applicable law? 
Impact on third parties:  
How easily can third parties and issuers identify the applicable law? 
Impact on global players: 
Are rules consistent with the rules of non-EU countries?  
Impact on CSDs:  
How would the rules impact the business models of  central securities depositories (CSDs) 
and custodians?  

99  Expert group on conflict of laws regarding securities and claims: 

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3506 

100   The  term  "maintaining  an  account"  would  be  defined  similarly  to  the  Hague  Convention  through  a 
sequential test: effecting or monitoring entries into securities accounts, administering payments or corporate 
actions or other regular activity necessary for administration of securities accounts. 

61 

 
 
                                                 
 
7.3.1

  Baseline 

Effectiveness in reaching the objectives: 

To recall, the objectives of any intervention on securities are to reduce any residual costs  of 
cross-border  transactions  and  to  reduce  any  unexpected  losses.  Given  the  existence  of  EU 
legislation  on  the  most  relevant  aspects,  the  issues  that  remain  were  found  not  to  be 
substantial problems. In line with this, any objectives to improve are marginal improvements. 
Given  that  cross-border  activity  is  already  quite  substantial,  increasing  cross-border 
transactions is not an explicit objective. 

Driver 

differently 

Problems 

and 

Unclear 
implemented rules 
Legal risks 

Problem 
Consequences  Costs 
Losses 

Size  or  scale 
of problems 

Residual 

Objectives 
Ensure  clear  rules  and  consistent 
implementation 
Improve legal certainty 
Reduce costs 
Reduce losses 

Marginal 

Operational 

Specific 
General 

Size  or  scale 
of 
expected 
improvements 

In  the  absence  of  any  EU  intervention  it  is  unlikely  that  Member  States  would  arrive  to  a 
common interpretation of the three relevant directives and apply the rules in a more uniform 
way than at present. Markets would continue to work with the existing rules as they currently 
do, finding solutions with legal opinions and structuring transactions according to the national 
interpretations of EU conflict of laws rules. 

7.3.2

  Impacts of Option 1: Choice of law  

Effectiveness in reaching the objectives 

Introducing rules that allow for choice of governing law to the contracting parties (the account 
holder and the account provider), following the solution of The Hague Securities Convention, 
would make rules clearer to contracting parties. Therefore it could theoretically reduce their 
costs (costs related to assessing the applicability of different national laws) and any potential 
unexpected  losses  (losses  that  result  from  the  unforeseen  applicability  of  different  national 
laws).  Exact  figures  are not  available  to  quantify  these  costs  and  losses,  but  as  the problem 
definition already pointed out, these do not appear to be material problems for the industry.  

Impacts on stakeholder groups 

Account  holders:  End  investors  as  account  holders  might  find  that  the  intermediary  with 
market power imposes the applicable law, without end investors having a real say. 

Third  parties:  marginal  additional  costs  of  discovering  applicable  law  from  the  account 
agreement.  There  is  a  cost  impact,  but  it  is  not  substantial  compared  to  the  overall  cost  of 
establishing  an  interest  in  securities,  and  compared  to  how  easy  or  hard  it  is  currently  to 
establish  which  law  applies.  Third  parties  that  are  not  collateral  takers  but  creditors  would 
also have to run additional costs of obtaining the information from the account agreement as 

62 

 
 
 
 
 
to the applicable law. Finally issuers would also find it cumbersome to look into the account 
agreement for the choice of law clause in order to identify which law applies to ownership. 

Applicability of non-EU law: broad possibility to choose non-EU law. Since parties are free to 
choose as governing law the law of any state where the intermediary has an office, non-EU 
laws could be designated as applicable law in any circumstances, as long as the intermediary 
providing  the  accounts  has  an  office  in  the  state  the  law  of  which  is  chosen.  The  issue  of 
international  consistency  of  conflict  of  laws  provisions  is  an  important  consideration  for  a 
large  number  of  European  market  participants.  It  would  offer  cost  saving  to  market  players 
with  an 
international 
counterparties.  In the public consultation this  aspect  was mentioned by respondents (private 
parties as well as public bodies) as an important consideration.101  

international  portfolio  of  securities  or 

those  engaging  with 

Costs and coherence with existing EU acquis 

Coherence with EU acquis: The adoption of the Hague Securities Convention would require 
changing the existing EU law provisions in the existing EU acquis under the SFD, FCD and 
WUD, to introduce rules in line the latter, or, alternatively to withdraw the relevant provisions 
of  the  three  Directives  and  ratify  the  Hague  Securities  Convention.  The  lack  of  political 
support from a number of Member States, as well as the doubts of the European Parliament 
and  the  ECB  was  the  sharp  contrast  between  the  approach  of  the  EU  acquis  (place  of  the 
relevant  intermediary  approach  -  PRIMA)  and  the  approach  of  the  Hague  Securities 
Convention (choice of law). 

Costs: In their response to the public consultation CSDs pointed out that they expect that an 
overarching reform which deviates from the currently applicable conflict of laws rules would 
result  in  a  review  of  legal  opinions  covering  the  conflict  of  laws  questions.102  They  did  not 
quantify  the  costs  of  such  reviews.  However  they  point  out  that  a  conflict  of  laws  rule 
referring  to  the  law  governing  the  contract  would,  for  accounts  in  some  CSDs,  have  to  be 
associated with the law applicable to the securities settlement system or the law of the CSD to 
cater  for  the  fact  that  those  CSDs  do  not  have  a  direct  account  agreement  with  the  account 
holders/investors. Without an appropriate safeguard, the CSD could find itself with deposits 
governed by a multitude of laws chosen by account operators and, as a result, a multitude of 
laws governing proprietary aspects of securities deposited with it.103 

101   Respondent arguing that a bank does not know if creditors of a customer will try to reach the securities by 

using judicial process in a state inside or outside the EU. Anonymous response.  
"If  -  for  whatever  reason  -  the  European  Union  decides  not  to  sign  the  Hague  Securities  Convention,  the 
conflict of laws rules of the Hague Securities Convention (Art. 4) are worth being considered for a European 
approach. European law along the lines of the rules of the Hague Securities Convention would ensure that 
European markets do not deviate from the global standard even if the European Union has not ratified the 
international Hague Securities Convention." 

102   See the response of ECSDA to the public consultation. 
103   See the response of Euroclear to the public consultation.  

63 

 
 
 
                                                 
 
7.3.3

  Impacts of Option 2: PRIMA – where the account is opened 

Effectiveness in reaching the objectives 

Option 2 would deliver on simplification and consistency within the EU: it would ensure that 
no matter where the legal proceeding is started or which authority examines the case  within 
the  EU,  always  the  same  law  will  be  applicable.  However  this  option  is  not  effective  in 
achieving  the  objective  of  international  consistency.  Under  option  2,  depending  on  whether 
the  case  is  brought  to  competent  court  or  authority  (inside  or  outside  the  EU),  potentially 
different laws will apply to determine proprietary rights in securities. Legal uncertainty would 
thus remain in an international context. 

The  main  drawback  of  this  option  is  that  it  cannot  offer  international  consistency  and 
therefore some legal uncertainty and additional costs will remain for those market participants 
that are active internationally.  

Impacts stakeholders 

The PRIMA option would not offer a choice of law to contracting parties as did sub-option 1, 
and therefore there would not be any impacts related to choice of non-EU law. Applicability 
of non-EU law would be limited to situations where the account is opened outside the EU.  

Costs and coherence with existing EU acquis 

Coherence:  This  option  would  also  be  consistent  with  the  existing  EU  acquis.  The  laws  of 
Member  States  currently  apply  PRIMA  based  on  the  EU  Directives  and  in  some  cases  also 
beyond  the  scope  of  those  Directives.  However  the  interpretation  of  relevant  intermediary 
differs across Member States. Under this option even if Member States currently apply some 
interpretation of PRIMA, they might have to change their law or their legal practice in order 
to adopt the new uniform EU definition of this concept: where the account was opened for the 
client.  

Costs: Changing the law would entail costs, not only for the legislative changes but also for 
the courts deciding cases, and the market participants when preparing legal opinions for their 
transactions. 

7.3.4

  Impacts of Option 3: PRIMA – where the account is maintained 

Effectiveness in reaching the objectives 

The mixed approach was developed by the Legal Expert Group to find a way to address the 
shortcomings of both above examined options. This option has the advantage of option 2 of 
not allowing free choice of law that might prejudice end investors and third parties. It would 
also  be  relatively  close  to  the  current  legal  solutions  applied  in  member  states.  It  would 
achieve the objective of EU-wide consistency in the same way as option 2 would. In addition 
it  would  also  allow  market  participants  to  obtain  international  consistency  in  some  specific 
situations:  when  the  law  chosen  under  the  Hague  Securities  Convention  in  a  third  country 
coincides with the law of the state where the account is maintained, and when there is no valid 
choice  made  in  the  third  country  applying  the  Hague  Securities  Convention.  Arguably  the 
latter objective, international consistency, would not be achieved to the same extent as under 

64 

 
 
option  1,  choice  of  law.  But  option  3  would  allow  somewhat  more  opportunity  for  an 
internationally consistent solution than option 2, by enabling internationally active players to 
comply with both the EU solution and the Hague Securities Convention that applies in the US 
and Switzerland. 

Impacts on stakeholders 

Solutions  such  as  the  use  of  the  legal  entity  identifier  (LEI)  in  the  account  agreement  to 
specify the entity maintaining the account would ensure that third parties can get access more 
easily to the relevant information on governing law then under option 1, choice of law. Using 
the  LEI  facilitates  obtaining  precise,  non-confidential  information  from  the  account 
agreement.  It  would  still  come  at  additional  costs  to  third  parties,  but  arguably  lower  costs 
than under option 1. 

Account  holders  would  have  more  clarity  over  the  governing  law  than  under  the  current 
situation  where  conflict  of  laws  rules  are  inconsistent.  The  legal  definition  of  where  the 
account is maintained would give more reassurance to the weaker contracting party (account 
holders, including also end-investors) than option 1, choice of law, that the governing law will 
not  be  arbitrarily  imposed  by  the  account  provider.  A  requirement  that  the  law  where  the 
account is maintained be explicitly  mentioned also in the account agreement would provide 
further clarity to account holders. However intermediaries have some leeway to define where 
an account would be maintained, which means that account holders, especially end investors 
would not be protected as much as under option 2, and might be exposed to a provision on 
place of maintenance and governing law that they do not expect. 

This  option  limits  the  applicability  of  non-EU  law  to  those  situations  where  the  account  is 
maintained outside the EU. 

Costs and coherence with existing EU acquis 

Coherence:  Under  this  option  a  number  of  transactions  would  be  internationally  consistent: 
those where the law chosen in the account agreement coincide with the law of the state where 
the account is maintained by the intermediary or the branch, as well as those where no valid 
choice  has  been  made  (given  that  the  fall-back  option  of  the  Hague  Securities  Convention 
would  apply  the  same  rule  as  this  option).  Other  situations  however  would  not  be 
'internationally  consistent':  if  parties  choose  a  governing  law  other  than  the  law  of  the  state 
where the account is maintained. In these cases questions of ownership in the same securities 
might be judged under a different law for example in the US than in the EU.  

Costs:  The costs  of  compliance  with  this  option  are likely  not  to  be  excessive,  given  that  it 
stays close to the current  wording  of  the Financial Collateral  Directive (the law of the  state 
where  the  account  is  maintained)  but  defines  this  concept  more  clearly  to  avoid  differing 
national interpretations.  

7.4  How do the legislative options compare?  

This  section  compares  the  options  on  applicable  law  as  well  as  the  different  options  on  the 
relevant level(s) of accounts. To facilitate the comparison, the options on governing law and 

65 

 
 
relevant level of account were combined in a way to get realistic and workable options that 
aim to maximise benefits.  

7.4.1

  Stakeholder preferences  

Value added in EU action 

The  public  consultation  that  took  place  between  April  and  July  2017  asked  whether 
stakeholders saw value added in EU action to harmonise applicable conflict of laws rules 
in this field. To this question, 19 respondents answered positively, i.e. they see added value in 
EU  action,  and  9  respondents  thought  EU  action  would  not  have  added  value.  Overall  it 
appears  that  there  is  no  unanimous  support  for  EU  action,  although  about  two  thirds  of  the 
respondents would favour intervention. 

Form and scope of intervention 

When asked about the form and scope of intervention, 11 stakeholders were of the opinion 
that  targeted  amendments  to  existing  EU  legislation  (SFD,  FCD  and  WUD)  would  be 
sufficient, among them some of those who argued no intervention is needed (6 respondents). 9 
respondents  favoured  an  overarching  reform,  i.e.  a  separate  legal act that  would  specify  the 
applicable  law  to  third  party  effects  of  transactions  in  securities.  In  addition,  7  respondents 
thought  that  both  solutions  –  targeted  amendments  or  an  overarching  reform  –  could  be 
effective. Therefore, when asked about  a legislative intervention,  slightly  more stakeholders 
were in favour of an amendment of existing Directives than an overarching new initiative. 

Governing law 

The  public  consultation  tested  options  on  the  governing  law.  7  respondents  expressed 
preference  for  the  choice  of  law  option,  and  9  preferred  a  definition  of  the  applicable  law 
based on PRIMA (of which 2 respondents would leave it to parties to define contractually the 
relevant intermediary). Of those respondents who see no added value in EU action, 6 replied 
that  they  would  prefer  PRIMA,  should  policymakers  decide  to  put  forward  a  legislative 
proposal.  

In several responses the reason provided for the choice of PRIMA as the preferred option was 
that  respondents  were  aware  that  adopting  the  Hague  Securities  Convention  -  which  would 
otherwise be their own preferred option - was politically not feasible, due to resistance from 
other stakeholders. These respondents stressed however that the definition of PRIMA should 
be as close as possible to the definitions used under the Hague Securities Convention. At the 
same  time  there  were  also  respondents  preferring  PRIMA  due  to  a  fear  of  "major  legal 
uncertainty in a complete overhaul in the paradigm of the current conflict of law rules". Two 
stakeholders  preferred  the  issuer's  law  and  6  other  proposals  were  made  that  were  mainly 
variants  of  PRIMA  and  Hague,  for  example  the  place  of  the  relevant  account  approach,  a 
limited right to parties to choose the applicable law, etc.  

On preferences of stakeholders between options 2.) and 3.) on how to define PRIMA, out of 
the  15  stakeholders  opting  for  PRIMA  only  8  gave  their  preference.  6  respondents  thought 
that  PRIMA  should  be  defined  through  the  intermediary's  branch  handling  the  account,  1 
argued for the intermediary's registered office, another one proposed a list of three criteria to 

66 

 
 
be taken into account: the state in which the representative office of the intermediary is, the 
state  in  which  the  intermediary's  head  office  is  and  the  state  in  which  the  intermediary's 
branch is maintaining the account. 

As a result, stakeholders are strongly divided between the choice of law option and PRIMA, 
where  most  respondents  did  not  clarify  how  PRIMA  should  be  interpreted  exactly,  but  the 
intermediary's branch handling the account got the highest support. 

Costs and benefits 

Neither  part  of  the  consultation  strategy  (explained  in  detail  in  Annex  2)  could  deliver  any 
cost estimates or quantified benefit assessments. Therefore a comprehensive and quantitative 
cost benefit analysis  on the options on book-entry securities is  not possible.  The options on 
book-entry securities as to the governing law and the relevant level of account are compared 
below qualitatively as to their cost impacts and benefits, their economic and social impacts, 
their overall cost-effectiveness and their coherence.  

7.4.2

  Effectiveness comparison 

The  three  options  are  equally  effective  in  achieving  the  objective  of  simplification  and 
consistency across EU member States, and would achieve the result of having rules in place 
that designate the same applicable law no matter where the case is examined within the EU.  

A further aspect that stakeholders signalled as desirable is international consistency. On this 
aspect only the choice of law option (option 1) delivers fully. Option 2 is not compatible with 
the Hague Securities Convention and therefore would not deliver on international consistency. 
Option 3 offers the possibility of partial compatibility with the Hague Securities Convention. 
Not  achieving  international  consistency  means  that  the  problem  is  solved  in  a  European 
context,  but  remains  unsolved  in  a  global  context,  with  negative  implications  on  the  risks, 
costs  and  feasibility  of  international  transactions  in  securities.  In  terms  of  international 
consistency,  only  option  1  and  partially  option  3  deliver  on  rules  that  result  in  the  same 
applicable law irrespective of whether the case is examined by an EU or a non-EU competent 
court or authority.  

7.4.3

  Cost comparison 

Due to lack of quantitative data, only a qualitative analysis of costs can be carried out. All 
options would have some compliance cost implications on market participants, but given that 
under  the  current  status  quo  there  are  already  costs  related  to  the  lack  of  clarity  and  the 
inherent risks in cross-border transactions, the fact that there are  one-off switching costs to 
comply with the new rules does not mean that the options are not cost effective. Currently 
participants have to procure legal opinions on their cross-border transactions, often covering 
more  than  one  substantive  law  that  might  be  applicable.  Under  all  of  the  three  options 
presented  in  this  impact  assessment  the  rules  on  conflict  of  laws  would  be  clear  and 
harmonised across the EU, meaning that cross-border transactions would no longer be subject 
to  legal  uncertainty.  Legal  opinions  would  still  be  needed  for  cross-border  transactions, 
but  these would be  easier  to  obtain, and would not  need to cover several legal  systems, as 
one single law would be applicable to any given cross-border transaction across the EU. 

67 

 
 
Option 1 has some significant drawbacks on costs and negative impacts: it is inconsistent 
with the current EU acquis, therefore it can impose higher costs of switching on CSDs, and it 
also risks having negative impact on third parties who will find it harder and more expensive 
to obtain information about the law applicable to the transaction. As for end investors, among 
them  retail  investors,  they  might  find  that  the  account  provider  with  market  power  imposes 
the applicable law on them. 

Option 2 (where the account was opened) has no negative impacts on account holders, third 
parties and CSDs.  It would however, as shown above, be less effective than option 1 as it is 
incompatible with the solution applied in jurisdictions outside the EU. 

Option 3 achieves the objective of international consistency only partially, but it does not 
have negative impact on account holders, third parties and CSDs, and is coherent with the 
existing EU acquis. 

A purely qualitative assessment shows significant trade-offs in the case of both Option 1 and 
Option  2.  For  Option  1,  the  positive  economic  impacts  of  international  consistency  would 
reduce  risks  and  costs  of  cross-border  transactions  not  only  across  the  EU  but  also  in  an 
international context. However, that might be outweighed by negative social impacts and high 
compliance costs, as it departs from the current EU acquis. Option 2 does not impose as high 
compliance  costs,  as  it  does  not  depart  fundamentally  from  the  EU  acquis,  and  it  brings 
benefits in terms of legal certainty to end investors, without disproportionate costs on CSDs 
and custodians.104 However, it does not deliver on international consistency and therefore its 
benefits  are  also  lower.  Option  3,  similar  to  option  2,  creates  low  negative  effects  and 
compliance costs, but the benefits it would achieve in terms of end investor protection would 
be somewhat lower, since the relevant level of account for individually segregated accounts is 
the  account  provided  by  the  highest  level  intermediary  where  accounts  are  still  segregated, 
and  not  the  account  provided  to  the  end  investor.  This  option  would  however  deliver 
somewhat  better  on  the  objective  of  international  consistency  than  option  2,  but  to  a  much 
lesser extent than option 1 (choice of law). Option 3 has the lowest negative impacts and cost 
implications, and achieves some benefits in terms of international consistency.  

To  recall,  stakeholders'  preferences  are  extremely  divided  between  option  1  (choice  of  law) 
and  any  form  of  PRIMA  (options  2  and  3).  Financial  sector  actors105  as  well  as  Member 
States106  are  highly  divided  as  to  which  option  would  be  preferable  in  case  of  a  legislative 
intervention. Given that the quantification of the costs and benefits is not possible, much of 
the  problems  are  theoretical  or  speculative  with  no  supporting  evidence  and  the  ultimate 
decision on which option is best greatly depends on how much weight policy makers put on 
the various trade-offs and on achieving international consistency (compatibility with conflict 
of  laws  rules  applicable  outside  the  EU,  where  US  and  Switzerland  follow  the  same  legal 
solution:  The  Hague  Securities  Convention).  Keeping  this  in  mind,  option  3  is  the  option 
balancing best the objective of aiming for some international consistency with the constraint 
of  potentially  departing  too  radically  from  the  current  EU  acquis  that  would  be  costly  for 

104   This is due to the differentiated approach between individually segregated and omnibus accounts. See the 
replies of ECSDA and Euroclear to the public consultation, explaining why any deviations from the existing 
acquis would result in disproportionately high costs for CSDs. 
105   See the summary of responses to the public consultation in Annex 2. 
106   Ibid. 

68 

 
 
                                                 
some  market  participants  or  impose  negative  effects  on  end  investors  or  third  parties.  
However, it should be recalled that the findings are highly speculative and theoretical given 
the lack of concrete evidence. 

7.4.4

  How do the legislative and non-legislative options compare? 

EU  action  on  securities  could  take  the  form  of  a  Regulation,  an  amending  Directive  or  a 
Communication to clarify the Commission's views with regards to the existing provisions.  

7.4.4.1  Legislative intervention: Absence of material problem 

Under a legislative intervention a Regulation would repeal the three specific provisions in the 
three  existing  Directives.  It  would  be  directly  applicable  and  would  therefore  prevent 
problems  of  divergent  transpositions.  It  would  however  also  have  some  significant  cost 
implications, as  indicated above  in  the analysis of options. Alternatively the initiative could 
take  the  form  of  an  amending  Directive  to  the  FCD,  SFD  and  WUD.  Some  stakeholders 
thought this was reasonable, since the main issues arise in the context of the situations that the 
three Directives cover. Clearer wording could address both divergent interpretations and any 
differences in wording and scope across the three Directives. This option would also entail the 
same trade-offs as indicated above in the analysis of options. 

The  three  alternative  legislative  options  are  analysed  and  compared  above.  In  light  of  the 
above  analysis,  it  is  clear  that  there  are  trade-offs  in  legislative  intervention  under  each 
substantive option, and that stakeholders and Member States strongly diverge as to what the 
preferred option should be. Given that the problem is not material, i.e. no market disruption in 
cross-border securities transactions were found, and that the legal risk is residual at most, it 
appears  that  a  non-legislative  intervention  would  be  a  more  proportionate  response  at  this 
juncture. 

7.4.4.2  Non-legislative intervention: Improving clarity in the existing EU acquis 

The  issuance  of  a  Communication  clarifying  the  Commission's  views  of  the  text  of  the 
existing conflict of laws provisions of the SFD, FCD and WUD would mean that the scope 
and wording of the Directives would remain unchanged. The Communication would however 
improve transparency of the existing rules across the European Union. 

A  clarification  would  bring  more  transparency  and  reduce  the  costs  of  legal  opinions  that 
transacting  parties  incur  when  trying  to  remedy  the  residual  legal  uncertainty  that  was 
identified  in  the  evaluation.  Although  no  precise  figures  are  available  on  these  costs,  it  is 
estimated  that  a  clarification  through  a  non-legislative  Communication  would  have  a 
somewhat lower cost-reduction effect than a legislative amendment. 

However the Communication can deliver on the objective of introducing more clarity without 
imposing  significant  adjustment  costs  and  without  unsettling  the  existing  EU  acquis  that 
stakeholders warn against. It would also avoid disrupting national systems which work well, 
given that no evidence has been found of a material problem. 

69 

 
 
 
 
 
A  legislative  solution  to  address  the  theoretical  and  residual  legal  uncertainties  is  also 
considered to be premature at this stage given the strong divergence of views among market 
participants and Member States on the preferred option. 

A  Communication  would  be  a  quick  tool  to  take  action,  and  it  would  be  the  best  way  to 
preserve the existing EU acquis and to limit negative impacts while achieving real and strong 
benefits providing clarity to the existing rules.  

A Communication might also be the most appropriate option in terms of future developments. 
International  and  technological  developments  might  alter  the  preferred  policy  option  on 
substance.  First,  in  an  international  context  further  third  countries  might  ratify  the  Hague 
Securities Convention. This international development would place into new perspective the 
objective  to  achieve  international  consistency.  Secondly,  future  technological  developments 
might  change  the  cost  benefit  analysis  of  the  substantive  policy  options.  Distributed  ledger 
technology is being tested and gradually introduced into various areas of financial markets. A 
legislative solution implies engagement with a policy direction throughout a long policy cycle 
from proposal to adoption of a measure, until entry into application. A communication would 
mean swifter action at present, leaving freedom to assess in the future, in light of international 
and  technological  developments,  whether  a  more  pronounced  solution  would  achieve  better 
results.  It  would  be  without  prejudice  to  future  decisions  that  might  be  made  on  the 
aforementioned issues by the Court of Justice of the European Union, which is responsible in 
the final instance for interpreting the Treaty and secondary legislation. 

In  light  of  these  considerations  and  in  terms  of  proportionality,  a  Communication  is  the 
preferred  form  of  action.  It  follows  the  considerations  that  led  to  the  selection  of  the 
preferred policy option; i.e. to achieve more legal clarity but at the same time avoid deviating 
too  much  from  the  existing  EU  acquis,  and  not  to  prejudice  future  international  and 
technological developments. The Communication will provide clarity for market participants, 
without imposing compliance costs that could be disruptive for the market. More clarity as to 
the  applicable  rules  will  help  decrease  any  cross-border  risks  related  to  legal  uncertainty  as 
well as transaction costs related to discovering the applicable law. 

These benefits would accrue with financial intermediaries, and they might be passed on to end 
investors  (enterprises  –  including  SMEs  –  funds,  retail  investors,  etc.).  The  benefits  will  be 
marginal, as the problem is not material to begin with. The benefits cannot be quantified due 
to lack of data. 

In conclusion, a Communication would provide a proportionate response to the residual legal 
uncertainty of existing EU conflict of law rules in the field of securities. 

It is also considered to be the most appropriate option in line with better regulation principles. 

The negative impacts of such a Communication are expected to be minimal. Given that there 
is  no  substantial  evidence  of  disruption  in  the  market,  the  Communication  will  not  seek  to 
change  the  application  of  the  Directives'  relevant  provisions,  but  rather  to  clarify  the 
Commission's views with regards to the existing provisions. 

70 

 
 
In  conclusion,  the  cost-benefit  analysis  confirms  that  a  Communication  would  provide  a 
proportionate and adequate response to the residual legal uncertainty of existing EU conflict 
of law rules in the field of securities: 

Base 
line: 
no  EU 
action 

0 

Effective-
ness in 
achieving 
objectives 

Coherence 
with EU 
acquis 
Compliance 
costs 

0 

0 

0 

Cost 
effective-
ness 

1.  Legislative:  Choice 
of law  

2.  Legislative:  Law 
where 
account 
opened  

3.  Legislative:  Law 
where 
account 
maintained  

4.  Non-legislative 
Communication 

Reduce costs of legal 
opinions: + + + 
Reduce losses: + + +  
( Full harmonisation 
across the EU and vis-à-
vis US & Switzerland –
the Hague Securities 
Convention) 
(-) Departs from current 
EU rules 

(-) 
(adjustment costs, 
mainly on CSDs) 
(-) 
(negative effects on third 
parties) 
No data available. 
Positive economic 
impacts might be 
outweighed by 
compliance costs and the 
applicability of non-EU 
laws, with potentially 
negative impacts on 
third parties and end 
investors (including 
retail investors).  

Reduce costs of legal 
opinions: + + 
Reduce losses: + + 
(full harmonisation 
across the EU) 

+ Coherent with 
current EU acquis  

(-)(-) 
(costs for CSDs and 
custodians having to 
offer accounts 
governed by different 
laws) 
No data available. 
Positive impacts are 
limited to intra-EU 
transactions, at a 
certain compliance 
cost. Would benefit 
some end investors, 
but at a cost ultimately 
likely to be passed on 
to them. 

Reduce costs of legal 
opinions: + + 
Reduce losses: + + 
(full harmonisation 
across EU & some 
situations compatible 
with The Hague 
Securities Convention) 
+ Coherent with 
current EU acquis 

(-) 
(adjustment costs, 
mainly on CSDs) 

Reduce costs of 
legal opinions: +  
Reduce losses: + 
(across the EU &, 
possibly some 
international 
convergence) 

+ Coherent with 
current EU acquis 

(~ 0) 
(no material costs) 

No data available. 
Positive impacts 
mainly for intra-EU 
transactions, at a 
certain compliance 
cost. 

No data available. 
Positive impacts of 
clarification for 
intra-EU 
transactions, 
without legislative 
changes that would 
impose material 
adjustment costs. 

8 

IMPACTS OF THE PACKAGE OF OPTIONS ON CLAIMS AND SECURITIES 

On claims, the preferred option is to adopt a proposal for a Regulation on the law applicable 
to  the  third-party  effects  of  assignments  of  claims  based  on  Option  4.  The  adoption  of 
harmonised conflict of laws rules will bring legal certainty to market participants and thereby 
eliminate  the  current  legal  risk  of  possible  financial  losses  where  legal  risk  is  unknown;  of 
increased  transaction  costs  if  the  legal  risk  is  mitigated  by  due  diligence  and/or  compliance 
with  all  possibly  applicable  national  laws;  or  of  missed  business  opportunities  if  legal  risk 
deters parties from entering into cross-border assignments.  

On  book-entry  securities,  the  preferred  option  is  to  issue  a  Communication  clarifying  the 
Commission's views with regards to the existing provisions, whose impact is expected to be a 
net positive impact, with benefits accruing from increased legal clarity. Although the evidence 
gathering exercise revealed that some uncertainty as to the interpretation of certain concepts 
of  the  existing  EU  Directives  still  existed,  it  also  demonstrated  that  this  residual  legal 

71 

 
 
 
 
uncertainty did not prevent the development of significant cross-border markets and that it is 
not  expected  to  hinder  the  further  development  of  cross-border  activities.  An  interpretative 
Communication  is  expected  to  have  some  positive  impact  on  reducing  risks  and transaction 
costs of cross-border transactions. It is not expected that the Communication would result in 
any material compliance cost or other costs for stakeholders and Member States.  

The overall package of options (a Regulation on the law applicable to the third-party effects 
of  assignments  of  claims  and  a  Communication  on  transactions  in  securities)  will  increase 
legal  certainty  and  foster  cross-border  investment.  Neither  of  the  two  preferred  options' 
impacts can be quantified in monetary terms.  

9  HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

The  Commission  will  monitor  the impacts  of  the  proposed  initiative  on  claims  by  way  of  a 
questionnaire sent to key stakeholders. The questionnaire will aim at gathering information on 
trends in the number of cross-border assignments, trends in due diligence costs further to the 
adoption of a uniform rule, and the one-off costs related to changes in legal documentation. 
The impact of the proposed solution on claims will be evaluated in a report prepared by the 
Commission five years after the entry into force of the proposed instrument.  

The  monitoring  of  the  impacts  of  the  adoption  of  a  uniform  rule  will  cover  the  areas  of 
factoring, securitisation, collateralisation and the specific assignments of cash credited to an 
account  in  a  credit  institution  and  of  claims  arising  from  financial  instruments  such  as 
derivative contracts.  

The analysis will keep in mind that the volume of transactions, the transaction costs and the 
nature of hidden risks in claim assignments are influenced by a number of different economic, 
legal or regulatory factors unrelated to legal certainty on the applicable law.  

As for securities, the Communication will call on stakeholders and Member States to signal to 
the Commission if they observe specific cases where legal uncertainties cause disruptions in 
the  market  or  any  disproportionate  costs.  A  targeted  questionnaire  will  be  sent  to  Member 
States  and  key  stakeholders  from  the  financial  sector  five  years  after  the  adoption  of  the 
Communication to assess the situation. The feedback from the questionnaire will be assessed 
and  published.  The  assessment  will  also  take  account  of  international  and  technological 
developments in the field to examine whether legislative intervention is needed. 

72 

 
 
 
10  GLOSSARY OF TERMS 

This  Glossary  defines  the  technical  terms  used  for  the  purposes  of  this  impact  assessment 
only.107 These definitions are without prejudice to the existing EU acquis.  

Account  agreement:  The  agreement  between  the  account  holder  and  the  relevant 
intermediary governing the securities account.  

Account  holder:  A  person  in  whose  name  an  intermediary  maintains  a  securities  account, 
whether that  person  is  acting  for  its  own  account  or  for  others (including  in  the capacity  of 
intermediary).  

Applicable law: The national substantive law designated as applicable by the conflict of laws 
rules of the forum.  

Assignor: a person who transfers his right to claim a debt against a debtor to another person.  

Assignee:  a  person  which  obtains  the  right  to  claim  a  debt  against  a  debtor  from  another 
person. 

Assignment: voluntary transfer of a right to claim a debt against a debtor. It includes outright 
transfers  of  claims,  contractual  subrogation,  transfers  of  claims  by  way  of  security  and 
pledges or other security rights over claims. 

Book-entry  securities:  An  electronic  recording  of  securities  or  other  financial  assets.  The 
transfer  of  book-entry  securities  and  other  financial  assets  does  not  involve  the  physical 
movement of paper documents or certificates. For the purposes of this impact assessment the 
term book-entry securities will refer to all book-entry financial instruments, as legally defined 
in  point  (ii)  of  Article  2(9)  of  Insolvency  Regulation  Recast  as  meaning  “financial 
instruments, the title to which is evidenced by entries in a register or account maintained by 
or on behalf of an intermediary”. 

Book-entry  system:  A  mechanism  that  enables  market  participants  to  transfer  assets  (for 
example, securities) without the physical movement of paper documents or certificates.  

Central counterparty (CCP): An entity which operates as the buyer for every seller and as 
the seller for every buyer so that the parties only bear the credit risk of the CCP.  

Central  securities  depository  (CSD):  An  entity  that  provides  the  initial  recording  of 
securities in a book-entry system or that provides and maintains the securities accounts at the 
top tier of the intermediated holding chain. The entity may provide additional services such as 
clearing, settlement and processing corporate actions. It plays an important role in helping to 

107   This  Glossary  relies  on  the  Glossary  of  the  UNIDROIT  Draft  Legal  Guide,  which  in  turn  includes  the 
definitions  and  descriptions  provided  by  the  Geneva  Securities  Convention  and  the  OFFICIAL 
COMMENTARY and, for other terms, relies to the extent possible on the definitions provided by CPMI’s 
glossary of terms used in payments and settlements systems. 

73 

 
 
                                                 
ensure the integrity of securities issues, i.e. that there are no more securities in circulation than 
there were securities issued.  

Claim: the right to claim a debt of whatever nature, whether monetary or non-monetary, and 
whether  arising  from  a  contractual  or  a  non-contractual  obligation.  The  United  Nations 
Convention on the Assignment of Receivables in International Trade uses the term receivable 
to refer to the claim. 

Clearing:  The  process  of  transmitting,  reconciling  and,  in  some  cases,  confirming 
transactions  prior  to  settlement,  potentially  including  the  netting  of  transactions  and  the 
establishment of final positions for settlement. Sometimes this term is also used (imprecisely) 
to cover settlement.  

Close-out netting provision: A provision of a collateral agreement, or of a set of connected 
agreements of which a collateral agreement forms part, under which, on the occurrence of an 
enforcement event, either or both of the following shall occur, or may at the election of the 
collateral taker occur, whether through the operation of netting or set-off or otherwise: (a) the 
respective obligations of the parties are accelerated so as to be immediately due and expressed 
as an obligation to pay an amount representing their estimated current value or are terminated 
and replaced by an obligation to pay such an amount; (b) an account is taken of what is due 
from each party to the other in relation to such obligations, and a net sum equal to the balance 
of the account is payable by the party from whom the larger amount is due to the other party.  

Corporate  actions:  Events  called  or  initiated  by  an  issuer  of  securities  concerning  the 
securities and the holders of the securities.  

Corporate  law:  The  area  of  law  dealing  with  the  formation  and  operation  of  a  company, 
which in particular includes the rights of shareholders. 

Distributed ledger technology: A distributed ledger is essentially a record of information, or 
database, that is shared across a network. It may be an open, publicly accessible database or 
access  may  be  restricted  to  a  specified  group  of  users. It  can  be  used  to  record transactions 
across  different  locations.  Individual  transactions  are  stored  in  groups,  or  blocks,  which  are 
attached to each other in chronological order to create a long chain, and is secured to protect 
the integrity of the data. This chain then forms a register of transactions that its users consider 
to be the official record. 

Eurosystem: The Eurosystem comprises the European Central Bank and the national central 
banks of those countries that have adopted the euro. 

Immobilisation: The act of durably concentrating the holding of securities certificates with a 
depository to allow the crediting of an equal amount of securities to securities accounts and 
the transferability of such securities by way of book entry. 

Individually  segregated  account:  An  account  structure  in  which  a  specific  intermediary 
holds  the  securities  belonging  to  one  or  more  account  holders  in  an  account  with  its  own 
(relevant) intermediary that is distinct (segregated) from the securities its holds for itself or for 
other account holders. 

74 

 
 
Intermediary: A person (including a CSD) who in the course of a business or other regular 
activity maintains securities accounts for others or both for others and for its own account and 
is acting in that capacity.  

Intermediated  holding  chain:  A  term  used  to  describe  the  relationship  and  interaction 
among the (possibly many) tiers of participants in an intermediated securities holding system.  

Intermediated securities: Securities credited to a securities account or rights or interests in 
securities resulting from the credit of securities to a securities account.  

International consistency: In respect of securities The Hague Securities Convention applies 
in  the United States  and Switzerland, as  well as in  Mauritius. In  this impact assessment the 
term  international  consistency  refers  to  rules  that  are  consistent  with  The  Hague  Securities 
Convention. 

Investor:  A  person  or  entity,  such  as  individuals,  companies,  pension  funds  and  collective 
investment funds, who acquire securities to make a profit or gain an advantage.  

Issuer: A government or entity such as a company which issues securities.  

Netting arrangements: An arrangement by which debits and credits in respect of securities 
of the same description may be effected on a net basis.  

Priority:  the  right  of  a  person  in  preference  to  the  right  of  another  person.  Ranking  among 
competing  interests  with  respect  to  the  same  intermediated  securities  or  with  regard  to  the 
same claim.  

Private  law:  The  area  of  law  which  regulates  the  relationships  between  individuals  and 
private entities (e.g. contract law, tort law, etc.).  

Relevant intermediary: The intermediary that, in relation to a securities account, maintains 
that securities account for the account holder.  

Securities  account:  An  account  maintained  by  an  intermediary  to  which  securities  may  be 
credited or debited.  

Securities  settlement  system  (SSS):  A  system  that  settles,  or  clears  and  settles,  securities 
transactions  and  is  operated  by  a  central  bank  or  central  banks  or  is  subject  to  regulation, 
supervision  or  oversight  by  a  governmental  or  public  authority  in  relation  to  its  rules.  To 
qualify as a SSS under the Geneva Securities Convention, it must also be identified as such in 
a  declaration  made  by  the  Contracting  State  the  law  of  which  governs  the  system  on  the 
ground of the reduction of risk to the stability of the financial system. See paragraph 70. 

Security  interest:  A  security  interest  is  a  limited  interest  in  assets  (such  as  a  lien,  pledge, 
charge, or title transfer) which secures an obligation.  

Settlement:  A  process  which  discharges  the  obligations  arising  out  of  the  agreement  of  the 
parties to transfer securities. Securities settlement may represent the conclusion and fulfilment 
of  a  stock  exchange  transaction  between  two  or  more  parties  (i.e.  a  trading  object  is 

75 

 
 
exchanged for a cash counter value). Resulting obligations can be redeemed either in central 
bank or book money. Settlement is normally preceded by clearing.  

Transparent systems: Systems in which an investor’s particular holdings are identified by, or 
known  to,  the  CSD  primarily  because  the  role  of  maintaining  a  securities  account  is  shared 
between the CSD (which is the relevant intermediary for the purpose of the Geneva Securities 
Convention  and  the  Guide)  and  other  persons  often  called  account  operators,  such  as 
investment firms, securities dealers, etc.  

76 

 
 
ANNEX 1: PROCEDURAL INFORMATION  

1. LEAD DG, AGENDA PLANNING AND WORK PROGRAMME 

This  impact  assessment  and  the  related  initiatives  are  a  shared  responsibility  of  the 
Directorate-General  for  Financial  Stability,  Financial  Services  and  Capital  Markets  Union 
(FISMA)  and  the  Directorate-General  for  Justice  and  Consumers  (JUST).  In  the  Agenda 
Planning of the European Commission, the project is referred to under PLAN/2016/227. The 
project is based on the Capital Market Union Action Plan, which envisages a targeted action 
on securities ownership rules and the third-party effects of the assignment of claims. 

2. ORGANISATION AND TIMING 

Work  on  the  preparation  of  this  initiative  started  in  September  2015  with  the  CMU  Action 
Plan.  The  impact  assessment  was  prepared  with  the  involvement  of  the  following  Services 
through the Inter-Service Steering Group, chaired by the Secretariat General:  

the Commission's Legal Service;  

DG Internal Market, Industry, Entrepreneurship and SMEs;  

DG Climate Action;  

DG Competition, and  

DG Economic and Financial Affairs.  

The  Steering  Group  met  on  three  occasions,  between  22  March  2017  and  January  2018, 
including  one  meeting  on  the  preparation  of  the  consultation  document  for  the  public 
consultation.  On  each  occasion,  the  members  of  the  Steering  Group  were  given  the 
opportunity  to  provide  comments  orally  and/or  in  writing  on  the  draft  versions  of  the 
documents  presented,  including  the  draft  consultation  document  and  the  draft  impact 
assessment. 

3. CONSULTATION OF THE REGULATORY SCRUTINY BOARD 

The  impact  assessment  report  was  submitted  to  the  Regulatory  Scrutiny  Board  on  8 
November  2017.  The  RSB  reviewed  the  impact  assessment  at  a  meeting  on  13  December 
2017 and gave a negative opinion, calling for it to be resubmitted. 

The Board made the following observations:  

  The report does not adequately reflect how markets have responded to perceived risks 

in securities. It should indicate whether this reduces concerns about securities.  

  The report does not show how the preferred options would solve the problems as they 
are  described.  This  applies  to  conflicts  between  EU  rules  and  global  rules  for 
securities, and to general rule derogations for claims.  

  The report does not address the problems for securities and claims in a balanced way. 

Following the Board’s recommendations, the impact assessment was revised as follows:  

77 

 
 
  On the structure of the impact assessment, more emphasis was put on issues relating to 
assignments  of  claims.  The  part  on  securities  was  shortened  and  clarifications  were 
added; 

  The  problem  description  was  streamlined  to  delineate  where  appropriate  the 

differences between claims and securities; 

  The preferred options were explained in more detail; 
  Further  information  on  the  international  context  and  particularly  on  the  Hague 
Securities  Convention  and  the  United  Nations  Convention  on  the  Assignment  of 
Receivables in International Trade was added; 

  A glossary of the main terms used in the impact assessment was included. 

The  impact  assessment  report  was  resubmitted  to  the  Regulatory  Scrutiny  Board  on  19 
January 2018. The RSB rendered a positive opinion with reservations on 1 February 2018. 

The  Board  acknowledged  that  the  report  had  been  significantly  reworked  to  reflect  the 
recommendations. The Board, however, made the following observations: 

  The report does not sufficiently justify the preferred option on securities in relation to 
the  findings  of  the  evaluation.  It  is  not  sufficiently  clear  whether  costs  linked  to 
'conflicts of law' will continue for international securities transactions; 

  The  report  does  not  address  the  consistency  between  the  two  solutions  found  for 

claims and securities. 

Following the Board’s recommendations, the impact assessment was revised as follows:  

  The  preferred  option  for  securities,  a  Communication  providing  the  Commission's 
views on the existing EU acquis is now analysed on a par with other policy options; 

  Further clarification as to the consistency between the two solutions was inserted; 
  The  cost  analysis  of  the  different  options  for  securities  transactions  was  analysed  in 

more detail; 

  Simpler language was used in the text of the impact assessment. 

5. EXTERNAL EXPERTISE 

The  Commission  consulted  widely  and  received  input  from  various  sources  for  this  impact 
assessment work. 

Evidence used in this impact assessment was gathered following a consultation strategy which 
included  a  consultation  with  industry  experts  through  a  High  Level  Group  of  experts 
(European Post Trade Forum), an Expert Group on conflict of laws regarding securities and 
claims108  and  a  public  consultation  through  an  on-line  questionnaire  accompanied  by  a 
consultation document109. The public consultation strategy is described in detail in Annex 2. 

108http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3506&NewSear

ch=1&NewSearch=1 

109  Responses to the public consultation and consultation document available here: 
https://ec.europa.eu/info/consultations/finance-2017-securities-and-claims_en 

78 

 
 
                                                 
 
On  18  September  2017,  the  Commission  held  a  meeting  with  Member  State’s  experts  on 
conflicts of laws to inform them of the planned initiative and the solutions envisaged. While 
some Member Stes expressed a preference for the law chosen in their national law, a majority 
of Member States did not express a position. On 8 November 2017, the Commission held a 
meeting  of  Member  States'  experts  on  conflict  of  laws  in  securities  and  claims  that  are 
relevant  for  financial  markets.  On  securities,  the  vast  majority  of  Member  States  voiced 
support  for a  Communication clarifying  the  Commission's views with regard to the existing 
provisions of the three Directives. 

The  Commission  services  have  taken  into  account  the  observations  from  all  the  above-
mentioned sources in the impact assessment. 

79 

 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION STRATEGY 

The objective of the public consultation was to receive input from all concerned stakeholders, 
and  in  particular  those  who  engage  in  or  are  affected  by  the  practice  of  factoring, 
securitisation, collateralisation, as well as legal counsels and experts familiar with conflict of 
laws  on  third  party  effects  of  transactions  in  claims  and  securities.  Member  States  and 
supervisory authorities were also invited to provide their input. 

The  consultation  strategy  included  consultation  with  industry  experts  through  a  High  Level 
Group  of  experts  called  European  Post  Trade  Forum  (EPTF),  consultation  with  renowned 
legal  experts  through  a  separate  High  Level  Group  of  experts  and  a  public  consultation 
through  an  on-line  questionnaire  accompanied  by  a  consultation  document.  Member  States 
were also consulted.  

The  EPTF  published  its  report  on  23  August  2017.  This  report  examines  the  post-trade 
barriers to the Capital Markets Union and it lists the current divergent conflict of laws rules 
with  regard  to  the  law  governing  proprietary  aspects  of  transactions  in  securities  and  third 
party effects of assignment of claims as one of the barriers requiring EU action. 

With  regard  to  securities  the  High  Level  Group  of  legal  experts  proposed  two  alternative 
solutions, which are both examined in the impact assessment accompanying the initiative. 

On  8  November  2017,  a  meeting  was  held  with  Member  States  on  conflict  of  laws  in 
securities and claims that are relevant for financial markets. On securities, the vast majority of 
Member States voiced support for a Communication clarifying the Commission's views with 
regards to the existing provisions.  

The  published  inception  impact  assessment  received  one  feedback  from  the  Association  for 
Financial Markets in Europe, who welcomed this regulatory initiative, particularly supporting 
the proposed form of a Regulation to avoid discrepancies of transpositions into national laws 
by Member States. At the same time they called for further clarification and substantiation of 
the scope of the initiative with regard to claims. This has been done in the impact assessment. 

The public consultation opened on 7 April 2017 and closed on 30 June 2017, which complies 
with  the  minimum  standards  of  12  weeks  for  public  consultations  of  the  European 
Commission.  39  responses  were  submitted  to  the  consultation,  and  among  the  respondents 
there were 5 governments or Ministries, 15 industry associations, 4 companies, 2 law firms, 2 
think  tanks  and  5  private  individuals.  From  the  financial  sector  the  interests  of  banks,  fund 
managers,  regulated  markets,  CCPs,  CSDs,  issuers  and  investors  were  represented.  There 
were  no  replies  from  consumer  organisations.  The  analysis  of  impacts  in  the  impact 
assessment  therefore  pays  particular  attention  to  any  impacts  on  consumers  and  retail 
investors. 

In  terms  of  geographical  coverage  the  public  consultation  reached  a  number  of  different 
Member  States,  but  smaller  countries  and  newer  members  of  the  EU  were  largely  under 
represented.  13  responses  were  submitted  from  the  UK,  9  responses  were  received  from 
France,  and  the  same  number  from  Belgium,  3  responses  from  Germany  and  3  from  the 
Netherlands,  2  responses  came  from  Spain,  and  1  from  Finland,  the  Czech  Republic  and 
Sweden  each.  In  our  assessment  we  acknowledge  the  limited  geographical  coverage  of  the 

80 

 
 
consultation  results.  The  analysis  of  the  alternatives  options  in  the  impact  assessment  have 
regard  to  all  Member  States  of  the  EU  and  is  not  limited  to  the  countries  from  which 
responses were received. 

The methodology used to process the data consisted in quantitative and qualitative analysis of 
the  responses.  Very  little  data  was  submitted  that  could  support  the  impact  assessment. 
However the anecdotal evidence supplied by respondents were used in the impact analysis. 

1. Claims 

In general, when asked whether there have been problems encountered in practice in securing 
the  effectiveness  of  assignments  of  claims  against  persons  other  than  the  assignee  and  the 
debtor  in  transactions  with  a  cross-border  element  in  the  past  five  years,  11  stakeholders 
replied  that  there  have  been  problems,  5  stakeholders  denied  having  encountered  problems 
and  21  did  either  not  know  or  did  not  give  an  answer.  Out  of  the  39  stakeholders  that 
responded  to  the  question  whether  they  see  added  value  in  Union  action  to  address  the 
identified  issues  in  the area  of  assignment  of  claims  involving  a  cross-border  element,  59% 
answered positively, 22% denied added value and 18% did not have an opinion on this. The 
stakeholders who denied added value argued that Art. 14 (2) of the Rome-I Regulation was 
sufficient and that they have not experienced any difficulties with the current regulation. 

As  to  what  the  best  connecting  factor  of  such  an  EU  act  would  be,  stakeholders  were 
requested to indicate an order of preference ranging from 1 (best solution) to 4 (least preferred 
solution).   57%  favoured the law of the assignor’s habitual residence  as "best  solution"  and 
43% favoured the law of the assigned claim. The law applicable to the assignment contract as 
connecting factor was least favoured as "best solution" by only 30% of the stakeholders.  

For  the  law  of  the  assignor's  habitual  residence  it  was  laid  out  that  this  law  could  be 
determined easily and would imply great legal certainty as well as respect more than any other 
approach the economic logic of important trade practices. For the law of the assigned claim it 
was put forward that this applicable law would comply with the principle of party autonomy, 
would  guarantee  consistent  outcomes  as  between  competing  assignments  of  the  same  asset 
and potentially lower transaction costs. Contrary to the first option the applicable law cannot 
be  foreseen  by  third  parties  in  this  case.  For  the  third  option  of  the  law  applicable  to  the 
assignment  contract,  it  was  advocated  that  this  rule  would  give  necessary  clarity,  prevent 
surprises and be uniform with Art. 14 of the Rome-I Regulation.  

The  public  consultation  asked  the  stakeholders  what  the  scope  of  the  applicable  law  on  the 
assignment  of  claims  should  be.  To  this  only  50%  of  stakeholders  gave  a  reply.  Out  of  the 
replies  received  38%  advocated  for  the  steps  necessary  to  render  rights  in  claims  effective 
against third parties while nearly the same amount of 36% recommended priority issues and 
25% favoured something other. 

With  respect  to  the  positive  impacts  of  the  option  of  assignor's  habitual  residence,  a 
financial  industry  stakeholder  indicated  that  supported  the  law  of  the  assignor  as  the  most 
suitable  connecting  factors  due  to  a  number  of  reasons:  bulk  nature  of  assignments  of  both 
present and future receivables, often of small value do not allow time or expense of individual 
checking;  invoice by invoice checking of the applicable contract law is impracticable; finance 
providers  will  always  be  aware  of  the  habitual  residence  of  their  clients  and  the  law 

81 

 
 
thereunder for third party claims; many receivables arise under informal arrangements where 
there  is  no  written  contract  and  thus  the  applicable  law  of  the  claim  will  be  difficult  to 
ascertain and the choice may well be disputed. 

Another  stakeholder  from  the  financial  industry  indicated  that  the  applicable  law  of  the 
assignor is foreseeable for both assignor and assignee (even if it is a choice of law made only 
on  conclusion  of  a  contract)  is  an  advantage  which  increases  legal  certainty  and  makes 
expansion into other jurisdictions possible. The applicable law according to this option (which 
is favoured by the European factoring industry) has the advantage of being foreseeable for all 
involved  and  affected  parties,  thereby  decreasing  the  risk  of  disputes  especially  with  third 
parties. In his view only the law of the assignor, i.e. the law of the place where the assignor 
has  its  centre  of  main  interest,  offers  a  well-balanced  solution  to  the  issue  of  the  law 
applicable  to  the  priority  of  parallel  assignments  and  to  the  effectiveness  of  assignments 
towards  third  parties.  The  law  of  the  assignor  is  predictable  not  only  for  the  assignment 
parties but also for third parties. It thereby considers the interests of these third parties while 
not  leaving  the  interests  of  the  assignor  and  the  assignee  aside.  Moreover,  the  law  of  the 
assignor generally also decides on the consequences in case of the insolvency of a factoring 
client/assignor. Submitting the questions of priority and effectiveness of assignments against 
third  parties  to  the  law  of  the  assignor  would  thus  lead  to  synchronising  effects  also  with 
regard to insolvency procedures. 

Last but not least, applying the law of the assignor to fill in the aforementioned regulatory gap 
would also entail that the Rome I Regulation is in line with international conventions on the 
conflicts  of  law  i.e.  the  2001  UN  Convention  on  the  Assignment  of  Receivables  in 
International Trade which in its Art. 22 also uses “the law of the State in which the assignor is 
located”  as  connecting  factor.  Such  a  synchronisation  of  rules  on  the  conflicts  of  laws 
contained in different European and international legislative documents enhances legal clarity 
and makes practical implementation simpler. By defining the law of the assignor as the law of 
the place where the assignor has its habitual residence or centre of main interest (which for 
businesses generally is the place of their central administration), the rules contained in Art. 19 
para.  1  of  the  Rome  I  Regulation  would  not  only  be  synchronised  with  Art.  5  (h)  of  the 
aforementioned UN Convention, but also with Art. 3 para. 1 of the Council Regulation (EC) 
No. 1346/2000 of 29 May 2000 on insolvency proceedings. As most questions with regard to 
the  effectiveness  of  an  assignment  against  third  parties  arise  upon  the  insolvency  of  the 
assignor, such a synchronisation would be advantageous. 

A  banking  industry  representative  stated  that  the  law  of  the  assignor’s  habitual  residence 
should be preferred over any other solution. The habitual residence should be appreciated on 
the  assignment  date.  A  decrease  of  legal  due  diligence  costs  is  obvious  but  will  not  affect 
most the deals. A clear rule of conflict of laws will mostly enable European banks to propose 
more  competitive  deals  to  their  clients  (i)  predictability  for  third  parties:  as  the  assignor  is 
known  to  all,  there  would  be  an  objective,  clear  rule  of  connection;  (ii)  solution  consistent 
with that used internationally by UNCITRAL Convention on the Assignment of Receivables 
in  International  Trade;  (iii)  solution  suited  to  rules  concerning  insolvency  proceedings 
(regulation 1346/2000) in the event of the assignor’s bankruptcy: given that the assignment of 
claims  reduces  the  assignor’s  assets  and  therefore  affects  the  rights  of  other  creditors,  it  is 
entirely  appropriate  that  the  same  law  should  apply  to  the  effectiveness  of  the  assignment 
against third parties and assignor bankruptcy, (iv) - definite advantage when future claims are 
assigned,  insofar  as  the  assignor  is  known  from  the  outset,  which  is  not  the  case  with  the 

82 

 
 
assigned claim or debtor, (v)- solution also appropriate in cases where a portfolio of claims is 
assigned (all claims by a single assignor; e.g. securitisation, factoring, etc.), as this avoids the 
cumulative  application  of  several  laws  when  debtors  fall  under  different  jurisdictions,  and 
applies a single law to the effectiveness of the assignment of all claims against third parties. 
This  also  reduces  the  cost  of  legal  research,  which  would  have  been  incurred  through  the 
application  of  different  national  laws,  and  ensures  better  visibility  for  third  parties  while 
simplifying formalities to be completed. 

Law of the assignor’s habitual residence appears also appropriate in cases where a portfolio of 
claims is assigned (all claims by a single assignor; e.g. securitisation, factoring, etc.), as this 
avoids  the  cumulative  application  of  several  laws  when  debtors  fall  under  different 
jurisdictions,  and  applies  a  single  law  to  the  effectiveness  of  the  assignment  of  all  claims 
against  third  parties.  This  also  reduces  the  cost  of  legal  research,  which  would  have  been 
incurred  through  the  application  of  different  national  laws,  and  ensures  better  visibility  for 
third parties while simplifying formalities to be completed. 

With  respect  to  the  negative  impact  of  the  option  of  assignor's  habitual  residence,  one 
financial  industry  stakeholder  stated  that  the  over-riding  requirement  to  use  the  law  of  the 
place  of  the  assignor's  habitual  residence  to  resolve  third  party  aspects  would  increase  the 
number of cases where the outcome was potentially in conflict with (i) the public policy laws 
of the jurisdiction of the original debtor of the law by which its contract with the assignor is 
governed  (if  different)  and  possibly  relevant  property  laws  of  that  jurisdiction;  or  (ii)  the 
property law of the jurisdiction of the contract between the assignor and the assignee; or (iii) 
the property laws of the jurisdiction of the law of the contract or other legal situation under 
which  the  third  party  acquired  rights  which  it  can  assert  in  relation  to  the  underlying  debt, 
which could potentially be different from the law of the habitual residence of the debtor, the 
law  of  the  contract  or  other  legal  situation  which  created  the  original  debt  owed  to  the 
assignor,  the  law  of  the  contract  between  the  assignor  and  the  assignee  and  the  law  of  the 
habitual residence of the assignor.  

A  banking  industry  stakeholder  mentioned  that  the  law  of  the  assignor’s  habitual  residence 
offers a considerable degree of predictability and certainty for the creditors of the assignor, in 
particular  with  regard  to  corporate/legal  as  the  law  applicable  at  the  registered  seat  of  such 
entity. However, in particular with regard to natural persons the degree of predictability and 
certainty  is  much  lower  since  the  habitual  residence  can  change  with  time.  In  addition,  this 
option  may  lead  to  a  split  of  laws  in  a  transaction  with  more  than  one  assignor  residing  in 
different countries. 

With  respect  to  the  positive  impact  of  the  option  of  the  law  of  the  assigned  claim,  one 
financial industry stakeholder indicated that it would support use of the governing law of the 
assigned claim as the connecting factor (i.e. the basis on which the securitisation industry has 
generally been operating) to further support the approach that the securitisation industry has 
generally  been  taking  in  practice,  using  the  law  governing  the  assigned  claim  as  the 
connecting factor. In her view using the governing law of the assigned claim could result in 
additional  costs  and  the  creation  of  new  issues  and  uncertainties,  hampering  cross-border 
activity. This would adversely affect securitisations, especially for SMEs or small businesses, 
where  there  is  often  no  critical  mass  of  claims  in  any  one  jurisdiction  and  so  cross-border 
securitisations are currently more common. 

83 

 
 
Another  financial  industry  stakeholder  set  out  reasons  for  favouring  the  law  governing  the 
assigned  claim,  which  include:  (i)  alignment  with  the  principle  of  party  autonomy;  (ii)  its 
ability to guarantee consistent outcomes as between competing assignments of the same asset; 
(iii) the ability of the underlying debtor to identify the person entitled to lay claim to the debt 
in priority to other assignees, which is observed to be of consequence; and (iv) the potential 
for lower transaction costs. Moreover, in her view a) the use of this connecting factor helps to 
minimise fraud risk by ensuring that the entitlement of an earlier-in-time assignee will not be 
subject  to  the  application  of  a  new  and  unpredictable  system  of  law  prioritising  the 
entitlement of a later-in-time assignee (for example, because of notarisation requirements); b) 
where  the  same  law  governs  effectiveness  against  the  debtor  and  effectiveness  against  third 
parties,  there  is  reduced  scope  for  legal  uncertainty  which  might  otherwise  arise  given  the 
potential  for  alternative  characterisations  of  a  legal  issue  before  a  court;  c)  it  may  prove 
difficult  to  obtain  a  clean  legal  opinion  providing  comfort  as  to  the  location  of  the  habitual 
residence of an assignor, as this is a question of fact and not law; and d) where assignors are 
tied  to  the  law  of  their  habitual  residence,  requirements  i.e.  notarisation  and  registration 
imposed by the law of their habitual residence for the purpose of establishing the priority of 
the  assignee’s  title  may  create  a  “drag”  on  the  transaction,  particularly  in  the  case  of  bulk 
assignments, and disadvantage the assignor. 

Also one public authority indicated that main advantages of this solution are the stability of 
the  connecting  factor  and  the  avoidance  of  increasing  the  number  of  applicable  laws  to  an 
assignment.  However,  this  rule  might  need  an  adjustment  e.g.  in  case  of  assignments  of 
claims under future contracts and bulk assignments. 

With respect to the negative impact of the option of the law of the  assigned claim, one 
financial  industry  stakeholder  stipulated  that  in  the  context  of  a  cross-border  securitisation 
where  the  securitisation  pool  contains  claims  with  different  governing  laws,  multiple 
assignments  are  typically  used  such  that  the  law  of  the  assignment  matches  the  law  of  the 
underlying claims. The transaction opinion(s) would typically cover the effectiveness of each 
assignment  under  its  governing  law.  Additional  legal  due  diligence  may  be  carried  out  to 
ascertain whether that same governing law will be recognised as governing third party effects 
of the assignment in the originator's jurisdiction (if different) and in any debtor jurisdictions. 
In  some  cases,  if  the  initial  legal  due  diligence  identifies  issues  in  certain  jurisdictions,  the 
commercial  solution  taken  may  be  to  remove  the  'problematic'  agreements  from  the  pool 
rather than attempt to secure the effectiveness of the assignment against third parties in those 
jurisdictions. 

A factoring industry stakeholder underlined that due to the predominance of bulk assignments 
in  factoring,  it  is  unfeasible  to  establish  for  each  claim/receivable  which  law  is  applicable, 
especially if each claim were to underlie a different law. Hence, this option would most likely 
lead to a significant decrease in cross-border factoring transactions. Cross-border transactions 
which  involve  the  assignment  of  many  claims  /receivables  (especially  bulk  assignments) 
would become more unattractive due to the many different applicable laws. 

Banking  industry  stakeholder  mentioned  the  application  of  the  law  of  the  assigned  claim 
would  lead  to  high  complexity  if  there  is  an  assignment  of  more  than  one  claim 
(securitisation,  factoring,  etc.):  need  to  comply  with  several  laws  to  make  the  assignment 
effective  against  third  parties.  Furthermore,  such  a  conflict  of  law  rule  would  require  to 
research the law of the original claim when the parties have not expressly designated this in 

84 

 
 
their contract. Besides, further objections to the application of the law of the assigned claim 
remain  (i)  this  law  is  not  consistent  with  the  law  applicable  to  the  assignor’s  bankruptcy 
although in practice, the law of the assignor’s habitual residence has always to be taken into 
account  in  the  event  of  the  assignor’s  bankruptcy,  (ii)    the  law  of  the  original  claim  is  not 
necessarily known to third parties, and will have to be researched when the parties have not 
expressly  designated  this  in  their  contract.  Another  banking  industry  stakeholder  explained 
that In a typical trade receivables Transaction, for instance, where the assignor (a supplier of 
goods or services) assigns claims against debtors (its customers, the buyers of such goods or 
services)  in  various  countries,  this  option  may  lead  to  a  split  of  the  laws  governing  those 
claims  and  hence  the  laws  governing  the  effects  of  assignment  to  third  parties,  which  may 
lead to considerable uncertainty and also increased costs and administrative burden and which 
may, in fact, restrict the opportunities of the assignor to refinance its transactions. 

2. Securities 

The  consultation  asked  stakeholders  whether  legal  opinions  are  covering  the  question  of 
applicable law always when relevant or not. 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. 

Respondents  were  slightly  more  divided  on  the  question  whether  the  default  of  a  large 
participant  in  financial  markets  could  raise  difficult  questions  as  to  which  law  is  applicable 
and who is the owner  of (or has entitlement to) which  assets.  While  33%  did  not think  this 
was likely, 46% argued that this is likely to happen, and 21% did not know or did not provide 
any answer to this question. 

As  to  the  applicable  EU  conflict  of  law  rules,  about  one  third  of  the  respondents  did  not 
provide  answer.  Of  those  who  did,  62%  considered  that  it  was  not  clear  how  to  apply 
applicable EU conflict of law rules. The technical details provided by respondents were used 
in the evaluation that is annexed to the impact assessment, as well as in the impact assessment 
itself. It has to be mentioned also that 18 Member States also provided answers to a technical 
questionnaire  on  how  EU  rules  are  transposed  and  applied.  Those  answers  were  used 
alongside  the  responses  from  stakeholders  to  the  public  consultation.  The  evaluation  also 
gives detailed feedback on the responses received. 

The  public  consultation  asked  stakeholders'  views  about  the  value  added  in  EU  action  to 
harmonise  applicable  conflict  of  laws  rules  in  this  field.  To  this  question  19  respondents 
answered  positively,  i.e.  they  see  added  value  in  EU  action,  and  9  respondents  thought  EU 
action would not have added value.  

The detailed arguments of stakeholders who argued against EU intervention were analysed in 
detail, and can be distinguished into two main groups: the fear of upsetting the current status 
quo that CSDs rely on, and the apparent lack of problem in France. A group of 3 respondents 
submitted the former argument, namely that any variation in the current status quo could alter 
the current legal basis that securities settlement systems are relying on. Therefore the impact 
assessment pays particular attention to this angle, so that the preferred policy option does not 
produce  disproportionate  undesirable  effects.  Another  group  of  4  respondents  argued  that 
there were no problems with the currently applicable EU rules, and therefore EU intervention 

85 

 
 
 
is  not  necessary.  This  argument  is  taken  into  consideration  in  the  analysis  of  the  impact 
assessment, along with replies from other Member States indicating opposite views. 

Two  additional  arguments  against  EU  intervention  were  submitted.  One  respondent  argued 
that there was a real risk that if steps were taken to harmonise the laws determining ownership 
entitlement of end investors without addressing related issues of over-allocation of securities 
accounts through the holding chain, a securities issuance could in effect become inflated, with 
more  rights  to  securities  being  capable  of  being  exercised  than  there  were  securities  issued. 
Finally, another respondent argued that a full EU codification could be destructive because it 
could only capture that part of the flows that can be attributed to the EU territory and would, 
as the entire codification tradition, still have serious problems with customary law and general 
principle and would set commerce and finance in concrete. These aspects were therefore also 
considered in the impact assessment. 

Those who argued for EU intervention pointed to the lack of clarity in the applicable rules, the 
legal uncertainty that results from it, and the efficiency gains it could produce. "We believe 
that this reform would be beneficial in providing for legal certainty, including in the context 
of taking collateral." "…harmonisation of the definition of securities to which the rule applies 
would be very helpful and would remove uncertainty and produce efficiency savings." 

When asked about the form and scope of intervention, 11 stakeholders were of the opinion 
that  targeted  amendments  to  existing  EU  legislation  (SFD,  FCD  and  WUD)  would  be 
sufficient, among them some of those who argued no intervention is needed (6 respondents). 9 
respondents  favoured  an  overarching  reform,  i.e.  a  separate  legal act that  would  specify  the 
applicable  law  to  third  party  effects  of  transactions  in  securities.  In  addition,  7  respondents 
thought  that  both  solutions  –  targeted  amendments  or  an  overarching  reform  –  could  be 
effective.  

The argument of those in favour of targeted amendments, rather than an overarching reform 
included  fears  of  a  complete  overhaul  in  the  existing  EU  acquis:  "we  see  major  legal 
uncertainty in a complete overhaul in the paradigm of the current conflict of law rules". The 
argument of those in favour of an overarching reform was that a "targeted amendment of the 
existing EU conflict of law rules would hardly be worth the effort, as it would only apply to 
the  specific  situations  covered  by  those  rules  and  would  leave  the  conflict  of  laws  issues 
relevant to cross-border holding of securities largely unsolved. If the goal is to enhance legal 
certainty in a significant way, a more universal legal framework covering third party effects of 
transactions in book-entry securities is needed." It was also argued that: "If the EU legislation 
does  not  cover  all  aspects  of  account-credited  securities,  this  will  lead  to  problems  of 
compatibility  with  the  Hague  Securities  Convention  (entered  into  force  this  year  by 
ratification  by  the  U.S.).  Moreover,  a  partial  solution  for  special  kinds  of  account-credited 
securities and trading conditions would not minimize the uncertainty of the law applicable – 
in  fact,  the  problems  could  actually  increase."  Several  further  respondents  confirmed  these 
views, and it is worth noting that the EPTF Report also concurs in its findings. 

The  public  consultation  tested  options  on  the  governing  law.  7  respondents  expressed 
preference  for  the  choice  of  law  option,  and  9  preferred  a  definition  of  the  applicable  law 
based on PRIMA (of which 2 respondents would leave it to parties to define contractually the 
relevant intermediary). Of those respondents who see no added value in EU action, 6 replied 

86 

 
 
that  they  would  prefer  PRIMA,  should  policymakers  decide  to  put  forward  a  legislative 
proposal.  

In several responses the reason provided for the choice of PRIMA as the preferred option was 
that  respondents  were  aware  that  adopting  the  Hague  Securities  Convention,  which  would 
otherwise  be  their  own preferred  option,  was  politically  not  feasible,  due  to  resistance  from 
other stakeholders. These respondents stressed however that the definition of PRIMA should 
be as close as possible to the definitions used under the Hague Securities Convention. At the 
same  time  there  were  also  respondents  preferring  PRIMA  due  to  a  fear  of  "major  legal 
uncertainty  in  a  complete  overhaul  in  the  paradigm  of  the  current  conflict  of  law  rules",  as 
already quoted above. Two stakeholders preferred the issuer's law and 6 other proposals were 
made that were mainly variants of PRIMA and Hague, for example the place of the relevant 
account approach, a limited right to parties to choose the applicable law, etc. 

Some  respondents  preferring  PRIMA  did  not  give  further  clarifications  on  how  PRIMA 
could  be  defined.  12  respondents  specified  their  preference  as  to  where  within  a  holding 
chain  the  relevant  account  should  be.  9  of  them  argued  in  favour  of  a  separate  relevant 
account  at  each  level  of  the  holding  chain,  while  2  other  preferred  one  single  level,  one  of 
them specifying that it should be at the bottom of the holding chain (bottom line account). On 
the question how to identify the relevant intermediary, fewer respondents provided answers. 
Of  those  who  did,  6  respondents  thought  the  place  of  the  relevant  intermediary  could  be 
identified through the intermediary's branch through which the account agreement is handled, 
which  could  be  either  contractually  stipulated  (3  respondents)  or  identified  by  an  account 
number  (1  respondent).  One  other  respondent  expressed  preference  for  the  intermediary's 
registered office, rather than the branch. 

Only 4 respondents considered that conflict of laws rules on third party effects of transactions 
in certificated securities should be harmonised at EU level, while 10 respondents did not see 
added  value  in  taking  action  on  certificated  securities.  The  rest  of  the  respondents  did  not 
provide any answer to this question. The most frequent argument for taking no action was that 
certificated securities are not being used very much anymore, and that conflict of laws rules 
on  these  are  probably  not  as  divergent  as  on  book-entry  securities.  In  line  with  the  view  of 
most responses, the scope of harmonisation will be limited to book-entry securities.  

In terms of quantitative data and impacts of various policy options the consultation delivered 
little  results.  The  few  references  to  the  size  of  the  problem  and  anecdotal  evidence  that 
stakeholders submitted were taken into account in the impact analysis. 

87 

 
 
 
ANNEX 3. WHO IS AFFECTED BY THE INITIATIVE AND HOW? 

Legal  uncertainty  has  different  consequences  for  different  types  of  players,  i.e.  retail 
investors, institutional investors, financial intermediaries and CCPs, to mention a few major 
categories of impacted parties. The proposal will have different impact on these categories of 
participants. Below the main impacts are reviewed from the package of preferred options. 

Enterprises, including SMEs 

In relation to the third-party effects of the assignment of trade receivables (claims), the law of 
the  assignor's  habitual  residence  would  increase  the  possibility  of  obtaining  financing  for 
enterprises, including SMEs, since it would allow those enterprises to offer their future claims 
against their non-domestic clients as a security to the banks which provide them with credit. 
At  the  same  time,  the  law  of  the  assignor's  habitual  residence  would  be  beneficial  for 
enterprises,  including  SMEs,  wishing  to  sell  their  invoices  (claims)  against  non-domestic 
clients  to  factoring  industry.  Companies  would,  thus,  be  positively  impacted  by  the 
application of the assignor's law.  

By  contrast,  since  law  of  the  assigned  claim  is  usually  better  matched  with  the  law  under 
which the claim is ultimately enforced, the application of the assigned claim law could have a 
beneficial effect on selling and enforcing existing individual claim of a higher value;  

Enterprises  and  SMEs  could  possibly  also  benefit  from  marginal  decrease  in  cross-border 
transactions costs in securities. However the effects are expected to be small when taking into 
account  that  the  overall  cost  reduction  benefits  would  have  to  be  calculated  at  the  level  of 
each  individual  transaction  and  would  be  conditional  on  intermediaries  passing  on  these 
benefits to clients. Similar marginal benefits might accrue with other end investors, including 
funds or retail investors. 

Banking and factoring industry 

The  banking  industry  believes  that  the  law  of  the  assignor  will  would  decrease  the  due 
diligence costs and would enable European banks to presents more competitive deal offers to 
their  clients.  At  the  same  time,  the  banking  industry  is  of  the  opinion  that  the  law  of  the 
assigned  claim  may  lead  to  restriction  of  opportunities  for  assignors,  i.e.  businesses  and 
SMEs, to refinance their transactions. 

The  law  of  the  assignor's  habitual  residence  would  be  beneficial  for  enterprises,  including 
SMEs,  wishing  to  sell  their  invoices  (claims)  against  non-domestic  clients  to  factoring 
industry  which  the  factoring industry,  in  turn, could  treat  more  easily and  with  lower  costs. 
The factoring industry would, thus, be positively impacted by the application of the assignor's 
law.  On  the  other  hand,  due  to  the  prevalence  of  bulk  assignments  in  factoring  involving 
multiplicity of claims  law of the assigned would increase the costs of factoring transactions 
and, thus, have a negative effect on development of factoring activities. 

Financial  intermediaries  would  benefit  from  more  legal  certainty  on  the  applicable  law  to 
proprietary effects of securities transactions in terms of reduced legal costs and reduced risks. 
In  addition,  they  should  not  face  any  compliance  costs  when  switching  to  the  new  rules 

88 

 
 
following the Communication clarifying the Commission's views with regards to the existing 
provisions. 

Securitisation industry 

The securitisation industry is divided as to the effects of the assignor's law on securitisation 
activities:  certain  members  of  this  industry  consider  the  law  of  the  assignor’s  habitual 
residence as the most beneficial conflict of law rule allowing for expansion of securitisation 
transactions involving multiple jurisdictions. Other members of the securitisation industry see 
the a negative impact of the assignor's law on securitisation transactions due to the possible 
problem of enforceability resulting from the discrepancy of the law applicable to third-party 
effects and the law applicable to the enforcement of the claim. 

Similarly as with respect to the law of the assignor, the securitisation industry is split as to the 
effects of the law of the assigned claim on securitisation transactions: some of the players who 
already use the law of the assigned claim as a connecting factor believe that the change of this 
connecting  factor  would  adversely  affect  cross-border  securitisation  activities;  by  contrast, 
other  persons  involved  in  the  securitisation  industry  claim  that  the  law  of  the  applied  claim 
would  render  securitisation  transactions  more  complex  and,  thus,  would  represent  an 
impediment to the securitisation business. 

All market participants 

The  introduction  of  uniform  conflict  of  laws  rules  at  EU  level  may  generate  one-off  costs 
related to the need for market participants involved in cross-border assignments of claims to 
check and eventually amend the legal documentation they currently use. These one-off costs 
can be expected to be small: they will consist of the fees paid by market participants to their 
legal counsel to carry out a one-off compliance check with the new conflict of laws rules. The 
exact  amount  of  such  costs  will  depend  on  the  length  and  complexity  of  the  legal 
documentation used as well as on the rates agreed between the market participants and their 
legal counsel. Market participants whose legal documentation needs to be modified following 
the  introduction  of  the  new  rules  will  bear  additional,  but  equally  non-significant,  one-off 
costs  for  the  revision  of  their  current  legal  documentation  to  accommodate  it  to  the  new 
conflict of laws rules. 

89 

 
 
 
 
 
ANNEX 4. DATA SOURCES AND QUANTIFICATION OF IMPACTS AND COSTS 

This  impact  assessment  does  not  rely  on  modelling.  Quantification  of  the  costs  stemming 
from legal uncertainty of applicable law to cross-border transactions in securities was carried 
out based on the following assumptions and sources. 

It  is  generally  accepted  that  cross-jurisdictional  legal  uncertainty  stemming  from  conflict  of 
laws increases the cost of capital and reduces the value of securities to investors and secured 
creditors. As such, it can also make securities less valuable as collateral and thus constrain the 
flow  of  credit  in  an  economy.110  The  cross-border  legal  uncertainty  affects  negatively  the 
beneficiaries  of  these  instruments,  such  as  pension  schemes,  collective investment  schemes, 
asset  managers  and  central  banks.  It  also  has  negative  repercussions  on  settlement 
organisations,  custodian  banks,  international  central  securities  depositories  (ICSDs)  and 
CSDs. Ultimately, this uncertainty makes transactions more expensive, with a knock-on effect 
on settlement efficiency and liquidity.  

Quantification  of  the  economic  effects  of  cross-border  legal  uncertainty  is  not  a  straight-
forward  matter  and  the methodology  can  differ,  depending  on  the  specific  market.  Some  of 
the  markets  to  look  at  include  over-the-counter  (OTC)  derivatives  and  securities  financing 
transactions, which include repurchase agreements (repos) and securities lending agreements. 
In  these  markets,  cross-border  conflict  of  laws  negatively  affects  'good-faith  acquisition'  of 
collateral  assets.  Derivatives,  as  well  as  repo  and  securities  lending  collateral  assets  face 
increased enforcement difficulties in cross-border settings, stemming from different national 
rules.  

Financial instruments used as collateral need to be delivered between the parties, implying a 
transfer  of  property  from  the  collateral  provider  to  the  collateral  taker.  In  a  cross-border 
situation, there  is  a  higher  risk  of  the  transfer being  invalid  or  otherwise  defective.  In  other 
words, the assumed legal positions might later be challenged in court, either by the insolvency 
administrator  of  one  of  the  parties  or  by  a  third  party  claiming  to  have  interests  in  the 
securities. If enforcement proves to be impossible or considerably delayed, significant losses 
may  occur,  which  might  provoke  the  party’s  insolvency  and  maybe  even  have  systemic 
effects,  provided  others  are  affected  by  the  same  problem.  As  collateral  is  often  reused  in 
further  transactions,  it  is  important  that  a  first  defective  acquisition  does  not  become  the 
source  of  a  chain  of  subsequent  defective  acquisitions  of  the  same  collateral  assets.  Thus, 
collateral markets heavily rely on ‘good faith acquisition’ of the subsequent acquirers. At the 
same  time,  the  concept  of  good  faith  acquisition  is  not  covered  by  the  Financial  Collateral 
Directive111. 

Quantification 

As  part  of  the  standard  market  practice,  collateralisation  is  used  as  a  significant  risk 
management  tool  to  reduce  counterparty  risk.  The  magnitude  of  potential  maximum 
exposures to legal risk inherent in cross-border conflict of laws situations can thus be gauged 

110   For more details, see Guynn, R.D. and Marchand, N.J.,  Transfer or Pledge of Securities held through Depositories in 

Van Houtte, H. (ed.), The Law of Cross-Border Securities Transactions, London, 1999. 

111   Directive 2002/47/EC on financial collateral arrangements. 

90 

 
 
 
                                                 
by looking at the amount of collateral posted in these markets. Alternatively, data on positions 
can also be used, since those positions are backed up by collateral assets. 

Based  on  the  latest  BIS  OTC  derivatives  statistics  as  at  December  2016112,  the  maximum 
amount  exposed  to  potential  cross-border  conflict  of  laws  situations  in  the  OTC  derivatives 
space113 is estimated at EUR 1.4 trillion, which is the net114 value (i.e. the gross market value 
after netting) of all cross-border OTC contracts with at least one counterparty from Europe115. 
Some  EUR  1.1  trillion  is  represented  by  OTC  interest  rate  derivatives  (IRDs)  and  EUR  33 
billion by the credit default swaps (CDS) market116. To the extent that a considerable share of 
OTC  derivatives  transactions  are  centrally  cleared,  central  clearing  counterparties  (CCPs) 
stand  on  one  side  of  many  of  these  contracts.  According  to  the  BIS  data  as  at  end  of  June 
2016117,  62%  of  the  reported  positions  in  the  OTC  derivatives  markets  were  against  CCPs. 
Thus, one could approximate the potential maximum gross exposure of CCPs to cross-border 
conflict of laws risk in this market at EUR 870 billion. At a more detailed level, and according 
to  the  more  up-to-date BIS  data  quoted  above,  76%  of  the  reported  positions  in  OTC  IRDs 
and 44% of the positions in CDS were centrally cleared as at December 2016. Thus, in these 
two  segments  the  maximum  risk  exposure  of  CCPs  to  cross-border  conflict  of  laws  can  be 
estimated at EUR 800 billion and EUR 14.5 billion, respectively.   

Based on the latest ICMA data for Europe as at June 2017118, the value of the cash side of the 
cross-border repo and reverse repo contracts outstanding represented 56.6% of the total, with 
some  EUR  3.4  trillion.  The  value  of  cross-border  contracts  involving  at  least  one  euro  area 
counterparty stood at about EUR 1 trillion. Although there is no dedicated data on the netting 
effects  in  this  market,  netting  efficiencies  in  the  centrally  cleared  repo  market  reach  about 
70%  of the gross  exposures. Given that  28%  of all  outstanding  transactions involve a CCP, 
one can approximate the net value of cross-border repo contracts where a CCP stands on one 
side  at  some  EUR  285  billion.  Thus,  one  can  estimate  the  maximum  amount  exposed  to 
potential cross-border conflict of laws situations in the non-central bank repo markets at the 
combined value of the cash side of cross-border contracts not involving a CCP (72% of EUR 
3.4  trillion)  and  of  the  net  value  of  centrally  cleared  cross-border  repo  contracts  (EUR  285 
billion), yielding a EUR 2.73 trillion figure. 

As the ICMA survey does not cover the repo transactions which are part of the Eurosystem 
liquidity operations, one should also add in those repo transactions. The ECB statistical data 

112   See Statistical release, OTC derivatives statistics at end-December 2016, BIS, May 2017. 
113   Covering interest rate, foreign exchange, credit, commodity and equity-linked derivatives. 
114   It  is  the  net  position  that  is  collateralised. The  share  of  cross-border  contracts  in the  OTC  derivatives  markets,  which 
involve  at  least  one  counterparty  from  Europe,  was  estimated  assuming  the  same  proportion  of  44%  for  cross-border 
transactions as in the CDS market. This figure is very close to the general estimate of 40% for the share of cross-border 
contracts by EU market participants, and hence credible. E.g. see Paech, P., Market needs a paradigm – breaking up the 
thinking  on  EU  securities  law,  in  Intermediated  Securities  by  Conac,  P.-H.,  Segna,  U.  and  Thevenoz,  L.  (eds.), 
Cambridge, 2013. 

115   Covering Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, the UK and Switzerland. 
116  Representing 44% of the gross market value of the CDS market internationally. 
117   See Wooldridge, P., Central clearing predominates in OTC interest rate derivatives markets, BIS Quarterly Review, 11 

December 2016. 

118   See European Repo Market Survey, Number 33 – conducted June 2017, ICMA, October 2017, covering 47 participants 
based  across  14  EU  member  states.  42  participants  were  based in  12  euro  area  countries.  The  total  number  of  survey 
participants was 64, 22 of which were foreign affiliates predominantly located in the UK.  

91 

 
 
                                                 
as  at  June  2017119  shows  that  additional  EUR  453  billion  of  cross-border  collateral  (after 
haircut) was posted to the Eurosystem as part of its liquidity operations. 

According to the ISLA securities lending data as at December 2016120, there were about EUR 
264  billion  of  government  bonds  on  loan  in  Europe,  as  well  as  some  EUR  145  billion  of 
equities.  Although  there  are  no  figures  for  cross-border  transactions,  one  would  expect  that 
the proportion of 44% used earlier should not be an overstatement of cross-border business in 
this market segment. Applying this assumption yields a gross risk figure of EUR 180 billion. 
To date, there is no data on either the share of the market that is centrally cleared or on the 
netting benefits that can be achieved in this market. 

As  mentioned  previously  and  in  addition  to  the  overall  maximum  risk  exposure  estimates 
provided  above,  legal  uncertainty  in  cross-border  operations  have  a  cost.  One  estimate  puts 
the additional transaction cost linked to this cross-border legal uncertainty  at  22%,121 which 
can be combined with EU securities settlement system data provided by the ECB (as at end-
2016)  and  survey-based  data  obtained  by  Oxera122  to  obtain  an  annual  cost  estimate.  This 
yields an aggregate annual cost estimate of EUR 13 billion, which is due to legal uncertainty 
in cross-border transactions. Approximately EUR 6 billion of this cost can be attributed to the 
increased  cost  of  clearing  and  settlement  of  cross-border  securities  transactions,  whilst  the 
remaining  EUR  7  billion  relate  to  account  provision  and  asset  servicing  on  a  cross-border 
basis. Whether the entire amount or only part of it is attributable to specific legal uncertainty 
around  the  applicable  law  to  proprietary  aspects  of  ownership  of  securities  cannot  be 
established with certainty. 

In  respect  of  claims  not  traded  on  financial  markets,  theoretically,  the  magnitude  of  the 
problem resulting from the lack of legal certainty as to the law applicable to the third-party 
effects  of  assignments  of  claims  in  terms  of  costs  could  be  measured  as  follows.  first,  one 
could count all agreements on assignment of claims concluded by private parties (natural or 
legal persons) including a cross-border element (for example, parties are located in different 
States,  or  the  assignment  of  the  claim  involves  a  foreign  debtor)  within  a  given  period. 
Second,  the  value  of  the  assigned  claims  would  have  to  be  calculated.  Third,  in  order  to 
determine the additional costs resulting from the lack of legal certainty, the costs of seeking 
legal advice on the law applicable or the costs of compliance with all possible laws applicable 
to the third-party effects of the assignment would have to be determined and multiplied by the 
number  of  assignment  contracts  and  the  value  of  the  assigned  claims.  Finally,  in  order  to 
determine  the  amount  of  cross-border  assignments  which  did  not  take  place  due  to  legal 
uncertainty,  a  statistical  example  of  natural  and  legal  persons  in  the  EU  would  have  to  be 
asked whether, for example, in the previous five years, they had contemplated an assignment 
of  claims  from  or  to  another  Member  State  and,  if  so,  whether  they  abandoned  such 
transactions because of the additional legal advice/compliance costs inherent in cross-border 
transactions,  because  of  the  legal  certainty  risks  or  because  of  other  reasons.  To  be  able  to 
carry out such analysis, the Commission would thus need to have information on the number 

119   See https://www.ecb.europa.eu/stats/payment_statistics/cross-border_collateral/html/coll1.en.html 
120   See ISLA Securities Lending Market Report , 6th edition, ISLA, December 2016. 
121   See Paech, P., Market needs a paradigm – breaking up the thinking on EU securities law, in Intermediated Securities by 

Conac, P.-H., Segna, U. and Thevenoz, L. (eds.), Cambridge, 2013. 

122   See  Monitoring  prices,  cost  and  volumes  of  trading  and  post-trading  services,  Report  prepared  for  the  European 

Commission by Oxera, London and Brussels, 2011. 

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and contents of a relevant statistical sample of different types of written and oral assignments 
of  claims  concluded  by  natural  and  legal  persons  as  well  as  on  the  value  of  the  claims 
assigned,  information  on  which  of  such  claim  assignments  had  a  cross-border  element, 
information on the costs of legal advice and/or compliance of such cross-border assignments, 
and  information  on  the number  of  cross-border assignments  which  were  not  concluded  as  a 
result  of  the  additional  costs  inherent  in  cross-border  transactions  or  because  of  the  legal 
uncertainty risk. Obtaining information on these aspects is not possible as this information is 
not recorded or collected to such extent by any public or private organisation. 

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ANNEX 5. EVALUATION OF EXISTING DIRECTIVES 

Section 1 Executive Summary 

An  ad  hoc  evaluation  of  the  existing  conflict  of  laws  provisions  on  proprietary  aspects  of 
transactions  in  securities  was  carried  out  in  line  with  the  requirement  of  assessing  the 
performance of existing rules when new action is being considered in the same field. This is 
not a full evaluation of the relevant Directives in the sense of the Better Regulation rules.  

The  evaluation  of  specific  conflict  of  laws  provisions  in  the  Settlement Finality  Directive123 
(‘SFD’),  Financial  Collateral  Directive124  (‘FCD’),  and  Winding  up  Directive125  (‘WUD’) 
showed  that  the  rules  in  place  do  not  achieve  enough  certainty  as  to  which  law  governs 
proprietary effects of transactions in securities.  

The  evaluation  showed  that  the  wording  of  the  provisions  is  not  always  clear  and  precise 
enough. Therefore, the national transpositions of the rules and the interpretations differ across 
Member States. Whereas it is acceptable to have some leeway to transpose the provisions of a 
Directive into national law, the final outcome of the transposition reveal that the differences 
result  in  possibly  different  governing  laws  being  applied  in  practice  in  different  Member 
States.  As  the  objective  was  to  harmonise  the  rules  determining  the  governing  law,  the 
evaluation concludes that the provisions did not fully achieve their intended results. 

Section 2 Introduction 

The  SFD,  FCD  and  WUD,  hereafter  collectively  referred  to  as  the  ‘directives’,  came  into 
force  in  1999,  2003,  and  2004.  In  most  Member  States,  all  three  Directives  have  been 
transposed more than a decade ago. Thus, enough time has passed to allow for an evaluation 
of the acquis.  

The first two directives (SFD, FCD) harmonise the substantive law of Member States. Only 
supplementary, each of the two directives contains  a single provision  which harmonises the 
conflict of laws rules of Member States within their restricted scope of application, namely in 
relation  to  proprietary  rights  in  book-entry  securities  when  those  assets  are  provided  as 
collateral to/or among specific parties. The third directive (WUD) harmonises the conflict of 
laws  rules  of  Member  States  which  designate  the  applicable  law  in  reorganisation  and 
insolvency  proceedings  of  EU  credit  institutions  and  investment  firms.  However,  only  one 
conflict of laws rule in the WUD concerns proprietary rights in book-entry securities.  

This evaluation is confined only to the mentioned conflict of laws rules, i.e. Article 9(2) of the 
SFD, Article 9 of the FCD and Article 24 of the WUD. The wording of the conflict of laws 
rules in the three directives to be evaluated is as follows: 

123   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 

124   Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral 

arrangements 

125   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 

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  “Where  securities  including  rights  in  securities  are  provided  as  collateral  security  to 
participants, system operators or to central banks of the Member States or the 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.” (Article 9(2) SFD); 

  “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”,  where  the  term 
‘relevant account’ is defined 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” (Article 9(1) and Point (h) of Article 2(1) 
FCD); 

  “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” (Article 24 WUD).  

An evaluation of the substantive law provisions of the Directives is beyond the scope of this 
exercise as it has been carried out in the past and the assessment was positive126. In contrast, 
the  previous  evaluation reports  reached  a  negative  conclusion  in  relation  to  conflict  of  laws 
rules: “The Commission is of the opinion that there is not a sufficient level of legal certainty 
at  present,  neither  at  the  international  level  nor  at  Community  level.  Therefore,  also  in  the 
event  that  the  Council  would  decide  not  to  go  forward  with  the  [Hague  Securities] 
Convention, Article 9 FCD (as well  as Article 9 SFD and Article 24 Winding-up Directive) 
would still have to be amended to improve the situation within the Community by specifying 
the  exact  criteria  for  determining  the  relevant  location  of  account”127.  However,  so  far  the 
robustness  of  this  conclusion  has  not  been  backed  up  by  a  detailed  assessment  of  the 
performance of the existing conflict of laws acquis.  

The objective of this evaluation is to analyse in-depth whether the objective of the directives 
to provide legal certainty in cross-border securities transactions has been met. The aim of this 
evaluation is thus to (i) examine how exactly the conflict of laws rules in the directives have been 
transposed by Member States, (ii) assess whether problems for market participants arise that stem 
from  transpositions  or  from  differences  between  transpositions,  and  (iii)  identify  if  and  to  what 
extent the conflict of laws rules in the directives provide solutions for legal uncertainty as to the 
applicable law to third party effects of cross-border transactions in securities.  

126   See Report from the Commission. Evaluation report on the Settlement Finality Directive 98/26/EC (EU 25), 
COM(2005)675  final/2  (‘SFD  Evaluation  Report’);  Report  from  the  Commission  to  the  Council  and  the 
European Parliament. Evaluation report on the Financial Collateral Arrangements Directive (2002/47/EC), 
COM(2006)833 final (‘FCD Evaluation Report’).  

127   FCD Evaluation Report, p. 11.   

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The results of this evaluation will be used in the context of the  CMU Action Plan where legal 
uncertainty as to securities ownership in cases of cross-border transactions was named as one 
of the obstacles standing in the way of well-functioning Capital Markets Union128.  

Section 3 Background to the initiative 

Settlement Finality Directive (‘SFD’) 

Before  the  adoption  of  the  SFD,  there  was  systemic  risk  inherent  in  the  EU  payment  and 
securities settlement systems.  

A ‘system’ is a formal arrangement between big financial institutions based on common rules 
for the processing, clearing and settlement of payment or securities transactions. This can be 
(1) a payment system, i.e. a system for the settlement of payment instructions on the basis of 
which  funds  between  institutions  are  transferred;  (2)  a  securities  settlement  system,  i.e.  a 
system  dedicated  to  the  transfer  of  financial  instruments  which  is  usually  operated  by  a 
CSD129;  (3)  a  clearing  system  which  is  operated  by  a  ‘central  counterparty’  (so-called 
‘CCP’)130  interposing  itself  between  the  transaction  counterparties  in  order  to  assume  their 
rights  and  obligations.  Those  systems  rely  heavily  on  collateral  that  is  posted  to  secure  the 
pending obligations of system participants.  

Systems  have  an  inclination  not  only  to  propagate  the  risk  that  one  party  to  a  transaction 
performs its obligation (e.g. delivery of securities) whereas the other does not (e.g. payment), 
but to amplify it. The inability of one system participant to honour its obligations can trigger a 
knock  on  effect  leading  to  the  inability  of  other  system  participants  to  honour  their 
obligations.  At  worst,  financial  markets  as  a  whole  may  become  gridlocked.  This  systemic 
risk was highlighted by the ‘Herstatt insolvency’ in the 70-ties131.  

The  principal  objectives  of  the  SFD  were  therefore  “to  reduce  the  risk  associated  with 
participation  in  securities  settlement  systems”  and  to  contribute  “to  the  efficient  and  cost 
effective  operation  of  cross-border  payment  and  securities  settlement  arrangements  in  the 
Community” (Recital 3). The main way to achieve these objectives was though harmonisation 
of  substantive  laws  of  Member  States  which  disapplied  certain  rules  of  national  insolvency 

128   Communication from the Commission to the European Parliament, the Council, the European Economic and 
Social  Committee  and  the  Committee  of  the  Regions  ‘Action  Plan  on  Building  a  Capital  Markets  Union’ 
(‘CMU Action Plan’), COM(2015) 468 final, p.23 

129   According  to  Article  39(1)  of  Regulation  (EU)  No  909/2014  on  improving  securities  settlement  in  the 
European Union and on central securities depositories (‘CSDR’), the authorisation as a CSD under CSDR 
requires that the CSD is notified as a designated system under the Settlment Finality Directive.  

130   According to Article 17(4) of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and 
trade repositories (‘EMIR’), the authorisation as a CCP under EMIR requires that the CCP is notified as a 
designated system under the Settlment Finality Directive. 

131   In  1974  a  small  bank  in  Germany,  Bankhaus  Herstatt,  was  closed  in  the  middle  of  the  day  by  regulators. 
That day, a number of banks had released payment of Deutsche Marks to Herstatt in Frankfurt in exchange 
for US Dollars  that were  to be  delivered  in New  York.  Because of  time  zone  differences, Herstatt  ceased 
operations  between  the  times  of  the  respective  payments.  The  counterparty  banks  did  not  receive  their 
Dollar  payments.  There  was  a  panic  as  banks  rushed  to  freeze  their  outgoing  payments,  and  the  market 
ground to a halt. The Herstatt failure caused a string of cascading defaults in a rapid sequence, totalling a 
loss of over 600 million USD to the international banking sector. 

96 

 
 
                                                 
laws to ensure that (1) payments or securities instructions (called ‘transfer orders’) are settled 
once  they  have  entered  a  system,  regardless  of  whether  the  sending  institution  has  become 
insolvent  or  a  transfer  order  has  been  revoked  (so-called  ‘settlement  finality’)  and  (2) 
collateral which is heavily used in those systems to secure the performance of the participants’ 
obligations is fully enforceable in the collateral provider’s insolvency. 

For conflict of laws cases, the objectives of the SFD were to determine “which insolvency law 
is  applicable  to  the  rights  and  obligations  of  […]  [a]  participant  in  connection  with  its 
participation  in  a  system”  (Recital  17)  and  “to  ensure  that  if  the  participant,  the  central 
bank  of  a  Member  State  or  the  future  European  central  bank  has  a  valid  and  effective 
collateral  security  as  determined  under  the  law  of  the  Member  State  where  the  relevant 
register, account or centralized deposit system is located, then the validity and enforceability 
of that collateral security as against that system (and the operator thereof) and against any 
other  person  claiming directly  or  indirectly  through  it,  should  be  determined  solely  under 
the law of that Member State” (Recital 20 of the SFD). 

The  way  to  achieve  these  objectives  was  though  introduction  of  two  conflict  of  laws  rules 
(Article 8 and Article 9(2) of the SFD): 

  First, with regard to rights and obligations of system participants, Article 8 of the SFD 
stipulates that the applicable law is the law governing the system. This law – according 
to Article 2(a) of the SFD – is the law of a Member State chosen by the participants 
(whereby participants may choose the law of a Member State in which at least one of 
them  has  its  head  office).  The  objective  of  Article  8  of  the  SFD  is  to  determine 
beforehand  that  the  system  rules  and  the  agreements  entered  into  with  a  participant 
from  another  Member  Sate  will,  in  the  event  of  that  participant’s  insolvency,  be 
enforceable under the insolvency rules applicable to it.  

  Second,  with  regard  to  property  rights  of  collateral  takers  to  securities  provided  as 
collateral in connection with a designated system or to the ECB/central banks of EEA-
States, Article 9(2) of the SFD provides for a specific solution and stipulates that the 
applicable law is  the law of the Member State where the right of the collateral taker 
with respect to the securities is legally recorded on a register, account or centralised 
deposit system. The objective of Article 9(2) of the SFD is to remove uncertainty as to 
which law determines the validity and enforceability of collateral, as such uncertainty 
could stand in the way of the immediate realisation of collateral security in the event a 
system participant defaults and be thus a factor of systemic risk.  

Financial Collateral Directive (‘FCD’) 

The  situation  before  the  adoption  of  the  Financial  Collateral  Directive  was  described  in  the 
Explanatory Memorandum accompanying the Commission proposal as follows132:  

“Participants in the EU market who seek to reduce credit risk through the use of collateral 
face  fifteen  different  regimes  as  regards  perfection  requirements  (procedures  a  collateral 

132   Proposal for a Directive of the European Parliament and of the Council on financial collateral arrangements, 

COM(2001) 168 final, Explanatory Memorandum, p. 3. 

97 

 
 
                                                 
taker must follow to ensure the rights to the collateral are good against third parties including 
a  liquidator  in  the  event  of  bankruptcy).  They  also  are  confronted  with  uncertainties  as 
regards the law applicable to cross-border transfers of book entry securities. They also have 
to  consider  the  impact  of  all  the  different  bankruptcy  legislations  which  exist  in  Member 
States.  Therefore,  administrative  burdens  hamper  a  cost-effective  and integrated  EU  market 
and legal uncertainty results in unnecessary systemic risk in the financial markets, there being 
a  higher  risk  of  invalidation  of  cross-border  use  of  collateral  than  for  domestic  use  of 
collateral”. 

As stated in the recitals of the FCD, the aim of the EU intervention was to “contribute to the 
integration  and  cost-efficiency  of  the  financial  market  as  well  as  to  the  stability  of  the 
financial  system  in  the  Community,  thereby  supporting  the  freedom  to  provide  services  and 
the  free  movement  of  capital  in  the  single  market  in  financial  services”  (Recital  3).  The 
objective  of  the  directive  was  “to  improve  the  legal  certainty  of  financial  collateral 
arrangements” (Recital 5). The main way to achieve this objective was though harmonisation 
of substantive laws of Member States which insulated financial collateral from insolvency.  

Specifically for conflict of laws cases, the objective of the FCD was “to create legal certainty 
regarding  the  use  of  such  securities  held  in  a  cross-border  context  and  used  as  financial 
collateral  under  the  scope  of  this  Directive”  by  extending  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” (Recital 7). This should achieve that “if the collateral taker has a valid and effective 
collateral arrangement according to the governing law of the country in which the relevant 
account  is  maintained,  then  the  validity  against  any  competing  title  or  interest  and  the 
enforceability  of  the  collateral  should  be  governed  solely  by  the  law  of  that  country,  thus 
preventing legal uncertainty as a result of other unforeseen legislation” (Recital 8).  

The way to achieve this objective was though introduction of a conflict of laws rules (Article 
9 of the FCD). Article 9(1) of the FCD provides that “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” and the term 
‘relevant  account’  is  defined  under  Point  (h)  of  Article  2(1)  of  the  FCD  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”. Article 9(2) of 
the FCD lists the matters covered by this conflict of laws rule as follows: “(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”.  

Winding Up Directive (‘WUD’) 

Before  the  adoption  of  the  WUD,  the  insolvency  or  reorganisation  of  a  bank  or  investment 
firm  established  in  one  Member  State  that  was  operating  on  a  cross-border  basis  within  the 

98 

 
 
Union, in particular through branches in other Member States, raised many legal problems for 
all  parties  involved.  This  is  because  different  Member  States  approach  insolvency  from 
different perspectives. Some jurisdictions are more pro-debtor than others, while some favour 
judicial  rather  than  administrative  procedures  for  dealing  with  the  insolvency  procedures. 
Some of the problems also included conflict of laws issues, differences of procedure, different 
treatment of assets, and different approaches to set-off and netting. 

As  stated  in  the  recitals  of  the  WUD,  the  aim  of  the  Directive  was  to  guarantee  that  the 
reorganisation  and  insolvency  measures  adopted  by  the  administrative  or  judicial authorities 
of  the  home  Member  State  of  the  failing  bank  or  investment  firm  are  effective  in  all  other 
Member States (Recital 7). The principal objective was to ensure that it is only the authorities 
of  the  home  Member  State  which  “have  sole  jurisdiction”  and  that  their  decisions  are 
“recognised  and  […]  capable  of  producing  in  all  the  other  Member  States,  without  any 
formality, the effects ascribed to them by the law of the home Member State, except where this 
Directive  provides  otherwise”  (Recital  16).  This  objective  was  counterbalanced  by  the 
supplementary objective to safeguard “the confidence of third-party purchasers in the content 
of the registers or accounts regarding certain assets entered in those registers or accounts” 
(Recital 29).  

The way to achieve these objectives was through a fully-fledged harmonisation of conflict of 
laws rules applicable in reorganisation and insolvency of EU credit institutions and investment 
firms. Although the general conflict of laws rule of the WUD is that it is the law of the home 
Member  State  that  applies  to  reorganisation  or  insolvency  measures  (Articles  3  and  10  of 
WUD), a specific conflict of laws rule was designed regarding the enforcement of proprietary 
rights to financial instruments in the bank's or the investment firm's insolvency. Article 24 of 
the  WUD  provides  that  the  applicable  law  to  enforcement  of  such  rights  is  the  law  of  the 
Member State where the register, account, or centralised deposit system in which those rights 
are recorded is held or located. As explained in the Council Common Position133, the objective 
of  Article  24  of  WUD  was  to  protect  “the  rights  in  these  securities  against  the  potential 
negative effects of reorganisation measures or insolvency proceedings opened according to 
the law of a Member State which is different from the law of the Member State where the 
register, account or deposit system is held”.  

The intervention logic below provides a description  – in a summarised diagram format  – on 
how  the  EU  conflict  of  laws  rules  are  expected  to  work.  It  is  also  used  to  carry  out  the 
evaluation and answer specific questions.  

Figure 1: Intervention Logic diagram 

asse 

Scope 
Financial institutions' transactions in book-entry securities 

133   Common  Position  (EC)  No  43/2000  adopted  by  the  Council  on  17  July  2000  with  a  view  to  adopting 
Directive  2000/…/EC  of  the  European  Parliament  and  of  the  Council  of  …  on  the  reorganisation  and 
winding  up  of  credit  institutions,  OJ  C  300,  20.10.2000,  p.  13,  p.  29  (see  the  explanation  in  relation  to 
Paragraph 1(f)).  

99 

 
 
 
   
                                                 
Need 
Increase legal certainty around ownership of securities in cross-border transactions 

 Specific objective  
Ensure the same 
applicable law in the 
context of financial 
collateral 

Specific objective  
Ensure the same 
applicable law in 
the context of 
settlement 

Specific objective  
Ensure the same 
applicable law in the 
context of 
insolvencies 

EU input 
3 Directives contain specific conflict of laws provisions: 
Financial Collateral Directive 
Settlement Finality Directive 
Winding-Up Directive 

 Output 
One and the same law 
governs questions of 
ownership in case of 
financial collateral 

Output 
One and the same law 
governs questions of 
ownership in case of 
settlement 

Output 
One and the same law 
governs questions of 
ownership in case of 
insolvencies 

Result  
Legal certainty around ownership in 
cross-border transactions  

Impacts 
- Increased cross-border transactions 
- Reduced risks 
- Improved financial stability 

Section 4  Evaluation Questions 

Question 1: How effective has the EU intervention been? 

100 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
To what extent have the objectives of  

a) the SFD to reduce the risk associated with participation in securities settlement systems and 
to  contribute  to  the  efficient  and  cost  effective  operation  of  cross-border  payment  and 
securities settlement arrangements, and in particular the objective of Article 9(2) of the SFD to 
ensure  that  if  the  collateral  taker  has  a  valid  and  effective  collateral  security  as  determined 
under the law of the Member State where the relevant register, account or centralized deposit 
system  is  located,  then  the  validity  and  enforceability  of  that  collateral  security  should  be 
determined solely under the law of that Member State; 

b)  the  FCD  to  create  legal  certainty  regarding  the  use  of  securities  held  in  cross-border 
context, and in particular the objective of Article 9 of the FCD to ensure that if the collateral 
taker  has  a valid  and  effective  collateral  arrangement  according  to  the governing  law  of  the 
country in which the relevant account is maintained, then the validity against any competing 
title or interest and the enforceability of the collateral should be governed solely by the law of 
that country, thus preventing legal uncertainty as a result of other unforeseen legislation;  

c)  the  WUD  to  safeguard  the  confidence  of  third-party  purchasers  in  the  content  of  the 
registers  or  accounts  regarding  certain  assets  entered  in  those  registers  or  accounts,  and  in 
particular  the  objective  of  Article  24  of  the  WUD  to  protect  the  property  rights  in  financial 
instruments  against  the  potential  negative  effects  of  reorganisation  measures  or  insolvency 
proceedings opened according to the law of a Member State which is different from the law of 
the Member State where the register, account or deposit system is held 

been achieved and what factors influenced the achievements observed? 

Question 2: How efficient has the EU intervention been? 

To what extent have Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
been  cost-effective  for  market  participants  given  the  effects  they  have  achieved  to  provide 
legal certainty? 

Question 3: How relevant is the EU intervention? 

To what extent are Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
still  relevant  more  than  a  decade  after  they  had  been  introduced  and  in  light  of  current 
developments in the financial markets? 

Question 4: How coherent is the EU intervention internally and with other EU actions? 

To what extent are the evaluated EU conflict of laws rules coherent internally as well as with 
other  pieces  of  EU  conflict  of  laws  legislation,  i.e.  the  Rome  I  Regulation,  the  Insolvency 
Regulation  Recast,  the  Winding  Up  Directive  and  the  Solvency  II  Directive,  and  with  other 
pieces of EU financial legislation, i.e. the Central Securities Depositories Regulation and the 
Markets in Financial Instruments Directive? 

101 

 
 
Question 5: What is the EU added value of the intervention? 

To what extent have Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
helped to increase legal certainty and to what extent does the legal risk related to cross-border 
transactions continue to require action at EU level?  

Section 5 Method 

This  evaluation  is  primarily  based  on  the  feedback  received  to  Commission  Questionnaires 
and  public  consultations  with  the  stakeholders,  findings  of  the  T2S  Harmonisation  Steering 
Group,  report  of  the  European  Post-Trade  Forum,  i.e.  an  expert  group  established  by  the 
Commission in 2016 with the task of assessing the evolution of the EU post-trade landscape 
(‘EPTF’), and the discussions with the expert group stablished by the Commission in 2017 on 
conflict of laws regarding claims and securities (‘Expert Group on conflict of laws’). 

Particularly, the sources include: 

  Non-public  responses  received  to  a  targeted  Questionnaire  developed  by  the 
Commission  services  and  addressed  to  Member  States  via  the  Expert  Group  of  the 
European  Securities  Committee  (‘EGESC’),  a  comitology  committee,  as  well  as 
responses  received  to  a  targeted  Questionnaire  from  several  members  of  the  EPTF 
(i.e.,  from  Association  for  Financial  Markets  in  Europe  (AFME),  Association  of 
Global  Custodians  (AGC),  European  Banking  Federation  (EBF),  European  Central 
Securities Depositaries Association (ECSDA), and T2S National User Groups, issued 
by the Commission on December 9, 2016 with a deadline for responses: January 31, 
2017). Both Questionnaires were specifically designed to obtain feedback on how the 
conflict of laws rules of the directives have been transposed across Member States, as 
well  as  on  what  kind  of  financial  instruments  under  MiFID  II134  are  creditable  to 
securities or other accounts according to the national regimes and/or practices; 

  Conflicts  of  Laws  Issues  in  T2S  Markets  –  A  Fact  Finding  Exercise  by  T2S 
Harmonisation Steering Group (hereafter  ‘T2S Fact Finding Exercise’), published  on 
November 10, 2015 regarding a survey issued on specific conflict of laws issues across 
21 national markets covered in Target2Securities135; 

  Report of the European Post-Trade Forum (hereafter ‘EPTF Report’), published on 27 

August 2017136; 

134   Directive  2014/65/EU  on  markets  in  financial  instruments  and  amending  Directive  2002/92/EC  and 

Directive 2011/61/EU (‘MiFID’)  

135   Conflicts of Laws Issues in T2S Markets - A Fact Finding Exercise by T2S Harmonisation Steering Group 
https://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/mtg29/item_4_20151116.pdf?7d32b%208e9f88a6823f
fd9dd%2061650d3de3  

136   The  EPTF  Report  and  its  Annexes  are  available  at:  https://ec.europa.eu/info/publications/170515-eptf-

report_en  

102 

 
 
                                                 
  Feedback137  received  to  the  public  consultation:  Building  a  Capital  Markets  Union, 
launched  by  the  Commission  on  February  18,  2015  and  running  until  May  13,  2015 
(hereafter ‘CMU public consultation of 2015’)138; 

  Feedback139 received to the public consultation on the conflict of laws rules for third 
party effects of transactions in claims and securities, launched by the Commission on 
April  7,  2017  and  running  until  June  30,  2017  (hereafter  ‘conflict  of  laws  public 
consultation of 2017’)140;  

  Discussions  with  the  members  of  the  Expert  Group  on  conflict  of  laws  regarding 
claims  and  securities141,  which  specifically  addressed  national  transpositions  of  the 
directives and national conflicts of laws rules or solutions outside the harmonised field. 

Limitations – robustness of findings 

First,  the  assessment  of  the  current  legal  situation  raises  some  methodical  challenges.  For 
example, as for the responses to the Questionnaires, some of the respondents did not provide 
an  explicit  answer  to  the  question  raised  instead  limiting  the  answer  to  a  quotation  of  the 
national law. In such cases particular responses were assessed individually and subjectively by 
analysing  the  quoted  laws,  thus  creating  a  possibility  that  the  assessment  was  not  entirely 
correct. Another issue encountered was inconsistency of terminology used among respondents 
(particularly, ‘Member States’, ‘EU States’, ‘EEA States’ and so on) which also added some 
level  of  doubt  as  to  what  exactly  respondents  meant  by  their  answers  (NB  –  this  issue  was 
encountered with only regards a specific question on geographical scope of the national law 
implementing conflicts of laws rules of the Directives (Figure 11)). 

Second, there is hardly any quantitative/practical evidence available from the market to back 
up the legal evaluation by economic considerations.  

Section 6 Implementation state of play (Results) 

The  directives  have  been  adopted  already  some  time  ago  (SFD  applicable  since  1999,  FCD 
applicable since 2003, and WUD applicable since 2004) and have been transposed in due time 
by all Member States (Croatia as the newest Member State having done that in 2013) as well 
as the three EEA states (Norway, Iceland and Liechtenstein) therefore giving a notable time to 

137   Responses to the public consultation: Building a Capital Markets Union 

138   Public 

https://ec.europa.eu/eusurvey/publication/capital-markets-union-2015?language=en  
Building 
http://ec.europa.eu/finance/consultations/2015/capital-markets-union/index_en.htm  

consultation: 

Capital 

a 

Markets 

Union: 

139   Responses to the public consultation on the conflict of laws rules for third party effects of transactions in 
https://ec.europa.eu/eusurvey/publication/securities-and-claims-

claims: 

securities 
2017?surveylanguage=en 

and 

140   Public consultation on the conflict of laws rules for third party effects of transactions in securities and claims 

https://ec.europa.eu/info/consultations/public-consultation-conflict-laws-rules-third-party-effects-
transactions-securities-and-claims_en  

141   For the agenda and minutes of the meetings of the Expert Group on conflict of laws regarding securities and 
claims  (E03506)  please  consult  the  webpage  of  the  Register  of  Commission  Expert  Groups  available  at: 
http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3506  

103 

 
 
                                                 
assess the working of the directives in practice. This section explains how the conflict of laws 
rules in the directives have been implemented and which problems have been identified.   

6.1. Unclear location of securities accounts under PRIMA 

Although all three directives use a similar rule that designates as the applicable law the place 
of  the  location  or  maintenance  of  the  relevant  securities  account  (so-called  ‘PRIMA’),  the 
solutions in all three directives differ in detail. The wording of the directives leaves open how 
to  determine  where  the  account  is  ‘located’  (this  is  the  wording  used  by  Article  9(2)  of  the 
SFD and Article 24 of the WUD) or ‘maintained’ (this is the wording used by Article 9 of 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. This is not 
self-explanatory, since new technologies mean that the data may be stored in one country, the 
client relationship managed from another and electronic records accessible through multiple 
locations.  

It is of major practical importance to examine whether Member States have specified in their 
implementing  legislation  criteria  to  be  taken  into  account  when  determining  the  country 
where the securities account is located, and if not, how are those rules applied in practice.  

First,  the  responses  given  by  Member  States  (Figures  2  and  3)  reveal  that  considerable 
inconsistencies  exist  in  terms  of  the  national  approaches  used  to  determine  the  relevant 
account and its location/maintenance.  

When transposing Article 9(2) of the SFD and Article 24 of the WUD, most Member States 
have  not  provided  any  additional  criteria  in  legislation  that  would  help  determining  the 
country  where  the  register,  account  or  centralised  deposit  system  is  located.  In  addition,  the 
solution applied in  practice to  fill the gap as  well as the legislative solution  in two Member 
States differ considerably.  

Figure  2:  Summery  of  Responses  to  Questionnaire  developed  by  the  Commission  services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

Question 16 and 28: Does your national transposition of Article 9(2) of SFD and Article 
24 of WUD specify any criteria to be taken into account when determining the country 
where  the  register,  account  or  centralised  deposit  system  is  located?  If  no,  how  do 
national case law and/or legal counsel address these issues? 

Summary of Member States Responses: 

Legislative 
solution 

No criteria 
specified in 
legislation 

Solution applied in practice  

DE, EE: 

Supervision 
over the 

AT, BE, BG, CZ, 
EL, FI, FR, IE, 
LV, LT, NL, PT, 

Main establishment of the account provider: BE 

Registered office of the CSD: SI 

Freedom to specify contractually where the account is 

104 

 
 
relevant 
register 

RO, SK, SI, UK 

located: CZ 

When  transposing  Article  9  of  the  FCD,  most  Member  States  have  also  not  provided  any 
additional  criteria  in  legislation  that  would  help  determining  the  country  where  the  relevant 
account  is  maintained.  In  those  Member  States  where  a  legislative  solution  exists,  the 
connecting factor varies considerably.   

Figure  3:  Summery  of  Responses  to  Questionnaire  developed  by  the  Commission  services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

the place where the intermediary is incorporated or has its seat, 
the place where the intermediary's branch is located, if the account agreement is 

Question 20: 
Does your national transposition of Article 9 of FCD specify any objective criteria to be 
taken  into  account  when  determining  the  country  where  the  relevant  account  is 
maintained, such as 
• 
• 
concluded in the course of the operations of a branch, 
• 
• 
b) Does your national transposition of the FCD leave a complete or partial choice of law 
possibility when determining the country where the relevant account is maintained.  
If your law is silent, how do national case law and/or legal counsel address these issues? 

the place where the IT platform is located that operates the securities account, 
any other? 

Summary of Member States Responses: 

No criteria 
specified in 
legislation 

AT, BE, BG, 
CZ, EE, FI, 
FR, GR, IE, 
LV, LT, NL, 
RO 

Legislative solution 

DE: Supervision over the 
relevant register 

PT: a) Management of 
CSD;  
b) Location of entity where 
the securities are 
registered or deposited;  
c) Issuer  

SK: Lien register 

SI: Register  

Solution applied in practice  

Main establishment of the account provider: 
BE 

Place where the account is effectively 
maintained: AT 

Place where the register is kept: EE 

Registered office of the CSD: SI 

Branch of the account provider: FI 

Freedom to specify contractually where the 
account is located: CZ, GR, NL, UK 

Mix of criteria: FR 

105 

 
 
 
Second,  the  responses  to  the  T2S  Survey  provided  by  the  National  User  Groups  (Figure  4) 
also highlight the heterogeneity of solutions as to the location of the securities account applied 
in the harmonised field.  

Figure  4:  Conflicts  of  Laws  Issues  in  T2S  Markets  –  A  Fact  Finding  Exercise  by  T2S 
Harmonisation Steering Group, 10 November 2015, p. 8 

Question 2d: 

When  your  national  conflict  of  laws  rules  refer  to  the  place  of  location  of  the  relevant 
account  (PRIMA),  register  etc.,  do  they  refer  to  any  objective  criteria  to  be  taken  into 
account  to  determine  the  location?  Have  you  experienced  difficulties  with  the  issue  of 
location of an account (e.g. account opened in branches)? 

Summary of Responses by T2S National User Groups: 

d) Criteria for determining the PRIMA location 

•  PT  NUG:  Portuguese  conflict  of  laws  rules  establish  that  the  relevant  location  is  not  the 
physical/material  location  of  the  securities  but  the  location  of  the  “legal  situation  of  a 
security”  i.e.  the  location  of  the  management  of  the  CSD  and  the  location  of  the  custodian 
where the securities are registered/deposited 

• Two T2S NUGs (CH, DK) responded that the criteria relevant for determining the location 
of the relevant account are as per the HSC rules (e.g. “relevant intermediary”) 

• NL NUG: Dutch conflict of laws rules do not provide objective criteria for determining the 
PRIMA  location  but,  merely,  guidance  on  the  basis  of  which  to  identify  the  place  of 
maintenance of the relevant account. No practical issues have arisen so far. 

• FR NUG: French conflict of laws rules do not provide for any objective criteria to determine 
the PRIMA location. What this means in practice is that the securities account is located in the 
country where the custody services are provided. 

• Two T2S NUGs (SK, LU) responded that their national law does not define any objective 
criteria on the basis of which to determine the PRIMA location. 

•  IT  NUG:  Italian  law  refers  to  the  account  in  which  the  book  entries  or  annotations  are 
directly performed in favour of the account holder. 

Therefore,  one  of  the  main  conclusions  of  the  T2S  Fact  Finding  Exercise  reads  as  follows: 
“The considerable heterogeneity in the rules and procedures currently followed by the CSDs 
operating in the EU (and in the future in T2S), and which is largely a function of the different 
transposition  of  the  Settlement  Finality  Directive  (SFD)  and  Financial  Collateral  Directive 
(FCD)  into  domestic  laws,  is  identified  in  the  responses  as  a  generator  of  legal  uncertainty 

106 

 
 
and, by implication, as an obstacle to cross-border trade in securities transactions”142. Thus, 
the  Seventh  T2S  Harmonisation  Progress  Report  of  January  2017  lists  the  “location  of 
securities  accounts/conflict  of  law”  as  a  priority  2  activity  for  T2S  which  is  “key  for  the 
enhancement of the competitive environment and the efficiency of T2S”143. 

Third,  most  respondents  to  the  conflict  of  laws  public  consultation  of  2017  (41,03%) 
confirmed that they were aware of actual or theoretical situations where it was not clear how 
to  apply  EU  conflict  of  laws  rules  or  where  their  application  leads  to  outcomes  that  are 
inconsistent144.  In  addition,  some  of  those  stakeholders  who  answered  the  question  in  the 
negative  (25,64%)  also  acknowledged  that  even  if  they  were  not  aware  of  any  actual 
situations,  such  situations  were  theoretically  possible145.  The  T2S  factfindings  exercise 
highlighted  that  no  clear  concrete  cases  have  been  reported  by  T2S  National  User  Groups  of 
conflict of laws issues in cross-border settlement. 

The  risk  of  a  situation  where  it  was  not  clear  how  to  apply  EU  conflict  of  laws  rules  was 
illustrated by one stakeholder as follows: “the parties may proceed on a confident assumption 
as to where an account is ‘located’ and then discover under the pressure of litigation, when it 
is too late to remedy the situation, that the “location” of the account was not, in fact, clear 
once all relevant factors were considered”146.  

Another respondent illustrated the situation where the application of EU conflict of laws rules 
leads to inconsistent outcomes by the example of a Belgian intermediary that has a branch in 
the Netherlands. Under Belgian law PRIMA is generally understood as referring to the main 
establishment  of  the  intermediary  which  usually  leads  to  the  application  of  Belgian 
substantive  law,  whereas  under  Netherlands  law  PRIMA  is  understood  as  referring  to  the 
branch, i.e. Netherlands substantive law would  be applicable to  the Netherlands branch of a 
Belgian intermediary. However, the respondent also noticed that practitioners did not regard 
this inconsistency as a problem147. 

6.2. Unclear which is the relevant account under PRIMA 

The  SFD  and  the  WUD  do  not  specify  which  ‘record’  is  the  relevant  one  to  determine  the 
applicable law in case a book-entry security is recorded simultaneously in several accounts at 
different  levels  of  the  holding  chain  (both  directives  refer  to  a  “register,  account  or 
centralised  deposit  system”)  and  each  of  the  securities  accounts  is  located  in  a  different 

142   Conflicts of Laws Issues in T2S Markets – A Fact Finding Exercise by T2S Harmonisation Steering Group 
https://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/mtg29/item_4_20151116.pdf?7d32b%208e9f88a6823f
fd9dd%2061650d3de3, p. 3. 

143  See  Seventh  T2S  Harmonisation  Progress  Report  by  T2S  Advisory  Group,  31  January  2017, 

http://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/2017-01-
31_7th_T2S_Harmonisation_Progress_Report.pdf, p. 48–49. 

144   See  responses  to  Question  3  of  the  Consultation  Document  on  the  conflict  of  laws  rules  for  third  party 
effects  of  transactions  in  securities  and  claims,  https://ec.europa.eu/eusurvey/publication/securities-and-
claims-2017?surveylanguage=en 

145   For example, see the response of the Federal Government of Germany to Question 3. The Government of 
Finland  who  answered  Q3  in  the  affirmative  says  that  they  "find  it  self-evident  that  there  is,  at  least 
theoretically, a risk of situations where the EU conflict of laws rules lead to inconsistent outcomes".  

146   See the response of ISDA to Question 42.  
147   Response of the Ministry of Finance and Ministry of Security and Justice of the Netherlands to Question 3.  

107 

 
 
                                                 
country. The Financial Collateral Directive does not provide full clarity on this issue either, 
although it defines the ‘relevant account’ (Point (h) of Article 2.1 of the FCD). However, the 
definition  seems  circular  as  it  refers  to  the  account  in  which  the  entry  of  the  collateral 
provision has to be made and this very issue depends in turn on national securities law which 
the conflict of laws rule still needs to determine.  

The  EPTF  highlights  these  shortcomings  of  the  directives  in  its  Report  and  concludes  that 
“the  formulation  of  the  conflict  of  laws  provisions  of  the  aforementioned  directives  is  not 
identical and might create confusion as to the notion of the relevant account. As a result, the 
law of the relevant account concept itself is not always clear in its application”148. 

It  is  important  to  examine  whether  Member  States  have  specified  in  their  implementing 
legislation that there is only one relevant account or that there are many accounts relevant for 
conflict of laws purposes, which is(are) the relevant account(s), and if this is not determined 
by implementing legislation, how this issue is solved in practice.  

The responses (Figure 5) reveal that most Member States have left the issue of the ‘relevant 
account’  open  when  implementing  the  directives.  Among  those  Member  States  which  have 
addressed the question by specifying in implementing legislation the level of the holding chain 
where  the  record  of  the  provision  of  book  entry  securities  collateral  has  to  be  made,  the 
adopted solutions vary considerably. Whereas in some Member States there is only one single 
‘relevant account’, in other Member States more than one account can be relevant. The level 
of the account that is deemed relevant differs between EU jurisdictions as well.  

Figure  5:  Summery  of  Responses  to  Questionnaire  developed  by  the  Commission  services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

Question 22: 

Does your national transposition of the FCD specify the level of the holding chain where 
the  record  of  the  provision  of  book  entry  securities  collateral  has  to  be  made,  in 
particular  in  the  scenario  where  the  collateral  taker  is  also  the  collateral  provider’s 
direct intermediary? If so, please indicate whether the record of the provision has to be 
made at the level of a CSD, the level of the collateral provider’s direct intermediary, or 
at  any other level  of the holding chain. If  your law is  silent,  how do national case law 
and/or legal counsel address this issue? 

Summary of Member States Responses: 

Legislative solution 

BE: All levels are possible 

BG: CSD level in Bulgaria or any intermediary in case of non-

No specification in 
legislation 

AT, EE, FR, GR, IE, LV, 
LT, NL, PT, RO, UK 

148   European Post Trade Report, 15th May 2017, p. 95–96. The EPTF Report and its Annexes are available at: 

https://ec.europa.eu/info/publications/170515-eptf-report_en  

108 

 
 
                                                 
residents 

CZ: Only for holding chain of securities under Czech law 

FI, DE: Direct intermediary  

PT: CSD level; b) Intermediary level; c) Issuer level  

SK, SI: CSD level 

The  above  responses  as  well  as  the  feedback  received  to  the  conflict  of  laws  public 
consultation of 2017 suggests that the answer to the question which is the relevant account for 
the purpose of determining the applicable law does not depend on national transposition in the 
field of conflict of laws, but rather on the national securities law that determines the holding 
model.  

First, the respondents to the public consultation often point to their national securities law and 
deduce from the substantive provisions that the relevant account for conflict of laws purposes 
is  either  the  end-investor  account149  or  the  account  held  at  CSD  level  or  at  the  level  of  the 
participants  of  a  CSD150.  Second,  most  of  the  stakeholders  are  of  the  opinion  that  problems 
can  be  expected  if  within  one  Member  State  the  legal  relevance  of  record(s)  for  conflict  of 
laws  purposes  does  not  coincide  with  the  legal  relevance  of  record(s)  under  national 
substantive law151. For example, one respondent argued that “[u]nless the two rules coincide, 
there is a risk that a conflict of laws rule will require the application of the substantive law of 
a Member State to a record when that Member State’s substantive law does not recognize the 
record.  Such a result would create uncertainty as to the outcome of a dispute in the Member 
State”152. Other stakeholders, however, clearly distinguish between the relevance of a record 
for conflict of laws purposes and for substantive law purposes and do not expect any fractions 
in  case  the  relevant  account  under  PRIMA  is  not  aligned  with  the  account  that  evidences 
property rights under the substantive law153.  

Therefore, as highlighted in the Report of the EPTF, this leads to legal uncertainty as to the 
applicable  law  to  book  entry  security  collateral:  “[…]  the  connecting  factor  of  Article  9(1) 
FCD is unclear and has not been interpreted uniformly across Member States. This can result 
in  legal  uncertainty  in  an  important  case,  commonly  encountered  in  post-trade  collateral 
arrangements:  where  a  financial  intermediary,  such  as  a  clearing  member  or  a  custodian 
providing settlement services, receives securities from its client into an account provided by 
the  intermediary.  Depending  on  the  jurisdiction,  the  question  of  the  identification  of  the 
relevant account can lead to different possible answers: (i) the accounts of the collateral taker 
on  the  intermediary’s  books;  (ii)  the  account  where  the  intermediary’s  entitlement  to  the 

149   Confidential response to the public consultation, Question 5. 
150   Confidential response to the public consultation, Question 5.  
151   See  the  Responses  of  Association  of  Global  Custodians,  BNY  Mellon,  City  of  London  Law  Society, 
Comptershare  Limited,  EuropeanIssuers,  German  Banking  Industry  Committee  -  Die  Deutsche 
Kreditwirtschaft,  Majadaking,  Federal  Government  of  Germany,  Ministry  of  Finance  and  Ministry  of 
Security and Justice of the Netherlands, Joanna Benjamin and Ferdisha Snagg to Question 10.  
152   See the Response of Association of Global Custodians - European Focus Committee to Question 10.  
153   See  the  Responses  of  AFTI,  AFME,  Association  Nationale  des  Sociétés  par  Actions,  Euroclear  SA/NV, 

French Banking Association, ISDA and Swedish Securities Dealers Association to Question 10. 

109 

 
 
                                                 
securities is recorded (such as the next intermediary in a custody chain or the CSD or another 
set of books) or (iii) the account of the collateral provider”154. 

6.3. Unclear how many laws apply in the holding chain under PRIMA 

The divergence of views as to whether there is only one single ‘relevant account’ or whether 
more  than  one  account  can  be  relevant  for  conflict  of  laws  purposes,  translates  into  the 
question  whether  there  is  a  single  legal  system  applicable  or  whether  more  governing  laws 
could apply to a given case.  

The responses to the T2S Survey provided by the National User Groups (Figure 6) show the 
heterogeneity of solutions adopted by Member States as to how many laws apply in a holding 
chain.  In  a  multi-tier  holding  structure  which  goes  across  different  Member  States  this 
translates  into  complexity  to  determine  which  of  the  several  accounts  in  a  tier  –  and  in 
consequence  which  of  the  several  applicable  laws  –  is  to  be  deemed  the  decisive  one  and 
which substantive law prevails in case there are inconsistent solutions as to the merits.  

Figure  6:  Conflicts  of  Laws  Issues  in  T2S  Markets  –  A  Fact  Finding  Exercise  by  T2S 
Harmonisation Steering Group, 10 November 2015, p. 7–8 

Question 2b: 

Whether  your  national  conflict  of  laws  rule(s)  designates  a  single  law  that  governs  all 
stages of a securities transfer from the buyer to the seller, or several laws applicable  at 
each level of the holding chain. 

Summary of Responses by T2S National User Groups: 

b) Single or several laws covering the holding chain 

• PT NUG:  Portuguese conflict of laws rules establishes that for securities issued in a CSD, 
the law applicable is law of the member state where the management of the CSD is located. 
For other securities registered and deposited but issued in a CSD, it is the law of the place of 
their initial issuance that will apply. 

• Three T2S NUGs (CH, DK, IT) responded that their rules allow the applicability of several 
conflict of laws rules across the holding chain. 

• NL NUG: when the Dutch law is the law applicable, it will cover the whole holding chain, as 
long as the accounts are held in Netherlands. 

• HU NUG: the law covering all stages of the securities transfer is that of the country of the 
stock exchange where the relevant securities are listed and traded. 

• SK NUG: The parties to the agreement whose subject matter is a financial instrument may 
chose the law governing the contractual relationship of the parties. There is no restriction on 

154   European  Post  Trade  Report,  15th  May  2017,  p.  76.  The  EPTF  Report  and  its  Annexes  are  available  at: 

https://ec.europa.eu/info/publications/170515-eptf-report_en,  

110 

 
 
                                                 
choice of law with respect to financial instruments. 

•  FR  NUG:  A  single  law  will  cover  the  entire  holding  chain,  and  this  is  the  law  of  the 
“relevant account”, as per the relevant EU Directives (FCD, SFD, WUD). 

•  DE  NUG:  A  single  law  will  cover  the  entire  transaction  between  a  seller  and  a  buyer  or 
between pledgor and a pledgee. 

In addition, the feedback received to the conflict of laws public consultation of 2017 proves 
uncertainty as to the operation of PRIMA in the Member States. Already the fact that almost 
half  of  the  stakeholders  have  not  responded  at  all  to  Question  5  of  the  Consultation 
Document155 (asking how do statutory rules, case law and/or legal doctrine in their jurisdiction 
answer the question which is the relevant ‘record’ for conflict of laws purposes) might suggest 
that  the  concept  of  the  relevant  record  itself  is  not  clear  in  its  application.  Some  responses 
expressly confirm that it is unclear156.  

Moreover, the other half of the stakeholders who provide a response present conflicting views 
as to how many relevant accounts there are, which is the relevant account and how many laws 
apply in the holding chain under the existing EU conflict of laws rules157.  

Most stakeholders are convinced that under PRIMA – as employed by the EU conflict of laws 
rules – all accounts are relevant in the sense that the applicable law is determined separately 
for each level of the chain of intermediaries158. Some of these respondents also note that the 
step-by-step  approach  does  not  amount  to  multiple  laws  being  applicable,  as  “a  collateral 
taker  takes  collateral  in  an  account  that  is  maintained  and  operated  in  one  given  legal 
system”,  so  e.g.  if  collateral  is  taken  in  an  account  in  France,  only  French  law  applies  and 
there  is  no  need  to  verify  whether  requirements  of  other  legal  systems  are  also  complied 
with159.  However,  the  same  stakeholders  acknowledge  that  “a  conflict  arises  where  an 
investor  from  an  intermediated  holding  system  invests  in  securities  issued  in  a  transparent 
holding  system.  In  that  case,  each  system  considers  the  account  in  its  own  system  to  be  the 
‘relevant  account’,  although  the  end  investor  can’t  provide  instructions  in  relation  to  the 
account opened at the CSD in the transparent system”160.  

Conversely, one  bank association is confident that its jurisdiction a step-by-step-approach is 
not  applied  and  that  under  its  conflict  of  laws  rule  it  is  the  account  of  the  end  investor  that 
determines the law applicable to the whole transaction, irrespectively of how many countries 

155   Out of 39 respondents to the public consultation 19 respondents (which amounts to 48,71%) have provided 

no answer to Question 5. 

156   See  response of Joanna  Benjamin  and Ferdisha Snagg  to  Question 5 and  response of Ministry of  Finance 

and Ministry of Security and Justice of the Netherlands to Question 6a.  

157   See responses to Question 5and 6 of the Consultation Document on the conflict of laws rules for third party 
effects  of  transactions  in  securities  and  claims:  https://ec.europa.eu/eusurvey/publication/securities-and-
claims-2017?surveylanguage=en 

158   See responses of AFTI, and French Banking Federation to Question 3 and 6a; Responses of Association of 
Global Custodians, BNY Mellon, Euroclear SA/NV to Question 5; Responses of Government of Finland to 
Question 6a.  

159   See responses of AFTI, and French Banking Federation to Question 5. 
160   See responses of AFTI, and French Banking Federation to Question 6a. 

111 

 
 
                                                 
are involved161. This view is, however, expressly rejected by another stakeholder from another 
jurisdiction  who  is  of  the  opinion  that  “predefining  one  single  applicable  law  in  the  chain 
would completely disregard the legal nature of the chain and we are unclear about how this 
could actually work in practice”162.  

Nevertheless,  there seems to  be wide agreement that if different substantive laws apply in a 
cross-border  holding  chain,  they  interact  smoothly.  This  view  is  shared  by  most 
stakeholders163.  However,  one  stakeholder  believes  that  “the  application  of  different 
substantial laws in one cross-border holding chain may create problems in practice especially 
in cases a ‘securities entitlement’ of ‘trust’ approach is applied”164. Another one noted in a 
similar vein that “there might be unsolved legal questions where the substantive laws involved 
are  based  on  different  principles  and  the  conflict  of  laws  rules  do  not  lead  to  a  single 
jurisdiction that is applied to all legal questions in respect of the ownership of securities held 
within that cross-border holding chain”165.  

Only three respondents provided concrete examples of practical problems created by different 
substantive  laws  being  applicable  in  one  cross-border  holding  chain:  1.  floating  charges  are 
hampered  from  operating  in  an  international  context166;  2.  security  interests  over  financial 
securities outside the scope of the FCD might be subject to different substantive laws which 
interact less smoothly167; 3. different laws might understand differently whether something is 
a claim or a thing168.  

Finally, one respondent noted that “[e]ven if we cannot consider specific situations in which 
the  different  substantive  laws  create  problems,  the  variety  of  substantive  laws  could  cause 
risks  and  costs  in  transactions.  Because  of  the  complexity  of  cross-border  holding  chains, 
different safeguards have to be established (‘Drei-Punkte-Erklärung’, general custody terms, 
legal opinions etc.)”169. 

6.4. Renvoi  

‘Renvoi’  is  a  legal  technique  where  a  jurisdiction’s  conflict  of  laws  rule  does  not  only 
designate  another  country’s  substantive  law  to  be  applicable,  but  also  the  other  country’s 
conflict of laws rules, which might refer back to the law of the original jurisdiction or point to 
another law. 

161   See response of German Banking Industry Committee – Die Deutsche Kreditwirtschaft to Question 5.  
162   Response of Euroclear SA/NV to Question 6.  
163   Responses of AFTI, Association for Financial Markets in Europe, City of London Law Society, Euroclear 

SA/NV and French Banking Federation to Question 6a. 

164   Response of EuropeanIssuers to Question 6a.  
165   Response of German Banking Industry Committee - Die Deutsche Kreditwirtschaft to Question 6b.  
166   Response of Professor Jan H. Dalhuisen to Question 6b.  
167   Response of French Banking Federation to Question 6b.  
168   Confidential response to the public consultation, Question 6b.  
169   Response of the Federal Government of Germany to Question 6b. 

112 

 
 
                                                 
Whereas the Financial Collateral Directive expressly excludes  renvoi (Sentence 2 of Article 
9.1  of  the  FCD170),  the  other  two  directives  do  not.  Thus,  it  is  important  to  check  whether 
Member  States  have  excluded  renvoi  in  their  implementing  legislation,  and  if  not,  whether 
renvoi is applied in practice.  

The responses to the T2S Survey provided by the National User Groups (Figure 7) show that 
“substantial variations exist across jurisdictions in terms of the recognition, or otherwise, by 
their national conflict of laws rules, of the possibility of renvoi (i.e. the incorporation, in the 
national conflict of laws rules, not only of the ordinary (internal) law of a foreign country but, 
also, of that foreign country’s conflict of laws rules)”171. 

Figure  7:  Conflicts  of  Laws  Issues  in  T2S  Markets  –  A  Fact  Finding  Exercise  by  T2S 
Harmonisation Steering Group, 10 November 2015, p. 8 

Question 2c: 

Whether and which of your national conflict of laws rule(s) expressly excludes, or allows 
the  possibility  of  renvoi  (i.e.  whether  a  designation  of  the  law  under  your  national 
conflict of laws rule includes a foreign conflict of laws rule). 

Summary of Responses by T2S National User Groups: 

c) “Renvoi” doctrine 

•  Six  T2S  NUGs  (PT,  CH,  DK,  NL,  IT,  SK)  responded  that  their  conflict  of  laws  rules 
expressly exclude renvoi (i.e. i.e. the incorporation, in the national conflict of laws rules, not 
only  of  the  ordinary  (internal)  law  of  a  foreign  country  but,  also,  of  that  foreign  country’s 
conflict of laws rules), while another two T2S NUGs (DE, CH) responded that their conflict of 
laws rules are deemed to exclude, by way of interpretation, the possibility of renvoi. 

• Three T2S NUGs (FR, RO, BE) reported that their national conflict of laws rules are deemed 
to allow, by way of interpretation, the possibility of renvoi. 

• LU NUG: If an agreement between the parties is governed by a law other than the law of 
Luxembourg, and this law allows for renvoi, the law of Luxembourg will allow it. 

• One non-T2S NUG (UK) responded that if an agreement between the parties to a securities 
transaction is governed by a law other than the laws of the UK, and this law allows for renvoi, 
the laws of the UK law will allow it. 

170   Sentence 2 of Article 9.1 of the FCD reads as follows: "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".  

171   Conflicts of Laws Issues in T2S Markets – A Fact Finding Exercise by T2S Harmonisation Steering Group 
https://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/mtg29/item_4_20151116.pdf?7d32b%208e9f88a6823f
fd9dd%2061650d3de3, p. 3. 

113 

 
 
                                                 
The  T2S  Fact  Finding  Exercise  concludes  that  “[t]hese  variations  inevitably  add  to  legal 
uncertainty  (in  terms  of  the  possible  application  of  unforeseen  application  of  foreign 
legislation in connection with transactions over intermediated securities), despite the fact that 
Articles  8  and  9  of  the  SFD  are  deemed  (be  it  only  by  way  of  interpretation),  to  exclude 
renvoi”172.  The  EPTF  Report  also  refers  to  the  renvoi  problem  when  it  highlights  the 
uncertainty as to the legal soundness of risk mitigation techniques used by intermediaries and 
of CCPs’ default management procedures (EPTF Barrier 8)173. 

6.5. Fragmented legal framework  

The conflict of laws rules of the Directives have a restricted scope of application and do not 
cover all transactions or all  counterparties which results in a fragmented legal framework at 
national  level.  The  three  EU  conflict  of  laws  rules  also  vary  between  themselves  when  it 
comes to their material, personal, and geographical scope which adds to the inconsistencies.  

The following sections will present the respective scopes of the EU conflict of laws rules in 
turn and examine how Member States have implemented them, in particular analyse whether 
national  transpositions  differ  on  introducing  various  scopes  as  compared  with  the  scopes  of 
the EU rules. 

6.5.1. Material scope of the EU conflict of laws rules 

6.5.1.1. Directives 

The material scope of Article 9(2) of the SFD is limited to book-entry securities provided as 
collateral  in  connection  with  participation  in  a  designated  system  or  in  connection  with 
operations of central banks. Given that the notion of ‘securities’ under the SFD refers to the 
list of ‘financial instruments’ annexed to the Markets in Financial Instruments Directive II174, 
Article  9(2)  of  the  SFD  covers  all  MiFID  II  financial  instruments  which  are  provided  as 
collateral  in  connection  with  participation  in  a  settlement  system  or  in  connection  with 
operations of central banks. 

The material scope of Article 9 of the FCD covers book-entry securities that are provided as 
collateral, also outside designated systems, but the notion of ‘book-entry securities collateral’ 
under the FCD is based on a self-standing definition of ‘financial instruments’175 which covers 
a different (more restricted) range of assets than the SFD.  

The material scope of Article 24 of the WUD is not limited to collateral only, but covers all 
proprietary rights in financial instruments as defined by MiFID II176. However, it covers only 
one narrow aspect, namely the effects of reorganisation measures and winding-up proceedings 

172   Ibid.. 
173   See  European  Post  Trade  Report,  15th  May  2017,  The  EPTF  Report  and  its  Annexes  are  available  at: 

https://ec.europa.eu/info/publications/170515-eptf-report_en, p. 76, footnote 100.  

174   Article 9(2) in conjunction with point (h) of Article 2 of the SFD. This dynamic reference has to be read as 
reference to section C of Annex I to Directive 2014/65/EU on markets in financial instruments (‘MiFID II’). 

175   Points (e) and (g) of Article 2(1) of the FCD.   
176   Article 24 in conjunction with indent 11 of Article 2 of the WUD. This dynamic reference has to be read as 

reference to section C of Annex I to MiFID II. 

114 

 
 
                                                 
of a credit institution or an investment firm on the enforcement of third parties’ property rights 
in financial instruments.  

6.5.1.2. Transpositions 

First,  the  responses  (Figure  8)  reveal  that  most  Member  States  have  transposed  the  material 
scope of the three conflict of laws rules exactly as stated by the relevant directive. Only few 
Member States have taken the opportunity to extend the material scope of the rules to cover 
more transactions. Therefore, in most Member States a fragmented system of conflict of laws 
rules exists at national level: (1) provisions of EU origin which implement Article 9(2) of the 
SFD, Article 9 of the FCD and Article 24 of the WUD, and (2) purely national conflict of laws 
rules for transactions falling outside the implementing provisions177. 

Figure  8:  Summery  of  Responses  to  Questionnaire  developed  by  the  Commission  services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

Questions 13a, 19a and 26a: 

Is the material scope of your national conflict of laws rule exactly the same as set out in 
Article 9(2) of SFD, Article 9 of FCD and Article 24 of WUD? 

Summary of Member States Responses: 

Exactly as stated by the relevant 
directive 

Other 

SFD  AT, BG, CZ, EL, IE, LV, LT, NL, PT, 

Extended: BE, EE, FI, FR, DE 

RO, SK, SI, UK 

FCD  BE, BG, CZ, EE, EL, IE, LT, NL, PT, 

Extended:  AT, FI, FR, DE 

RO, SK, SI, UK 

WUD  AT, BE, BG, CZ, EE, FI, FR, IE, LV, 
LT, NL, PT, RO, SK, SI, UK 

– 

Second,  given  that  the  notion  of  ‘book-entry  securities’  is  legally  defined  the  acquis  as 
meaning  “financial  instruments,  the  title  to  which  is  evidenced  by  entries  in  a  register  or 
account maintained by or on behalf of an intermediary”178, the material scope of EU conflict 
of  laws  rules  effectively  depends  upon  which  assets  which  are  being  credited  to  securities 

177   This  does  not  intend  to  suggest  that  there  are  statutory  conflict  of  laws  rules  in  all  those  Member  States. 
However,  even  if  there  are  no  statutory  provisions  in  a  given  Member  States  for  transactions  other  than 
those being covered by national implementations of EU conflict of laws rules, but there is a case before that 
Member State’s court, the judge will need to develop the conflict of laws rule to be able to give the ruling. In 
that sense, there is no such thing as no national conflict of laws rules in a Member State. 

178   Point (ii) of Article 2(9) of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 

May 2015 on insolvency proceedings (recast).  

115 

 
 
                                                 
 
 
 
accounts  in  market  practice.  Thus,  it  is  useful  to  examine  which  financial  instruments  are 
being credited by intermediaries to securities accounts in which jurisdictions.   

The  feedback  to  the  Commission  Questionnaires  (Figure  9)  reveals  that  there  is  a  notable 
divergence  between  Member  States  concerning  the  issue  which  assets  can  be  credited  to 
securities accounts. By way of example, in some Member States certain derivatives contracts 
are  credited  to  ‘securities  accounts’,  in  others  they  are  rather  being  evidenced  as  ‘other 
records’, e.g. in ‘derivatives accounts’.  

Figure 9: Summery of Responses to Questionnaires developed by the Commission services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), to T2S National User Groups via the ECB and to the European Post-
Trade Forum 

Question:  

Which  financial  instruments  of  those  listed  in  Section  C  of  Annex  1  Directive 
2004/39/EC  (MiFID  I)  are  being  credited  by  investment  firms  located  in  your 
jurisdiction to  a 'securities account' and, if applicable, to other accounts as defined by 
your national laws? 

Summary of Responses: 

Black: Responses received from Member States via the EGESC  
Red: Responses received from T2S National User Groups  
Green: Responses received from AGC via EPTF 
Blue: Responses received from ECSDA via EPTF 

Section C of Annex 1 MiFID I 

Securities account  

Other account  

(e.g. derivatives 
account) 

1. 

Transferable securities 
as defined by Article 4(1) point 18: 

(a) shares in companies and other securities 
equivalent to shares in companies, partnerships 
or other entities, and depositary receipts in 
respect of shares; 

(b) bonds or other forms of securitised debt, 
including depositary receipts in respect of such 
securities; 

(c) any other securities giving the right to 
acquire or sell any such transferable securities 
or giving rise to a cash settlement determined 
by reference to transferable securities, 
currencies, interest rates or yields, commodities 
or other indices or measures; 

IE 

EE 

EE 

EE 

AT, FR, DE, DE, EL, EL, 
IE, IE, LT, NL, NL, RO, 
IT, IT, HU, HU, CY, MT 
AT, BG, EE, FI, FI, FR, 
DE, DE, EL, EL, IE, LV, 
LT, NL, NL, PT, PT, RO, 
SK, SK, SI, SI, UK, DK, 
DK, IT, IT, HU, HU, PL, 
PL, CY, MT  
AT, BG, EE, FI, FI,FR, 
DE, DE, EL, EL, IE, LV, 
LT, NL, NL, PT, PT, RO, 
SK, SK, SI, SI, UK, DK, 
DK, IT, IT, HU, HU, PL, 
PL, CY, MT  
AT, BG, EE, FI, FI,FR, 
DE, DE, EL, EL, IE, LV, 
LT, NL, NL, PT, PT, RO, 
SK, SK, SI, SI, UK, DK, 
DK, IT, IT, HU, HU, PL, 
PL, CY, MT 

116 

 
 
 
 
 
 
 
 
AT, EE, FI, FI, FR, DE, 
DE, IE, IE, LV, LT, NL, 
NL, PT, PT, SK, SK, SI, 
SI, UK, DK, DK, IT, IT, 
PL, PL, CY, EL, MT 
AT, BG, EE, FI, FI, FR, 
DE, EL, EL, IE, IE, LV, 
LT, NL, NL, PT, PT, DE, 
UK, DK, DK,  IT, IT, 
HU, HU,  PL, PL, CY, , 
MT, SI 
AT, FI, FI, DE, DE, IE, 
IE, LV, LT, PT, PT, SI, 
UK, DK, DK, CY, EL, 
MT 

EE, RO, DE, IE, HU, PL 

EE, RO, SK, DE, IE, UK, 
PL 

NL, RO, SK, HU, PL 

AT, FI, FI, DE, IE, LV, 
LT, PT, PT, SI, UK, CY, 
DK, EL, MT 

NL, RO, SK, HU, PL 

AT, FI, FI, DE, IE, IE, 
LV, LT, PT, PT, SI, UK, 
CY, DK, EL, MT 

AT, FI, FI, DE, IE, IE, 
LV, LT, PT, PT,SI, UK, 
CY, DK, EL, MT 

NL, RO, SK, HU, PL 

NL, RO, SK, HU, PL 

AT, FI, FI, FR, DE, IE, 
IE, LV, LT, PT, PT, SI, 
UK, CY, DK, EL, MT 
AT, FI, FI, IE, IE, LV, 
LT, PT, PT, SI, UK, DK, 
CY, DK, EL, MT 
AT, FI, FI, DE, IE, IE, 
LV, LT, PT, PT, SI, UK, 
CY, DK, EL, MT 

NL, RO, SK, HU, PL 

NL, RO, SK, HU, PL 

NL, RO, SK, HU, PL 

2.  

Money-market instruments 

3. 

4. 

5. 

6. 

7. 

8.  

9. 

Units in collective investment undertakings 

Options, futures, swaps, forward rate 
agreements and any other derivative contracts 
relating to securities, currencies, interest rates 
or yields, emission allowances or other 
derivatives instruments, financial indices or 
financial measures which may be settled 
physically or in cash 

Options, futures, swaps, forwards and any other 
derivative contracts relating to commodities 
that must be settled in cash or may be settled in 
cash at the option of one of the parties 
(otherwise than by reason of a default or other 
termination event) 

Options, futures, swaps, and any other 
derivative contract relating to commodities that 
can be physically settled provided that they are 
traded on a regulated market and/or an MTF 

Options, futures, swaps, forwards and any other 
derivative contracts relating to commodities, 
that can be physically settled not otherwise 
mentioned in C.6 and not being for commercial 
purposes, which have the characteristics of 
other derivative financial instruments, having 
regard to whether, inter alia, they are cleared 
and settled through recognised clearing houses 
or are subject to regular margin calls 

Derivative instruments for the transfer of credit 
risk 

Financial contracts for differences 

10.  Options, futures, swaps, forward rate 

agreements and any other derivative contracts 
relating to climatic variables, freight rates, 
emission allowances or inflation rates or other 
official economic statistics that must be settled 
in cash or may be settled in cash at the option 
of one of the parties (otherwise than by reason 
of a default or other termination event), as well 
as any other derivative contracts relating to 
assets, rights, obligations, indices and 
measures not otherwise mentioned in this 
Section, which have the characteristics of other 

117 

 
 
derivative financial instruments, having regard 
to whether, inter alia, they are traded on a 
regulated market or an MTF, are cleared and 
settled through recognised clearing houses or 
are subject to regular margin calls 

This  translates  into  a  situation  where  the  same  financial  instrument  might  be  assessed 
differently across the EU for conflict of law purposes. For example, if a court in Member State 
A in which an exchange-traded derivatives are credited to securities accounts has to determine 
the law applicable to third party effects of a transaction, this court will most likely classify this 
asset  a  book-entry  security  and  thus  determine  the  applicable  law  based  on  the  national 
transposition of the EU conflict of laws rule. However, a court in Member State B where such 
derivatives are not being credited to securities accounts may consider the very same asset as 
being outside the scope of the EU conflict of laws rules and thus determine the law applicable 
based on purely national conflict of laws rules which might lead to diverging outcomes.  

As observed by one respondent to the conflict of laws public consultation of 2017,  “[g]iven 
the possible differences among national laws in terms of defining the kinds of instruments that 
may be credited to securities accounts and under what circumstances they may be so credited, 
it is important to have uniform coverage in the conflicts rule”179. 

6.5.2. Personal scope  

6.5.2.1. Directives 

The personal scope of each of the three EU conflict of laws rules is also different.  

The  personal  scope  of  Article  9(2)  of  the  SFD  is  limited  to  collateral  security  provided  to 
participants or operators of designated systems or central banks of the EEA States or the ECB.  

The personal scope of Article 9 of the FCD is limited to the collateral taker belonging to one 
of  the  specified  categories  of  public  bodies  or  financial  institutions180  and  the  collateral 
provider  either  belonging  to  one  of  these  categories  or  being  a  non-financial  firm,  if  the 
Member State has not excluded such firms from the scope of the FCD181. 

The  personal  scope  of  Article  24  of  the  WUD  is  not  restricted  at  all  (otherwise  than  that  it 
applies only in insolvency or reorganisations proceedings of credit institutions or investment 
firms which is rather a restriction rationae materiae). 

6.5.2.2. Transpositions 

179   Response of Association of Global Custodians - European Focus Committee to Question 4. 
180   Article  1(2)  of  the  FCSD  reads  as  follows:  "The  collateral  taker  and  the  collateral  provider  must  each 
belong  to  one  of  the  following  categories:  (a)  a  public  authority  […],  (b)  a  central  bank,  the  European 
central Bank, the Bank for International Settlement, a multilateral development bank […[, the International 
Monetary  Fund  and  the  European  Investment  Bank;  (c)  a  financial  institution  subject  to  financial 
supervision […], (d) a central counterparty, settlement agent or clearing house […], (e) a person other than 
a  natural  person,  including  unincorporated  firms  and  partnerships,  provided  that  the  other  party  is  an 
institution as defined in points (a) to (d)".  

181   Article  1(3)  of  the  FCSD  reads  as  follows:  "Member  States  may  exclude  from  the  scope  of  this  Directive 

financial collateral arrangements where one of the parties is a person mentioned in paragraph 2(e). […]".  

118 

 
 
                                                 
As  the  responses  (Figure  10)  reveal,  most  Member  States  have  not  extended  the  personal 
scope  of  the  EU  conflict  of  laws  rules.  Only  few  national  transpositions  cover  more 
counterparties than the conflict of laws rules set out in the directives. Thus, in most Member 
States  other  counterparties,  i.e.  private  investors  and  consumers,  as  well  as  sometimes  non-
financial firms (in those Member States which have made use of the option in Article 1(3) of 
the FCD) are also outside the scope and covered by national conflict of laws regimes.  

Figure 10: Summery of Responses to Questionnaire developed by the Commission services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

Questions 13a, 19a and 26a: 

Is the personal scope of your national conflict of laws rule exactly the same as set out in 
Article 9(2) of SFD and Article 9 of FCD? 

Summary of Member States Responses: 

Exactly as stated by the relevant directive 

Other 

SFD  AT,  BE,  BG,  CZ,  EL,  IE,  LV,  LT,  NL,  PT, 

Extended:  DE, EE, FI, FR 

RO, SK, SI, UK 

FCD  BE,  BG,  CZ,  EE,  FR,  EL,  IE,  LV,  LT,  NL, 

Extended: AT, DE, FI, UK 

PT, RO, SK, SI 

6.5.3. Geographical scope  

6.5.3.1. Directives  

The geographical scope of the EU conflict of laws rules varies.  

The widest scope has Article 9 of the FCD which might designate as applicable law the law of 
any country in the world (so-called ‘universal scope’). This is because the wording of Article 
9(1) refers to “the law of the country in which the relevant account is maintained”. Therefore, 
any law specified by the place of the relevant account is applicable whether or not it is the law 
of a Member State. 

In contrast, Article 9(2) of the SFD and Article 24 of the WUD rules refer to an account being 
located in ‘Member States’ only. Thus, situations where the account is located in a third state 
fall outside the geographical scope of both EU conflict of laws rules. Nevertheless, it should 
be  born  in  mind  that  both  directives  have  been  incorporated  into  the  EEA  Agreement  by 
respective decisions of the EEA Joint Committee amending Annex IX (Financial services)182. 

182   Settlement  Finality  Directive  98/26/EC  was  incorporated  by  Decision  of  the  EEA  Joint  Committee  No 
53/1999  of  30  April  1999  amending  Annex  IX  (financial  services)  to  the  EEA  Agreement;  Winding-up 

119 

 
 
 
 
 
                                                 
 
Thus,  any  reference to  ‘Member  States’  in  those  directives  incorporates  not  only  the  28  EU 
Member  States  but  also  the  EEA  States  Iceland,  Norway  and  Liechtenstein183.  Therefore, 
Article  9(2)  of  the  SFD  and  Article  24  of  the  WUD  can  only  designate  the  law  of  an  EEA 
State  as  applicable  law.  Hence,  situations  involving  account  holdings  in  third  countries  are 
outside  the  scope  of  both  EU  conflict  of  laws  rules  and  thus  fall  under  domestic  conflict  of 
laws rules of Member States. 

6.5.3.2. Transpositions 

The  responses  (Figure  11)  reveal  that  the  transposition  of  the  geographic  scope  of  the  EU 
conflict  of  laws  rules  has  provided  some  difficulties.  Although  most  national  transpositions 
have either the same or a wider geographical scope than the EU conflict of laws rules in the 
directives,  some  Member  States  seem  to  have  restricted  the  geographical  scope  of  their 
national implementing provisions. 

Based on the responses provided by Member States to the Questionnaire, it appears that  

 

two Member States have transposed Article 9(2) of the SFD (which applies to all EEA 
States) by restricting its application to situations  

o  where  the account, register or centralised deposit system is located in the EU 

Member States (Belgium) or  

o  when  collateral  security  is  provided  to  participants,  system  operators  or  to 

central banks of the EU Member States or the ECB (Czech Republic); 

 

 

three Member States have transposed Article 9 of the FCD (which has universal scope 
of application)  by restricting  its application to  EEA States  only  (Bulgaria, Lithuania, 
Romania) and two more Member States have implemented it unilaterally by restricting 
its scope only to situations where  

o 
o 

the account is located in the territory of the respective Member State (Latvia),  
the  securities  are  registered  in  the  CSD  of  the  respective  Member  State 
(Slovakia); 

four Member States have transposed Article 24 of the WUD (which applies to all EEA 
States)  by  restricting  its  application  to  situations  where  “the  register,  account,  or 
centralised deposit system in which those rights are recorded is held or located” in an 
EU Member State (Ireland, Latvia, Portugal, Slovenia).  

Figure 11: Summery of Responses to Questionnaire developed by the Commission services 
and  addressed  to  Member  States  via  the  Expert  Group  of  the  European  Securities 
Committee (EGESC), 31 January 2017 

Questions 13b, 19b and 26b: 

Directive  2002/24/EC  was  incorporated  by  Decision  of  the  EEA  Joint  Committee  No  167/2002  of  6 
December 2002 amending Annex IX (financial services) to the EEA Agreement. 

183   In  its  judgement  of  24  October  2013  in  Case  C-85/12  (LBI  hf,  formerly  Landsbanki  Islands  hf  v  Kepler 
Capital Markets SA and Frédéric Giraux), the Court of Justice of the European Union confirmed that States 
party to the Agreement on the European Economic Area are treated under the Winding-up Directive in the 
same way as Member States of the EU. 

120 

 
 
                                                                                                                                                         
Is  the  geographical  scope  of  your  national  conflict  of  laws  rules  implementing  Article 
9(2) of SFD, Article 9 of FCD, and Articles 24 and 31 of WUD universal or is it limited 
to the law of EEA-States only? 

SFD 

FCD 

Summary of Member States Responses: 

Universal 

EEA-States 

Other 

EE, FI, DE, LV, NL, 
SL 

AT, BG, FR, EL, IE, 
LT, PT, RO, SK, UK 

EU Member States: 
BE, CZ 

AT, BE, CZ, EE, FI, 
FR, DE, EL, IE, PT, 
SI, UK 

BG, LT, RO 

Unilateral: 
LV, SK 

WUD 

AT, CZ, EE, SK, SI 

BE, BG, FI, FR, LT, 
NL, RO, UK 

EU Member States: 
IE, LV, PT, SI 

6.5.4. Unexpected results and "knock-ons" 

The  above  overview  confirms  that  the  scope  of  EU  conflict  of  laws  rules  effectively  varies 
across  the  Union  depending  on  national  transposition,  legal  and  regulatory  requirements  as 
well as market practice in a given Member State. When it comes to the non-harmonised area, 
few  Member  States  have  extended  the  scope  of  their  national  transpositions.  Therefore,  the 
framework  of  most  Member  States’  conflict  of  laws  rules  is  composed  of  (i)  a  harmonised 
area  implementing  the  Financial  Collateral  Directive,  the  Settlement  Finality  Directive  and 
the Winding-up Directive; and (ii) a non-harmonised area, outside the scope of EU law.  

The feedback received to the public consultation on the conflict of laws rules does not allow 
assessing  the  concrete  impact  of  this  fragmented  legal  framework  on  the  actual  situation  of 
market  players.  Most  stakeholders  do  not  see  difficulties  due  to  the  dispersal  of  conflict  of 
laws rules in EU directives and national laws184.  

Those respondents who acknowledge problems due to the fragmented legal framework, point 
to the need of more sophisticated legal due diligence and more costs185. As explained by one 
stakeholder, “[i]t is often uneconomic or impractical for transacting parties to comply with 
the  substantive  laws  of  multiple  States.  Yet,  compliance  may  be  prudent  because of  the  risk 
that a dispute in one forum would lead to the application, under the forum State’s conflict of 
law rules, of a substantive law different from the substantive law determined if a dispute were 
in a forum in another State after applying the other State’s conflict of laws rules. However, it 
is often difficult to identify all of the States in which a dispute is likely to occur, let alone to 

184   See the responses of AFTI, Association Nationale des Sociétés par Actions, City of London Law Society, 
Euroclear SA/NV, European Central Securities Depositories Association, EuropeanIssuers to Question 7 of 
the Consultation Document on the conflict of laws rules for third party effects of transactions in securities 
and claims: https://ec.europa.eu/eusurvey/publication/securities-and-claims-2017?surveylanguage=en 

185   See the response of Joanna Benjamin and Ferdisha Snagg to Question 7.  

121 

 
 
 
 
 
                                                 
determine  the  conflict  of  laws  rules  of  a  forum  in  each  of  the  States  and  the  resulting 
applicable substantive law that would be applied by the forum”186.  

Discussions with the members of the Expert Group on conflict of laws regarding claims and 
securities have further manifested legal uncertainty resulting from the fragmented conflict of 
laws  frameworks  which  exists  in  most  Member  States187.  Some  of  the  experts  argued  that 
particularly  for  property  rights  fragmentation  of  conflict  of  laws  rules  is  flawed  by  nature. 
This is because any competing rights which have erga omnes effects need to be assessed on 
the basis of a single substantive law only. If, on the contrary, the law applicable to  property 
rights in one and the same asset is determined on the basis of different conflict of laws rules 
within  one  jurisdiction  depending  on  the  scope  of  such  rules,  conflicting  results  are  to  be 
expected. For example, if priority disputes arise between collateral takers covered by different 
conflict  of  laws  rules  entailed  in  different  legal  instruments,  different  substantive  laws  can 
become applicable and if they provide for diverging solutions, the priority conflict will remain 
unsolved.  

Section 7 Answers to the evaluation questions 

Question 1: How effective has the EU intervention been? 

7.1. Article 9(2) of the SFD 

To  what  extent  has  the  objective  of  the  Settlement  Finality  Directive  to  reduce  the  risk 
associated with participation in securities settlement systems and to contribute to the efficient 
and cost effective operation of cross-border payment and securities settlement arrangements, 
and in particular the objective of Article 9(2) of the SFD to ensure that if the collateral taker 
has a valid and effective collateral security as determined under the law of the Member State 
where the relevant register, account or centralized deposit system is located, then the validity 
and enforceability of that collateral security should be determined solely under the law of that 
Member State been achieved and what factors influenced the achievements observed? 

The evaluation report of the Settlement Finality Directive of 2005 (hereafter ‘SFD evaluation 
report’)  found that  “[t]he SFD is  functioning  well.  Member  States  are overall  satisfied with 
it”188. However, there no explicit assessment of Article 9(2) of the SFD has been done by the 
Commission in this SFD evaluation report189.  

186   Response of Association of Global Custodians - European Focus Committee to Question 7. 
187   See minutes of the second meeting of the Expert Group on Conflict of Laws on Securities and Claims, 

Brussels 15-16.5.2017, Ares(2017)3159733, 
http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=33452&no=2, p. 
2–3. 

188   Report  from  the  Commission.  Evaluation  report  on  the  Settlement  Finality  Directive  98/26/EC  (EU  25), 

COM(2005)675 final/2, p. 9.  

189   In terms of conflict of laws, there are only the two following statements to be found in the SFD evaluation 

report:  
P. 9: “Article 8 applies the law of a system to “[…] the rights and obligations arising from, or in connection 
with, participation in that system”, in the insolvency of a participant. Clarity is suggested as to a possible 
collision of insolvency laws, where the law of system is different from the law of the Member State where the 
system is located”; 

122 

 
 
                                                 
 
 
First,  with  regard  to  security  collateral  provided  in  connection  with  participation  in  a 
designated  system,  the  conflict  of  laws  public  consultation  of  2017  provided  a  positive 
feedback on the effectiveness of Article 9(2) of the SFD from CSDs who operate designated 
systems  and  thus  have  the  inside  to  assess  the  functioning  of  this  conflict  of  laws  rule  in 
practice.  The  European  Central  Securities  Depositories  Association  (ECSDA)  found  that 
“[t]he  rules  have  proved  to  function  well  for  the  CSDs  in  the  past  and  do  not  require  a 
change”190. By the same token, one of the two ISCDs explained the following: “In spite of the 
cross-border dimensions of their business, the Euroclear group entities have not experienced 
material problems or difficulties in this area. We believe the conflict of law rules related to in 
rem rights on securities held in EU CSDs are clear and the European legislation in this area 
is already quite complete as regards CSDs and their legal environment”191. 

The  T2S  Survey  has  also  failed  to  reveal  concrete  cases  of  conflict  of  laws  issues  in  cross-
border settlement. This might indicate that Article 9(2) of the SFD is working effectively in 
practice.  However,  the  T2S  Fact  Finding  Exercise  concludes  that  “the  paucity  of  concrete 
cases  of  conflict  of  laws  concerns  arising  […]  in  the  context  of  […]  transactions  over 
securities  held  in  a  T2S-participating  CSD  is  likelier  to  be  attributable  to  a  lack  of  legal 
certainty surrounding cross-border trades, which discourage their execution, than it is to be 
the  consequence  (or  an  indication)  of  a  genuine  lack  of  issues  to  be  addressed  through 
legislative or another form of top-down intervention”192.  

Second,  with  regard  to  security  collateral  provided  in  connection  with  central  bank 
transactions,  neither  of  the  sources  collected  for  this  evaluation  supplied  any  proximate 
evidence on the effectiveness of Article 9(2) of the SFD. Nevertheless, in its response to the 
CMU public consultation of 2015  the European Central  Bank voiced the following opinion: 
“As  the  ECB  has  stated  on  earlier  occasions,  a  single  conflict  of  laws  rule  for  financial 
instrument  holdings  is  required.  In  cross-border  collateral  transactions  it  is  of  vital 
importance  to  ensure  that  there  is  legal  certainty  with  regard  to  the  law  that  governs  the 
validity  of  the  collateral  and  the  rights  flowing  therefrom.  Currently,  the  place  of  relevant 
intermediary  approach  (PRIMA)  is  the  rule  applied  in  the  FCD  and  SFD.  However,  this 
approach only covers certain aspects and a single conflict of laws rule would be welcomed. 
Thus, the introduction of a clarified connecting factor would be desirable to increase the legal 
certainty”193. Thus, one could derive from this ECB response that the current limited scope of 
Article 9(2) of the SFD is not beneficial for legal enforceability of central bank collateral.  

Third, as evidenced by Section 6 of this evaluation, the positive achievements of Article 9(2) 
of the SFD are diminished by at least the following factors:  

P. 11: “The Commission may propose legal instruments to increase the efficiency and safety of clearing and 
settlement services during 2006. Moreover, the outcome of the discussion of the proposal for the Community 
to sign the Hague Securities Convention may also have to be taken into account”.  

190   Response of ECSDA to Question 8.  
191   Response of Euroclear to Question 7.  
192   Conflicts of Laws Issues in T2S Markets - A Fact Finding Exercise by T2S Harmonisation Steering Group 
https://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/mtg29/item_4_20151116.pdf?7d32b%208e9f88a6823f
fd9dd%2061650d3de3, p. 3. 

193   See European Central Bank, Building a Capital Markets Union – Eurosystem contribution to the European 
at: 

Commission’s 
https://www.ecb.europa.eu/pub/pdf/other/150521_eurosystem_contribution_to_green_paper_-
_building_a_cmuen.pdf 

available 

Paper, 

Green 

24, 

p. 

123 

 
 
                                                                                                                                                         
 
1. the wording of the provision (“Where […] right […] 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”)  raises  a  number  of 
interpretative  questions,  i.e.  where  the  account  is  located  (see  Point  6.1.),  whether  it  is  the 
“register,  account  or  centralised  deposit  system”  that  is  relevant  for  determining  the 
applicable law (see Point 6.2.) and how many laws might apply to one case (see Point 6.3.); 

2. the provision of the directive does not expressly exclude renvoi (see Point 6.4.); 

3.  the  geographical  scope  of  Article  9(2)  of  the  SFD  is  limited  to  EEA  States  only  and 
therefore conflict of laws issued related to collateral accounts maintained in third countries are 
not covered by EU law but left to national conflict of laws rules; there are also some Member 
States which have even further restricted the scope in their national transpositions (see Point 
6.5.). 

Thus,  although  Article  9(2)  of  the  SFD  has  greatly  enhanced  legal  certainty  as  compared  to 
the situation before its enactment when in all jurisdictions national conflict of laws rules were 
silent on book-entry security collateral, Article 9(2) has not completely eliminated legal risk in 
designated systems and central bank transactions. Due to the factors mentioned above as well 
as  the  diverging  transpositions  across  the  EU,  the  possibility  exists  that  courts  in  different 
Member  States,  if  addressed  with  the  very  same  case,  might  still  answer  differently  the 
question  which  is  the  law  applicable  to  collateral  security  provided  in  connection  with  a 
designated system or in EEA central bank transactions.  

Therefore,  the  objective  of  Article  9(2)  of  the  SFD  to  ensure  that  the  collateral  taker  has  a 
valid  and effective collateral  security  under  the law  determined  solely  by  the  law  where the 
relevant securities account is located may not be achieved in certain cases. Thus, the objective 
of  the  Settlement  Finality  Directive  to  reduce  the  risk  associated  with  participation  in 
securities settlement systems and to contribute to the efficient and cost effective operation of 
cross-border  payment  and  securities  settlement  arrangements  has  been  achieved  only  partly 
when  it  comes  to  conflict  of  laws  issues.  Thus,  the  examined  EU  intervention  in  shape  of 
Article 9(2) of the SFD has been effective only partly.  

7.2. Article 9 of the FCD 

To what extent has the objective of the Financial Collateral Directive to create legal certainty 
regarding the use of securities held in cross-border context, and in particular the objective of 
Article 9 of the FCD to ensure that if the collateral taker has a valid and effective collateral 
arrangement according to the governing law of the country in which the relevant account is 
maintained, then the validity against any competing title or interest and the enforceability of 
the  collateral  should  be  governed  solely  by  the  law  of  that  country,  thus  preventing  legal 
uncertainty  as  a  result  of  other  unforeseen  legislation  been  achieved  and  what  factors 
influenced the achievements observed? 

The evaluation report of the Financial Collateral Directive of 2006 (hereafter ‘FCD evaluation 
report’) found that “the FCD has made it easier to use financial collateral in the European 
financial  market  and  that  it  has  simplified  and  made  considerably  more  efficient  the 

124 

 
 
procedures  for  doing  so”194.  However,  the  FCD  evaluation  report  also  pointed  out  the 
weakness  of  Article  9  of  the  FCD  which  was  lacking  exact  criteria  for  determining  the 
relevant location of account195. The FCD evaluation report therefore concluded the following: 
“Conflicts-of-law regime: Amend Article 9 FCD (as well as Article 9 (2) SFD and Article 24 
Winding-up  Directive),  either  as  a  consequence  of  a  Council  Decision  to  sign  the  Hague 
Securities  Convention  or  (in  case  the  latter  would  not  occur)  in  order  to  specify  the  exact 
criteria for determining the location of account”196. This conclusion, however, has so far not 
been put into action.  

Section 6 of this evaluation has confirmed that different interpretations of the ‘place where the 
relevant  account  is  maintained’  under  Article  9  of  the  FCD  exist  and,  as  a  consequence, 
different transpositions across the EU cause problems of legal certainty (see Point 6.1.). This 
evaluation has also revealed the following other factors that deteriorated the achievements of 
Article 9 of the FCD: 

1.  the  wording  of  the  provision  (“the  law  of  the  country  in  which  the  relevant  account  is 
maintained”)  and  the  definition  of    ‘relevant  account’  under  the  FCD  (“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”)  allow  for 
different  interpretations  of  the  issue  which  is  the  relevant  account  (see  Point  6.2.)  and  how 
many laws might apply to a case (see Point 6.3.); 

2. the fragmentation of the conflict of laws regime at national level causes risks which might 
negatively influence the application of the national transposition of Article 9 of the FCD itself; 
in  addition,  there  are  some  Member  States  which  have  restricted  the  scope  of  their  national 
transpositions (see Points 6.5. and 6.6.).  

Some respondents to the conflict of laws public consultation of 2017 stress that the Financial 
Collateral  Directive  “brought  a  leap  forward  in  legal  certainty  in  cross  border  collateral 
transactions” 197. However, they base their assessment rather on the positive effects achieved 
by  the  directive  on  substantive  law  harmonisation198.  When  it  comes  to  conflict  of  laws,  a 
respondent voiced the opinion that “for collateral arrangements entered into under the FCD, 
the  application  of  the  PRIMA  principle  may  not  always  be  entirely  clear  and,  for  other 
collateral arrangements, there may not be any express conflict of law rule (as is the case in 
France)”199. 

Although Article 9 of the FCD has enhanced legal certainty as to the law applicable to book-
entry securities collateral provided outside designated systems or central bank transactions as 

194   Report  from  the  Commission  to  the  Council  and  the  European  Parliament.  Evaluation  report  on  the 

Financial Collateral Arrangements Directive (2002/47/EC), COM(2006)833 final 

195   See FCD Evaluation Report, p. 11.   
196   FCD Evaluation Report, p. 12.   
197   Response of AFTI to Question 1. 
198  AFTI  elaborates  on  its  view  as  follows:  „Before  the  Financial  Collateral  Directive,  it  was  as  good  as 
impossible  to  take  financial  collateral  in  several  European  jurisdictions,  including  of  the  major  financial 
markets  of  the  EU.  Namely  by  removing  formal  requirements,  allowing  substitutions  and  permitting 
enforcement through close out netting, the FCD made it possible to take financial collateral throughout the 
European Union in any securities account maintained in any Member State”. 

199   Response of French Banking Federation to Question 1. 

125 

 
 
                                                 
compared to the situation before its enactment when no statutory conflict of laws rules existed 
in most Member States, it does not guarantee certainty about applicable law in all cases. As 
highlighted in the response to the CMU public consultation of 2015 by the Contact group on 
euro  securities  infrastructures  which  consists  of  representatives  of  members  of  the 
Eurosystem,  market  infrastructures  and  participants  active  in  the  field  of  collateral 
management,“[c]lear  and  consistent  rules  are  needed  across  account  providers  (and  in 
particular  intermediaries  in  collateral  chains)  as  to  which  law  applies  to  cross-border 
transfers of securities and the provision of collateral. A single conflict of laws rule would be 
beneficial in relation to the holding, acquisition and disposition of securities/collateral”200.  

To  sum  up,  the  objective  of  Article  9  of  the  FCD  to  ensure  that  the  validity  against  any 
competing right and the enforceability of book-entry securities collateral is being determined 
solely  by  the  law  designated  by  PRIMA  may  not  be  achieved  in  certain  cases.  Due  to  the 
factors mentioned above as well as the diverging transpositions across the EU, the possibility 
exists that courts in different Member States, if addressed with the very same case, will still 
answer differently the question which is the law applicable to book-entry securities collateral. 
Given that the collateral taker usually does not know in which Member State’s courts will the 
creditors  of  the  collateral  provider  try  to  reach  the  securities,  the  objective  of  the  Financial 
Collateral  Directive  to  create  legal  certainty  regarding  the  use  of  securities  held  in  cross-
border context has been achieved only partly due to potential conflict of laws issues. Thus, the 
examined EU intervention in shape of Article 9 of the FCD has been effective only partly.  

7.3. Article 24 of the WUD 

To what extent has the objective of the Winding Up Directive to safeguard the confidence of 
third-party  purchasers  in  the  content  of  the  registers  or  accounts  regarding  certain  assets 
entered  in  those  registers  or  accounts,  and  in  particular  the  objective  of  Article  24  of  the 
WUD  to  protect  the  property  rights  in  financial  instruments  against  the  potential  negative 
effects of reorganisation measures or insolvency proceedings opened according to the law of 
a  Member  State  which  is  different  from  the  law  of  the  Member  State  where  the  register, 
account or deposit system is held been achieved and what factors influenced the achievements 
observed? 

So far, the Winding Up Directive has not been subject to a specific evaluation report by the 
Commission. Nevertheless, the FCD evaluation report mentioned Article 24 of the WUD as a 
provision  to  be  amended  in  future  “to  improve  the  situation  within  the  Community  by 
specifying  the  exact  criteria  for  determining  the  relevant  location  of  account”201.  Thus,  the 
Commission  already  in  2006  implicitly  recognised  that  the  wording  of  the  provision  (“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 

200   See COGESI Contribution for CMU on collateral management services (CMS) in response to Question 27 
of the Commission’s Green paper on building a Capital Markets Union (“What measures could be taken to 
improve the cross-border flow of collateral? Should work be undertaken to improve the legal enforceability 
of 
at: 
https://www.ecb.europa.eu/paym/groups/pdf/cogesi/contribution_for_CMU_on_coll_mgmt_services.pdf?49
f0ca7dc9d354fed908d7dd2ef4f224 

close-out  netting  arrangements 

cross-border?”),  p.  3, 

collateral  and 

available 

201   FCD Evaluation Report, p. 11.   

126 

 
 
                                                 
rights are recorded is held or located”) raises interpretative questions, i.e. where the account 
is located (see Point 6.1.). 

The achievements of Article 24 of the WUD are further diminished by similar factors as those 
relating to the two other EU conflict of laws rules:  

1.  it  is  unclear  whether  it  is  the  “register,  account  or  centralised  deposit  system”  that  is 
relevant for determining the applicable law in a multi-tier account holding structure (see Point 
6.2.) and how many substantive laws might apply to one case (see Point 6.3.); 

2. the provision of the directive does not expressly exclude renvoi (see Point 6.4.); 

3.  the  material  scope  of  the  provision  might  be  interpreted  differently  across  jurisdictions, 
depending on which assets are credited to a securities account, and some Member States have 
restricted the geographical scope of Article 24 WUD in their national transpositions (see Point 
6.5.). 

It should, however, be also noted that, as compared to the two other EU conflict of laws rules, 
Article  24  of  the  WUD  fulfils  a  different  function.  Whereas  Article  9(2)  of  the  SFD  and 
Article 9 of the FCD are to be characterised as ‘general’ conflict of laws rules which designate 
the law governing the creation and effectiveness of property rights over financial instruments 
(i.e. they allow the counterparties to identify the applicable law under which they can validly 
create  and  acquire  proprietary  rights  that  can  be  enforced  if  the  collateral  provider  defaults 
pre-insolvency),  Article  24  of  the  WUD  is  a  pure  ‘insolvency  conflict  of  laws  rule’  which 
deals only with the effects of reorganisation measures and winding up proceedings (hereafter 
referred  to  commonly  as  ‘insolvency  proceedings’202)  upon  the  proprietary  rights.  In  other 
words, the aim of Article 24 WUD is to clarify that, in case of insolvency proceedings opened 
in respect of a credit institution or investment firm, the enforcement of proprietary rights over 
financial instruments located in another EEA State is governed by the law of this latter EEA 
State and not by the law of the resolution authorities or the insolvency court. So, for instance, 
if  there  is  a  stay  (or  moratorium),  this  is  subject  to  the  law  of  the  “register,  account  or 
centralised deposit system”, and not to the law of the home EEA State (as the general rules of 
Articles  3(2)  and  10(1)  of  the  WUD  provide).  Article  24  of  the  WUD,  however,  does  not 
establish  a  ‘general  conflict  of  laws  rule’  that  would  apply  also  outside  restructuring  or 
winding-up scenarios. 

This  difference  between  the  conflict  of  laws  rules  has  also  a  bearing  on  their  assessment. 
Parties  always  need  to  know  the  law  designated  by  the  ‘general  conflict  of  laws  rules’,  i.e. 
Article  9(2)  of  the  SFD  and  Article  9  of  the  FCD,  in  order  to  be  able  to  validly  create  the 
security collateral (i.e. to complete the steps specified by the applicable substantive law which 
are  necessary  to  render  a  collateral  arrangement  and  the  provision  of  collateral  effective 
against third parties). Thus, if parties cannot be absolutely sure about which is the substantive 
law they need to comply with, the risk to the transaction is essential. Article 24 of the WUD, 
however,  comes  into  play  rather  rarely,  namely  only  in  cases  where  the  credit  institution  or 

202   This is the concept used by the Settlement Finality Directive. See Point (j) of Article 2 of the SFD which 
defines ‘insolvency proceedings’ as „any collective measure provided for in the law of a Member State, or a 
third  country,  either  to  wind  up  the  participant  or  to  reorganise  it,  where  such  measure  involves  the 
suspending of, or imposing limitations on, transfers or payments”.  

127 

 
 
                                                 
investment  firm  enters  insolvency. Thus,  it could  be  argued  that  the  above  listed drawbacks 
weight in practice somewhat heavier in case of Article 9(2) of the SFD and Article 9 of the 
FCD  than  in  case  of  Article  24  of  the  WUD  which  is  applied  only  in  a  rather  extreme 
situation. 

If,  however,  such  an  insolvency  situation  arises,  then  it  becomes  essential  that  there  are  no 
doubts how to apply Article 24 of the WUD. If there are a number of interpretative questions 
in  an  insolvency  scenario,  then  the  objective  of  the  Winding  Up  Directive  to  safeguard  the 
confidence  of  third-party  purchasers  (e.g.  collateral  takers)  in  the  content  of  the  registers  or 
accounts  regarding  certain  assets  (e.g.  collateral  security)  entered  in  those  registers  or 
accounts might not be fully achieved. This is because the risk exists that collateral takers will 
retrospectively  learn  that  their  assets  are  deemed  to  be  located  in  another  jurisdiction  (other 
than  the  jurisdiction  they  have  relied  upon  when  they  created  the  collateral  security  and 
probably  other  than  the  insolvency  law).  If  the  enforcement  of  their  property  rights  has  to 
occur according to that unforeseen law, there may also be unforeseen consequences. 

Thus, although Article 24 of the WUD has greatly improved the protection of property rights 
in  financial  instruments  against  the  potential  negative  effects  of  foreign  insolvency 
proceedings as compared to the situation before its enactment, the Winding Up Directive has 
also  introduced  automatic  recognition  of  foreign  insolvency  proceedings  which  might  bear 
significant  legal  risks  for  collateral  takers  and  investors.  As  a  result,  the  examined  EU 
intervention in shape of Article 24 of the WUD has been only partly effective. 

Question 2: How efficient has the EU intervention been? 

To what extent have Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
been  cost-effective  for  market  participants  given  the  effects  they  have  achieved  to  provide 
legal certainty? 

There  is  only  a  very  limited  amount  of  quantitative  evidence  available  to  carry  out  the 
evaluation  of  the  efficiency  of  the  EU  intervention.  Neither  of  the  sources  used  for  the 
evaluation  listed  in  Section  5  provided  any  data  on  cost-savings  or  cost-burdens  for  market 
participants resulting from the operation of the EU conflict of laws rules. 

What seems clear is that this EU intervention has not caused any increase of costs for market 
participants. This is because any introduction of EU-wide conflict of laws rules – unlike some 
regulatory requirements – is not able to add per se compliance cost on financial industry, but it 
can  produce  only  costs  savings  for  those  market  participants  that  engage  in  cross-border 
dealings, if the EU intervention is effective in increasing legal certainty. It could be otherwise 
only  if  the  newly  introduced  EU  conflict  of  laws  rules  were  to  fundamentally  alter  existing 
and well-established domestic conflict of laws rules which was not the case when Article 9(2) 
of the SFD, Article 9 of the FCD and Article 24 of the WUD were adopted. The introduced 
EU  conflict  of  law  rules,  even  if  based  on  the  innovative  PRIMA  concept,  in  fact  merely 
rendered the lex rei sitae rule – traditionally applicable to property rights in tangible assets – 
more precise in case of book-entry securities.  

One indicator of costs-efficiency of the EU intervention could be the amount of fees related to 
specialised  legal  advice  required  to  determine  the  applicable  law  in  cross-border  cases.  It 
seems  clear  that  if  parties  need  to  seek  advice  of  a  specialised  lawyer  to  investigate  both 

128 

 
 
national  and  foreign  conflict  of  laws  rules  and  the  investigation  may  involve  several 
jurisdictions, the costs will be higher than if they had to investigate only one set of conflict of 
laws rules. However, neither the EPTF Report nor the conflict of laws public consultation of 
2017 provided any concrete data on the increased costs of such multiplied legal advice.  

Nevertheless,  the  EPTF  Report  attests  that  due  to  residual  legal  uncertainty  as  to  the 
applicable law to certain ownership aspects of dealings in securities (EPTF Barrier 11), “the 
cost  of  cross-border  transactions  is  raised,  because  investors  considering  a  potential 
transaction (and their intermediaries) find that due diligence is harder, the risk of litigation 
higher, and the search for certainty elusive. Therefore, the execution of cross-border security 
transactions often requires costly and extensive legal opinions”203.  

Some respondents to the conflict of laws public consultation of 2017 endorse this finding. For 
example, one respondent explains that “it is cumbersome and costly to have legal opinions in 
a cross-border  context. Usually a law firm only will produce  a legal  opinion regarding one 
national  law  (basic  assumption)  and  you  have  to  complement  that  opinion  with  one  or  two 
more  legal  opinion  depending  on  the  cross-border  situation.  There  is  a  clear  lack  of  legal 
certainty and stability regarding conflict of laws questions”204. Another stakeholder gives the 
following example of a conflict of laws opinion: “Assume that Customer, located in State A, 
maintains securities in an account at Bank, located in State B. Bank obtains a security right in 
the securities to secure obligations owed by Customer to Bank, and obtains priority for that 
security  right  by  complying  with  the  rules  of  State  B.  However,  Bank  does  not  know  if 
creditors of Customer will try to reach the securities by using judicial process in State A or 
whether  an  insolvency  administrator  in  State  A  will  recognize  Bank’s  security  right. 
Accordingly, Bank often will obtain a legal opinion from counsel in State A that the conflict of 
laws rules in State A would point to the laws of State B on priority. If the conflict of laws rule 
in Country A point to the law of State A or to some State other than State B, then Bank will 
need to consider obtaining priority for the security right under the laws of State A or the other 
applicable  State.  The  need  for  the  legal  opinion  would  be  significantly  reduced  if  it  were 
transparent that States A and B had the same conflicts of law rule that pointed to the same 
applicable law. In that case, whether a dispute is heard in a forum in State A or in State B, the 
law applied by the forum would be the same”205.  

Another  indicator  of  cost-efficiency  of  the  EU  intervention  could  be  the  foregone  gains 
resulting out of avoidance of cross-border activity by market participants who try to eliminate 
the  residual  legal  uncertainty.  As  evidenced  by  the  EPTF  Report206,  the  feedback  to  the 
conflict of laws public consultation of 2017207 and the T2S Fact Finding Exercise208, market 
participants  are  sometimes  disincentivised  from  developing  certain  cross-border  economic 
activity because of the legal risk. As explained by one stakeholder, “[i]f there is uncertainty 
regarding  which  laws  should  have  applied  when  taking  collateral  by  way  of  a  security 

203   EPTF Report, p. 97. 
204   Response of the Swedish Securities Dealers Association to Question 1.  
205   Response of Association of Global Custodians - European Focus Committee to Question 1, p. 2. 
206   EPTF Report, p. 98.  
207   Confidential responses to the public consultation, Question 1.  
208   Conflicts of Laws Issues in T2S Markets – A Fact Finding Exercise by T2S Harmonisation Steering Group 
https://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/mtg29/item_4_20151116.pdf?7d32b%208e9f88a6823f
fd9dd%2061650d3de3, p. 3. 

129 

 
 
                                                 
interest,  there  will  be  uncertainty  whether  the  security  taken  has  followed  the  correct 
procedures and laws, and thus whether such security is effective. This can affect the relevant 
parties’ ability to take, hold, transfer or otherwise dispose of the relevant assets or security if 
necessary to protect their commercial and contractual interests. […] If there is uncertainty in 
adopting these approaches, the parties may seek to restrict the scope of the transaction so as 
to  avoid  or  mitigate  those  uncertainties,  rather  than  carry  out  extensive  conflict  of  laws 
analysis”209. However, as observed by the EPTF Report, the level of such avoidance of cross-
border activity “is almost impossible to measure”210.  

It seems that the EU conflict of laws rules have been cost-effective for market participants to 
the  extent  allowed  by  the  form  of  the  legal  instrument  in  which  they  are  enshrined  (i.e. 
directive). Given the limitations of a directive with regard to unification of laws, the objective 
of the EU intervention has been achieved to a large extent at a low expense to all the parties 
involved.  However,  the  EU  intervention  could  be  more  efficient,  if  the  rules  were  less 
ambiguous, enshrined in the form of a regulation and uniformly applied across the EU. This 
would  result  in  cost  savings  related  to  specialised  legal  advice  as  it  would  be  no  longer 
necessary to identify all the Member States in which a dispute is likely to occur, to determine 
the  conflict  of  laws  rules  of  each  Member  State  in  which  judicial  proceedings  are  likely  to 
occur and to examine the substantive laws that would be applied by the different fora.  

Question 3: How relevant is the EU intervention? 

To what extent are Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
still  relevant  more  than  a  decade  after  they  had  been  introduced  and  in  light  of  current 
developments in the financial markets? 

The evaluated conflict of laws rules are still very relevant because legal certainty as to the law 
applicable to property rights over book-entry securities is more important than ever.  

First, this is because of the raise in cross-border securities transactions. As estimated recently 
by  an  academic,  „[c]ross-border  investment  and  collateralization  had,  of  course,  always 
existed. However, now the share of transactions with a cross-jurisdictional element rose to 40 
per cent or more”211.  

209   Response of Association for Financial Markets in Europe to Question 1.  
210   EPTF Report, p. 98. 
211   P.  Paech,  Securities,  intermediation  and  the  blockchain:  an  inevitable  choice  between  liquidity  and  legal 
certainty?, Unif. L. Rev., Vol. 21, 2016, p. 621, with the following elaboration in footnote 48: „Data shows 
that  between  5  per  cent  and  95  per  cent  of  investments  in  the  different  European  financial  centres  are 
allocated to cross-border securities; typically, in large financial centres like London, Frankfurt, and Paris, 
between  30  per  cent  and  70  per  cent  are  allocated  to  cross-border  holdings.  The  share  of  cross-border 
holdings is mirrored by a  correspondent percentage of cross-border trading activity. Data extracted from 
Oxera, ‘Monitoring Prices, Cost and Volumes of Trading and Post-Trading Services,’ Report prepared for 
the  European  Commission,  London  and  Brussels  (2011)  73.  Although  the  data  itself  relates  to  equity 
investments, the authors note, that they have found a positive correlation between equity and debt securities 
in respect of cross-border holdings). No data is available indicating the percentage of securities collateral 
provided across borders but, going by the aforementioned figures, a significant percentage may be assumed. 
It is probably justified, therefore, for ease of reference, to collapse these three elements into the figure of 40 
per cent of all holding, trading, and collateral operations by EU market participants in one way or another 
imply a cross-jurisdictional element”.  

130 

 
 
                                                 
Second, since the financial crisis, collateral in the form of book-entry securities has become 
vital to the financial system. One respondent to the public consultation of 2017 elaborated on 
the question of relevance of the EU conflict of laws rules as follows: “This issue is becoming 
increasingly  important.  Two  pillars  of  post  financial  crisis  regulatory  reform  have  been  the 
expansion of clearing and the imposition of mandatory margining requirements for uncleared 
transactions. The ability to take effective security is the foundation on which those pillars are 
built.  CCPs  are  "safe"  because  they  collateralise  their  exposures.  Uncleared  exposure 
margining  requires  effective  collateralisation.  As  well  as  giving  rise  to  a  risk  of  challenge, 
uncertainties  about  whether  collateralisation  or  assignments  are  effective  may  have  wide-
ranging consequences, as market participants rely on effective collateralisation in a variety of 
situations,  including  those  set  out  in  the  Additional  Information  filed  alongside  this 
response”212.  

With rising collateral scarcity, there is a growing demand to ensure that all eligible book-entry 
securities  are  made  available  to  be  used  as  collateral  to  all  its  counterparties,  regardless  of 
where  the  assets  or  the  counterparty  are  situated.  Therefore  it  is  increasingly  important  to 
guarantee  that  securities  collateral  provided  on  a  cross-border  basis  is  legally  safe  and 
available  to  be  enforced  when  the  counterparty  defaults.  Thus,  current  developments  in  the 
financial markets have only increased the relevance of Article 9(2) of the SFD, Article 9 of the 
FCD and Article 24 of the WUD. 

Question 4: How coherent is the EU intervention internally and with other EU actions? 

To what extent are the evaluated EU conflict of laws rules coherent internally as well as with 
other pieces of EU conflict of laws legislation, such as the Rome I Regulation, the Insolvency 
Regulation  Recast,  the  Winding  Up  Directive  and  the  Solvency  II  Directive,  and  with  other 
pieces of EU financial legislation, such as the Central Securities Depositories Regulation and 
the Markets in Financial Instruments Directive? 

First, on internal coherence between Article 9(2) of the SFD, Article 9 of the FCD and 24 of 
the  WUD,  it  has  already  been  pointed  throughout  this  evaluation  that  the  current  EU 
framework is incoherent. In fact, the different wording of the conflict of laws rules set out in 
the directives and their limited scope, the diverging transpositions as well as the dispersal of 
conflict  of  laws  rules  between  EU  law  and  domestic  law  are  a  very  significant  reason  why 
there is still residual legal risk and, in consequence, why the EU intervention has proved not 
so effective and efficient as it could be.  

Second, on external coherence between this EU intervention and other EU actions, the conflict 
of laws rules are related to other pieces of EU legislation which also contain conflict of laws 
rules  relating  to  securities,  namely  the  Rome  I  Regulation213,  the  Insolvency  Regulation 
Recast214, the Winding Up Directive and the Solvency II Directive215: 

212  Response of Association for Financial Markets in Europe to Question 1. 
213   Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I) 
214   Regulation (EU) 2015/848 on insolvency proceedings (recast) 
215   Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency 

II) 

131 

 
 
                                                 
  Article 9(2) of the SFD and Article 9 of the FCD are related to the Rome I Regulation 
in  that  there  are  some  uncertainties  which  rights  fall  within  the  scopes  of  which 
conflict of laws rules:  

(1) it  is  unclear  whether  Article  9(2)  of  the  SFD  covers  only  proprietary  or  also 
contractual aspects of collateral arrangements. A systematic interpretation militates 
in  favour  of  the  exclusion  of  contractual  rights,  since  they  are  subject  to  the 
conflict of laws rules of the Rome I Regulation. However, Recital 31 of the Rome 
I Regulation may be used as an argument that Article 9(2) of the SFD covers also 
contractual aspects of dealings in securities;  

(2) there  are  some  issues  with  ‘characterisation’  (i.e.  the  process  of  assigning  each 
component element of a case to the most appropriate juridical category in order to 
find a relevant conflict of laws rule) with respect to certain types of assets which 
could be characterised both as ‘book-entry securities’ or as ‘claims’. There is also 
some debate as  to  whether Article  14 of the Rome I  Regulation  already contains 
rules  relating  to  third  party  effects  of  the  assignment  of  claims.  If  this  view  is 
followed, then the problem of an overlap with Article 9(2) of the SFD and Article 
9 of the FCD arises for some assets.  

Both issues would benefit from an explicit clarification. 

  Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD are linked to  
other  ‘insolvency  conflict  of  laws  rules’  which  protect  third-party  purchasers  of 
securities after the opening of insolvency proceedings of a corporate (Article 17 of the 
Insolvency  Regulation216)  reorganisation  or  winding-up  proceedings  of  a  credit 
institution or investment firm (Article 31 of the WUD217) or reorganisation or winding-
up proceedings of an insurance undertaking (Article 291 of Solvency II218). The three 
insolvency  conflict  of  laws  rules  refer  to  the  law  of  the  Member  State  under  the 
authority of which the register, account or deposit system is kept. Given the similarity 
of  their  wording  to  the  EU  conflict  of  laws  rules  on  one  hand,  but  a  different 
formulation of the connecting factor on the other (‘Member State under the authority 
of  which  the  account  is  kept’  instead  of  ‘place  of  location/maintenance  of  the 

216   Article  17  of  Insolvency  Regulation  reads  as  follows:  “Where,  by  an  act  concluded  after  the  opening  of 
insolvency proceedings, a debtor disposes, for consideration, of: (a) an immoveable asset; (b) a ship or an 
aircraft  subject  to  registration  in  a  public  register;  or  (c)  securities  the  existence  of  which  requires 
registration in a register laid down by law; the validity of that act shall be governed by the law of the State 
within the territory of which the immoveable asset is situated or under the authority of which the register is 
kept”. 

217   Article 31 of the WUD reads as follows: “Where, by an act concluded after the adoption of a reorganisation 
measure or the opening of winding-up proceedings, a credit institution disposes, for consideration, of: […]  
-  instruments  or  rights  in  such  instruments  the  existence  or  transfer  of  which  presupposes  their  being 
recorded in a register, an account or a centralised deposit system held or located in a Member State, the 
validity of that act shall be governed by the law of the Member State […] under the authority of which that 
register, account or deposit system is kept”. 

218   Article 291 Solvency II reads as follows: “The following law shall be applicable where, by an act concluded 
after  the  adoption  of  a  reorganisation  measure  or  the  opening  of  winding-up  proceedings,  an  insurance 
undertaking disposes, for consideration, of any of the following: […] (c) in regard to transferable or other 
securities, the existence or transfer of which presupposes entry in a register or account laid down by law 
or  which  are  placed  in  a  central  deposit  system  governed  by  the  law  of  a  Member  State,  the  law  of  the 
Member State under the authority of which the register, account or system is kept”.  

132 

 
 
                                                 
account’),  there  is  lack  of  coherence  within  the  acquis  which  might  lead  to 
interpretation problems. Thus, the wording of all mentioned rules could be aligned.  

Third, the evaluated conflict of laws rules are also indirectly related to two other pieces of EU 
financial legislation, namely the Central Securities Depositories Regulation (‘CSDR’)219 and 
the  Markets  in  Financial  Instruments  Directive  (‘MiFID  II’)220,  although  neither  of  these 
instruments contains conflict of laws rules: 

  Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD are related to 
the  Central  Securities  Depositories  Regulation  in  that  Article  38(5)  of  the  CSDR 
introduces  for  a  participants  of  a  CSD  the  obligation  to  offer  its  clients  the  choice 
between  ‘omnibus  client  segregation’  and  ‘individual  client  segregation’.  If  clients 
choose ‘individual client segregation’,  than the securities are credited in the name of 
the  investor  in  the individually  segregated  client  accounts  at  CSD  level  and  possibly 
throughout the chain of several other intermediaries, including at the investor account 
at  the  lowest  tier  level.  Such  a  situation  potentially  creates  new  problems  on 
establishing  which  is  the  ‘relevant’  account  under  the  EU  conflict  of  laws  rules,  as 
revealed by the discussions with the members of the Expert Group: “where a French 
investor  accessed  the  Spanish  CSD  through  a  French  custodian,  under  Spanish  law 
any  security  right  needed  to    be    registered    in    the    Spanish    CSD  which    was    the  
relevant  account  for  conflict  of  laws  purposes,  if an individual  client  account  
was  used.  Under  French  conflict  of  laws  the relevant  account  was  at  custodian  
level  and  any  security  right  was  to  be  registered  there. In many  countries  there  
seems    to    be    a    dual    system    of    connecting    factors    depending    on    the  account  
structure:    one    level    of    account    is    deemed    relevant    for  securities    held    in  
individual accounts  at  CSD  level,  and  potentially  multiple  accounts  are  deemed  
relevant  if  omnibus accounts  are  being  employed”221. Against this background, the 
EU  conflict  of  laws  rules  could  benefit  from  an  explicit  clarification  which  is  the 
relevant  account,  when  ‘individual  client  segregation’  is  applied  throughout  a  cross-
border chain. 

  Article  9(2)  of  the  SFD  and  Article  24  of  the  WUD  are  related  to  the  Markets  in 
Financial Instruments Directive II in that they use the MiFID II definition of ‘financial 
instruments’ to define the material scope of the two conflict of laws rules. However, 
Article 9 of the FCD is based on a self-standing definition of ‘financial instruments’ 
which is different than the MiFID II one. In the conflict of laws public consultation of 
2017  the  suggestion  has  been  made  to  align  the  definition  of  ‘financial  instruments’ 
between the directives by uniformly using the reference to the MiFID II definition, but 

219   Regulation  (EU)  No  909/2014  on  improving  securities  settlement  in  the  European  Union  and  on  central 

securities depositories 

220   Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  on  markets  in 

financial instruments 

221   See minutes of the second meeting of the Expert Group on Conflict of Laws on Securities and Claims, 

Brussels 15-16.5.2017, Ares(2017)3159733, 
http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=33452&no=2, p. 
3. 

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qualified  to  apply  only  to  interests  capable  of  being  recorded  in  a  register  or 
account222. 

To sum up, the coherence of the conflict of laws rules in the SFD, the FCD and the wud both 
internally and with other pieces of EU legislation could be improved.  

Question 5: What is the EU added value of the intervention? 

To what extent have Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD 
helped  to  increase  legal  certainty  and  to  what  extent  does  the  legal  risk  related  to  cross-
border transactions continue to require action at EU level?  

Regarding  the  EU  added  value,  the  evaluated  EU  conflict  of  laws  rules  largely  reduced  the 
legal risk related to cross-border transactions which was huge more than a decade ago.  

In  1998,  Article  9(2)  of  the  SFD  introduced  for  the  first  time  a  harmonised  approach 
throughout the EU and endorsed PRIMA to collateral transactions within the limited scope of 
designated  systems  and  with  central  banks.  This  conflict  of  laws  rule  has  served  as  a 
foundation  for  a  wider  codification  of  this  than  innovative  approach  and  clarified  the  law 
applicable to securities held through a modern multi-tiered system.  

In 2001, Article 24 of the WUD broadly restated the connecting factor of Article 9(2) of the 
SFD for the purpose of enforcement of property rights in financial instruments in insolvency 
proceedings of credit institutions.  

In  2002,  Article  9  of  the  FCD  complemented  Article  9(2)  of  the  SFD  and  extended  its 
application to the wholesale market. At this occasion the wording of the connecting factor was 
improved. In addition, Article 9(2) of the FCD defined the circumstances in which the conflict 
of laws rule selected by Article 9(1) of the FCD was to apply, thereby removing some of the 
ambiguities of the limited scope of application of its precursor. By selecting the domestic law, 
Article 9(1) of the FCD made also clear that renvoi is excluded, which is what Article 9(2) of 
the SFD probably intended but did not make express.  

The combined scopes of Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of the 
WUD probably cover the greatest part of the wholesale market with a rule based on PRIMA. 
Nevertheless,  this  EU  conflict  of  laws  framework  is  not  enough  to  fully  guarantee  legal 
certainty as to the law applicable to cross-border acquisitions of property rights in securities. 
As a basic concern, the wording and therefore the exact connecting factor of the existing rules 
is  not  consolidated  and  the  reference  to  the  location  of  the  account  is  not  clarified. 
Furthermore, there is a lack of uniform solutions in the areas that fall outside the scope of the 
directives.  

Therefore, further EU action is desirable both (i) to cure the inconsistencies arising under the 
existing acquis and (ii) to provide a uniform conflict of laws regime across the Union where 
no EU legislation exists today, including retail accounts.  

222   Repsonse of City of London Law Society to Question 4. 

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Section 8 Conclusions 

Effectiveness and efficiency: 

There is residual theoretical legal uncertainty arising from different national transpositions but 
also  in  inconsistency  and  limited  scope  of  the  EU  conflict  of  law  rules  themselves.  This 
theoretically  translates  into  a  potential  issue  where  several  laws  can  become  applicable  in 
situations where there are several parties to a transaction, one falling within the scope of the 
directives but the other(s) outside, leaving it to the national conflict of laws rules to determine 
the  applicable  law  which  may  potentially  differ  from  the  one  designated  according  to  the 
directives223. Thus, the legal uncertainty arises from (i) inconsistencies among the directives, 
(ii)  inconsistencies  among  national  transpositions  of  the  directives  and  (iii)  possible  clashes 
between the harmonised and unharmonised field. 

The evaluation has revealed that the EU intervention has not been fully effective and efficient 
due to the following factors: 

(i) conflict of laws rules of the directives have been transposed and are being applied differently 
among Member States; 

(ii)  problems  for  market  participants  arise  that  stem  from  transpositions  or  from  differences 
between transpositions; 

(iii) the limited scope of the EU conflict of laws rules and uncertainties relating to their application 
do  not  provide  a  sound  legal  framework  across  EU  and  thus  do  not  solve  the  issue  of  legal 
uncertainty as to the law applicable to cross-border transactions in securities.  

Coherence: 

Although  Article  9(2) of the SFD, Article 9 of the FCD and Article 24 of the WUD are all 
based on PRIMA and are broadly aligned with each other, the internal coherence between the 
rules could be further improved. In addition, some uncertainties about the interplay between 
the  EU  conflict  of  laws  rules  and  other  pieces  of  EU  legislation  have  been  identified. 
Regarding EU added value, Article 9(2) of the SFD, Article 9 of the FCD and Article 24 of 
the WUD were successful in modernising Member States’ conflict of laws more than a decade 
ago. The increased integration of today’s securities markets would warrant legal certainty as 
to applicable law, and this can be only achieved by a more consistent implementation of the 
rules. 

223   Expert Group, Meeting Minutes of the 15-16 May 2017 meeting; available at: 

http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetailDoc&id=33452&no=2  

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