Property Rights in Investment Securities and the Doctrine of Specificity

227 Pages·2009·3.012 MB·English

by  Erica Johansson (eds.)

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1 23
Property Rights in Investment Securities
and the Doctrine of Specificity
Erica Johansson
Property Rights in Investment
Securities and the Doctrine
of Specificity
ABC
Dr.EricaJohansson
Associate-FinanceGroup
MayerBrownInternationalLLP
11PilgrimStreet
LondonEC4V6RW
UnitedKingdom
[email protected]
ISBN:978-3-540-85903-1 e-ISBN:978-3-540-85904-8
LibraryofCongressControlNumber:2008935630
(cid:176)c 2009Springer-VerlagBerlinHeidelberg
Thisworkissubjecttocopyright.Allrightsarereserved,whetherthewholeorpartofthematerialis
concerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation,broadcasting,
reproductiononmicrofilmorinanyotherway,andstorageindatabanks.Duplicationofthispublication
orpartsthereofispermittedonlyundertheprovisionsoftheGermanCopyrightLawofSeptember9,
1965,initscurrentversion,andpermissionforusemustalwaysbeobtainedfromSpringer.Violations
areliabletoprosecutionundertheGermanCopyrightLaw.
Theuseofgeneraldescriptivenames,registerednames,trademarks,etc.inthispublicationdoesnot
imply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevantprotective
lawsandregulationsandthereforefreeforgeneraluse.
Coverdesign:WMXDesignGmbH,Heidelberg
Printedonacid-freepaper
springer.com
ForMatthiasPannier
Preface
Thisbookis,withsomeadjustmentsandadditions,largelybasedonmyPhDthesis
onPropertyRightsinInvestmentSecuritiesandtheDoctrineofSpecificity,which
I defended in London on 15 June 2007 with Professor Lars Gorton and Dr. Kern
Alexanderasexaminers.
Thesubjectmatteristhedoctrineofspecificityanditsnon-conformitywiththe
developmentsinthefinancialmarkets.
As this book shows, the requirement for specificity in book-entry securities is
closely linked to loss allocation. If we decided that the rights that the investor has
against its intermediary shall be property rights (as opposed to claims), then, loss
allocationiscrucial.Shouldtheintermediarybecomeinsolventandtherebeinsuf-
ficientsecurities,theshortfallhastobedistributed.Throughsegregationondesig-
natedaccountsthelevelofprotectionfortheinvestorcanbeincreased.Itcanalso
beincreasedbyarequirementthattheintermediaryshouldholdasufficientnumber
ofsecuritiescorrespondingtoitscustomers’securities.
During the course of this work I have received valuable assistance from sev-
eral persons, for which I am very grateful. First of all, I am indebted to Tekn. dr.
MarcusWallenbergsStiftelsefo¨rutbildningiinternationelltindustrielltfo¨retagande
andFo¨retagsjuridikNord&Coforthefinancialsupporttheyhaveprovided.
Justice Torgny Ha˚stad initially brought my attention to the issues discussed in
Chap. 2 and Professor Sir Roy Goode, QC and Professor Philip Wood kindly met
metodiscussthechoiceofsubject.ProfessorMadsAndenasandProfessorJoseph
Nortonhavebeenofgreatsupportandguidancethroughoutmystudies.
Dr. Go¨ran Millqvist and Karin Wallin-Norman provided helpful and thought-
provokingcommentsonearlierversionsofthethesis.Theirinterestinandwilling-
nesstodiscussSwedishsecuritylawandtheNordicCentralSecuritiesDepository
systems have been of great value. Karin also provided helpful insights in relation
totheworkoftheEuropeanCommission’sLegalCertaintyGroupandtheworkof
UNIDROITonSubstantiveRulesRegardingIntermediatedSecurities.
Dr.StaffanMyrdal,fromwhoseworkonA˚terpantsa¨ttning:Ompantsa¨ttningav
pant och pantra¨tt (published in 2005) I have benefited greatly, read and provided
helpfulcommentsonChap.6.Healsokindlydiscussedsomeofthequestionsthat
vii
viii Preface
repledge trigger under Swedish law. Dr. Thomas Keijser read and provided help-
ful comments on Chaps. 5–7, Professor Hugh Beale, QC FBA, Professor Andrew
McKnight and Dr. Rizwaan Mokal provided helpful comments on earlier versions
ofChap.5anddiscussedvariousissuesunderEnglishlawandDr.ClaesMartinson
providedhelpfulcommentsonthefirstdraftofChap.1.NickosNassuphishasbeen
ofvaluableassistancethroughoutbyexplaininghowthederivativesmarketswork.
Attheearlierstagesofthestudies,ProfessorJamesPennermadehimselfavail-
able to discuss different aspects of property law and legal theory. Dr. Joanna
Benjamin kindly met me to discuss the equity of redemption, and Professor Peter
WinshipansweredmyignorantquestionsonArts.8–9oftheUCC.
In the summer of 2005 Professor Jan Kleineman and the Law Department of
StockholmUniversitygavemeaccesstoadeskattheLawDepartment,whichIused
whileworkingonChap.6.DuringthistimeIhadmanyinterestingdiscussionswith
manyofmyformercolleagues,onlawandonothersubjects.
At the later stages of this work I received helpful inputs from Dr. Laila
Zackariassononthedoctrineofspecificity.MartinThomasinvitedmetoBrusselsto
discuss the European Commission’s Legal Certainty project and Geoffrey Davies,
who at the time worked on the English Law Commission’s project on Property
Rights in Intermediated Securities, provided thoughtful and interesting comments
on the thesis. Dan Hanqvist provided some thoughtful comments in relation to
SwedishlawandIainWalkerkindlyproofreadthetext.
Duringandaftertheexamination,ProfessorLarsGortonandDr.KernAlexander
providedsomevaluablesuggestionsonhowtoimprovethetext.
Iwouldalsoliketothankmyfamily,fortheirloveandsupport.
Theaimhasbeentostatethelawasof31March2008.Theviewsexpressedand
themistakesmadeare,ofcourse,myown.
London EricaJohansson
March2008
Contents
1 Introduction................................................... 1
1.1 SubjectMatter ............................................. 1
1.2 Theme.................................................... 2
1.3 Background ............................................... 3
1.4 SourcesandMethodology ................................... 5
1.4.1 ComparativeLegalStudies ............................ 5
1.4.2 DeLegeLatavsDeLegeFerenda ...................... 6
1.4.3 SourcesandMethodology............................. 6
1.4.4 Terminology ........................................ 7
2 TheNewOrder ................................................ 9
2.1 Introduction ............................................... 9
2.2 TheEUFinancialServicesActionPlan ........................ 9
2.3 TheFinancialCollateralDirective............................. 10
2.3.1 TheSuccessfulLobbyingforLawReform ............... 10
2.3.2 Objective,ScopeandApplicability ..................... 12
2.3.3 ImplementationandOpt-OutPossibilities................ 13
2.3.4 TheRightsofReuse.................................. 15
2.3.5 SubstitutionandTop-UpofCollateral
andtheDisapplicationofCertainInsolvencyProvisions.... 18
2.3.6 Perfection .......................................... 20
2.3.7 Set-OffandNetting .................................. 21
2.3.8 ConflictofLaws..................................... 23
2.4 TheSettlementFinalityDirective ............................. 23
2.5 MiFID.................................................... 25
2.6 RelatedInitiatives .......................................... 28
2.6.1 TheHagueSecuritiesConvention....................... 29
2.6.2 TheUNIDROITDraftConventiononSubstantiveRules
regardingIntermediatedSecurities...................... 32
2.6.3 TheLegalCertaintyGroup ............................ 34
2.7 SummaryandConclusions................................... 36
ix
x Contents
3 DevelopmentsoftheSecuritiesMarkets .......................... 39
3.1 Introduction ............................................... 39
3.2 DevelopmentsoftheSecuritiesMarkets........................ 39
3.2.1 Background......................................... 39
3.2.2 Risks .............................................. 42
3.2.3 IndirectlyHeldSecurities ............................. 43
3.2.4 UnallocatedandIntermediatedSecurities ................ 44
3.2.5 InterestinSecurities.................................. 45
3.3 ClearingandSettlement ..................................... 47
3.3.1 Sweden ............................................ 47
3.3.2 UnitedKingdom..................................... 48
3.3.3 UnitedStates........................................ 51
3.4 SummaryandConclusions................................... 53
4 TheUseofCollateralintheSecuritiesMarkets.................... 55
4.1 Introduction ............................................... 55
4.2 TheUseofCollateral ....................................... 55
4.2.1 ReposandSecuritiesLending.......................... 57
4.2.2 OTCDerivativesMarkets ............................. 58
4.2.3 ClearingandSettlement............................... 59
4.3 RiskManagementPractices.................................. 60
4.3.1 CollateralManagement ............................... 61
4.3.2 OtherMethodsofMitigatingCreditRisk ................ 63
4.4 ReuseofFinancialCollateral................................. 65
4.4.1 Repledge ........................................... 66
4.4.2 Repos.............................................. 67
4.5 ExamplesofMarketDocumentation........................... 69
4.5.1 ISDACreditSupportDocumentation.................... 69
4.5.2 RepoDocumentation ................................. 71
4.6 SummaryandConclusions................................... 72
5 Property Rights in Securities and the Doctrine of Specificity
underEnglishLaw ............................................. 73
5.1 Introduction ............................................... 73
5.2 InterestsinSecurities ....................................... 73
5.2.1 IntroductiontoEnglishSecurityLaw.................... 73
5.2.2 TheConceptofTrust ................................. 76
5.2.3 SecurityoverInvestmentSecurities ..................... 76
5.3 ReuseofFinancialCollateral................................. 79
5.3.1 Repledge ........................................... 80
5.3.2 A Right of Reuse under the Financial Collateral
ArrangementsRegulations ............................ 83
5.3.3 Repos.............................................. 86
5.4 TheDoctrineofSpecificity .................................. 88
5.4.1 Identification........................................ 88
Contents xi
5.4.2 Substitution......................................... 90
5.4.3 Tracingvs.Mixing................................... 93
5.4.4 UnallocatedSecurities ................................ 94
5.5 SummaryandConclusions................................... 99
6 Property Rights in Securities and the Doctrine of Specificity
underSwedishLaw ............................................103
6.1 Introduction ...............................................103
6.2 InterestinSecurities ........................................103
6.2.1 IntroductiontoSwedishSecurityLaw...................103
6.2.2 SecurityoverInvestmentSecurities .....................105
6.3 ReuseofFinancialCollateral.................................107
6.3.1 Repledge ...........................................108
6.3.2 ARightofReuseundertheFinancialCollateralDirective ..112
6.3.3 TheUseofRepos....................................120
6.4 TheDoctrineofSpecificity ..................................122
6.4.1 Identification........................................122
6.4.2 Substitution.........................................124
6.4.3 Mixtures ...........................................127
6.4.4 UnallocatedSecurities ................................129
6.5 SummaryandConclusion ...................................133
7 Property Rights in Securities and the Doctrine of Specificity
underUSLaw .................................................137
7.1 Introduction ...............................................137
7.2 InterestsinSecurities .......................................137
7.2.1 IntroductiontoUSSecurityLaw .......................137
7.2.2 Article9oftheUniformCommercialCode ..............139
7.2.3 SecurityoverInvestmentSecurities .....................141
7.3 ReuseofFinancialCollateral.................................145
7.3.1 Repledge ...........................................145
7.3.2 TheUseofRepos....................................152
7.4 TheDoctrineofSpecificity ..................................154
7.4.1 Identification........................................154
7.4.2 Substitution.........................................156
7.4.3 Mixtures ...........................................159
7.4.4 UnallocatedSecurities ................................160
7.5 SummaryandConclusions...................................164
8 SecuritiesasProperty ..........................................167
8.1 Introduction ...............................................167
8.2 SecuritiesandFungibility....................................167
8.3 TheDoctrineofSpecificity ..................................171
8.4 SummaryandConclusions...................................179