Minimising risk in crossborder transactions
In times of dematerialised securities, the risks for customers and depositors in case of a security intermediate default are no longer manageable. The practice of pledging a security to another owner involves concrete risks for cross-border transactions. In order to offer customers of the Luxemburg financial centre the best possible security, the Luxembourg government has already transposed a project relating to dematerialised securities into national law.
The law was passed on April 6, 2013. “For Luxembourg this is very important because with Clearstream, the financial centre is at the heart of securities flows”, Pierre-Henri Conac, Professor of Financial Markets Law at the Luxembourg University, says. “Customers can now benefit from a system of predictability.”
Under the future UCITS V and the new AIFM Directive, the depositor is now strictly liable to his clients. Thus, the risk on the depositor will increase dramatically, since he will be liable for any problem in the chain, even if one of the sub-depositors fails.
But each European country has its own legal status of intermediate securities, which are not necessarily compatible: a lesson painfully learned during the Lehman default. “In the USA and in Europe, even after five years, the Lehman case is still going on, because it took ages to identify the owners of the securities and hold them responsible in accordance with their national law”, the professor explains.
Professor Conac, together with Dr Ulrich Segna from the Faculty of Law, Economics and Finance and Professor Luc Thévenoz, Director of the Banking and Financial Law Centre from the University of Geneva, recently edited “Intermediated Securities: The impact of the Geneva Securities Convention and the Future European Legislation”. The book compares two legislative projects that will harmonise the various European legislations regarding risk control in the chain of securities intermediaries.
The Geneva Securities Convention has been developed by UNIDROIT, an international organisation composed of specialists. Any country in the world can already apply this treaty. The European Union is also working on a legislative project that, however, has not yet been approved by every member state and thus is currently blocked. This is why some countries, including Luxembourg, have decided not to wait and transposed the project into national law.
According to Professor Conac, the convention brings legal safety. “It asks the signatories to apply some basic principles and makes it easier to solve problems in case there is a default somewhere along the chain. As soon as all countries apply the convention, it will be easier to identify the owner in case of default”. EA