The Hague Securities Convention: A Modern Conflict of Laws Regime for the Holding, Transferring and Pledging of Interm

1. The Hague Securities Convention: A Modern Conflict of Laws Regime for the Holding, Transferring and Pledging of Intermediated Securities AMEDA 15th Meeting – Palais Jamai Hotel Fez, MOROCCO25 April 2011 Christophe Bernasconi Deputy Secretary General Hague Conference on Private International Law

2. The Hague Conference on Private International Law • Intergovernmental Organisation (origin goes back to 1893) • purpose: “progressive unification of the rules of private international law” • legislator, not a court or tribunal • It achieves this purpose by developing and servicingmultilateral treaties: the Hague Conventions • 38 Conventions in various fields of the law: • family law & child protection • legal cooperation & litigation • commercial & finance law • 72 Members (71 States plus the European Union) and growing; moreover, …

3. … 140 States are in fact “connected” to the Hague Conference Member of the Hague Conference Non-Member Contracting State to at least one Hague Convention Non-Member State signatory to at least one Hague Convention

4. The traditional conflict of laws rule applicable to proprietary rights… lex rei sitae (lex cartae sitae)

5. Bankruptcy Trustee Transfer to Bank Account Mohamed Abd El Salam Security interest (Swiss Law) Beach Housein Morocco Christophe Bernasconi

6. Bankruptcy Trustee Transfer to Bank Account Mohamed Abd El Salam Security interest (Swiss Law) Painting in the Netherlands Christophe Bernasconi

7. Christophe Bernasconi 100 Shares BioTeX Inc. (Delaware) Bankruptcy Trustee Collateral Agreement (Swiss Law) Mohamed Abd El Salam Certificates in Hong Kong Transfer to Bank Account

8. BioTeX Inc. Christophe Bernasconi 100 Shares Christophe Bernasconi Bankruptcy Trustee Mohamed Abd El Salam Register in New Jersey BioTeX Inc. (Delaware) Transfer to Bank Account Collateral Agreement (Swiss Law)

9. The traditional conflict of laws rule applicable to proprietary rights… …is not suitable for securities held with an intermediary!

10. BioTeX Inc. (Ruritania) Gotham Bank A/c 950,000 Moroccan Bank Customers A/c 5,000,000 Shares 45,000 Moroccan Inv. Pledgeto Swiss Bank A/c Moroccan Investor A/c Bankruptcy Trustee Transfer to Bank Account Pledge (Swiss Law) Ruritanian CSD Vault (Metropolis) Ruritanian CSD • Gotham Bank 100 100 0 Moroccan Bank Swiss Bank Moroccan Investor

11. India France SARHK Switzerland Euroclear France CCASS SIS SegaInterSettle NSDL Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Egypt MCDR DTC USA Local sub-custodian Local sub-custodian South Africa Local sub-custodian STRATE Morocco Local sub-custodian Local Bank MAROCLEAR Transfer Pledge (Swiss Law) Moroccan Investor Swiss Bank

12. NSDL MAROCLEAR SIS JASDEC CCASS STRATE CDS DTC Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian • Intermediary A Intermediary Y Intermediary B Account holder 2(Transferee / Pledgee) Account holder 1(Transferor / Pledgor)

13. Main provisions of the Hague Securities Convention

14. Important to keep in mind: The Hague Securities Convention only addresses the conflict of laws question (which law applies?), not substantive law matters (content of the applicable law)

15. Scope of the applicable law designated by the Convention - Art 2(1) • Nature of rights resulting from credit of securities to account (proprietary, contractual, or other) • Nature and effects of disposition (no risk of “recharacterisation”) • Perfection • Priorities • Duties of intermediary where third party asserts competing interest in securities • Realization • Entitlement to dividends, etc. • List is exhaustive – the “Art 2(1) issues”

16. The primary rule for determining the applicable law – Art 4 • Early consensus on “no look-through” (PRIMA) • BUT: How to put “anti-look-through” into operation? • Agreement between parties to a/c agreement (not to disposition!) vs lex rei sitae (i.e. search for actual location of the securities account) • Final solution reached by consensus: choice of law (agreement on law governing a/c agreement) + proviso (i.e. rel interm must have an office engaged in the business of maintaining securities accounts in the selected State – Qualifying Office requirement) • Focus is on relationship between account holder and its intermediary – not about “place” of account or intermediary • Convention goes beyond PRIMA

17. The primary rule for determining the applicable law – Art 4 (cont.) • Applicable law: • express agreement on law governing account agreement; or • express agreement on law governing all Article 2(1) issues • subject to Qualifying Office proviso: • Relevant intermediary, at the time of the agreement, must have a “Qualifying Office” in selected State

18. Art 4 does not disempowersupervisory authorities • Convention is a PRIVATE (international) law instrument • Has no impact on existing or future regulatory regime controlling private conduct, whether towards the goal of preventing money laundering or preventing tax evasion, or assuring safe and sound business practices or minimising systemic risk • Thus, choice under Art 4 is subject to any regulatory regime that may apply

19. Arts 4 and 5 apply independently with respect to each securities account NSDL MAROCLEAR SIS JASDEC CCASS STRATE CDS DTC Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian • Intermediary A Intermediary Y Intermediary B Account holder 2(Transferee / Pledgee) Account holder 1(Transferor / Pledgor)

20. Who benefits from the Convention? NSDL MAROCLEAR SIS JASDEC CCASS STRATE CDS DTC Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian Local sub-custodian • Intermediary A Intermediary Y Intermediary B Account holder 2(Transferee / Pledgee) Account holder 1(Transferor / Pledgor)

21. Early Endorsements of the Hague Convention • G30 • Recommendation 15 of 2003 Plan of Action on Global Clearing and Settlement • Final Monitoring Report of 2006 • Board of Indeval (CSD Mexico) formally recommends signing of the Convention (21 Sept 2006) • Securities Commission and Central Bank of Brazil • ISDA • ACSDA (Exec. Com.) adopts Recommendation (14 May 07) • Switzerland and US signed Conv on 5 July 2006 – on same day, release of EC Commission’s “[l]egal assessment of certain aspects” of the Convention: concludes that signing of Conv would be in the “best interest” of the EC – current position in the EC • Mauritius signed on 28 April 2008

22. Other developments • On 14 September 2009, Switzerland deposited its instrument of ratification – first ratification • Mauritius ratified the Convention on 15 October 2009 • One more ratification is needed to bring the Convention into force on the international plane • USA likely to be the third ratifying State

23. Questions? Christophe Bernasconicb@hcch.nl