On 7 April 2017, the European Commission published a consultation document on the conflict of laws rules for third party effects of transactions in securities and claims.

The history behind the consultation document

In the year 2015, the European Commission (“Commission”) presented the “Action Plan on Building a Capital Markets Union” (“CMU Action Plan”) to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. With this CMU Action Plan, the Commission explained its evaluation of recent studies with respect to the single market for capital. The Commission noted, that despite significant attempts, the aim of a single market for capital still had not been successfully reached. On the contrary, there remain many major obstacles in the way of a respective single market. Following this CMU Action Plan, a Commission Report 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 (“Commission Report”) was adopted in the year 2016. The consultation document is the logical consequence following these documents.

The purpose of the public consultation

The purpose of the public consultation is to gather respective different views on the types of risks caused by the current state of harmonisation of the conflict of laws rules on third party effects of transactions in securities and claims, on practical problems as well as to gather views on possibilities for improving such rules.

The issue of the matter and how markets deal with it today

Because of the fact that conflict of laws rules are traditionally national, they might deviate from each other and thus might lead to conflicting situations. Normally, it is no problem if only one national law is applicable. However, as soon as there is a cross-border situation, it is often unclear which national substantive law applies. In this case, for example the questions

  1. which law is applicable to transactions in securities and claims, particularly with regard to the acquisition and disposal of such assets;

  2. whether a transaction is effective against third parties and other market participants who interact with any of such parties; or

  3. which transfer has priority if competing transfers occur because the same assets were wrongfully assigned multiple times to different recipients

are sometimes difficult to answer. This leads to another phenomenon: forum shopping.

Within the European Union (“EU”), the lack of uniform conflict of law rules leads to forum shopping, which might lead to different results, depending on which national law might be recognized as being applicable. Even the Rome I Regulation does not help in this context, because it covers contractual aspects of transactions in securities and claims but does not designate the applicable law to the effects of such transactions against third parties.

The effect is, that the outcome of transactions in cross-border situations is still uncertain and that cross-border transactions in securities and claims still bear significant risks for market participants and third parties.

In order to be able to develop a consistency in legal requirements, the European Commission had now developed the public consultation paper with a responding questionnaire to evaluate the opinions and market practice of the respective market participants.

Our Advice

Since the consultation is public, everybody concerned might participate in the public consultation. Please find all information about the consultation and the proceedings as well as deadlines on the website of the European Commission.