Pursuant to the German Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz - EAEG) institutions are divided into private law, public law and other institutions and they have to participate in their respective group’s protection scheme by paying an initial contribution, annual contributions and, as the case may be, additional contributions. On 24 November 2009 the German Federal Constitutional Court (Bundesverfassungsgericht - BVerfG) confirmed that such general group classification and the requirement to pay annual contributions comply with the constitutional provisions in Germany.

It has to be noted that the BVerfG did not have to decide materially on the question whether the payment of additional contributions, following an event of claim, is in accordance with the constitution. This question is relevant for securities trading companies that are legally obliged to secure their liabilities through the affiliation with the compensation scheme for securities trading companies (Entschädigungseinrichtung der Wertpapierhandelsunternehmen - EdW).

On 15 March 2005, an event of claim has occurred within the EdW when Phoenix Kapitaldienst GmbH - as a result of a system based on fraudulent activities - had no longer sufficient financial resources to satisfy its liabilities. EdW is now obliged to compensate Phoenix’ investors. Although the volume of the overall compensation cannot be specified today, it is likely that an amount of several hundred million Euros will have to be financed by additional contributions of EDW’s members.

In its decision the Federal Constitutional Court explicitly pointed out that it had not to consider whether the scope and volume of the Phoenix case might influence its judgment on the system of group classifications and protection schemes. Insofar further legal discussions and proceedings are to be expected in this respect. Currently there is a significant risk for financial services institutions to be obligated to pay mayor additional contributions. Therefore, we recommend to our clients to avoid, where possible, any (full) participation in the EdW, e.g. by transforming a German securities trading company into a German branch of a European institution by use of a European passport.