Difficulties of application
The look-through approach has lost applicability due to the increasing complexity of cross-border securities transactions brought about by the introduction of an indirect holding system. There are severe conceptual, legal and practical difficulties with continuing to apply the look-through approach.
The indirect holding system is a system of securities clearance, settlement and ownership system where ownership information is held electronically as a book entry. It consists of one or more tiers of intermediaries between issuer and investor. It is an evolution from the "direct holding system" in which owners of securities had a direct relationship with the issuer.
Under the indirect holding system, securities are held through fungible accounts (omnibus accounts). Under such a system, there is no record of an individual investor's interest in respect of the securities at the level of the issuer's or intermediary's register, other than the intermediary with whom the investor has a direct relationship. Thus, if the investor, or a person such as a collateral taker asserting a claim against the investor's interest were to try to enforce that claim at any of these higher levels, the response would be that no record exists of any interest against which the claim could be pursued. This problem demonstrates that any attempt to apply the look-through approach under a fungible custody structure runs counter to the widespread conflict of laws principle that jurisdiction over proprietary aspects of dispositions of movable property should broadly be attributed to the jurisdiction where orders in respect of that property are capable of being enforced.
Practical difficulties
The look-through approach also creates severe practical difficulties:
- In many jurisdictions determining the applicable law is problematic, as a number of possible answers are available.
- It is often not possible to obtain the information needed to satisfy the test. In some circumstances underlying securities certificates may be kept in more than one jurisdiction. If the applicable law is the law of the place where the relevant securities certificates are stored, and the holding is through various tiers of intermediaries a collateral taker may be unable to discover where the securities certificates in questions are actually located.
- Where a diversified portfolio of securities with issuers from a number of jurisdictions is involved, the laws of a number of different jurisdictions may be applicable.
Uncertainties as to the approach, and of the look-through approach, if applicable, lead to significant expense for market participants. Because the position in many cases cannot be satisfactorily determined, there remains an element of systemic risk.
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".
Personal or contractual claim
If an investor holds merely contractual rights against its intermediary for delivery of securities, it no longer seems accurate to refer to the lex rei sitae, which is a property law concept. Rather, the applicable law has to be ascertained by reference to the conflict of laws principles for contractual matters. These principles would lead to the application of the law of the intermediary, be it under the heading of the "characteristic obligation", "the most significant relationship" or "the proper law".
A contract is a legally-binding agreement which recognises and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law. An agreement typically involves the exchange of goods, services, money, or promises of any of those. In the event of breach of contract, the law awards the injured party access to legal remedies such as damages and cancellation.
Property law is the area of law that governs the various forms of ownership and tenancy in real property and in personal property, within the common law legal system. In the civil law system, there is a division between movable and immovable property. Movable property roughly corresponds to personal property, while immovable property corresponds to real estate or real property, and the associated rights, and obligations thereon.
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States of America (U.S.) through UCC adoption by all 50 states, the District of Columbia, and the Territories of the United States.
The direct holding system is a traditional system of securities clearance, settlement and ownership in which owners of securities had a direct relationship with the issuer. Investors would either be recorded on the issuer's register or be in physical possession of bearer securities certificates.
Lex loci rei sitae, or simply lex situs, is the doctrine that the law governing the transfer of title to property is dependent upon and varies with the location of the property, for the purposes of the conflict of laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element if a difference in result will occur, depending on which laws are applied.
The Convention on the law applicable to certain rights in respect of securities held with an intermediary, or Hague Securities Convention is an international multilateral treaty intended to remove, globally, legal uncertainties for cross-border securities transactions. The Convention was drafted under the auspices of the Hague Conference on Private International Law, which as resulted in several Conflict of Laws conventions.
The Place of the Relevant Intermediary Approach, or PRIMA, is a conflict of laws rule applied to the proprietary aspects of security transactions, especially collateral transactions. It is an alternative approach to the historically important look-through approach, and was in its earliest form the basis for the initial draft of the Hague Securities Convention.
Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states, or provinces. The outcome of this process is potentially to require the courts of one jurisdiction to apply the law of a different jurisdiction in lawsuits arising from, say, family law, tort, or contract. The law which is applied is sometimes referred to as the "proper law." Dépeçage is an issue within choice of law.
Characterisation, or characterization, in conflict of laws, is the second stage of the procedure to resolve a lawsuit that involves foreign law. The process is described in English law as Characterisation, or classification within the English judgments of the European Court of Justice. It is alternatively known as qualification in French law.
A security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: When person, by the action of an expressed conveyance, pledges by a promise to pay a certain sum of money, with certain conditions, on a said date or dates for a said period, that action on the page with wet ink applied on the part of the one wishing the exchange creates the original funds and negotiable Instrument. That action of pledging conveys a promise binding upon the mortgagee which creates a face value upon the Instrument of the amount of currency being asked for in exchange. It is therein in good faith offered to the Bank in exchange for local currency from the Bank to buy a house. The particular country's Bank Acts usually requires the Banks to deliver such fund bearing negotiable instruments to the Countries Main Bank such as is the case in Canada. This creates a security interest in the land the house sits on for the Bank and they file a caveat at land titles on the house as evidence of that security interest. If the mortgagee fails to pay defaulting in his promise to repay the exchange, the bank then applies to the court to for-close on your property to eventually sell the house and apply the proceeds to the outstanding exchange.
Lex causae, in conflict of laws, is the law chosen by the forum court from the relevant legal systems when it judges an international or interjurisdictional case. It refers to the usage of particular local laws as the basis or "cause" for the ruling, which would itself become part of referenced legal canon.
Lex loci celebrationis is a Latin term for a legal principle in English common law, roughly translated as "the law of the land where the marriage was celebrated". It refers to the validity of the union, independent of the laws of marriage of the countries involved: where the two individuals have legal nationality or citizenship, or where they live. The assumption under the common law is that such a marriage, when lawfully and validly celebrated under the relevant law of the land, is also lawful and valid.
In the conflict of laws, the lex loci contractus is the Latin term for "law of the place where the contract is made".
The lex loci delicti commissi is the Latin term for "law of the place where the delict [tort] was committed" in the conflict of laws. Conflict of laws is the branch of law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are applied.
The lex loci arbitri is the Latin term for "law of the place where arbitration is to take place" in the conflict of laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are applied.
The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty developed by the Hague Conference on Private International Law on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of September 2017 ratified by 14 countries. The Convention uses a harmonised definition of a trust, which are the subject of the convention and sets Conflict rules for resolving problems in the choice of the applicable law. The key provisions of the Convention are:
The Unidroit convention on substantive rules for intermediated securities, also known as the Geneva Securities Convention, was adopted on 9 October 2009. So far, it has been signed by only one of the 40 negotiating States (Bangladesh). The adoption of the official commentary is forecasted by December 2010.
Investment Securities are securities that have been purchased as an investment. This is in contrast to securities that are purchased by a broker-dealer or other financial intermediary for resale or short term speculation.
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).
