Hague Securities Convention
The Hague Securities Convention, often known as the "PRIMA Convention", is an international multilateral treaty intended to remove, at a global scale, legal uncertainties for cross-border securities transactions. It is based on the Place of the Relevant Intermediary Approach (PRIMA) to international private law.
It has been open for signature and ratification since December 2002. As yet, none of the 64 member states of the Hague Conference of Private International Law have taken the necessary steps to adopt the Convention.
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The need for the Convention
The Convention is largely the result of the move in recent times from a direct holding system to an indirect holding system. The reforms, though largely beneficial, have created an alarming level of uncertainty as to the law applicable in cross-border securities transactions. The development of a legal regime governing such transactions have lagged behind market practice, leaving financial markets with a major source of legal risk.
The main problem is the number of intermediaries which exist between an investor and the company which issued a particular security.
Historically, many jurisdictions have attempted to apply the traditional lex rei sitae test to securities held with intermediaries by "looking through" the tiers of intermediaries to the laws of one or more of the jurisdiction of incorporation of the issuer, the location of the issuer's register or the location of the actual securities certificates (the so-called "look-through approach").
European applications of PRIMA
The PRIMA approach has been adopted in Europe under the European Union's Settlement Finality Directive of 1998. In 2002, the European Community also passed the European Union's Collateral Directive, which is also PRIMA-based, though this has yet to be implemented by most member states. Market participants view these directives as beneficial interim measures.
It is expected that the European Commission will in due course propose amendments to the European Union's Settlement Finality Directive and the European Collateral Directive so those directives are consistent with the Hague Securities Convention.
Modified PRIMA test
The first Special Commission of the Convention met at The Hague in January 2001 to consider the appropriate conflict of laws rule. PRIMA was unanimously adopted. The next two years of negotiations were spent determining an appropriate forumulation of the PRIMA doctrine.
The fundamental issue during negotiations was to determine a test that would accurately locate the relevant intermediary. The result of the analysis was that for large financial institutions with many offices, it is often not possible to point to one particular location. Delegates concluded that a test that tried to actually locate a particular securities account would result in an unacceptable level of uncertainty.
Over time a new approach was developed:
- the account holder and relevant intermediary may choose in the acount agreement the law to govern the issues under the Convention;
- this choice will be respected under the Hague Convention provided that the chosen law is of a place where the relevant intermediary has an office that is involved in the maintenance of securities accounts (a "qualifying office").
Main rule
The main rule of the Convention can be summarised as follows:
- Article 4: The first step is to look to the law expressly agreed between the account holder and its immediate (relevant) intermediary in the account agreement. If no such express designation is made, but the parties have expressly agreed on the law to govern the account agreement, then the governing law shall govern the issues under the Convention.
The second step is to apply the "qualifying office" test. Art 4(2) contains a "black list" of activities, each of which by itself is not sufficient to constitute maintenance of securities accounts.
Article 5(1): Where the previous rule does not provide a result, and a written account agreement exists which "expressly and unambiguously" states that the relevant intermediary entered into the account agreement through a particular office, the applicable law is the law of the location of that office, provided the "qualifying office" test is fulfilled.
Article 5(2) and (3): These provide a fallback where Art 5(1) provides no answer. Under these provisions, the applicable law is determined with reference to the place of incorporation or organisation of the relevant intermediary, or its principal place of business.
Multi-unit states
Where the primary rule in Art 4 leads to the law of a territorial unit of a multi-unit state (such as Canada or Australia), Art 12 indicates that the applicable law can be the law of a territorial unit specified in the account agreement provided that the relevant intermediary has a qualifying office somewhere in the multi-unit state.
Relevant intermediary as collateral taker
In Art 4(3), the Convention expressly provides that it applies in the specific case where an account holder:
- holds interests in securities through an intermediary and
- pledges or transfers title to securities held with an intermediary to that particular inventory.
In this situation, the Convention provides that the relevant intermediary is the account holder's own intermediary, and the account agreement between the account holder and its intermediary is the relevant account agreement to determine the law governing either perfection or completion.
Other issues
Other issues governed by the Convention include:
- issues of priority between competing dispositions;
- the requirements for the realisation of such an interest; and
- the duties of an intermediary to competing claimants to an interest in securities held with the intermediary
External links
- Full text of the Convention on the Law Applicable to Certain Rights in Respect of Securities Held With an Intermediary
- Hague Conference on International Private Law