European Commission consultation on Legislation on legal certainty of securities holding and dispositions

Transcription

1 11 June 2009 European Commission consultation on Legislation on legal certainty of securities holding and dispositions Euroclear is pleased to be given the opportunity to provide its feedback on the Commission s consultation regarding potential legislation on legal certainty of securities holding and dispositions. Euroclear group comprises the international central securities depository Euroclear Bank, based in Brussels, as well as the national central securities depositories (CSDs) Euroclear Belgium, Euroclear France, Euroclear Nederland, Euroclear UK & Ireland, Euroclear Finland and Euroclear Sweden. We believe we are therefore, well placed to contribute to issues related to the legal framework for book-entry securities. Summary Our detailed answers to the questions raised are described below, but in summary our main points are as follows. (i) Further detailed dialogue is required with the Commission on the precise definition of the term account provider. (ii) The lack of identical legal significance of a securities account in each member state contributes to the cost and complexity for cross border holding and settlement, but the main driver of such cost and complexity is local rules that are incompatible with multi-tiered holding structures and/or the use of omnibus accounts that hamper the investor s right to freely choose the holding pattern of securities. (iii) We support the concept of defining account providers in a way which delivers a consistent functional approach to future regulation by ensuring that institutions offering similar services are regulated in a similar way. (iv) We believe that account providing is an extremely small part of the investment services covered by MiFID and that it is inappropriate to attempt to fit such activity into a directive that was not designed for that activity, without a significant reworking of MiFID to avoid unnecessary and duplicate regulatory burdens. (v) We believe that far greater investigative work is needed before any conclusions can be reached on how Barrier Nine can best be removed; some of the open questions that we believe still need to be addressed are referred to below in answer to questions Page 1 of 19

2 General comments While the proposals for legislative change outlined in the Consultation Paper ( the Consultation ) are intended to apply to account providers, the concept of account providers is not defined in the Consultation. For instance, it is not clear whether it is intended to include entities like Euroclear UK and Ireland Limited ( EUI ) within the definition of account provider. The system operated by EUI possesses certain features which distinguish it from central securities depositories ( CSDs ): securities are directly held in EUI rather than deposited in it, and in the case of UK securities, the EUI record of holdings constitutes the register of legal title to the securities. There are a number of proposals within the Consultation that seem to have no application to a settlement system with the features of the system operated by EUI. These are, where relevant, identified in the discussion which follows. It is also unclear whether, for example, shareholder accounts maintained by an issuer or its agent, but not managed or provided by an intermediary or an (I)CSD (for instance, shareholder accounts maintained by a UK or Irish registrar) are covered by the term. In addition, the Consultation does not refer to the specific features of transparent systems, whereby the function of account providing is split between the CSD as account provider (the CSD) and the operator of the account with the CSD. This split is especially relevant with regard to the right to instruct the account provider to make a book entry on the account and the processing of rights from securities. For example, Euroclear Finland and Euroclear Sweden currently have upwards of 4 million such accounts for individual investors. We take note however, of sections and 2.5 of the Legal Certainty Group ( LCG ) report in this regard but assume that further consideration will be given to the different types/roles of account provider and that proposals for legislative change will be tailored accordingly where necessary. We would like to engage in further detailed dialogue with the Commission on these key points prior to the adoption of any legislative Proposal that may result from this consultation. Our answers to the detailed Consultation questions follow below. 1 In section of the LCG report it is indicated that records kept by a centralised technical infrastructure or a company registrar are not securities accounts in the sense of the report. Section 2.5. refers to the specificities of transparent systems and the position that future legislation should recognize the split between the role of the account provider and the account operator. Page 2 of 19

3 Question 1: The far greatest part of securities are held and administered through securities accounts maintained by an account provider (e.g., a bank, a broker, a custodian or similar). What is your estimate regarding the percentage of securities which are not held through a securities account? We do not have figures for each of our markets, but as an example for FTSE 100 securities in the UK, roughly between 25% and under 1% of the market capitalisation is held outside of the system operated by EUI in "accounts" on the register; the precise value depending on the shareholder profile of the issuing company. Question 2: Do you assume that the application of the legal framework for acquisition or disposition of book-entry securities, including the creation of collateral interest, is more complex as soon as there are cross-jurisdictional elements to be taken into account? [Yes, considerably more complex/yes, slightly more complex/no/i don't know. Please specify and make a distinction between operations occurring inside and outside a securities settlement system, if possible.] Complexities are generally not related to the cross-border acquisition or disposition of book entry securities as such, but arise mostly when account providers want to service securities from another jurisdiction. In general, starting a service offering in foreign securities entails (i) assessing potential structures for the holdings in function of local legal (and other) requirements, (ii) conducting an eligibility assessment of the financial instruments to be accepted; and (iii) obtaining a legal opinion on asset protection and the enforceability of the contract with the local custodian or CSD. Issues that make the set-up of a cross-border link complex or impossible stem mainly from local rules that are incompatible with multi-tiered holding structures and/or the use of nominees and omnibus accounts that hamper the investor s right to freely choose the holding pattern of securities. Concrete examples of such rules have been described in more detail in the LCG report under recommendation 13. We would like to stress that these rules may not only hamper the exercise of the rights attached to the securities by the investor (as suggested under recommendation 13 of the LCG report), but also more fundamentally restrict the freedom of investors and account holders to choose the holding pattern or account provider of their preference for the cross-border holding and transfer of their securities. It is these rules which have hampered cross-border flows within the EU and have (inter alia) limited the effectiveness of the Access and Interoperability provisions of the Code of Conduct. The complexities related to accessing other jurisdictions will generally translate in higher set-up and maintenance costs for the service offering which will make such service more expensive (costs will be reflected in the account providers fees) or can even make it uneconomic. Page 3 of 19

4 Question 3: Do you think that harmonisation of the law of holding and disposition of book-entry securities should be done by way of minimum harmonisation, i.e. that in general, Member States' law shall continue to define the general legal characterisation of bookentry securities, whereas certain characteristics of book-entry securities are harmonised? We believe that any harmonisation in this area could only be achieved through minimum harmonisation. A more far-reaching approach would most likely be too ambitious at this stage, since this would require significant modifications to the legal system in many Member States. However, a minimum harmonisation as suggested will not result in a material reduction of the legal costs incurred by account-providers when setting up cross-border access. It should therefore, be clear to policy makers that such minimum harmonisation will only partially remove the costs related to a non-harmonised legal framework. Furthermore, there is a potential risk that a minimum harmonization will make it costly and complex to accommodate the issuers right to freely choice the place of initial entry of its securities. Question 4: Do you think that book-entry securities should confer upon the account holder the following minimum rights [Yes/No/I don't know, please specify and indicate whether additional elements should be harmonised]: (a) the right to exercise and receive the rights attached to the securities, as far as the account holder itself is identified by the issuer law as the person entitled to these rights; (b) the right to instruct the account provider to dispose of the securities; (c) the right to instruct the account provider to arrange for holding the securities with another account provider or otherwise than with an account provider, as far as the applicable law allows holding otherwise than with an account provider. To the extent that the right to instruct the account provider to dispose of the securities under (b) should be read as the right to instruct the account provider to make a book entry on the account (for such purpose as to dispose of the securities or to create a security interest or other limited interests over the securities) and not to execute the underlying disposal (by way of contract, gift or other means which often is unknown to the account provider), we support this proposal. Note that in a transparent system this instruction would be directed to the account operator operating the account and not to the CSD maintaining the account. Page 4 of 19

5 Question 5: Do you think that a fix set of methods for acquisition and disposition of book-entry securities (crediting an account; debiting an account; earmarking book-entry securities in an account, or earmarking a securities account; removing of such earmarking; concluding a control agreement; concluding an agreement with and in favour of an account provider) should be available to market participants throughout all EU jurisdictions? [Yes/No/I don't know; please specify] No, we do not think that the benefits of having all six methods available under the laws of all Member States outweigh the difficulties which may result from the compulsory introduction of methods which are alien to the legal traditions of a Member State. For instance, to our knowledge, the control agreement is not very commonly used within the EU. Question 6: In the event of not all six methods listed in Question 5 becoming available to market participants in all Member States: do you think that the law of any Member State should recognise, in particular in an insolvency proceeding, acquisitions and dispositions effected by one of these methods under the law of another Member State, even if the law of the first Member State does not provide for that method? Yes, we think it is important that there are common recognition provisions, in particular to ensure that the insolvency law of EU Member States recognises acquisitions and dispositions that have been validly established under the applicable Member States law. Question 7: Do you think that future legislation should leave to Member States the possibility of making the effectiveness of an acquisition or disposition subject to a condition contractually agreed upon between account holder and account provider, in 6 particular a condition that a corresponding acquisition or disposition occurs? [Yes/No/ I don't know; please specify] Yes, Member States should have the possibility to allow conditional credits/debits as long as they are agreed upon between account provider and accountholder and are identified to all parties as conditional. To avoid risk of reversal, conditional credits should not be permitted to be transferred until such time as the applicable condition is met. Question 8: Do you think that there should be a short, harmonised list of conditions giving rise to a reversal of an acquisition or disposition, notably (a) the consent of the account holder; (b) the credit or debit which was made in error; (c) the debit or earmarking or removal of an earmarking which was not authorised. [Yes/No/I don't know, please specify, indicating which one to add/delete, if any] On the face of it, a short, harmonised list of conditions giving rise to a reversal of an acquisition or disposition may seem attractive. However, we Page 5 of 19

6 believe the practical and legal benefit of such a list is very limited and does not justify the adoption of a rule at EU level. Reversals reflect a business practice that is necessary for the chain of intermediaries in order for book-entry securities to function. The specific circumstances in which reversals may happen evolve as the market itself evolves (e.g. reversal by an issuer or its agent of proceeds of a corporate event) and book-entry movements that happen as a result of an operational error are by nature unforeseeable. In order to preserve the integrity of the book-entry securities holding system, it is necessary to maintain intermediaries flexibility in addressing situations that require a reversal. With this in mind, legislation in this area which is very detailed and, as a result proscriptive, must be avoided. The three conditions listed in question 8 seem to take this into account, in particular as we understand point (a) to allow an account provider to effect a reversal in the circumstances contractually agreed with the account holder. This leads to the question of whether such rules should be introduced at EU level. First, we have our doubts on the need for regulation in this area at all: the lack of harmonisation between laws in the EU Member States in this particular area is not, in the experience of the Euroclear group entities, an obstacle to a cross border securities market. Second, we do not see the practical value of introducing rules which, as explained above, need to be limited to generic categories of reversals with significant contractual discretion left to the account provider. We do not expect such a generic rule to lead to increased legal certainty, nor to harmonisation across account providers. In addition, the application of a list of reversal conditions will, by definition, be limited to the European Union, thus creating a situation where the circumstances in which an EU account provider can effect a reversal will be limited by law, whereas tiers of account providers located outside the EU will be subject to no such restrictions. This may lead to a situation where the EU account provider cannot take the necessary actions to reconcile its position held at a non-eu account provider with the total position of its clients (e.g. the non-eu upper tier account provider reverses in circumstances not foreseen by the EU rules). Question 9: Do you think that account holders in whose favour a credit has been made should be protected against the reversal unless they knew or ought to have known that the credit should not have been made? We believe a protection based on knowledge reflects a sound basic principle (as short-hand, we will refer to good faith when discussing the proposed knowledge test in this response). However, such a concept of good faith must be interpreted in the specific context of account provider chains and assessed against the overall interest of preserving the integrity of the bookentry system. As a result, and as explained in more detail below, we do not think that knowledge about whether a credit should have been made can or Page 6 of 19

7 should be an absolute criterion for whether or not a reversal may be effected. First, we would like to clarify our understanding of the concept of reliance in relation to a credit in favour of an account holder. The reversibility of a transfer in the books of an account provider can and should be distinguished from the transferee s ownership of the securities which may be subject to an adverse claim outside the intermediary holding chain. Good faith in relation to reversals should, from the point of view of the intermediary system and the necessary handling of reversals, relate to the account holder s legitimate expectation to receive the credit in its account as evidenced by an instruction to the account provider, not to the absence of adverse claims in relation to the underlying relationship(s). Secondly, we also think it is necessary to clarify the possible scope of application of any rule protecting a good faith transferee. It is important for the entire system of intermediated book-entry securities holdings that account holders can rely on credits to their accounts without conducting separate investigations into the circumstances which led to the credit in their account (provided, of course, that they have introduced an instruction to receive such credit). We are therefore convinced that an account provider s right of reversal should be limited to the initial credit that was correctable and should not extend to further debits and credits, thus leading to entire chains of transactions being reversed. An attempt to reverse beyond the initial transferee would encounter the following legal and practical obstacles: a) reversal beyond an initial, reversible transaction would have a serious adverse impact on the finality of settlement in intermediaries books and, as such, the integrity of the intermediary system; and b) as book entry securities are fungible, it will in most cases not be possible to trace the reversible securities in a chain of transactions. In light of these concerns, our further comments about reversals and reversibility relate only to the initial credit (and debit) to be corrected as subsequent debits/credits should be protected. Applying the principle that the legitimate expectation of an account holder should relate to the correct execution of his instruction to the account provider, we also think it is clear that an account holder who receives a credit not instructed by him should not be protected. The account holder who is in good faith about the correct execution of his instruction should generally be protected against reversals, but this principle cannot be applied without exceptions. In some circumstances it is very uncertain how to establish whether the account holder knew or should have known that the credit should not have been made; in others it may be in the interest of the entire community of account holders to deviate from the general principle of protecting a legitimate expectation. Below is a list of examples illustrating these difficulties: Page 7 of 19

8 If a credit is reversed by an upper tier account provider (due to, for example, an operational error or to an insolvency event affecting clients of an account provider which does not benefit for Settlement Finality Directive protection), and the lower tier account provider reflects this in the account of the account holder that received the initial credit, does the account holder know or ought he to have known that the initial credit should not have been made, and who is to prove this? In some instances, an account provider may have to effect debits as a result of a back-dated record date set by an issuer. Does the account holder know or ought to have known that the initial credit should not have been made and who is to prove this? Due to a severe operational error, securities within a securities settlement system have been transferred to a transferee although the transferor did not have sufficient securities in his account to effect the delivery. Securities in excess of the outstanding amount in issue would therefore be credited in the system. Although the transferee was in good faith, it may be preferable from a systemic point if view to recover the securities from the transferee (if he still holds them in his account) rather than proceeding to a debit of all accounts holding such securities through the application of a loss sharing arrangement. The preferable option may only be identified in the actual circumstances, taking into account the facts. This list shows that a general rule offering protection to good faith account holders would not be desirable. It may even create risks that do not exist today if irregularities cannot be corrected through adjustments to the accounts that are at the source of/initially impacted by the problem. Thirdly, we note that certain Member States (for example the UK, via the Uncertificated Securities Regulations 2001, which govern the operation of the system operated by EUI) have chosen to give the operator the protection of an ability to rely absolutely on instructions received by its system unless a very restricted set of circumstances apply. Such a rule may be a component of an overall approach taken by a legal system to transfers in a CSD and any changes thereto may have the affect of disturbing the balance of responsibilities between the operator, the transferor and the transferee. In our view, Member States which wish to continue to take a more restrictive approach to reversals, in the case of certain account providers, ought to continue to be permitted to do so. Question 10: Do you think that interests in book-entry securities, notably security interests, which are "visible" in the account, should have priority over book-entry securities which are not "visible" in the account? We assume that for the purposes of the Consultation, interests that are not visible in the account are exclusively the non-book-entry methods described in section 5 of the LCG report (control agreement with or notified to the account provider or agreement with the account provider). If this Page 8 of 19

9 assumption is correct, we do not see any compelling reason why security interests that are visible in the account should have priority over those that are not visible in the account (even though such priority rules already exist in some of the jurisdictions in which Euroclear is active and we would not see any problem if they were introduced at EU level). If the non-book-entry methods for creating security interests were to include other methods whereby the account provider may not be notified, we agree that security interests that are acquired by earmarking should have priority over these other methods as it is impossible for the account provider to monitor interests that are not visible in the account and that are not notified to it. Question 11: Do you think that there should be a legal obligation for account providers to maintain, for securities of the same description, a number of securities or book-entry securities that corresponds to the aggregate number of book-entry securities of that description credited to the accounts of the account holder's clients plus those securities held for its own account, if any? We agree that account providers should be obliged to have appropriate procedures in place to ensure that (i) they maintain, for securities of the same description, a number of securities or book-entry securities that corresponds to the aggregate number of book-entry securities of that description credited to the accounts of the account holder's clients plus those securities held for its own account, and (ii) any imbalances are rectified. The nature of such a rule would have to be considered carefully as there may be instances in which reconciliation discrepancies do occur in practice for various reasons beyond the control of the account provider (e.g. errors of upper tier account providers). It would be unfair and unreasonable to introduce rules which would make the account provider liable for such events. Therefore it is preferable that the rules impose an obligation on the account provider to have appropriate procedures in place rather than an absolute obligation. In our view this obligation should ideally be of a regulatory nature, which would allow regulators to assess the adequacy of the procedures put in place by the account provider. In addition, any rule would have to be adapted to the particular situation of CSDs, which are not holding any securities with upper tier account providers when they act in their capacity of issuer CSD. Question 12: Do you think that, in case of insolvency of the account provider, securities kept by it for its own account shall be attributed to its account holders, as far as the number of securities kept by the account provider for its account holders is insufficient? It is in our view a public policy decision whether priority should be given to the account holders of the account provider rather than its creditors in case of insolvency of the account provider, Page 9 of 19

10 Question 13: Do you think that a remaining shortage should be shared amongst account holders of that account provider, in the case of its insolvency?. Yes, this is one of the solutions that should be allowed under the law of the Member States (unless the shortfall can be attributed to the actions/omission of a specific accountholder, in which case the loss should be borne by that accountholder only). The remarks made with regard to EUI in relation to question 11 are also applicable here. Question 14: Have you encountered difficulties in the application of the legal framework regarding holding and disposition of book-entry securities that could be fully or partially attributed to an unsatisfactory conflict-of-laws regime? [Yes/No/I don't know; if yes, please specify the difficulties] In light of the growing trend to consolidate and centralize IT systems, operational staff and other aspects of the business of an account provider, the lack of clarity of the rules to determine the location of a securities account has in our experience given rise to problems. While it is generally accepted that neither the place of processing, nor the location of the computers, should be considered relevant factors in determining the applicable law, a modern and harmonized conflict-of-laws regime could bring more legal certainty in this connection. Question 15: Do you think that future legislation on the legal framework of book-entry securities holding and disposition should harmonise issues of substantive law as well as the question of which law is applicable to holding and disposition of book-entry securities, including the creation of security interests? We remain of the view that the Hague Convention would have been the most adequate solution to bring legal certainty regarding the law governing the proprietary aspects of book entry securities. A harmonised EU regime would only offer a "regional" solution to a global issue. Even though it is probably better to obtain clearer and more complete rules in the EU than making no progress at all, we consider it very important that any improved European framework be as compatible as possible with the conflict-of-laws rules that apply in the main financial markets outside the EU. While we support the proposal for harmonised conflict of law rules, we are strongly against the idea of introducing a Community-wide obligation for all securities accounts to refer to a country code, as suggested by the Commission in its reflection paper of 22 June First, such a code would only have an evidentiary value and, could as such, not be a substitute for a rule of substance. Secondly, this would require a significant re-engineering of IT systems used by CSDs and by their clients across Europe; one can imagine alternative and less costly means of providing the required Page 10 of 19

11 information in an objective manner (for example through a standard mention on account statements). We strongly question whether the practical means of evidencing the applicable law should be imposed by EU legislation. Question 15bis: If yes: do you think that a uniform conflict-of-laws rule should govern the issues within the scope of the Settlement Finality Directive, the Directive on Winding-Up of Credit Institutions and the Financial Collateral Directive plus the aspects which are todate not included in the scope of the three directives? Yes. We see no reason why a clear, harmonised conflict of laws rule in the EU should be limited to the scope of those three directives. The objective should be a clear rule for all book entry securities in the EU. Question 16: Do you think that holding and disposition of bookentry securities is more costly in cases where the situation involves a cross-jurisdictional element? See answer to question 2. Question 16bis: If yes, could you give your best estimate of the additional cost and specify what types of cost arise? The legal cost stems mainly from the legal opinions required for setting up cross border access. Question 17: Do you think that investors face difficulties in exercising rights flowing from securities as soon as they hold through a cross-border holding chain? [Yes, considerable difficulties/yes, slightly more difficulties than in a domestic context/no/i don't know, if yes, please specify the difficulties] Yes, considerable difficulties stem from local rules which do not recognise multi-tier holding systems (cf. question 2). Other difficulties may be more of a practical nature and relate to different practices and language problems. It is unclear at this stage whether the practical problems in exercising voting rights will be resolved after the implementation of the Shareholders rights Directive. Page 11 of 19

12 Question 18: Do you think that the law of Member States should bind account providers to facilitate the exercise of rights flowing from the securities (e.g. by providing the investor, upon demand, with a certificate confirming his holdings; or, by making the investor the account provider s representative with respect to the exercise of the relevant rights {proxy}), where the exercise of rights would be impossible or cumbersome without the assistance of the account provider? While in the two examples used above, it seems very reasonable and justified that the account provider should be bound to facilitate the exercise of rights flowing from the securities, the notion of facilitating the exercise of rights is very broad and diffuse and may potentially impose a wide variety of obligations on account providers, which may not always be appropriate or desirable and could lead to an increase of cost for investors. For instance, it is generally impossible for an investor to obtain withholding tax relief at source with respect to dividend and interest payments without the assistance of the account provider with whom he is holding the securities. In order to facilitate the exercise by the investor of his right to such tax relief at source, account providers may be required to enter into agreements with the tax authorities of the source country, to undergo tax audits, to set up rather costly reporting mechanisms or even to assume significant credit risks. Given the costs and risks associated with such a service, it would not be appropriate to oblige all intermediaries to facilitate the right to obtain withholding tax relief at source. In view of the above, and in a competitive environment where there is a wide choice of account providers for investors to choose, we think that the duty to facilitate the exercise of rights is best made subject to contractually agreed levels of service. Question 19: Do you know other cases where assistance of the account provider is a prerequisite for the exercise of the right by the investor? [Yes/No/I don't know; if yes, please specify] The account provider s assistance is often a pre-requisite to obtain withholding tax relief; Attendance to a general meeting is not possible in Sweden and Finland for nominee registered shares unless the final investor is temporarily registered in the shareholder list by the nominee. This process involves the entire holding chain, as the information needs to be delivered by nominee registered custodians. Page 12 of 19

13 Question 20: Do you think that Member States' law should make possible the exercise of rights flowing from securities by an account provider on behalf of the investor where the exercise of the rights by the investor himself is impossible? Our comments on question 18 regarding the facilitation of rights apply mutatis mutandis to the exercise of rights: subject to a limited number of exceptions with respect to the most fundamental rights of an investor which immediately affect the life of a security, the duty to administer instructions from accountholders to exercise their rights should be made subject to contractually agreed levels of service, amongst others to allow investors to control cost. Question 20bis: In the affirmative case, do you think that this possibility should be subject (a) to feasibility on the side of the account provider [Yes/No/ I don't know, please specify, in particular, the exact scope of such feasibility exemption], and/or Yes, even though the notion of feasibility is rather subjective and is likely to give rise to discussion. (b) to contractually agreed levels of service between the account holder and the account provider? [Yes/No,/ I don't know, please specify]. Yes Question 21: Do you think that Member States' law should make possible the exercise of rights flowing from securities by an account provider on behalf of the investor, in a scenario where the investor does not want to exercise the rights himself? No, account providers should not have discretionary powers in this respect and should only act on the basis of the account holder s/investor s consent. Question 21bis: In the affirmative case, do you think that this possibility should be subject (a) to feasibility on the side of the account provider [Yes/No/ I don't know, please specify, in particular the exact scope of such feasibility exemption], and/or (b) to contractually agreed levels of service between the account holder and the account provider? [Yes/No/I don't know; please specify]. N/a Page 13 of 19

14 Question 22: Do you think that an account provider should be bound to exercise, on behalf of the investor, the following rights flowing from securities: In answering this question, we have assumed that the obligation of the account provider to exercise rights on behalf of the investors should be understood as an obligation to provide assistance to investors in the exercise of fundamental rights. The nature of the assistance may vary depending on the relevant rights and on the account provider which provides the assistance. For instance, with respect to dividends, a custodian may receive the dividends from its upper tier account provider (or from the paying agent) and credit the cash accounts of its clients, while (some) other custodians may provide the issuer (or paying agent) with an overview of the positions of its accountholders in order to allow the paying agent to make payment directly to the accountholders. Note that in a transparent system this assistance is often provided by the account operator operating the account and not the CSD who maintains the account. (a) Rights entailing a change of the relevant security itself (e.g. conversions, reorganisation) ; Yes. (b) Collection of dividends or other payments and subscription rights ; Yes, subject to the above comments. (c) Acceptance or refusal of takeover bids and other purchase offers? ; No, this is not always possible or desirable. There are certain bids and offers which are only open to certain types of investors (e.g. sophisticated investors) and the account providers will not always have sufficient knowledge or expertise to know whether an account holder is permitted to participate in a particular bid or offer. (d) Other rights [please specify which and why] N/a Question 23: Do you think that account providers should be bound to pass on information with respect to book-entry securities which is required in order to exercise a right enshrined in the securities which exists against the issuer? ; In essence it should be up to the investor to decide which information it wishes to receive. If future legislation were to oblige an account provider to pass on information, such obligations should not apply: where the issuer has decided to communicate the information through other channels; or where the account holder has agreed with the account provider not to receive the information (investors and accountholders may not Page 14 of 19

15 wish to incur the cost of receiving information from their account provider which they may not need or already receive through other channels). Question 24: Do you think that this obligation should be restricted to information (a) which is received "through the holding chain", (i.e. directly either from the issuer or an account provider which maintains an account for the account provider in question, or from the investor or another account provider for which the account provider in question maintains an account.) ; The obligation should not only be restricted to the information received through the holding chain, it should in addition be limited to information that originates from the issuer, its agent or affiliated institution (and should thus not apply to information distributed by upper tier account providers which does not come from the issuer). (b) which is directed to all investors in securities of that description? The question whether or not the information is directed to all investors is in our view not a relevant criterion and cannot be applied in practice by upper tier account providers who have no direct relationship with the investors. Question 25: Would you advise other/additional restrictions to this duty? [Please specify] See above. Question 26: Do you think that the processing of rights flowing from securities is more costly in case where the situation involves a cross-jurisdictional element? [Yes/No/I don't know] Yes, but probably more because of a need for multiple intermediaries, lack of standardisation of market practices and communication means than for reasons of a legal nature. In situations where there is a cross-jurisdictional element, these difficulties on their own generally require the involvement of a local intermediary which adds to the cost. Question 26bis: If yes, could you give your best estimate of the additional cost and specify what types of cost arise? Page 15 of 19

16 Question 27: Do you think that an issuer incorporated under the law of an EU Member State should be allowed to arrange for its securities to be initially entered into holding and settlement structures (in particular those maintained by a central securities depository) in, or governed by the law of, another EU Member State? We agree in principle that an EU issuer should be able to choose the location of the initial entrance of its securities into a holding and settlement structure within any EU Member State. In theory at least, this would increase the competition between CSDs on this type of service offering. Such a choice must be without prejudice to the CSD s right to refuse on legitimate commercial grounds to accept the request for initial holding of securities. So, for example, if a CSD judged that the cost or difficulty of establishing adequate links with an issuer or registrar in another Member State was too great to make the establishment of the link commercially viable, it should retain the freedom to refuse to accept the issuer s request. Before the industry reaches a view on whether legislation is needed to facilitate such choice, clarification is needed on the following questions: How such regime would work in the case of already existing securities (specifically as most equities are already issued)? Would this regime only apply to securities issued after its implementation in national law? Would this regime specify how to deal with issuance of the same security at different locations? Would issuers have the possibility to pool all their (existing and new) securities into a single CSD? How would this regime link in with listing requirements? And how would it fit with the place of trading and clearing? Again, we would appreciate a more detailed dialogue with the Commission on this important area. Question 28: Do you think that holding and settlement structures for securities, in particular those maintained by a Central Securities Depository, which are governed by the law of an EU Member State, should be open for securities constituted under the law of another EU Member State? See answer to question 27 above. Question 29: Are there, in your view, issues stemming from other branches of law, such as corporate law, fiscal law, etc., or regulatory/supervisory concerns that could advise against the establishment of free choice by an issuer, as set out above. [Yes/No/I don't know; if yes, please specify the issues] Free choice of primary deposit is theoretically welcome, but costs may be high and implementation complex. The cost and effort of embarking on Page 16 of 19

17 such a reform may need to be balanced with the issuers appetite to change the location of their securities. For example, record dates used to determine dividend and other distributions or rights depend on the relevant corporate law rules. If these are not harmonised, the cost of adapting systems and operationally managing different processing timetables by any CSD acting as primary depository may not be justified. Another example relates to the form of the securities, CSDs which hold securities in dematerialized form would have to set up vaults and vaults management processes to be able to offer services for securities issued in physical form. Finally, CSDs may have established working relationships and often quite complex arrangements, with their local tax authorities to facilitate collection of taxes. Free choice of primary deposit may require CSDs to attempt to establish similar relationships and arrangements with tax authorities in other Member States. This is likely to involve CSDs in substantial additional costs and effort, which should be weighed against any benefit to issuers and others from free choice of primary deposit. Question 30: Do you at present incur additional cost because either or both of the above possibilities of choice do not exist? [Yes/No/I don't know/not applicable] Yes, there are additional costs that result directly from the holding restrictions imposed by the existence of certain local restrictions. Question 30bis: If yes, could you give your best estimate of the additional cost and specify what types of cost arise? As long as there are different layers of holding, access and interoperability costs include safekeeping fees that need to be paid to the issuer CSD. However, it is difficult to quantify these costs, since it at this stage it is not possible to make a comparative assessment between (i) the safekeeping fees paid for primary deposit and (ii) the costs that CSDs wanting to become the issuer CSD for foreign securities would have to incur. This will depend on the level of harmonisation achieved and on the likelihood that issuers would really change the existing holding structures. Where a CSD needs to maintain IT systems in a foreign location to comply with local restrictions, this can be very costly, as these include set up costs, ongoing maintenance and communications costs, etc. Question 31: Do you think that all providers of securities accounts established in the EU should be subject to authorisation and supervision in relation to their services of maintaining securities accounts? Yes, we are of the view that the service of maintaining securities accounts for clients should only be provided by regulated entities. We support the concept of defining account providers in a way which delivers a consistent Page 17 of 19

18 functional approach to future regulation by ensuring that institutions offering similar services are regulated in a similar way. However, we are not aware of any type of providers of securities accounts that are not already regulated today (unless registrars, and issuers acting as registrars, were to be considered account providers). The vast majority of account providers (e.g. credit institutions, investment firm) also offer investments services and will thus be subject to MiFID. Account providers which do not also offer investment services (and are thus not subject to MiFID) consist mainly of CSDs (to the extent they are considered account providers). CSDs are already regulated and subject to national and European rules which are better adapted to the specific activities carried out by them (cf. the Settlement Finality Directive, the ESCB-CESR recommendations for Securities Settlement Systems that are in the process of being adopted and contain specific provisions on the protection of customers securities). Question 31bis: If no, which account providers should not be subject to authorization and supervision by competent authorities? [Please designate the type of account provider and specify why.] N/a Question 32: Do you think that the service of safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management (which is a so-called ancillary service under MiFID) should be made an investment service in the sense of MiFID (i.e. inserted in Section A of Annex I of the MiFID and be deleted from Section B)? We do not think that making the pure and simple service of safekeeping and administration of financial instruments an investment service would be an appropriate solution: First, MiFID contains a number of obligations which are irrelevant, disproportionate or not adapted to account providers which do not also offer investment services (or which offer these services in an incidental manner only). Examples of such obligations include: the rules on the best execution of orders and order handling rules; the measures to be taken to manage external conflicts of interest, which are disproportionate for account providers which do not also offer investment services. The rules on the classification of clients, which are not adapted to the situation of some CSDs which only accept regulated financial institutions as clients (which will by definition be professional clients); The obligation to conduct, on a regular basis, reconciliations between internal records and those of any third parties by whom the assets are held, which are inadequate for CSDs to the extent they are Page 18 of 19

19 acting as issuer CSD (in which case they do not hold assets with third parties). Secondly, as mentioned above, CSDs are already regulated and subject to national and EU rules which are better adapted to the activities they carry out. Bringing them within the scope of MiFID may lead to overlapping rules and regulations (cf. above). Question 32bis: If yes, do you see any specific difficulties in including certain types of account provider in the full or even a limited scope of MiFID? [Yes/No/I don't know; if yes, please specify the difficulties] See above. For further questions on this response please contact Paul Symons (paul.symons@euroclear.com) or Ilse Peeters (ilse.peeters@euroclear.com) or Philip Kerfs (philip.kerfs@euroclear.com) Page 19 of 19