European Banking and Financial Law 2e

Matthias Haentjens, Pierre de Gioia Carabellese

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781351701792
• Edition: 2
• Topic: Économie
• Subtopic: Banques et services bancaires

Over the last few decades, banks, insurers, pension funds, investments firms and other financial institutions have become subject to sometimes dramatically new, but always substantially more, legislation. This is especially true for the EU. Moreover, Brexit has already caused profound changes to the dynamics of EU financial regulation, and its effects will likely become ever-more significant in the years to come.

This book serves as a comprehensive introduction to these developments, and, more generally, to European banking and financial law. It is organised around the three economic themes that are central to the financial industry: (i) financial markets, (ii) banking and financial institutions and (iii) financial transactions. It covers not only regulatory law but also commercial law that is relevant for the most important financial transactions.

This Second Edition has been completely revised. The basic structure of the First Edition has been maintained, but all chapters have been thoroughly rewritten and restructured. Attention is now also given to topics such as shadow banking and credit rating agencies. As a matter of course, all new relevant legislation and case law has been included. In addition, on the basis of real-life classroom experience, student questions and further reading suggestions have been updated and expanded.

Part D

Financial transactions

Chapter 10
Custody and transfer of cash and securities

In this chapter, you will learn about:

• the concepts of custody, clearing and settlement;
• how to understand custody, clearing and settlement from a private law perspective;
• what the Settlement Finality Directive and PSD II entail; and
• how EU regulatory and private law try to accomplish segregation.

10.1 Introduction

As stated in section 6.1, banks as we know them today have developed from their original role as moneychangers to the business of deposit taking, i.e. the accepting and safekeeping of monies from the public, and the granting of loans with those monies. Cf. the definition of “credit institution” found in Art. 4(1)(1) CRR:¹ “A credit institution is an undertaking the business of which is (i) to take deposits or other repayable funds from the public and (ii) to grant credits for its own account”. Whilst Chapter 7 is concerned with the regulatory law dynamics of this definition, i.e. the authorization that must be obtained if one falls under this definition, this Chapter 10 is concerned with the first limb of this definition, i.e. the taking of deposits, and with the provision of payment services. The next chapter focuses on the second limb, i.e. the granting of loans. The custody and transfer of monies is in many ways similar to the custody and transfer of securities. Moreover, banks commonly hold not only cash but also securities for their clients. Therefore, the two types of assets are addressed together in this chapter. However, under EU legislation, the custody of cash is offered by “credit institutions” (banks), whilst custody of securities is offered by investment firms, so that when credit institutions offer securities custody services, they do so in a capacity as investment firm.²

1In full: Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176.

2More specifically, custody services qualify as an “ancillary service”, which may be performed under a licence authorising investment services or activities. See Art. 6(1) MiFID II and Section B of Annex I, under (1). See on investment services or activities also Chapter 9.

As explained in section 6.1, people in the Italian city states such as Genoa, Florence and Venice brought their coins to a banker primarily for the safe keeping of these monies, but also so that the banker could facilitate, upon a transfer order by his client(s), cross-border transfers of this cash³ . Thus, even at this pioneering stage of the banking business, deposits were already credited to accounts and the banker could effectuate a cross-border transfer order simply by making the relevant credit and debit entries in the accounts he maintained in his books, i.e., by making the relevant book-entries in his ledgers.⁴ It is not difficult to envisage how this system of book-entry transfers was instrumental in minimising the risks that would stem from a physical cross-border transfer of monies. This system has thus been conceived and put in practice for dealings with money, and has subsequently been refined over the following centuries. It was only over the course of the last century that the invention of accounts and book-entry transfers has also been generally applied to the custody of securities.

3In the medieval context the term “cross-border” should be understood as referring to transactions between different city states sometimes not far from each other, yet formally under a different jurisdiction.

4R De Roover, New Interpretations of the History of Banking, in J Kirshner (ed), Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (University of Chicago Press, Chicago 1974) 201; RC Mueller, The Venetian Money Market, Banks, Panics, and the Public Debt, 1200–1500 (Johns Hopkins University Press, London 1997) 8 and M De Poli, European Banking Law (Wolters Kluwer, Assago 2017) 22, 23.

As a result of the technological developments which materialised over the latter half of the last century, the accounts maintained on (physical) books just referred to, both in relation to money and securities, have been replaced by electronic accounts. Thus, the bulk of cash and securities in contemporary banking are held and transferred through the medium of electronic book-entries in electronic accounts. The latest stage in this development has been the invention of Distributed Ledger Technology (DLT), whereby assets are no longer held at a centralised place (such as a central securities depository or CSD for securities and a central bank for cash), but in various “nodes” or devices. Various assets can be held through DLT, including securities, but bitcoin is probably the best-known asset held through DLT. But because no extensive EU legislation has yet been enacted for this type of custody, the remainder of this chapter will discuss traditional assets and their custody only.

As do the following chapters, this chapter takes a transactional perspective, and is therefore more concerned with private or commercial law than with regulatory, i.e. administrative law rules. Thus, this chapter deals with the custody and transfer of money, i.e. cash,⁵ and securities mainly from a private or commercial law perspective. First, the practice and relevant EU legislation relating to the transfer of cash and securities following transactions concluded on the financial markets, i.e. “clearing and settlement”, will be discussed. The main EU instrument in this regard is the Settlement Finality Directive,⁶ which deals with transfer (orders) of both cash and securities, and aims to reduce the systemic risk associated with participation in payment and securities settlement systems, and, more specifically, the risk that materialises when a participant in such a system becomes insolvent.⁷

5Interestingly, “money” is not a concept defined in EU legislation. Rather, the terms “cash” and “funds” (the latter including cash) are used. See, e.g. PSDII and MiFID II.

6In full: Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems, OJ L 166.

7For a brief commentary to the Settlement Finality Directive, see C Proctor, The Law and Practice of International Banking (2nd edn Oxford University Press, Oxford 2010) 638, 642.

Subsequently, attention will shift to the custody and transfer of cash. Cash in the EU is governed by the Single European Payments Area (SEPA), whilst the Payment Services Directive II (PSD II)⁸ forms a crucial component of SEPA. In short, PSD II aims to harmonise the regulatory framework regarding payment services providers and introduces an authorisation requirement for the pursuit of the payment services business. The technical and regulatory guidelines put in place via SEPA and PSD II will not be subject to an extensive discussion in this chapter, as focus will be on private law aspects.

8In full: Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC, OJ L 337.

Finally, the custody and transfer of securities will be discussed. The custody of cash and securities has not been the subject of much European legislation. Yet in the immediate aftermath of the global financial crisis of 2007/2008, the issue of the custody of cash and securities and, more specifically, of the segregation of client assets from the bank’s own assets and from the assets between clients, has caught the eye of legislators across the globe. Thus, the rules of segregation that follow from MiFID II⁹ and the CSD Regulation¹⁰ will be discussed. Also, attention shall be drawn to the various solutions which, from a private law perspective, the relevant jurisdictions have developed for securities custody.

9Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173 (MiFID II); and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173 (MiFIR). See also Chapter 9, section 2.

10In full: Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012, OJ L 257/1.

10.2 Clearing and settlement¹¹

11The following draws on M Haentjens and WAK Rank, Legal and operational asset segregation, in M Haentjens and B Wessels (eds), Crisis Management in the Banking Sector (Edward Elgar Publishing, 2015) 366 et seq.

10.2.1 Depositum and indirect holding

Under the Roman law concept of depositum (regulare), a depositor has a property right in individually deposited assets.¹² Legally, this means that the depositor retains his ownership right in the deposited assets and may retrieve those assets at any time, including in the custodian’s insolvency. In practice, depositum (regulare) obligates a custodian to register the individual assets held for each individual depositor. This concept applied both to cash and, later, also to securities. However, as the practice of individual custody involved increasingly burdensome administrative costs, assets became merged in the custodian’s coffers and administered on a collective basis. Moreover, money is the most interchangeable, i.e. fungible thing. Therefore, collective custody means that a banker can only return equivalent assets, i.e. not the very same assets that the client had deposited, but the same in terms of both quality and quantity only.¹³ Consequently, in most legal systems, s...