The Integration of European Financial Markets

The Regulation of Monetary Obligations

Noah Vardi

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136847820
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

The last decade has seen the increasing integration of European financial markets due to a number of factors including the creation of a common regulatory framework, the liberalisation of international capital movements, financial deregulation, advances in technology and the introduction of the Euro. However, the process of integration has proceeded largely in the absence of any comprehensive legal regulation, and has rather been constructed on the basis of sectorial provisions dictated by the needs of cross-border transactions. This has meant that many legal barriers still remain as obstacles to complete integration.

This book considers the discipline of monetary obligations within the wider context of financial markets. The book provides a comparative and transnational examination of the legal rules which form the basis of transactions on financial markets. Analysing the integration of the markets from a legal point of view provides an opportunity to highlight the role of globalisation as the key element favouring the circulation of rules, models, and especially the development of new regulatory sources.

The book examines market transactions and the institutes at the root of these transactions, including the type of legislative sources in force and the subjects acting as legislators. The first part of the book concentrates on the micro-discipline of money, debts, payments and financial instruments. The second part goes on to analyse the macro-context of integration of the markets, looking at the persistence of legal barriers and options for their removal, as well as the development of new legal sources as a consequence of the transfer of monetary and political sovereignty. Finally, the book draws links between the two parts and assesses the consequences of the changes at the macro-level of regulation on the micro-level of legal discipline of monetary obligations, particularly focusing on the emergence and growing importance of soft law.

Chapter 1:
The Root of Transactions in Financial Markets: Monetary Obligations

1. Introduction

If an inquiry into legal sources of financial markets can be imagined as trying to provide a cross-section of a multi-storey building, each floor of which represents different legal institutes and different legal sources, a logical starting point is the ground floor of the building. One of the legal institutes at the basis of transactions taking place in financial markets is the monetary obligation, an institute which broadly defined also comprises rules on payments and financial instruments. An examination of the changes in the regulation of this institute is paradigmatic of the development of new sources disciplining financial market transactions. Before assessing the consequences of this evolution and the role of new and old forms of regulation, it is necessary to briefly recall the main legal problems and developments surrounding the notion of monetary obligations.

2. Money

Monetary obligations are functionally associated with the object that renders them typical: money. The traditional approach to the study of these obligations begins with tentative definitions of money from a legal standpoint.¹ This methodological approach appears to be justified in view of the particular rules to which money is subject and which consequently reflect on the obligations involving the payment of a sum.

While some of the definitions and theoretical approaches that have been developed over the course of centuries may appear today as purely academic and to a certain extent have been outdated by practice,² a very brief account of the central notions of what may be qualified as ‘money’ from a legal point of view may however be useful as a guideline when it is necessary to assess the characteristics of new payment and financial instruments.

This assessment consequently allows, following the corollary that transactions involving the payment of a sum of money are referred to as ‘monetary obligations’, a series of operations that are carried out in financial markets worldwide (and that will be the object of analysis of this study, with special focus on the European Union (EU) markets after the introduction of the euro) to be considered as monetary obligations.

In most legal systems, the notion of money is nowhere explicitly defined by the legislator.³ However, the law invariably refers to money as an acquired notion in disciplining payments, interests and so forth.⁴ The main difficulty lies therefore in the appraisal of a purely legal notion of money. From the economic point of view money is considered as a medium of exchange, a measure of value, and a store of wealth (that serves as a reserve of liquidity).⁵ One of the most authoritative legal transpositions of these concepts identifies money as ‘chattels, which are issued under the authority of the law in force within the State of issue, are denominated with reference to a unit of account, and are to serve as the universal means of exchange in the State of issue’.⁶

When money serves as a means of payment, it not only allows the reduction of two chattels that may have profoundly different characteristics to a homogeneous equation in terms of value;⁷ it also comes into consideration in its physical quality as a chattel that is given or promised. It is under the latter notion, however, that the particular nature of money affects the obligation based on it. Indeed, in those legal systems where money under the law of property should be disciplined by the general rules on circulation of chattels (and a monetary obligation would be classified as belonging to the general category of ‘delivery obligations’), a series of exceptions arise.⁸ The fact that money, with the end of metallism, is an abstract ‘ideal unit’, completely dematerialised and unconvertible, entails that it is not a commodity but rather a ‘function’, which serves as a medium of exchange and as a measure of value. Hence the difficulties in applying possessory rules or rules on performance of a delivery obligation to a ‘function’.⁹

A transfer of money will be disciplined differently depending on whether money is being transferred as a commodity (i.e. a sale or exchange of foreign currency, or of specific coins) or as a medium of exchange (money paid in discharge of a debt). For example, the rules on specific performance are only available in the case of money being transferred as a commodity; damages in the case of non-performance or delay can be awarded only in the case of money as a commodity (a transfer of money as such only provides entitlement to the nominal value of the debt and in the case of delay the remedy is interest).¹⁰

As for the difficulties in applying possessory actions to recover money, the problems are due to the fact that, while an action for recovery cannot involve specific coins because money is inherently fungible, there can be no proprietary claim to a mere ‘debt’ either. In the Common Law there is a possibility of applying the personal ‘action for money had and received’ to follow money into the hands of an accounting party even when the subject matter is not money itself but some form of security or equivalent, provided that ‘the parties have treated it as money or a sufficient time has elapsed so as to raise an inference that it had been converted into money by the defendant’.¹¹ In equity too, the doctrine of equitable tracing extends beyond the expression ‘money’ to all assets capable of being identified from a mixed fund.¹²

German scholarship has developed the special notion of a ‘debt of a sum of money’ (the Betragsschuld), to which special recovery actions could be applied (i.e. the Surrogationstheorie or the Wertvindication).¹³

The modern relevance of these distinctions lies in the correct assessment of certain monetary transactions (i.e. especially banking transactions). For example, a transfer of foreign currency can be either a repayment obligation (a loan of foreign currency) or an exchange/sale obligation (a purchase of foreign currency); the distinguishing feature between the two being that usually a repayment transaction implies that the recipient has to return the sum in the same currency or in a different currency whose quantum is determined with reference to the currency received. The same parameters enable a distinction to be made between a currency swap with a commitment to re-exchange (in which two currencies are exchanged in a sale followed by a later reverse counter-sale) from a back to back loan (in which the currencies are exchanged as two concurrent loans, the repayment of which will be measured by the currency of the initial transfer).¹⁴ The notion of money as a means of exchange (or means of payment) relates to the further important distinction between money and currency. The latter indicates money that has legal tender in a State (an attribution which is possible due to monetary sovereignty).¹⁵ In order to comply with the function of means of payment, money paid in the performance of a debt has to discharge the debtor.

The discharging effect is due to the monetary sovereignty of the State. The fundamental State Theory of Money, holds that only the State can attribute the character of ‘money’ to a chattel independently of an intrinsic value it may have because of the material from which it is coined (an assumption, on the contrary, at the basis of the metallistic theory).¹⁶ This state sovereignty entails the right to control money; not only by setting its value at the moment of issue, but also by retaining the power to change the means of payment and the basic money unit, to exercise exchange controls, abrogate gold standards and so forth. According to a development of this theory, by tendering currency in discharge of an obligation, the debtor ultimately delegates the State that has issued that money to discharge the debt between himself and the creditor.¹⁷

A theory opposed to the State Theory of Money (the ‘social’ or ‘societary theory of ‘money’) holds that it is commercial usage or social confidence that qualifies ‘money’. This view corresponds to the wide notion that economists tend to have of what money is, and therefore this view is often considered insufficient by those authors in search of a strictly legal definition of money.¹⁸ It constitutes one of the criticisms of Knapp’s theory which cannot explain how historically and in practice different chattels and/or titles, not issued nor designated as money by the State, have been accepted as such.¹⁹

These considerations are at the root of another of the key contributions on the nature of money: the theory of the Ideal Unit developed by Arthur Nussbaum.²⁰ According to this theory, ‘money, the concrete object, is a thing which irrespective of its composition, is by common usage given and received as a fraction, integer or multiple of an ideal unit’.²¹ The importance of this theory lies in the fact that it too serves as a basis for nominalism, emancipating the notion of money from metallistic theories, but by providing an alternative to the State Theory of Money (and thus overcoming the criticisms of the excessive rigidity of the latter because of its failure to explain certain concrete historical experiences). Nominalism ensues from the social ‘acceptance’ of money that follows once money is given or taken in pure reliance on the ‘name’ of the weight, without a concrete measurement of the monetary units exchanged.²²

The notion of monetary sovereignty and legal tender, which attribute to money one of the characteristics that distinguish it from the general category of chattels, are at the base of the universal default principle applied to monetary obligations: a debt is extinguished at its nominal value.

The nominalistic principle finds its first theoretical basis in the State Theory of Money. If the State formally designates a chattel as money, and if it does so independently of any intrinsic value (such as a gold or metallic standard), the ‘value’ of the currency derives simply from the nominal value that the state ‘declares’ that it shall have. Therefore if a debtor extinguishes his debt through payment of money issued by the State for a quantity that nominally corresponds to the sum for which the debt was contracted, he pays good money and must accordingly be discharged.

Nominalism has developed as a principle opposed to the metallistic or intrinsic value of money theories (according to which money derives its value from the substance in which it is coined or from the parity in terms of gold or another substance). Among the historical achievements of the nominalistic principle is the provision of a foundation for circumventing the effects of the widespread ancient practice of debasement of coins. The affirmation of nominalism (today universally accepted as a legal principle for monetary obligations) was also strongly favoured by the diffusion of banknotes (which though at first convertible into metallic money, have been progressively detached from the underlying gold or metallic standard and have been imposed as unconvertible legal tender). The value of banknotes as legal tender at their nominal value has been sustained not only by constitutional and legal provisions, but a...