Dalhuisen on Transnational Comparative, Commercial,

Financial and Trade Law

Volume 3

Financial Products, Financial Services and Financial Regulation

Jan Dalhuisen

Professor o f Law, D ickson P oon School o f Law King’s College L ondon

M iran d a C h air in T ransnational F inancial Law C atholic U niversity Lisbon

V isiting P rofessor U C Berkeley

C o rresp o n d in g M em ber N etherlands Royal A cadem y o f A rts and Sciences

M em ber N ew York Bar

ICSID A rb itra to r

• H A R T -PUBLISHING

O X FO RD A N D PO RTLA N D , O R E G O N2013

Contents

Table o f Cases.................................................................................................................................................. xixTable o f Leg is la tion ....................................................................................................................................xxvii

C h a p te r I : F in an c ia l P ro d u c ts a n d S e rv ic e s ........................................................................................ 1

Part I: Secured Transactions, Finance Sales and Other FinancialProducts and Services........................................................................................................ 1

1.1 Civil and C o m m o n Law A pproaches. C red it C u ltu resand T ra n sn a tio n a lisa tio n .........................................................................................................1

1.1.1 In tro d u c tio n .................................................................................................................. 11.1.2 F inancial P roduc ts in C om m erc ia l B anking

an d C ap ita l M arkets................................................................................................... 51.1.3 D ifferen t C red it C u ltures, th e Prevalence o f D om estic

Laws an d the Issue o f Legal T ran sn a tio n a lisa tio n .........................................101.1.4 Local D ifferences and S im ilarities in th e Legal O rg an isa tion

o f A sset-Backed F in a n c in g .................................................................................... 161.1.5 In te rn a tio n a l C onvergence in Secured T ransactions

and F inance Sales?.................................................................................................... 211.1.6 T he P rob lem s o f and N eed fo r M o d ern N on-Possessory

Security In terests in P ersonal P roperty an d th e A lternativeUse o f F inance Sales.................................................................................................24

1.1.7 F inance Sales and Secured T ransactions D istingu ished , th e R e-C haracterisa tion Issue. D ifferen t Riskand R ew ard S tru c tu re s ...........................................................................................29

1.1.8 F orm al In te rn a tio n a l H a rm o n isa tio n A ttem pts in th e Area o f Secured T ransactions an d F inanceSales. T he EU C ollateral D irec tiv e ..................................................................... 35

1.1.9 N otions o f S epara tion , Segregation an d P riority . P ro p rie ta ry an d O th e r S truc tu res to the Effect. S et-o ff a n d C o n trac tu a l N etting C lauses. T he C oncep t o f S u bo rd ina tion .B ankrup tcy C o n se q u e n c e s ....................................................................................37

1.1.10 Party A u tonom y an d th e C o n trac tu a lisa tio n o r U n b u n d lin g o f P rop rie ta ry R ights fo r F u n d in g Purposes. T he B etter P ro tec tion o f B ona Fide P urchasers and the LesserP ro tec tion o f Bona Fide C re d ito rs ..................................................................... 43

1.1.11 A u to n o m o u s T ransna tiona l an d D om esticLegal D ev e lo p m e n ts .................................................................................................47

1.1.12 U n certa in ty in In te rn a tio n a l F inancial D ealings.T he Idea an d T echnique o f T ransna tiona lisa tionin A sset-B acked F u n d in g ....................................................................................... 51

v i CONTENTS

1.1.13 T he Im p ac t o f th e A pplicable D om estic B ank rup tcy R egim e in In te rn a tio n a l F inancial T ransactions. T he US A pproach a n d the EU B ankrup tcy R eg u la tio n ................................................................... 54

1.2 T h e S itua tion in the N e th e rla n d s .......................................................................................581.2.1 In tro d u c tio n : T he N ew Civil C ode o f 1992 ................................................... 581.2.2 Security S ubstitu tes and F loating C harges:

T he R eservation o f T it le .........................................................................................611.2.3 C o n d itio n a l and T em pora ry O w nersh ip : T he Lex C om m issoria 641.2.4 O p en o r C losed System o f P ro p rie ta ry R ig h ts ...............................................68

1.3 T he S itua tion in F ra n c e ...................................................................................................... 701.3.1 In tro d u c tio n : T he Vente ä Remere an d Lex

Comm issoria. T he M o d ern F loating C h a rg e .................................................. 701.3.2 T he Im p ac t o f th e N o tion o f the Solvability A p p a ren te ..............................721.3.3 T he M o d ern R epurchase A greem en t o r Pension L ivree ..............................741.3.4 T he R eservation o f T it le .........................................................................................751.3.5 Finance Sales: T he Pension Livree, E x tended R eservation

o f T itle, th e Effect o f the Loi Dailly, and the Im p lem en ta tio no f th e EU C ollateral D irec tive .............................................................................. 77

1.3.6 S ecuritisa tion o r Titrisa tion (Ponds C om m uns de Creances)an d the T ransfer o f In tang ib le Assets in F inance S c h e m e s ...................... 80

1.3.7 T he In tro d u c tio n o f the T rust o r Fiducie in F ra n c e ....................................811.3.8 O p en o r C losed System o f P ro p rie ta ry R ig h ts...............................................83

1.4 T he S itua tion in G e rm a n y ..................................................................................................831.4.1 In tro d u c tio n : the D eve lopm en t o f th e R eservation

o f T itle a n d C o n d itio n a l T ransfers; F loating C h a rg e s ................................ 831.4.2 Sicherungsübereignung an d C o n d itio n a l S a le s ...............................................881.4.3 F inance S a le s .............................................................................................................. 911.4.4 C u rb in g Excess: O p en o r C losed System

o f P ro p rie ta ry R ig h ts ...............................................................................................93

1.5 T he S itua tion in the U K ......................................................................................................961.5.1 In tro d u c tio n : D ifferences fro m Civil L aw .......................................................961.5.2 Basic Features o f C o n d itio n a l o r S p lit-O w nersh ip

In terests. E quitab le a n d F loating C harges. O p en Systemo f P ro p rie ta ry R ig h ts ...............................................................................................98

1.5.3 T he D istinc tion betw een C o n d itio n a l Sales an d Secured T ransactions: P ub lica tion R eq u irem en ts ........................................................104

1.5.4 R eservation o f T itle ................................................................................................ 1081.5.5 F inance S a le s .............................................................................................................109

1.6 T he S itua tion in the U S A .................................................................................................. 1111.6.1 In tro d u c tio n : T he A pproach o f A rticle 9 U C C

a n d its U n ita ry F u n c tio n a l A p p ro a c h ..............................................................1111.6.2 T he U n ita ry F unc tiona l A pproach an d F inance Sales:

P rob lem A reas in A rticle 9 U C C ....................................................................... 1141.6.3 P ro p rie ta ry C h a ra c te r is a tio n s ............................................................................119

CONTENTS VÜ

P a r t II: F in an c ia l P ro d u c ts a n d F u n d in g T ech n iq u es . In te rn a t io n a la n d R e g u la to ry A sp ec ts ...........................................................................................................123

2.1 F inance Sales as D istingu ished from Secured T ransactionsin Civil and C o m m o n Law: T he R e-C harac te risa tion R isk ................................. 123

2.1.1 In tro d u c tio n ............................................................................................................. 1232.1.2 T he P ractical D ifferences betw een Security- and

O w nersh ip -B ased F und ing . T he R e-C haracterisa tionIssue R ev isited ..........................................................................................................127

2.1.3 Legal D ifferences betw een Security- an d O w nersh ip -B ased F und ing . T he Early O p e ra tio n o f S p lit-O w nersh ipR ights in the U S A ...................................................................................................129

2.1.4 P ractical Issues and R e levance ...........................................................................1372.1.5 N atu re , Use and T ransfers o f C o n d itio n a l an d T em pora ry

O w n ersh ip R ights. T he D ifference betw een T h e m ......................................1392.1.6 T he D uality o f O w nersh ip in F inance Sales an d th e Im pac t

o f th e F ungib ility o f A ssets..................................................................................1462.1.7 F inance Sales an d Sharia F in an c in g .................................................................1482.1.8 In te rn a tio n a l Aspects: Private In te rn a tio n a l Law

A pproaches to th e Law A pplicable to P ro p rie ta ryR ights. B ank rup tcy E ffec ts..................................................................................151

2.1.9 In te rn a tio n a l Aspects: U n ifo rm Laws and M odel Lawson Secured T ransactions. T he EBRD E ffo r t................................................. 155

2.1.10 In te rn a tio n a l Aspects: T he 2001 U N ID R O IT C o n v en tio n on In te rn a tio n a l In terests in M obile E q u ip m e n t...............................................159

2 .1 .11 D om estic and In te rn a tio n a l R egulatory A spects........................................1612.1.12 C o nclud ing R em arks. T ransna tiona lisa tion an d the Issue

o f P arty A u tonom y in P ro p rie ta ry M a tte rs ...................................................161

2.2 M o d ern Security Interests: T he E xam ple o f th e F loating C h a rg e .......................1652.2.1 Types o f F loating C harges o r Liens. P rob lem A reas .................................1652.2.2 D ifferent A pproaches. C om para tive Legal A nalysis..................................1682.2.3 M o d ern P ub lica tion o r Filing R equ irem en ts . T h e ir M ean ing and

Defects. R ank ing Is su e s ........................................................................................1722.2.4 Special P rob lem s o f th e A ssignm ent in B u lk ..............................................1752.2.5 In te rn a tio n a l A spects o f F loating C harges. L im ited U nification

A tte m p ts .................................................................................................................... 1782.2.6 D om estic and In te rn a tio n a l R egulatory A sp ec ts .......................................1802.2.7 C o nclud ing R em arks. T ran sn a tio n a lisa tio n ................................................ 180

2.3 Receivable F inancing an d Factoring . T he 1988 U N ID R O IT F actoring C onven tion an d the 2001 U N C ITR A L C onven tiono n the A ssignm ent o f Receivables in In te rn a tio n a l T rad e ................................... 182

2.3.1 A ssignm ent o f M o n eta ry C laim s in Receivable F inancing and Factoring . T he Issue o f L iq u id ity ......................................................................182

2.3.2 Receivable F inancing and F actoring: O rig inand D ifferen t A p p ro a c h e s ................................................................................... 186

2.3.3 Factoring: th e C o n trac tu a l A spects.................................................................189

V l l l CONTENTS

2.3.4 Factoring : T he P ro p rie ta ry A sp e c ts ................................................................. 1912.3.5 In te rn a tio n a l A spects. T he U N C IT R A L a n d U N ID R O IT

C onven tions. In te rn a tio n a lity an d A p p licab ility ........................................1942.3.6 T he U N C IT R A L an d U N ID R O IT C onven tions. T h e ir C o n ten t,

Field o f A pp lica tion , In te rp re ta tio n a n d S u p p lem en ta tio n .T h e ir Role in th e Lex M ercatoria A p p ro a c h ..................................................198

2.3.7 D etails o f th e U N ID R O IT F acto ring C o n v e n tio n ....................................2002.3.8 D etails o f th e U N C ITR A L C onven tion . Its

O p era tio n a l Insu ffic iency .................................................................................... 2032.3.9 D om estic an d In te rn a tio n a l R egulatory A sp ec ts ....................................... 205

2.3.10 C o n c lu d in g R em arks. T ra n sn a tio n a lisa tio n ................................................. 205

2.4 M odern F inance Sales: T he Exam ple o f th e F inance L ease ...................................2072.4.1 R ationale o f F inance L easin g .............................................................................2072.4.2 Legal C h a ra c te r is a tio n .......................................................................................... 2092.4.3 C om para tive Legal A n aly sis.............................................................................. 2132.4.4 In te rn a tio n a l A spects o f F inance L easing.....................................................2152.4.5 U n ifo rm Substan tive Law: T he U N ID R O IT (O ttaw a) Leasing

C o nven tion o f 1988. Its In te rp re ta tio n an d S u p p le m e n ta t io n 2172.4.6 T he Leasing C on v en tio n ’s Sphere o f A pp lica tion , its

D efin ition o f F inance L easing ............................................................................2192.4.7 T he P ro p rie ta ry A sp ec ts ..................................................................................... 2212.4.8 T he E n fo rcem en t A spects...................................................................................2222.4.9 T he C o n trac tu a l A sp e c ts ....................................................................................223

2.4.10 T he C ollateral R ig h ts ...........................................................................................2252.4.11 D om estic an d In te rn a tio n a l R egulatory A spects....................................... 2262.4.12 C o nclud ing R em arks. T ra n sn a tio n a lisa tio n ................................................. 227

2.5 Asset S ecu ritisa tion an d C red it D erivatives. C overed B o n d s ...............................2292.5.1 Asset S ecuritisa tion o r F inancia l E n g in e e r in g ............................................ 2292.5.2 T he Layering o f R isk ..............................................................................................2342.5.3 Synthetic Securitisa tion . C red it D erivatives o r C red it

D efau lt Swaps (C D S). T he Total R etu rn Swapa n d C red it Spread O p t io n s ................................................................................ 236

2.5.4 Excess o l F inancial E ngineering? T he 2007-09B anking C ris is ..........................................................................................................241

2.5.5 A buse o f F inancial E ngineering? T he E n ron D eb a c le ............................2442.5.6 C overed B o n d s .......................................................................................................2462.5.7 T he R e-characterisa tion Risk in S e c u ritisa tio n s .......................................2472.5.8 T he C h arac te risa tio n Issue an d In su ran ce A nalogy in C D S ................ 2492.5.9 In te rn a tio n a l A spec ts ........................................................................................... 250

2.5.10 D om estic an d In te rn a tio n a l R egulatory A spects.......................................2512.5.11 C on clu d in g Rem arks. T ra n sn a tio n a lisa tio n ............................................... 254

2.6 D erivatives, I he ir Use a n d T ransfers. T h e O p e ra tio n o f D erivatives M arkets. C learing a n d S ettlem en t an d the F u n c tio n o f C en tra l C o u n te rp a rtie s (C C P s) ....................................................................................................... 256

2.6.1 Types o f F inancial D erivatives an d T h e ir O p e ra t io n ............................. 256

CONTENTS IX

2.6.2 T he Use o f D erivatives. H e d g in g ..................................................................... 2582.6.3 T he V aluation o f D erivatives..............................................................................2612.6.4 D erivatives M arkets and th e ir O p era tio n s. C learing

an d Settlem en t, CCPs an d th e N o tio n o f M arg in ......................................2632.6.5 T he C oncep t o f th e C C P an d Its P o ten tia l................................................... 2702.6.6 D erivatives Risk an d N etting fo r S w a p s ........................................................2722.6.7 Legal A spects o f Swaps. In teg ra tio n an d C ond itionality ,

A cceleration an d C lo se-o u t in th e O TC M arkets.T he ISDA Swap M aster A g re e m e n t................................................................ 274

2.6.8 In te rn a tio n a l A spects ............................................................................................ 2772.6.9 D om estic and In te rn a tio n a l R egulatory A sp ec ts ....................................... 277

2.6.10 C o n clu d in g R em arks. T ra n sn a tio n a lisa tio n ...............................................278

2.7 In s titu tio n a l In v es tm en t M anagem ent, Funds, F und M anagem enta n d P rim e B ro k e rag e .......................................................................................................... 279

2.7.1 Investm en t M a n a g e m e n t.....................................................................................2792.7.2 Investm en t F unds o r Collective Inves tm en t S ch em es..............................2812.7.3 H edge F unds a n d T h e ir O p e ra tio n ..................................................................2832.7.4 H edge F unds an d T h e ir R egu la tion ................................................................ 2852.7.5 P rim e B rokerage..................................................................................................... 2902.7.6 Private E q u ity .......................................................................................................... 2912.7.7 D om estic a n d In te rn a tio n a l R egulatory A spects, U C IT S ....................... 2922.7.8 C o n c lu d in g R em arks. T ra n sn a tio n a lisa tio n .................................................293

Part III: Payments, Modern Payment Methods and Systems. Set-off and Nettingas Ways of Payment. International Payments. Money Laundering................295

3.1 P aym ents, P aym en t Systems. M oney an d B ank A c co u n ts .....................................2953.1.1 T he N o tio n and M odes o f P a y m e n t............................................................... 2953.1.2 T he N o tio n o f M oney as U n it o f A ccount o r U nit

o f P aym ent: M oney as S tore o f V alue .............................................................2983.1.3 Legal A spects o f Paym ent. T he N eed fo r F in a lity ......................................2993.1.4 B ank T ransfers an d P aym ent Systems. Pull and Push

System s, C red it an d D ebit T ransfe rs............................................................... 3033.1.5 T he Legal N atu re an d C h arac te risa tio n o f M odern Bank

Transfers. T he Sui Generis C h arac te r o f the M odernB ank T ran sfe r.......................................................................................................... 304

3.1.6 C learing an d S ettlem en t o f Paym ents in the B anking S ystem 3083.1.7 In te rn a tio n a l A spects o f P ay m en t.................................................................... 3113.1.8 R egulatory A spects o f D om estic and In te rn a tio n a l P ay m en ts 3123.1.9 C o nclud ing R em arks and T ran sn a tio n a lisa tio n ..........................................313

3.2 T he P rincip les an d Im p o rtan c e o f S et-o ff and N e ttin g ..........................................3133.2.1 S et-o ff as a Form o f P aym en t............................................................................ 3133.2.2 T he E volution o f the S et-o ff P r in c ip le .......................................................... 3163.2.3 T he E xpansion o f S et-o ff th ro u g h C o n trac tu a l N etting

C lauses. D ifferen t Types o f N etting . Special Im p o rtan cein C learing and S ettlem en t and in B a n k ru p tc y ..........................................320

X CONTENTS

3.2.4 Use o f C o n trac tu a l N etting C lauses in Swaps an d Repos:C o n trac tu a l N etting a n d B ankruptcy . T he EUS ettlem en t F inality D irec tive .............................................................................. 323

3.2.5 T he ISDA Swap an d D erivatives M aster A greem ents.Swap an d R epo N etting . T he N o tion o f C o n d itio n a lity a n d ‘Flawed Assets’ as an A lternative to th e Set-off.T he EU C ollateral D irec tiv e ............................................................................... 326

3.2.6 In te rn a tio n a l A spects: T he Law A pplicable to Set-offs and C o n trac tu a l N etting u n d e r T rad itiona l PrivateIn te rn a tio n a l Law ....................................................................................................329

3.2.7 In ternational Aspects: T he Law A pplicable to N etting u n d er T ransnational Law.................................................................................................... 331

3.2.8 D om estic an d In te rn a tio n a l R egu la to ry A spects o f N e ttin g ..................3333.2.9 C o nclud ing R em arks. T ran sn a tio n a lisa tio n ................................................. 334

3.3 T rad itional F orm s o f In te rn a tio n a l P a y m e n t........................................................... 3343.3.1 C ross-B order P aym ents a n d T h e ir R isks......................................................3343.3.2 P aper C u rrenc ies an d M o d ern C urrency

Election an d G old C la u se s ..................................................................................336

3.3.3 Freely C onvertib le an d T ransferab le C u rre n c y .......................................... 3383.3.4 T he Effects o f a C u rren cy C ollapse. R ed en o m in a tio n

o f P aym ent O b lig a tio n s ........................................................................................3403.3.5 P aym ent in O p en A ccount. R e-estab lish ing S im u ltane ity

th ro u g h th e Use o f In te rm e d ia r ie s .................................................................. 3443.3.6 V arious Ways to R educe P aym en t Risk in In te rn a tio n a l

T ransac tions...............................................................................................................3453.3.7 Ways to R educe P aym ent Risk In te rna tiona lly : T he A ccepted

Bill o f E xchange....................................................................................................... 3463.3.8 Ways to R educe P aym en t Risk In te rna tiona lly : C o lle c tio n ...................3473.3.9 Ways to R educe P aym ent Risk In te rna tiona lly : Letters

o f C red it. T he D ifferent Banks In v o lv e d ....................................................... 3493.3.10 T he Types o f Letters o f C re d it...........................................................................3533.3.11 T he D o cu m en ts R equired u n d e r a D o cu m en ta ry L etter o f C re d it 3543.3.12 T he R ight o f R e im b u rsem en t o f th e Issu ing B ank u n d e r

a L etter o f C re d it ..................................................................................................... 3553.3.13 T he L etter o f C red it as In d e p e n d e n t an d P rim ary

O bligation : Legal N a tu re o f L etters o f C red it.T he ‘Pay F irst, A rgue L ater’ N o tio n .................................................................. 356

3.3.14 N o n -p e rfo rm an ce u n d e r L etters o f C red it: T heE xception o f ‘F rau d ’...............................................................................................359

3.3.15 T ransferable Letters o f C red it an d B ack-to-B ackLetters o f C re d i t ...................................................................................................... 361

3.3.16 Ways to R educe P aym ent Risk In te rna tiona lly : A u to n o m o u s G uaran tees. Exam ples. S tandby L etters o f C re d it ...................................... 362

3.3.17 T ransna tiona lisa tion : th e Law a n d /o r Rules A pplicable to Bills o f Exchange, C ollections, Letters o f C red it and B ank G uaran tees . T he IC C Rules an d th e irS tatus. Lex M erca toria ........................................................................................... 364

CONTENTS xi

3.3.18 T ransna tiona lisa tion : th e U N C IT R A L C onven tion on In te rn a tio n a l G uaran tees an d the W orld Bank S tandard C o n d itio n s ............................................................................................. 365

3.4 M oney L au n d e rin g ............................................................................................................. 3663.4.1 T echniques and R em ed ie s .................................................................................3663.4.2 W hy A ction? R em edies and th e O bjectives o f C o m bating

M oney L au n d erin g .................................................................................................3683.4.3 In te rn a tio n a l A ction. T he G -10, th e C ouncil o f E urope,

an d th e U n ited N a tio n s ....................................................................................... 3693.4.4 T he E U ........................................................................................................................371

P a r t IV: S ecu rity E n title m e n ts a n d T h e ir T ra n s fe rs th ro u g h S ecu ritie s A ccoun ts .S ecu ritie s R e p o s ...................................................................................................................... 373

4.1 Investm en t Securities E n titlem en ts a n d T h e ir T ransfers (E ither O u trig h t, C o n d itio n a lly o r as Security), Securities S ho rting , B orrow ingand R cpledging. C learing and S ettlem en t o f Investm en t S ecu ritie s................. 373

4.1.1 M o d ern Investm en t Securities. D em ateria lisa tionand Im m ob ilisa tion . B ook -en try System s an d th e LegalN atu re o f Securities E n title m e n ts ....................................................................373

4.1.2 Securities T ransfers: T iered o r C hained Transfer Systems.T he Legal C h arac te r o f th e Securities T ransferan d Its F in a lity ........................................................................................................377

4.1.3 Securities S horting , Securities L ending, P ledging and R epledgingo f Securities. T he N otion o f R ehypo theca tion ............................................381

4.1.4 M odern C learing an d S ettlem ent. C en tra l C o u n te rp a rtie s(C C Ps) an d th e ir S ign ificance ........................................................................... 386

4.1.5 In te rn a tio n a l Aspects. EU S ettlem en t F inality and C ollateral D irectives. T he H ague C onven tion on the Law A pplicable to C erta in R ights in Respect o f Securities he ld w ith an In term ed iary . T ransna tiona lisa tion and theM odern Lex M ercatoria ........................................................................................ 390

4.1.6 R egulatory A spects.................................................................................................3944.1.7 C o nc lud ing R em arks. T ran sn a tio n a lisa tio n .................................................395

4.2 Inves tm en t Securities R epos............................................................................................ 3954.2.1 T he R epurchase A greem ent as a P rim e A lternative to Secured

Lending: Its Legal C harac te risa tion . T he Effect o f F ungib ilityand o f the R ight to O n-sell th e S ecu ritie s .................................................... 395

4.2.2 T he D evelopm ent o f th e Repo in Fungible Investm en t Securities: Securities Lending an d th e Buy/Sell Back T ran sac tio n ............................ 400

4.2.3 M arg in in g ................................................................................................................. 4034.2.4 T he N etting A pproach in Repos. C lo se-ou t N e tt in g ................................4044.2.5 T he TBM A /ISM A G lobal M aster R epurchase A g re e m e n t.....................4054.2.6 In te rn a tio n a l A spec ts ............................................................................................4064.2.7 D om estic and In te rn a tio n a l R egulatory A sp ec ts ....................................... 4074.2.8 C o nclud ing Rem arks. T ran sn a tio n a lisa tio n .................................................408

x ii CONTENTS

Part V: Dispute Resolution in International Finance........................................................ 411

5.1 A rb itra tio n in In te rn a tio n a l F inance. C o m p ariso n w ith th e Roleo f O rd in a ry C ourts . T he E m ergence o f P.R.I.M .E. F in a n c e ................................ 411

5.1.1 In tro d u c tio n ............................................................................................................4115.1.2 In te rn a tio n a l F inancial A rb itra tio n an d B a n k ru p tc y .............................4135.1.3 In te rn a tio n a l F inancial A rb itra tio n s, P ro p rie ta ry

M atters an d Issues o f R a n k in g .......................................................................... 4175.1.4 In te rn a tio n a l F inancial A rb itra tio n and F inancia l R e g u la tio n 4205.1.5 In te rn a tio n a l F inancial A rb itra tio n , P ub lic O rd e r

R equ irem en ts an d F u n d am en ta l P rincip lesin In te rn a tio n a l F in a n c e .......................................................................................421

5.1.6 T he A u to n o m y o f In te rn a tio n a l F inancia l A rb itra to rs ..............................4235.1.7 In te rn a tio n a l F inancial A rb itra tio n and th e Position

o f O rd in a ry Judges C o m p a re d .......................................................................... 425

5.2 P.R.I.M.E. F in a n c e ................................................................................................................. 4265.2.1 In tro d u c tio n ..............................................................................................................4265.2.2 R elevant Is su e s .........................................................................................................427

5.2.2.1 P re lim in a ry Issu e s .................................................................................4275.2.2.2 S tatus, Pow ers an d O p e ra tio n o f A rb itra to rs .

A rb itrab ility .............................................................................................4275.2.2.3 P rocedu ra l Issues....................................................................................4295.2.2.4 C o n trac tu a l Issu es ................................................................................. 4295.2.2.5 P ro p rie ta ry Issues...................................................................................4295.2.2.6 R egulatory Issues....................................................................................4305.2.2.7 T axation I s su e s ...................................................................................... 4305.2.2.8 B an k rup tcy Is su e s ................................................................................ 4305.2.2.9 A pplicable Law Issues an d Parties’ C ho ice o f L aw ....................4315.2.2.10 Legitim acy o f the Award. S uperv ision , R ecognition

an d E n fo rcem en t Issu es..................................................................... 4315.2.3 T he P.R.I.M .E. Rules: th e A pplicable L a w ................................................... 4325.2.4 T he P.R.I.M .E. FinanceR ules: th e A p p o in tm en t o f A rb itra to r s 4335.2.5 T he O p e ra tio n o f an In te rn a tio n a l C om m ercia l C o u r t ...........................433

Chapter 2: Financial Risk, Financial Stability and the Role of FinancialRegulation................................................................................................................ 435

Part I: Financial Services, Financial Service Providers, Financial Riskand Financial Regulation.......................................................................................... 435

1.1 D om estic a n d C ross-B order F inancial Services. R egulatory Im p a c t ..................4351.1.1 T he Recycling o f M oney. C om m ercia l B anking

a n d C apita l M arkets ...............................................................................................4351.1.2 F inancial Services an d F inancial R egulation . Issues

o f Illiquidity , Insolvency an d F inancial S ta b ili ty ....................................... 4371.1.3 L iqu id ity M anagem en t an d M an ag em en t o f

B alance-Sheet R isk ................................................................................................. 439

CONTENTS x ii i

1.1.4 F inancial S tability and F inancial R egulation . Im m ed ia teC auses o f R egulatory F ailu re ............................................................................. 446

1.1.5 T he M o d ern C red it C u ltu re ............................................................................. 4531.1.6 D ifferen t A ttitudes and P o lic ies ...................................................................... 4601.1.7 Focus o f the R eform o f F inancial R egulation an d P ru d en tia l

S uperv ision A fter 2 0 0 8 ........................................................................................ 4641.1.8 Effect o f In te rn a tio n a lisa tio n . T he Lack o f an In te rn a tio n a l

Safety N et. A E urozone B anldng U n io n ? .......................................................4731.1.9 T he A m erican an d E uropean R esponse ........................................................476

1.1.10 O th e r R egulatory C oncerns. D eposito rs an d InvestorP ro tec tio n Is su e s .................................................................................................... 480

1.1.11 T he Basic S tru c tu re o f M o d ern F inancial R e g u la tio n ............................4821.1.12 D eregu la tion an d R e-R egulation o f M o d ern F inancial Activity.

T he In s titu tio n a l an d F unc tiona l A pproach . M onetary ,L iquidity, and Foreign Exchange Policies D istin g u ish ed .........................486

1.1.13 T he O bjectives o f M o d ern F inancial R eg u la tio n ..................................... 4901.1.14 R egulatory O bjectives an d M oral H azard . Lack o f C larity

in S ta tu to ry R egulatory A im s............................................................................ 4961.1.15 P rincip le-B ased R eg u la tio n ...............................................................................5021.1.16 O fficial an d U nofficial F inancial M arkets. R egulatory I s su e s 5041.1.17 U niversal Banks, C ong lo m era te Risks an d th e Effect

on R egulatory S u p e rv is io n ................................................................................. 5061.1.18 M arket A buse a n d M islead ing F inancial S tructu res .

T he R egulatory R e sp o n se ....................................................................................5081.1.19 In te rn a tio n a l A spects o f F inancial R egulation. W hen

A re F inancial Services In ternational? EU A p p ro ach ................................. 5121.1.20 B anldng R egulation in the USA. A ctivities o f Foreign B a n k s ..............5141.1.21 T he A m erican R egulatory A pproach to Issuing A ctivity

a n d to Investm en t Services R endered in th e USAby Foreign Issuers an d In te rm e d ia rie s ............................................................516

1.1.22 T he Basel C o n co rd a t C on cern in g In te rn a tio n a l C om m ercia l B anking R egulation and C onso lida ted Superv ision .E fforts to Achieve a F ram ew ork fo r In te rn a tio n a l Financial C o n g lo m era te Superv ision . T he Joint F o ru m ............................................. 519

1.1.23 T he M o d ern In te rn a tio n a l F inancial A rch itecture .T he F inancial S tability B oard (F S B )............................................................... 521

1.1.24 T he Shadow B anking S y s tem ............................................................................ 523

1.2 T h e Essentials o f C om m ercia l B a n k in g .................................................................... 5241.2.1 M ajo r A spects o f B anking. Superv ision and the Role

o f Banks o f Last R eso rt........................................................................................ 5241.2.2 Types o f B anks an d T h e ir O pera tions. T he Shadow

B anking System .......................................................................................................5271.2.3 C om m ercia l B anking P roduc ts, U nsecured an d Secured

Loans, Leasing, Repos, Receivable F inancing , SyndicatedLoans, T rade a n d P ro ject F in a n c e ....................................................................530

1.2.4 C om m erc ia l B anking R isk s ................................................................................ 533

x iv CONTENTS

1.2.5 Risk M anagem en t in B anks................................................................................ 5371.2.6 B road a n d N arro w B anking . S haria B anking. M arket-B ased

M o n ito rin g o f B a n k s ............................................................................................ 5401.2.7 C om m ercia l B anking R egulation a n d B anking

R egulators. In te rn a tio n a l A sp e c ts .....................................................................5421.2.8 In te rm e d ia tio n an d D is in te rm ed ia tio n o f C om m erc ia l B anks.............5441.2.9 T he B anking o r C u rre n t A ccount R ela tionsh ip an d A g reem en t.......... 546

1.2.10 T he D em ocra tisa tio n o f C red it an d Its Effects. A H u m anR ight to C red it an d a Public F unc tion fo r B anks?..................................... 551

1.3 T he E ssentials o f th e In v es tm en t Securities B usiness an d its R eg u la tio n 5531.3.1 M ajo r Types o f Securities. N egotiab le In s tru m en ts ,

T ransferab le Securities an d Investm en ts. B o ok -E n trySystem s an d Securities E n titlem en ts ................................................................553

1.3.2 Securities M arkets and T h e ir O rg an isa tio n . O fficial M ark e ts............... 5601.3.3 U nofficial M arkets, G lobalisa tion o f M arkets, E u ro m ark e ts ..................5621.3.4 T he P rim ary M arket and Security Issuers.

In te rna tiona l-S ty le O ffe rin g s ............................................................................. 5651.3.5 T h e Secondary M arket an d its T rad ing T e c h n iq u e s ................................. 5661.3.6 In te rn e t o r E lectron ic T rad ing . ATSs an d M T F s.........................................5681.3.7 M odern C learing , S e ttlem en t an d C u sto d y .................................................. 5701.3.8 T he Role o f Investm en t Banks as U n d erw rite rs

an d M arket M akers ................................................................................................ 5731.3.9 T h e Role o f Inv es tm en t B anks as B rokers

an d Inves tm en t M a n a g e rs ...................................................................................5771.3.10 Insolvency o f Securities Brokers. T he N o tio n o f

Segregation , T racing an d C o n struc tive T rustin R espect o f C lien t A ssets...................................................................................579

1.3.11 O th e r A ctivities o f Inves tm en t Banks. F u n d M anagem en t,P rim e B rokerage, C o rp o ra te F inance, a n d M ergersand A cquisitions. V a lu a tio n s .............................................................................. 583

1.3.12 T he Risks in the Securities B usiness. Securities R egulationan d its Focus. T he E uropean an d A m erican A p p ro ach es ........................585

1.3.13 Securities R egu la to rs ..............................................................................................5881.3.14 In te rn a tio n a l A spects o f Securities R e g u la tio n ...........................................590

Part II: International Aspects of Financial Services Regulation: the Effects of Globalisation and the Autonomy of the International Capital Markets.The Developments in GATT/WTO, the EU and BIS/IOSCO/IAIS................... 593

2.1 The G lobalisa tion o f th e F inancial M arkets an d th e In fo rm alL iberalisation o f F in a n c e ....................................................................................................593

2.1.1 A u tonom y of the In te rn a tio n a l C ap ita l M a rk e ts ....................................... 5932.1.2 1 he E u ro b o n d M arket an d its M ain Features. E uro D e p o s its ..............5942.1.3 T h e Legal S tatus o f E u rom arke t In s tru m en ts

a n d U n d erw ritin g P ractices................................................................................ 5972.1.4 C en tra l Bank In v o lv e m e n t................................................................................. 598

rCONTENTS XV

2.2 T he F o rm al R egim e fo r th e Freeing o f th e M ovem ent o f G oods,Services, C u rre n t Paym ents an d C apital a fter W orld W ar I I ................................ 599

2.2.1 C ro ss -b o rd e r M ovem ent o f G oods. G A TT.................................................. 5992.2.2 C ro ss -b o rd e r Paym ents an d M ovem ent o f C apital. IM F ...................... 6012.2.3 C ross-B order M ovem ent o f Services. G A T S .............................................. 6022.2.4 T he W T O ................................................................................................................. 605

2.3 T he C reation o f th e EEC and its E volution in to th e E U ....................................... 6072.3.1 T he E u ropean C o m m o n M arket an d M o n e ta ry U n io n .........................6072.3.2 T he EU In s titu tio n a l F ram ew ork an d Legislative In s tru m e n ts 6132.3.3 T he EU In te rna l M arket; D efin ition o f C ro ss-b o rd er

Services. C o n n ec tio n w ith Free M ovem ent o f G oodsa n d Persons an d w ith th e R ight o f E stab lish m en t.....................................615

2.3.4 Early Failure o f Full H arm o n isa tio n o f R egulated F inancial Services in the EU and the 1985 B reak through: M utual R ecognition o f H om e R egulation. T he E u ropean P a s s p o r t...................620

2.4 T he Effects o f A u to n o m o u s G lobalisation Forces on F inancialA ctivity and its R egulation in the E U ......................................................................... 6 2 12.4.1 Effects o f th e Free Flow o f C apital in th e EU. T he 1988

D irective o n th e Free M ovem en t o f C ap ita l.................................................6212.4.2 T he 1988 D irective an d the R edirec tion o f Savings an d Tax

A voidance Issues. T he 2003 Savings Tax D irec tiv e ....................................6222.4.3 T he 1988 D irective an d the M ovem ent o f F inancial P roducts

an d Services..............................................................................................................6252.4.4 T he 1988 D irective and M o n eta ry an d Exchange Rate A spects

o f the Free Flow o f C apital. T he 1997 Stability P a c t ................................6252.4.5 T he Single E uropean M arket fo r F inancial Services

an d its R elationsh ip to th e E u ro m a rk e ts .......................................................626

2.5 D evelopm ents in th e BIS, IO SC O and IAIS. T he In te rn a tio n a l F la rm on isa tion o f th e C apita l A dequacy R egim e (Basel I, II and I I I ) ..............627

2.5.1 T he F u nc tions o f the BIS, IO SC O an d IA IS ................................................6272.5.2 T he BIS C apita l A dequacy A pproach for Banks. T he Basel I

A ccord. C ritic ism . O th e r R egulatory BIS Initiatives. Basel II................ 6292.5.3 C red it Risk, Position Risk an d S ettlem en t R isk ..........................................6322.5.4 T he Risk Assets R atio, Risk W eightings an d Q ualify ing

C apital U n d er Basel 1............................................................................................6332.5.5 1993 BIS P roposals fo r N etting , M arket Risk and In terest

Rate Risk. T he 1996 A m e n d m e n t....................................................................6342.5.6 T he B uild ing Block A p p ro ach ........................................................................... 6362.5.7 C apital for D erivatives......................................................................................... 6372.5.8 O ff-balance-S heet E xposures. C o n tin g en t L iab ilities..............................6382.5.9 C apital A dequacy C alcu la tions U nder Basel I. T he Level

Playing Field for B anks an d th e Effect o f a C hangein th e M in im u m C apital R eq u irem en t.......................................................... 639

2.5.10 T he 1999 BIS C on su lta tio n D o cu m en t an d th e 2001 BIS Proposals. Basel II (2008) an d th e A m erican Shadow C o m m itte e ................................................................................................................ 641

x v i CONTENTS

2.5.11 C o n tin u in g C ritic ism an d th e 2008 C ris is .....................................................6462.5.12 T he S itu a tio n A fter Basel II. Basel III. N ew A pproach

to L iqu id ity R isk...................................................................................................... 6492.5.13 C apita l A dequacy C alcu la tions U n d er Basel II an d Basel I I I ................ 6522.5.14 E v a lu a tio n .................................................................................................................. 657

P a r t III: T h e EU R eg u la tio n s a n d D irec tiv es C o n c e rn in g th e In te rn a l M a rk e t in F in an c ia l Services: E arly A ctio n , th e E u ro p e a n P a s s p o r t, th e 1998 EU A ctio n P la n fo r a S ing le M a rk e t in F in a n c ia l S erv ices, a n d F u r th e r A c tio n F o llo w in g th e 2008 F in an c ia l C r is is ................................................................. 659

3.1 Early EU C oncerns an d A ction in the R egulated F inancia lService In d u s tr ie s .................................................................................................................. 659

3.1.1 R egulatory R estric tions on th e O p e ra tio n o f th e In te rn a l M arket. T he Effect o f H o m e an d H ost R egulation .T he C o n cep t o f the G enera l G o o d .................................................................. 659

3.1.2 Case Law C o n cern in g th e N o tio n o f th e G enera l G oodin S u p p o rt o f H o s t-C o u n try F inancial R egu la tion ....................................662

3.2 T he Early EU A chievem ents in th e R egulation o f F inancial Serv ices 6633.2.1 B ank ing ......................................................................................................................6633.2.2 D etails o f th e Early B anking D irectives a n d R e c o m m e n d a tio n s 6643.2.3 M ortgage C re d it.....................................................................................................6663.2.4 T he Early Securities an d Investm en ts R eco m m en d a tio n s

a n d D irectives........................................................................................................... 6673.2.5 U C IT S ........................................................................................................................669

3.3 T he E uropean P assp o rt........................................................................................................6703.3.1 T he T h ird G en era tio n o f EU D irec tives.......................................................6703.3.2 T he F u rth e r R eduction o f th e Role o f th e G eneral

G ood S u p p o rtin g H o s t-C o u n try Rule a fter th e T h irdG en era tio n D irec tives........................................................................................... 672

3.3.3 D ivision o f Tasks. N o Single EU R egulator.R egulatory C o m p e tit io n .......................................................................................675

3.3.4 In te rac tio n w ith GATS.........................................................................................6763.3.5 T he EU R eciprocity R equ irem en ts . R elation w ith T h ird

C o u n trie s . N ational T rea tm en t a n d Effective M arke t A ccess................ 676

3.4 T he 1998 EU A ction P lan fo r F inancial S e rv ice s ......................................................6773.4.1 T he M ain F ea tu re s ................................................................................................ 6773.4.2 Lam falussy R epo rt an d its Im p lem en ta tio n .

T he Role o f C o m ito lo g y ...................................................................................... 6813.4.3 T he 2005 W hite P aper o n F inancial S erv ices..............................................683

3.5 T he D etails o f th e T h ird G en era tio n D irectives an d th e irR evam ping u n d e r th e 1998 A ction P la n .......................................................................684

3.5.1 SB D /CID : H om e C o u n try Rule Reach. R esidualH o s t-C o u n try P ow ers........................................................................................... 684

CONTENTS x v ii

3.5.2 SB D /C ID : Scope o f the B anking Passport. U niversal B anking and the P rocedure for O b ta in in g th e Passport.H o m e- a n d H o st-C o u n try C o m m u n ic a tio n s ............................................. 686

3.5.3 ISD /M iFID : Basic S tructu re . B ackground an d Scope...............................6873.5.4 ISD /M iFID : H o m e-C o u n try Rule, A u th o risa tio n , C apital,

P ru d en tia l Rules. P rocedure fo r O b ta in in g the P assport.T he C oncep t o f th e G eneral G ood R ev isited .............................................. 689

3.5.5 ISD /M iFID : C o n d u c t o f B usiness....................................................................6903.5.6 M iFID : H om e- o r H o s t-C o u n try A u th o rity in M atters

o f C o n d u c t o f B u s in e ss ....................................................................................... 6933.5.7 ISD /M iFID : R egulated M arkets, C o n cen tra tio n P rincip le

an d S tock Exchange M em bersh ip . T he C o m p e titio no f M odern In fo rm al M arkets o r M TFs. Best Executiona n d In te rn a lisa tio n .................................................................................................694

3.5.8 C learing and S ettlem ent, C CP Access A fter M iF ID .................................. 6973.5.9 ISD /M iFID : M em ber S tates’ C o m m itte e .......................................................698

3.5.10 T he 2003 P rospectus D irective (P D ). T he Issuer’s P a s s p o r t ................. 6983.5.11 T he 2003 T ransparency D irective (T D ) ......................................................... 7023.5.12 T he EU A pproach to C ap ita l A dequacy ......................................................... 7033.5.13 T he M arket A buse D irective (M A D ).............................................................. 7033.5.14 F und M anagem en t an d U C IT S .........................................................................704

3.6 O th e r EU R egulatory In itiatives in th e F inancial A rea ...........................................7043.6.1 Large E x p o su re s ..................................................................................................... 7043.6.2 D eposit P ro tec tion a n d Investor C o m p e n sa t io n ....................................... 7053.6.3 W in d in g U p o f C red it In s titu tio n s. R e so lu tio n ..........................................7053.6.4 Pension F u n d s ......................................................................................................... 7063.6.5 In te rn a tio n a l B anking Superv ision . Basel C o n co rd a t, EU

Im p lem en ta tio n , C ong lom erate S uperv isio n .............................................. 7073.6.6 C onso lida ted Supervision. In te rn a tio n a l C o -o p e ra tio n ..........................7093.6.7 T he E -com m erce D irective................................................................................. 7093.6.8 L ong-d istance Selling o f F inancial P roducts to C o n su m e rs ..................7103.6.9 T he Takeover Bids D irective...............................................................................711

3.6.10 O th e r Parts o f th e A ction P lan: E lectron ic M oney, M oney L aundering , S ettlem en t Finality, C ross-B order Useo f C ollateral, an d Taxation o f Savings In c o m e ...........................................712

3.6.11 M ortgage C re d it ......................................................................................................7133.6.12 P aym ent Services D irective................................................................................. 7133.6.13 T he C o n su m er C red it D irec tive ........................................................................714

3.7 T he EU d u rin g an d after th e F inancial S to r m .......................................................... 7143.7.1 T he G enera l S c e n e .................................................................................................7143.7.2 T he N ew C apita l A dequacy and L iquidity R egim e (C D R 2 -4 ) .

T he C o n so lida tion o f th e C apita l R equ irem en ts fo r Banks and Investm en t F irm s in C RD 4 ...............................................................................720

3.7.3 T he A m en d m en ts to M iFID. M iFID II and M iF IR .................................. 7 2 13.7.4 T he E u ropean M arket In fra s tru c tu re R egulation (E M IR )..................... 7223.7.5 T he R egulation on S h o rt Selling an d C erta in A spects o f C D S 723

x v iii CONTENTS

3.7.6 T he C red it R ating Agency R egulation (C R A R )....................................... 7253.7.7 T he A lternative Investm en t F und M anagem en t

D irective (A IF M D )..............................................................................................7263.7.B T he N ew C o m m ittee S tructu re : th e E u ropean System

o f F inancial Superv isors (ESFS)......................................................................7263.7.9 O rderly R eso lu tion , S tate A id, an In te rn a tio n a l Safety

N et, and In te rn a tio n a l C o -o p e ra tio n ............................................................ 7283.7.10 E valuation an d C o n c lu s io n ............................................................................732

Index 735