1. In outright transfers of collateral or title finance, the collateral securities are transferred outright to the collateral taker, subject to contractual rights of redelivery on discharge of the collateralised exposure. Examples of this arrangement are repos, London-style stock-lending and swaps margin provided under one form of the English law standard form documentation, namely the ISDA credit support annex (transfer).

2. Settlement involves the delivery of cash and securities between participants in fulfilment of market sales and purchases and other transactions.

3. Some argue that third-party rights in intangibles are determined by their governing law. This is not the author's view, but it is reassuring to note that in the case of interests in immobilised securities, this approach produces the same result as the lex situs rule, with a reference to Belgian law in the case of Euroclear and Luxembourg law in the case of Cedel Bank.

4. See Macmillan v. Bishopsgate (No. 3) [1996] 1 W.L.R. 387, 404, 405 (per Staughton, LJ) 410, 411, 412 (per Auld, LJ) and 423, 424 (per Aldous, LJ).Google Scholar This complex judgment indicates overall that lex situs is relevant, rather than lex loci actus, which was favoured by Millett, J in the first-instance decision [1995] 1 W.L.R. 978.Google Scholar

The Court of Appeal judgment seems to reject r.120(2) of Dicey & Morris in the context of transfers of shares. In the author's view, the principle in the case may taken to apply to all forms of intangible securities. In contrast, r.120(2) indicates that the governing law of a chose in action determines the proprietary aspects of its assignment. See Staughton LJ at 401 and Auld LJ at 410, 411.

The lex situs rule emphasised in Macmillan accords with a long line of authority applying lex situs to determine the validity or perfection of security interests. See e.g. (lien on land) Norris v. Chambers (1860) 29 Beav. 246, 253 (per Sir John, Romily MR); on appeal 3 De. G.F. & J. 583, 584 (per the Lord, Chancellor)Google Scholar; (pledge of goods) City Bank v. Barrow (1880) 5 App. Cas. 664, 677, (per Lord, Blackburn)Google Scholar; (pledge of share certificates) Williams v. Colonial Bank (1888) 38 Ch.D. 388, 403, (per Lindley, LJ)Google Scholar; (pledge of documents of title to goods) Inglis v. Robertson [1898] A.C. 616, 625, (per Earl of Halsbury, LC)Google Scholar; (charge on real property under a debenture) Mount Albert Borough Council v Australasian Temperance and General Mutual Life Assurance Society Ltd [1937] 4 All E.R. 206, 213, 217 (per Lord, Wright).Google Scholar

5. Recharacterisation risk is the legal risk that, upon the default of the collateral provider, the courts would recharacterise the collateral arrangements as creating a security interest. Recharacterisation may have a number of disadvantages, including the possibility that such a security, interest may be void for want of registration;, For a fuller discussion, see Benjamin, , “Recharacterisation Risk and Conflict of Laws” (1997) 12 J.I.B.F.L. 513.Google Scholar

6. There is a measure of consensus in the City that the record-based approach is correct. See e.g. Wood, P., Comparative Law of Security and Guarantees (1995), p.190.Google Scholar

7. E.g. it is necessary to establish the English law position on this issue in order to advise whether the collateral arrangement is robust where the collateral giver is subject to English law insolvency proceedings, and in determining whether it is affected by the registration requirements of the Companies Act 1985, s.395.

8. See Rossano v. Manufacturers' Life Insurance Co. [1963] 2 Q.B. 352, 379–380.Google Scholar

9. Dicey, & Morris, , The Conflict of Laws (12th edn, Lawrence, Collins (Gen. Ed.), 1993).Google Scholar

10. See, e.g. Edelstein v. Schuler [1902] All E.R. Rep. 884.Google Scholar

11. “The situs of the obligation could, therefore, depend on the question at issue”: r.114 (5), in op. cit. supra vol. 2, at p.931.Google ScholarThis accords with the comments of Lord Lindley in Commissioners of Inland Revenue v. Muller & Co's Margarine Ltd [1901] A.C. 217, 237: “It may perhaps be true that property which has no physical existence may, if necessary, be treated for some purposes in one locality, and for other purposes in some other locality.”.Google Scholar

12. R.114(5), idem, pp.930, 931. See also R. v.Sadi and Morris (1787) 168 E.R. 336 (banknotes)Google Scholar; Hornblower v. Proud (1819) 106 E.R. 386, 389 (bills of exchange)Google Scholar; Cumming v. Baily (1830) 130 E.R. 1320, 1323 (bills of exchange)Google Scholar; Edwards v. Cooper (1847) 116 E.R. 386, 388 (bills of exchange).Google ScholarSee also the general discussion, Byles on Bills of Exchange. (26th edn., Ryder, F. et al. , (Eds)), p.5.Google Scholar

13. “In the conflict of laws, negotiable instruments are therefore treated as chattels, i.e. as tangible movables. Whether they are ‘negotiable’ is a question to be determined by the law of the country where the alleged transfer by way of ‘negotiation’ takes place and this is, in the nature of things, the country in which the instrument is situated at the time of delivery”: r.193(1), Vol.2, at p.1420.Google Scholar

14. In Alcock.v. Smith [1892] 1 Ch.238Google Scholar, in which the lex loci actus rule is clearly stated (see e.g. Lopes LJ at 266), the decision is clearly based on the authority of the lex situs rule in relation to chattels, as stated in Cammell v. Sewell (1858) 3 H. & N. 617Google Scholar and a line of subsequent cases (see e.g. Kay LJ at 268). The assimilation of negotiable instruments to chattels (and therefore the proposition that the lex loci actus rule is an aspect of the lex situs rule) is discussed further in Embiricos v. Anglo-Austrian Bank [1904] 2 K.B. 870Google Scholar (see Walton, J at 874 and, on appeal, Vaughan, Williams LJ at [1905] 1 K.B. 677.683, 684(CA)).Google ScholarFor recent authority, see Macmillan, supra n.4, at pp.399, 400 (per Staughton, LJ).Google Scholar

15. “These rules will not necessarily apply to cases involving issues other than taxation”: r.114(5), in op. cit. supra n, 9, Vol.2, at p.930.Google Scholar

16. Dicey & Morris, idem, cites In re Clark [1904] 1 Ch. 294. See Harwell J at 298: “With regard to the bonds, it is conceded that if they are on the same footing as simple contract debts the rule is, in construing a will, that the debts are, so far as they can have locality at all, be considered to be located where the debtor is resident: and for this purpose I do not see any ground for drawing a distinction between a bond and a simple contract debt.”

17. “…if [the question at issue] is whether the holder of the documentation is entitled to the debt—for example, in an expropriation case—the debt must be regarded as situate where it can be enforced, normally where the debtor resides” Dicey & Morris, idem, Vol.2, p.931.

18. [1946] Ch. 312. The case is not discussed in this context in Dicey & Morris.Google Scholar

19. Bills of Exchange Act 1882.

20. “The facts of the present case bring us directly within the decision of this Court in Administrator of German Property v. Russian Bank for Foreign Trade [unreported], from which it is indistinguishable in principle. In that case the Court had to consider the position of the holder of a bill of exchange drawn upon a house in London and payable in London. The bill of exchange was out of the country, it had to be enforced in the only place where it could be enforced—namely, in England. I agree with what Scrutton LJ and Greer LJ there said that the locality of the chose in action was to be determined by the place where it could be enforced”: [1946] Ch. 312, 432, 433 (per Lawrence, J).Google ScholarIn re Fry concerned the validity assignment of an interest under a trust fund (and more specifically, the question whether notice to the trustee was required).

21. They are unallocated in the sense that no particular Definitive is attributed to any participant's account. Allocation is not available in Euroclear and unusual in Cedel Bank.

22. The arrangements for recovery and enforcement differ according to whether a trustee has been appointed. In issues where a trustee us appointed, the issuer's covenants to pay principal and interest under the securities are owed to the trustee. The trustee holds these covenants on trust for participants (either directly or indirectly, depending on the drafting of the relevant documents) and is responsible for enforcement on default.

Participants do not have direct rights of action against the issuer. Even where no trustee is appointed participants do not have direct rights against the issuer. The issuer agrees to pay principal and interest to the bearer of the Global: in practice the Common Depositary has possession of the Global, and is therefore (it is argued) its bearer. (An alternative view is that the Common Depositary holds the Global as bailee for the Clearers.) The Common Depositary confirms in a letter of acknowledgement to the issuer that it holds the Global for the Clearers. In turn, the Clearers, in accordance with their general terms and conditions, will hold their interests in the Global for those of their participants to whose accounts interests in respect of the Global are credited. In the normal course, principal and interest payable under the Global are paid by the issuer to paying agents, who pass the monies on to the Clearers; the Clearers in turn credit the accounts of participants. Thus, in the absence of default, the participants' rights in immobilised securities are recovered through the Clearers: the participant has no direct recourse against the issuer or the Common Depositary.

How then do participants enforce their rights against issuers who are in default, in cases where there is no trustee to enforce on their behalf? Clearly, it may not be feasible for a participant to obtain the Definitive that would enable a participant to enforce as holder. In practice, the Common Depositaries are not willing to enforce on behalf of participants because of potential conflicts of interest. The solution in practice is for the issuer to execute a deed poll. It is provided in the Global that upon issuer default, the Global becomes void The deed poll provides that in this event participants are given direct rights of action against the issuer which are expressed to be the same as those which they would have enjoyed if they had been holders of Definitives.

Thus, in the absence of issuer default, the participant has no direct rights of action against the issuer. In the absence of default, the participant's rights are recoverable only through the Clearer. On issuer default the only direct rights against the issuer are held by the trustee (where one is appointed) or by the participant (where there is no trustee, and where a deed poll has been executed). However, these last rights do not arise under the immobilised securities but. rather, under the deed poll as a separate though ancillary document.

23. They are necessarily based on co-ownership because the participant's rights are unallocated. They are not mere personal rights; local legislation provides that participants' assets are not available to the clearing system's creditors in their insolvency (the Belgian Royal Decree No.62 of Nov. 1967 in the case of Euroclear, and the Luxembourg Grand Ducal Decree of Feb. 1979 in the case of Cedel Bank). The clearing systems obtain legal opinions for lawyers practising in the same jurisdiction as each Common Depositary that assets placed with Common Depositaries would not be available to the Common Depositaries' creditors in their insolvency.

Immobilised securities are akin to interests under English law equitable tenancies in common.

24. See Benjamin, , The Law of Global Custody (1996), pp.16–20 for a development of this argument, and a suggested solution to the issues posed by loss of negotiable status.Google Scholar

25. See idem, pp.20–21 for a development of these arguments.

26. See Dicey & Morris, op. cit. supra n.9, at p.931.Google ScholarSee also Macmillan, supra n.4, at p.411 (per Auld, LJ).Google Scholar

27. Brassard v. Smith [1925] A.C.371, 376 (per Lord, Dunedin)Google ScholarErie Beach Co. v. AG for Ontario [1930] A.C. 161.168 (per Lord, Merrivale).Google Scholar

28. Brassard v. Smith, ibid.

29. Dicey & Morris refers to New York Life Insurance Company v. Public Trustee [1924]2 Ch.101Google Scholar: Alloway v. Phillips [1980] 1 W.L.R. 888Google Scholar; and Kwok Chi Leung Karl v. Cmmr Estate Duty [1988] 1 W.L.R. 1035 (HL).Google ScholarSee also Swiss Bank Corporation v. Beohmische Industrial Bank [1923] 1 K.B. 673, 679 (per Bankes, LJ)Google Scholar; Re Russian Bank for Foreign Trade [1933] 1 Ch.745, 767 (per Maugham, J)Google Scholar: In re Fry 767(per Lawrence, J)Google Scholar; and Jabbour v. The Custodian [1954] 1 All E.R. 145, 151 (per Pearson, J).Google Scholar

30. See e.g. Commissioner of Stamps v. Hope [1891] A.C. 476, 481, 482 (per Lord, Field)Google Scholar: Payne v. King [1902] A.C. 552, 559, 560 (PC)(per Lord, Macnaghter)Google Scholar; Sedgwick Collins v. Rossia Insurance Co. of Petrograd [1925] 1 K.B. 1, 15 (per Sargant, LJ)Google Scholar; English, Scottish and Australian Bank v. IRC [1932] A.C. 238, 248 (HL) (per Lord, Warrington)Google Scholar; In re Fry, idem, p.431 (per Lawrence J).

31. See e.g. Commissioner of Stamps v. Hope, idem, p.482 (per Lord Reid); New York Life, supra n.29, at pp.111 (per Pollock, MR), 119 (per Atkin, LJ)Google Scholar; Swiss Bank Corporation, supra n.29, at p.679 (per Bankes, LJ)Google Scholar; Kwok Chi Leung, supra n.29, at p.1041 (per Lord, Oliver).Google Scholar

32. See Brassard v. Smith, supra n.27.

33. New York Life, supra n.29, at p.116 (per Pollock, MR)Google Scholar; In re Russo-Asiatic Bank, In re Russian Bank for Foreign Trade [1934] 1 Ch. 720, 738 (per Eve, J)Google Scholar; Jabbour v. The Custodian [1954] 1 All E.R. 145, 152 (per Pearson, J)Google Scholar; Alloway v. Phillips, supra n.29, at p.894 (per Waller, LJ)Google Scholar; Kwok Chi Leung, supra n.29, at pp.1041, 1042 (per Lord, Oliver).Google Scholar

34. Unless of course the issuer and/or the trustee happen to be located there.

35. “Its locality must be taken to be the place where the debt was in the ordinary course recoverable”: Re Russian Bank, supra n.29, at p.767 (per Maugham, J). More generally, a long series of cases emphasise the term “recovery” above that of “enforcement”Google Scholar: see New York Life, supra n.29, at p.112 (per Pollock, MR)Google Scholar: Swiss Bank Corporation, supra n.29, at p.679 (per Bankes, LJ)Google Scholar; In re Fry, supra n. 18, at p.431 (per Lawrence, J)Google Scholar; Jabbour, supra n.33, at p. 151 (per Peanon, J)Google Scholar; Alloway v. Phillips, supra n.29, at p.894 (per Waller, LJ).Google Scholar

36. Certain judgments express the view that only the law of a sovereign State can dispose of property located in that State. Thus the English court cannot purport to dispose of property located in a state which the UK has recognised: see Cammell v. Sewell, supra n.14, at p.627 (per Pollock, CB)Google Scholar; Castrique v. Imrie (1870) L.R. 4 H.L. 414.437 (per Blackburn, J)Google Scholar; Norton v. Florence Land and Public Works Co. (1877) 7 Ch.D. 332, 337 (per Jessel, MR)Google Scholar; Askionairnoye Obschestvo A. M. Lulher v. James Sagor & Co. [1921] 3 K.B. 532, 556 (per Scrutton, LJ)Google Scholar; Sedgwick Collins, supra n.30, at p.15 (per Sargant, LJ)Google Scholar; Re Russian Bank, idem, p.768 (per Maugham J); Re Bank de Marchands de Moscou [1952] 1 All E.R. 1269, 1275 (per Vaisey, J)Google Scholar; Winkworth v. Christie [1980] 1 Ch. 496, 513 (per Slade, J).Google Scholar

A possible development of this view is that only Italian law, for example, can deal with proprietary interests in securities issued from Italy.

37. Dicey & Morris, op. cit. supra n.9, Vol.1, at pp.6, 7Google Scholar, doubts the relevance of comity as a factor in conflicts of law. It may be argued further that the true basis for the lex situs rule is not the comity of nations but, rather, the practicalities of enforcement. Many provisions of English law purport to affect property abroad: e.g. English insolvency law in principle relates to assets wherever located (see s.144 of the Insolvency Act 1986); consider also s.395 of the Companies Act 1985 which (as a matter of English law) may avoid unregistered charges over foreign assets: see s.398 of that Act. However, in many cases the courts may hesitate to seek to enforce these provisions in relation to foreign assets, because of their limited prospects of success. It appears that in truth the objections to extraterritoriality are practical rather than principled. “The Court does not, and cannot attempt by its order to put its own officer in possession of foreign property”: In re Maudslay [1900] 1 Ch. 602, 611 (per Covens-Hardy, J).Google ScholarSee also Schemmer v. Property Resources [1974] Ch. 451, 458 (per Goulding, J).Google Scholar

As discussed above, the participant is able in the normal course to enforce its property rights in immobilised securities through the Clearers. Therefore any extraterritoriality implicit in the record-based approach raises no practical difficulties.

38. This is on the basis that the participant's asset would not be at risk in the insolvency of either the Clearer or the Common Depositary, in accordance with the local legislation of the Clearer's jurisdiction, and the legal opinions taken by the Clearers from lawyers in the jurisdictions of the Common Depositaries, in respect of the Common Depositaries.

39. “I do not think that anybody can doubt that with regard to the transfer of goods, the law applicable must be the law of the country where the movable is situate. Business could not be carried on if that were not so” In re Anziani [1930] 1 Ch. 407, 420 (per Maugham)

40. Cammel v. Sewell (1860) 5 H. & N. 728, 1378 (per Crompton, J)Google Scholarsupra n.36, at pp.512, 513Google ScholarWinkworth v. Christie, (per Slade, J.)Google Scholar

41. Indeed it was once contended that intangible property has no situs. “The subject matter of the assignment is a chose in action which has no locality”: Lee v. Abdy (1886) 17 Q.B.D. 309Google Scholar; (Day, J). However, “the notion that a debt or other chose in action, because incorporeal, can have no situs was laid to rest by the House of Lords in New York Life Insurance Co. v. Public Trustee [1924] 2 Ch. 101, 114per Warrington, LJ”Google Scholar: Kwok Chi Leung, supra n.29, at p. 1040, (per Lord, Oliver).Google Scholar Probate law had long found a technique for attributing location to debts, based on the residence of the debtor, and this technique was gradually extended to other branches of law. See e.g. Commissioner of Stamps v. Hope, supra n 30, at pp.481, 482 (per Lord, Field)Google Scholar; Mutter & Co's Margarine, supra n.11, at pp.236, 237 (per Lord, Lindley).Google Scholar

42. “But debts do, in one form or another, represent property of very considerable value in the modem world, and it appears to me it is desirable that they should possess a locality, even if they are invested with it by means of a legal fiction” English, Scottish and Australian Bank, supra n.30, at p.245 (per Lord, Buckmaster).Google Scholar

43. It informs the concept of a “securities entitlement” in the revised Art.8 of the US Uniform Commercial Code: s.8–110 (Transfers) and 5, 9–103(6) (Pledges). Belgium and Luxembourg adopt the record-based approach. In Luxembourg, see Art. 8(3) of the Grand Ducal Regulation of 17 Feb. 1971, as amended. For Belgium, see the Royal Decree No.62 of 10 Nov. 1967, as amended. The International Bar Association has advocated it more widely: see Guynn, R., Modernising Securities Ownership Transfer and Pledging Laws (1996).Google Scholar

In New York, the record-based approach is also supported by Fidelity Partners v. First Trust Company of New York, 97 Civ. 5184 (SHS) (SDNY 1 Dec. 1997). The author is grateful to Randall Guynn of Davis Polk Wardwell for this reference.