Introduction

On 12 March 2018, the European Commission published legislative proposals that are linked to the Capital Markets Union (CMU). The proposals are intended to boost the cross-border market for investment funds, promote the EU market for covered bonds as a source of long-term finance and ensure greater certainty for investors when dealing in cross-border transactions of securities and claims. The Commission will present further legislative proposals completing the CMU by May 2018.

Covered bonds

The Commission has proposed common rules – consisting of a Directive and a Regulation – for covered bonds. The legislative proposals are intended to enhance the use of covered bonds as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed.

The proposed Directive:

• provides a common definition of covered bonds, which will represent a consistent reference for prudential regulation purposes;
• defines the structural features of the instrument (dual recourse, quality of the assets backing the covered bond, liquidity and transparency requirements, etc);
• defines the tasks and responsibilities for the supervision of covered bonds; and
• sets out the rules allowing the use of the ‘European Covered Bonds’ label.

The proposed Regulation amends the Capital Requirements Regulation with the aim of strengthening the conditions for granting preferential capital treatment by adding further requirements.

The proposal will be discussed by the European Parliament and the Council. Once adopted, an implementation period of 12 months is envisaged before the new regime starts to apply.

Cross-border distribution of investment funds

The Commission has also published legislative proposals that are designed to facilitate the cross-border distribution of investment funds.

A proposed Regulation is intended to improve transparency by aligning Member State national marketing requirements and regulatory fees. It introduces more consistency in the way that these regulatory fees are determined. It also harmonises the process and requirements for the verification of marketing material by Member State national competent authorities. The Regulation enables the European Securities and Markets Authority to better monitor investment funds.

A proposed Directive seeks to harmonise the conditions under which investment funds may exit a Member State. It creates the possibility for asset managers to stop marketing an investment fund in defined cases in one or several host Member States. It also allows EU asset managers to test the appetite of potential professional investors for new investment strategies through pre-marketing activities. The proposal will be discussed by the European Parliament and the Council.

Law applicable to third-party proprietary effects of the cross-border assignment of claims

The Commission has also issued proposals concerning the law applicable to third-party proprietary effects of the cross-border assignment of claims. The assignment of a claim is a legal mechanism whereby a creditor (the assignor) transfers his right to claim a debt to another person. A claim gives a creditor the right to receive a sum of money or to the performance of an obligation by the debtor. This mechanism is used by companies to obtain liquidity and have access to credit, so-called factoring and collateralisation respectively, and by companies (most often banks) to optimise the use of their capital, also called securitisation.

A company can often assign a claim to an actor in another Member State, which can lead to a conflict of applicable laws. The Commission argues that for cross-border situations, a number of Member States do not have clear rules on third party effects of assignment of claims.

As a solution the Commission is proposing a general rule that in conflict situations the law of the assignor’s habitual residence applies. The law of the assignor’s habitual residence may be easy to determine and most likely be the place in which the main insolvency proceedings with respect to the assignor will be opened. The Commission also notes that special rules are needed to cater for sectors which may not be well served by the rule of the law of the assignor. Two types of specific claims are exempted from the general rule:

• cash on the account of a credit institution (for example a bank, where the consumer is the creditor and the credit institution is the debtor); and
• claims derived from financial instruments, such as derivatives.

In addition, for securitisation transactions, the Commission proposes a choice between the law of the assignor and the law of the assigned claim.

Communication on the law applicable to securities

Finally, the Commission has issued a Communication on the law applicable to securities. The Communication outlines the Commission’s views on the existing conflict of laws rules relating to securities transactions.

The Communication presents the Commission’s views as to how the relevant conflict of law provisions of the Settlement Finality Directive, Financial Collateral Directive and the Wing-Up Directive may be applied at present. The Commission is of the view that the difference in wording across the three Directives does not imply any difference in substance. In addition, without prejudice to potential future decisions of the Court of Justice of the European Union, the Commission is of the view that all the different ways to determine where a security account is “located” or “maintained” under national law appear to be valid.

The Commission will monitor developments in this area and within the next five years, it will assess how national interpretations and market practices have evolved in light of international and technological developments.