Explanatory Memorandum to COM(2018)96 - Law applicable to the third-party effects of assignments of claims

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This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2018)96 - Law applicable to the third-party effects of assignments of claims.
source COM(2018)96 EN
date 12-03-2018


1. CONTEXTOFTHEPROPOSAL

• Reasons for and objectives of the proposal

The Commission's priority is to further strengthen Europe's economy and stimulate investment to create jobs and sustain growth. In order to reach this objective, there is a need for stronger, deeper and more integrated capital markets. Efficient and safe post-trade infrastructures are key elements of such well-functioning capital markets. Following on from the 2015 Action Plan on Capital Markets Union (CMU), in May 2017 the Commission's Midterm Review set out the remaining actions which will be taken to put in place the building blocks of the CMU by 2019, with the objective of removing barriers to cross-border investment and lowering the costs of funding. Completing the CMU is an urgent priority.

As part of the CMU Action Plan and the Mid-Term Review, the Commission announced targeted action on rules on the ownership of securities and the third-party effects of assignments of claims to reduce legal uncertainty for cross-border transactions in securities and claims. This proposal and the Communication on the law applicable to the proprietary effects of transactions in securities1, presented in parallel, implement this commitment. The Communication clarifies the Commission's views on important aspects of the existing Union acquis with regard to the law applicable to the proprietary effects of transactions in securities and accompanies this legislative proposal on the third-party effects of assignments of claims. Matters governed by the Financial Collateral Directive2, the Settlement Finality Directive3, the Winding-up Directive4 and the Registry Regulation5 are not affected by this legislative proposal6.

The general objective of this proposal is, in line with the objectives of the CMU Action Plan, to foster cross-border investment in the EU and, thereby, facilitate access to finance for firms, including SMEs, and consumers. The specific objective of this proposal is to help to increase cross-border transactions in claims by providing legal certainty through the adoption of uniform conflict of laws rules at Union level.

Indeed, in order to increase cross-border transactions in claims and securities, clarity and predictability as to which country's law applies to determine who owns a claim or a security after a cross-border transaction are essential. Legal uncertainty as to which national law determines who owns an asset further to a cross-border transaction means that, depending on which Member State's courts or authorities assess a dispute concerning the ownership of a

COM (2018) 89.

Contents

1.

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial


collateral arrangements, OJ L 168, 27.6.2002, p. 43–50.

2.

Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement


finality in payment and securities settlement systems, OJ L 166, 11.6.1998, p. 45–50.

3.

Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the


reorganisation and winding up of credit institutions, OJ L 125, 5.5.2001, p. 15–23.

4.

Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to


Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and

No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations

(EU) No 920/2010 and No 1193/2011, OJ L 122, 3.5.2013, p. 1–59.

5.

See Article 9(1) and (2) of the Financial Collateral Directive (FCD), Article 9(2) of the Settlement


Finality Directive (SFD) and Article 24 of the Winding-Up Directive (WUD). While the FCD and the

SFD refer to book-entry securities, the WUD refers to instruments the existence or transfer of which

3

4

5

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claim or a security, the cross-border transaction may or may not confer the expected legal title. In case of insolvency, when the questions of ownership and enforceability of rights resulting from cross-border transactions are put under judicial scrutiny, legal risks stemming from legal uncertainty may result in unexpected losses.

The uniform rules laid down in this proposal will designate which national law should determine the ownership of a claim after it has been assigned on a cross-border basis and, thereby, eliminate legal risk and potential systemic consequences. The introduction of legal certainty will promote cross-border investment, access to cheaper credit and market integration.

The assignment of claims is a mechanism used by companies to obtain liquidity and have access to credit, as in factoring and collateralisation, and by banks and companies to optimise the use of their capital, as in securitisation.

Factoring is a crucial source of liquidity for many firms. In factoring, a company (the assignor, most often an SME) assigns (sells) its receivables to a factor (the assignee, often a bank) at a discount price as a means for the assignor to obtain immediate cash. The factor will collect the money owed for the invoices and accept the risk of bad debts. The majority of users of factoring are SMEs: Small represent 76%, Medium 11% and Large 13%. Factoring for SMEs is thus regarded by the industry as a basis for economic growth, as SMEs may find sourcing traditional lending more challenging7. Europe as a region is the largest factoring market world-wide and represents 66% of the world market8.

Example of

factoring

An SME C needs immediate cash to pay its suppliers. The invoices to its customers are only due for payment in three months. SME C (assignor) decides to assign (sell) its invoices to a factor (assignee), bank B, at a discount price in order to obtain immediate cash from B. The discount price at which SME C sells its invoices to B account for B's fees and commission.

In collateralisation, claims such as cash credited to a bank account (where the customer is the creditor and the bank is the debtor) or credit claims (that is, bank loans) can be used as financial collateral to secure a loan agreement (for example, a consumer can use cash credited to a bank account as collateral to obtain credit, and a bank can use a credit loan as collateral to obtain credit). The collateralisation of credit claims for the financial industry is very important. About 22% of the Eurosystem9 refinancing operations are secured by credit claims

as collateral10.

6.

Factoring and Commercial Finance: A Whitepaper, p. 20, by The EU Federation for the Factoring and


Commercial Finance Industry (EUF).

7.

Factoring in Europe as a region amounted to EUR 1,566 billion in 2015. The top European markets are


the UK, France, Germany, Italy and Spain. The global factoring market was EUR 2,373 billion in 2015.

Source: Factors Chain International FCI.

8.

The Eurosystem is composed of the European Central Bank and the national central banks of the


Member States which have adopted the euro.

About 22% of the Eurosystem refinancing operations are secured by credit claims as collateral,

9.

amounting to some EUR 380 billion as at Q2 2017, of which about EUR 100 billion represented credit


claims mobilised on a cross-border basis. Overall, the Eurosystem had mobilised some EUR 450 billion

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9

10

Example of

col late ralisation

An SME C (assignor) wants to get a loan from bank A (assignee) to build a bigger warehouse, using the claims it has against its customers as collateral (or security). If SME C goes bankrupt and cannot pay the credit back, bank A (the collateral taker) will be able to recover its debt by enforcing the claims that SME C had against its customers.

Securitisation enables the assignor, called ‘originatorʼ (for example, a company or a bank) to refinance a set of its claims (for example, motor vehicle rents, credit card receivables, mortgage loan payments) by assigning them to a ‘special purpose vehicle’ (SPV). The special purpose vehicle (assignee) then issues debt securities (for example, bonds) in the capital markets reflecting the proceeds from these claims. As payments are made under the underlying claims, the special purpose vehicle uses the proceeds it receives to make payments on the securities to the investors. Securitisation can lower the cost of financing because the special purpose vehicle is structured in such a way as to make it insolvency-remote. For companies, securitisation can provide access to credit at lower cost than bank loans. For banks, securitisation is a way to put some of their assets to better use and free up their balance sheets to allow for further lending to the economy11. As part of the Capital Markets Union Action Plan, the Union has adopted legislation to promote a safe and liquid market for securitisation. These rules aim to re-establish a safe securitisation market in the EU by differentiating simple, transparent and standardised securitisation products from more opaque and costly ones. For all types of securitisation, legal certainty about who owns the assigned claim is crucial.

Example of

securitisation

A large retail chain C (assignor) assigns its receivables arising from the use by customers of its in-house credit card to a special purpose vehicle A (assignee)12. A then issues debt securities to investors in the capital markets. These debt securities are secured by the income stream flowing from the credit card receivables that have been assigned to A. As payments are made under the receivables, A will use the proceeds it receives to make payments on the debt securities.

10.

The market volume of securitisation issuance was EUR 237.6 billion within the EU in 2016, with EUR


1.27 trillion outstanding at the end of 2016 - AFME Securitisation Data Report Q4 2016.

11.

This example is an adaptation of the illustration used in the UNCITRAL Legislative Guide on Secured



12

Why is legal certainty important?

is legal certainty

Ensuring the acquisition of legal title over the assigned claim is important for the assignee (for example, a factor, a collateral taker or an originator) as third parties could claim legal title over the same claim. This would give rise to a priority conflict, that is, a situation in which it would need to be determined which of the two rights, the right of the assignee or the right of the competing claimant, should prevail. A priority conflict between the assignee of the claim(s) and a third party can arise in essentially two situations:

- if a claim has been assigned twice (accidentally or not) by the assignor to different assignees, a second assignee could claim legal title over the same claim. The law applicable to the third-party effects of the assignment of claims will resolve the priority conflict between the two assignees of the same claim;

- in case the assignor becomes insolvent, the creditors of the assignor will want to know whether or not the assigned claim still forms part of the insolvency estate, that is, whether or not the assignment was effective and thus the assignee has acquired legal title over the claim. The law applicable to the third-party effects of the assignment of claims will resolve the priority conflict between the assignee and the creditors of the assignor.

In purely domestic assignments of claims, it is clear that national substantive law will determine the third-party (or proprietary) effects of the assignment of claims, that is, which requirements must be met by the assignee in order to ensure that he acquires legal title over the assigned claims in case a priority conflict should arise. However, in a cross-border scenario, several national laws can potentially apply and assignees need clarity as to which of such laws they must observe in order to acquire legal title over the assigned claims.

Legal risk

The applicable law, that is, the national law that applies to a given situation with a crossborder element, is determined by conflict of laws rules. In the absence of uniform Union conflict of laws rules, the applicable law is determined by national conflict of laws rules.

Conflict of laws rules on the third-party effects of assignments of claims are currently laid down at Member State level. Member States' conflict of laws rules are inconsistent as they are based on different connecting factors to determine the applicable law: for example, the conflict rules of Spain and Poland are based on the law of the assigned claim, the conflict rules of Belgium and France are based on the law of the assignor's habitual residence and the conflict rules of the Netherlands are based on the law of the assignment contract. National conflict of laws rules are also unclear, in particular where they are not laid down in statutory law.

Inconsistency in Member States’ conflict of laws rules means that Member States may designate the law of different countries as the law that should govern the third-party effects of the assignment of claims. This lack of legal certainty as to which national law applies to third-party effects creates a legal risk in cross-border assignments which does not exist in domestic assignments. Faced with this legal risk, an assignee may react in three different ways:

(i) if the assignee is not aware of the legal risk or chooses to ignore it, it may end up

facing unexpected financial losses if a priority conflict arises and it loses legal title over the assigned claims. The legal risk stemming from the legal uncertainty as to who owns a claim further to a cross-border assignment emerged during the 2008 financial crisis, for example in

the Lehman Brothers International (Europe) collapse, where the inquiry into the legal ownership of assets is still ongoing today13. Uncertainty about the ownership of claims can thus have knock-on effects and deepen and prolong the impact of a financial crisis;

(ii) if the assignee decides to mitigate the legal risk by seeking specific legal advice as to

which national laws can potentially apply to the third-party effects of the cross-border assignment and comply with the requirements under all such laws to ensure legal title over the claims assigned, it will incur higher transaction costs of between 25% and 60%14 which are not required for domestic assignments;

(iii) if the assignee is deterred by the legal risk and chooses to avoid it, it may forego

business opportunities and market integration may be reduced. Given the current absence of common conflict of laws rules regarding the third-party effects of assignments of claims, assignments of claims are mainly done on a national rather than on a cross-border basis: for example, the dominant type of factoring is domestic and, in 2016, it represented around 78% of total

turnover15.

If the assignee decides to carry out the assignment, the inconsistency between Member States’ conflict of laws rules means that the outcome of a priority conflict as to who owns a claim further to a cross-border assignment will vary depending on the national law applied by the Member State's court or authority assessing the dispute. Depending on the national law applied, the cross-border assignment may or may not confer the expected legal title on claimants.

Added value

of uniform rules

Currently, uniform Union conflict of laws rules determine the law applicable to the contractual obligations of transactions in claims and securities. In particular, the Rome I Regulation16 determines the law applicable to the contractual relationships between the parties to an assignment of claims (between the assignor and the assignee and between the assignee and the debtor) and between the creditor/assignor and the debtor. The Rome I Regulation also determines the law applicable to the contractual relationship between the seller and the buyer in transactions in securities.

Uniform Union conflict of laws rules also determine the law applicable to the proprietary effects of transactions in book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system in three Directives, namely the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. However, no uniform Union conflict of laws rules have been adopted on the law applicable to the proprietary effects of assignments of claims. This proposed Regulation aims at filling this gap.

13

14

Joint Administrators of Lehman Brothers International Europe (LBIE), Fifteenth Progress Report, 12.4.2016. See www.pwc.co.uk/services/business-recovery">www.pwc.co.uk/services/business-recovery-

12.

brothers-international-europe-in-administration-joint-administrators-15th-progress-report-12-april-2016.html


See the responses to Question 23 of the public consultation by the EU Federation for the Factoring and Commercial Finance Industry (EUF); the French Banking Federation (France); the Asset Based Finance Association Limited (ABFA) (UK).

13.

The EU Federation for the Factoring and Commercial Finance Industry - EUF Yearbook, 2016-2017, p. 13. Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the


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The common conflict of laws rules laid down in the proposed Regulation provide that, as a general rule, the law of the country where the assignor has its habitual residence will govern the third-party effects of assignments of claims. However, the proposed Regulation also lays down exceptions which subject certain assignments to the law of the assigned claim where the general rule would not be suitable and also a choice of law possibility for securitisations aimed at expanding the securitisation market.

The adoption of uniform conflict of laws rules at Union level on the third-party effects of assignments of claims will bring significant added value to financial markets.

First, the legal certainty brought by the uniform rules will enable assignees to comply with the requirements of only one national law to ensure the acquisition of legal title over the assigned claims. This legal certainty will eliminate the legal risk currently linked to cross-border assignments of claims in terms of unexpected losses and possible knock-on effects, increased transaction costs, missed business opportunities and reduced market integration. The uniform conflict of laws rules laid down, in particular, for securitisation, recognise the practice of large operators of applying the law of the assigned claim to the third-party effects of assignments of claims but aim, at the same time, at enabling smaller operators to enter or strengthen their presence in the securitisation market by subjecting the third-party effects of their assignments to the law of the assignor’s habitual residence. The flexibility in the conflict of laws rules applicable to securitisation will facilitate the expansion of the securitisation market with new market entrants and the creation of new business opportunities.

Second, the uniformity of the conflict of laws rules among Member States will ensure that the same national law will apply to resolve any priority conflict which arises between the assignee and a competing claimant regardless of which Member State’s court or authority examines the dispute.

The introduction of legal certainty will in this way promote cross-border investment, which is the ultimate goal of this proposed Regulation pursuant to the Capital Markets Union Action Plan.

What is a claim?

A claim is the right of a creditor against a debtor to the payment of a sum of money (for example, receivables) or the performance of an obligation (for example, delivery obligation of the underlying assets under derivative contracts).

Claims may be classified in three categories:

(i) The first category would cover traditional claims or receivables, such as money to be

received for unsettled transactions (for example, money to be received by a company from a customer for unpaid invoices).

(ii) Financial instruments as defined in MiFID II17 include securities and derivatives

traded on financial markets. While securities are assets, derivatives are contracts which include both rights (or claims) and obligations for the parties to the contract. The second category of claims would be claims arising from financial instruments (sometimes referred to

Financial instruments are listed in Section C of Annex 1 of MiFID II, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and

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as financial claims), such as claims arising from derivative contracts (for example, the amount due after the calculation of the close-out in a derivative contract).

(iii) The third category of claims would be cash credited to an account in a credit

institution (such as a bank), where the account holder (for example, a consumer) is the creditor and the credit institution is the debtor.

This proposal concerns the third-party (or proprietary) effects of the assignment of the above-mentioned claims. It does not cover the transfer of the contracts (for example derivative contracts), in which both rights (or claims) and obligations are included, or the novation of contracts including such rights and obligations. As this proposal does not cover the transfer or the novation of contracts, trading in financial instruments, as well as the clearing and the settlement of these instruments, will continue to be governed by the law applicable to contractual obligations as laid down in the Rome I Regulation. This law is normally chosen by the parties to the contract or is designated by non-discretionary rules applicable to financial markets.

Claims arising from financial instruments as defined in MiFID II, such as claims arising from derivative contracts, are relevant for the proper functioning of financial markets. Similarly to securities, trade in financial instruments such as derivatives generates large volumes of crossborder transactions. Financial instruments such as derivatives are often recorded in book-entry form.

The form of recording the existence or transfer of financial instruments such as derivatives, whether in book-entry form or otherwise, is governed by Member State law. In some Member States certain kinds of derivatives are recorded in book-entry form and are regarded as securities while, in other Member States, they are not. Depending on whether or not, under national law, a financial instrument such as a derivative contract is recorded in book-entry form and regarded as a security, the authority or court dealing with a dispute as to who has legal title over the financial instrument or over the claim arising from that financial instrument will apply the conflict of laws rule on the proprietary effects of the transfer of book-entry securities or the conflict of laws rule on the proprietary effects of the assignment of claims.

This proposal concerns conflict of laws rules on the third-party effects of the assignment of traditional claims, financial claims (that is, claims arising from financial instruments such as derivatives not recorded in book-entry form and not regarded as securities under national law) and ‘cash credited to a credit institution’, all of which are referred to as claims.

The third-party effects of transactions in financial instruments such as derivatives recorded in book-entry form and regarded as securities under national law are governed by the conflict of laws rules applicable to the proprietary effects of transactions in book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system laid down, in particular, in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. The scope of the conflict of laws rules in this proposal and the scope of the conflict of laws rules in these three Directives do not therefore overlap as the former apply to claims and the latter apply to book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system18. The three Directives are clarified by

14.

See Article 9(1) and (2) of the Financial Collateral Directive (FCD), Article 9(2) of the Settlement


8

the Communication on the law applicable to the proprietary effects of transactions in securities adopted today.

What

is the assignment

of a claim?

In an assignment of a claim, a creditor ("assignor") transfers his right to a claim against a debtor to another person ("assignee").

Clarity as to who owns a claim further to its cross-border assignment is relevant for participants in financial markets and also for the real economy. This is because the assignment of claims is often used by firms as a mechanism to obtain liquidity or access to credit.

In factoring, for example, a company (the assignor) sells its claims at a discount price to a factor (the assignee), often a bank, in exchange for immediate cash. The majority of factoring users are SMEs (87%)19.

The assignment of claims is also used by consumers, companies and banks to have access to credit, for example in collateralisation. In collateralisation, claims such as cash credited to a bank account or credit claims (that is, bank loans) can be used as financial collateral to secure a loan agreement (for example, a consumer can use cash credited to a bank account as collateral to obtain credit, and a bank can use a credit loan as collateral to obtain credit).

Finally, the assignment of claims is also used by companies and banks to borrow money from capital markets through the assignment of multiple similar claims to a special purpose vehicle and the subsequent securitisation of such claims as debt securities (for example, bonds).

15.

SFD refer to book-entry securities, the WUD refers to instruments the existence or transfer of which


presupposes the recording in a register, account or centralised deposit system (WUD).

16.

Factoring and Commercial Finance: A Whitepaper, p. 20, by The EU Federation for the Factoring and


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The stakeholders directly affected by the legal risk in cross-border transactions in claims are borrowers (retail customers and companies, including SMEs), financial institutions (such as banks engaged in lending, factoring, collateralisation and securitisation), financial intermediaries that transact in claims and end investors (funds, retail investors).

Development of

the conflict of laws rules on assignments of claims

With the increasing interconnectivity of national markets, assignments of claims often involve a cross-border element (for example, the assignor and the assignee, or the assignee and the debtor, are located in different countries). The laws of several countries can thus potentially apply to the assignment. Conflict of laws rules laid down at Union or Member State level must determine which national law applies to the various elements of a cross-border assignment of claims.

Conflict of laws rules on cross-border assignments of claims concern two elements: (1) the contractual element, which refers to the parties’ obligations towards each other; and (2) the proprietary element, which refers to the transfer of property rights over the claim and which can therefore affect third parties.

The Rome I Regulation on the law applicable to contractual obligations harmonised conflict of laws rules at Union level with regard to the contractual elements of the assignment of claims. The Regulation thus contains uniform conflict of laws rules with regard to (i) the relationship between the parties to the assignment contract - the assignor and the assignee20, and (ii) the relationship between the assignee and the debtor21. The conflict of laws rules of the Rome I Regulation also apply to the relationship between the original creditor (the assignor) and the debtor22.

In contrast, there are no conflict of laws rules at Union level with regard to the proprietary elements of the assignment of claims. The proprietary elements or third-party effects of an assignment of claims refer in general to who has ownership rights over a claim and, in particular, to: (i) which requirements must be fulfilled by the assignee in order to ensure that he acquires legal title over the claim after the assignment (for example, registration of the assignment in a public register, written notification of the assignment to the debtor), and (ii) how to resolve priority conflicts, that is, conflicts between several competing claimants as to who owns the claim after a cross-border assignment (for example, between two assignees where the same claim has been assigned twice, or between an assignee and a creditor of the assignor).

The question of which law should govern the third-party effects of assignments of claims was first considered when the 1980 Rome Convention was being converted into the Rome I Regulation23 and then during the legislative negotiations leading to the adoption of the Rome I Regulation. The Commission proposal for the Rome I Regulation chose the law of the assignor's habitual residence as the law that should apply to the third-party effects of the assignment of claims24. Ultimately, no conflict of laws rule on the third-party effects of

17.

20 21 22 23


Article 14(1) of the Rome I Regulation.

Article 14(2) of the Rome I Regulation.

Articles 2 and 3 of the Rome I Regulation.

18.

Question 18 of the Green paper on the conversion of the Rome Convention of 1980 on the law


applicable to contractual obligations into a Community instrument and its modernisation, COM(2002)

654 final, p. 39–41.

19.

Art. 13(3) of the Proposal for a Regulation of the European Parliament and the Council on the law


24

assignments was included in the Regulation25 due to the complexity of the matter and the lack of time to deal with it in the required level of detail.

However, Article 27(2) of the Rome I Regulation acknowledged the significance of this unresolved issue by requiring the Commission to present a report on the question of the effectiveness of assignments of claims against third parties accompanied, if appropriate, by a proposal to amend the Regulation26. To this end, the Commission contracted an external study27 and, in 2016, adopted a report presenting possible approaches to the matter28. In its report, the Commission noted that the absence of uniform conflict of laws rules determining which law governs the effectiveness of an assignment of a claim against third parties and the questions of priority between competing claimants undermines legal certainty, creates practical problems and results in increased legal costs29.

• Consistency with existing policy provisions in the policy area

This proposal complies with the requirement laid down in Article 27(2) of the Rome I Regulation that the Commission should publish a report and, if appropriate, a proposal on the effectiveness of an assignment of a claim against third parties and the priority of the assignee over the right of another person. The proposal harmonises conflict of laws rules on these issues as well as the scope of the applicable law, that is, the matters that should be governed by the national law designated as applicable by the proposal.

The proposal is consistent with existing Union instruments on applicable law in civil and commercial matters, in particular with the Rome I Regulation as regards the claims covered by the scope of the two instruments.

The proposal is also consistent with the Insolvency Regulation30 as regards the connecting factor which designates the law applicable to insolvency proceedings. The law of the assignor’s habitual residence chosen by the proposal as the law applicable to the third-party effects of assignments of claims coincides with the law applicable to the insolvency of the assignor as, under the Insolvency Regulation, the main insolvency proceedings must be opened in the Member State where the debtor has its centre of main interests (COMI). Most questions relating to the effectiveness of the assignments of claims made by the assignor arise in case of the assignor’s insolvency. The insolvency estate of the assignor will vary depending on whether or not the legal title of assigned claims has been transferred to the assignee and thus on whether or not the assignment of claims made by the assignor can be regarded as effective against third parties (for example, its creditors). Subjecting priority issues and the effectiveness of the assignments of claims against third parties, such as the creditors of the assignor, to the same law that governs the assignor’s insolvency is intended to facilitate the resolution of the assignor’s insolvency.

25

20.

26 27


28

21.

29 30


Cf. Article 13(3) of Proposal for a Regulation of the European Parliament and of Council on the law applicable to contractual obligations, COM(2005) 650 final and Article 14 of the Rome I Regulation. Article 27(2) of the Rome I Regulation.

British Institute of International and Comparative Law (BIICL), Study on the question of effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or

subrogated claim over a right of another person, 2011 (‘BIICL Studyʼ).

22.

Report from the Com m issi on to the European Parliament, the Council and the European Economic and


Social Committee on the question of the effectiveness of an assignment or subrogation of a claim

against third parties and the priority of the assigned or subrogated claim over the right of another

person, COM(2016) 626 fi na l (‘Commission Reportʼ).

Commission Report, p. 12.

23.

Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on


• Consistency with other Union policies

The aims of the initiative are coherent with Union policies on financial market regulation.

To facilitate cross-border investment, the Capital Markets Union Action Plan envisages targeted action on rules on the ownership of securities and the third-party effects of assignments of claims. The Action Plan further specifies that the Commission should propose a legislative initiative to determine with legal certainty which national law should apply to securities ownership and the third-party effects of the assignment of claims.

By reducing the legal uncertainty that may discourage cross-border assignments of claims or lead to additional costs for those transactions, this proposal will contribute to the objective of encouraging cross-border investment. By reducing the losses that might occur when market participants are not aware of the legal risk stemming from legal uncertainty, the proposal is fully consistent with the objective of investor protection set out in a number of Union financial market regulations. Finally, by harmonising conflict of laws rules on the third-party effects of assignments of claims, the proposal will provide legal certainty to parties involved in factoring, collateralisation and securitisation and thereby facilitate access to cheaper finance for SMEs and consumers.

In accordance with the Capital Markets Union Action Plan, this proposal on claims is complemented by a non-legislative initiative on the law applicable to the proprietary effects of transactions in securities. Currently, conflict of laws rules on the proprietary effects of crossborder transactions in securities are laid down in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. As indicated, the scope of the conflict of laws rules in this proposal and the scope of the conflict of laws rules in these three Directives do not overlap as the former apply to claims and the latter apply to book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system31.

Although uniform conflict of laws rules have been adopted in respect of securities in the three above-mentioned Directives, these rules do not use identical wording and are interpreted and applied differently in Member States.

The Impact Assessment carried out in relation to both claims and securities showed that the total absence of common conflict of laws rules regarding the proprietary effects of assignments of claims is one of the factors that results in assignments of claims being made on a national rather than on a cross-border basis. In contrast, with regard to transactions in securities, the residual legal uncertainty resulting from the different interpretations of the existing Directives does not appear to hinder the development of substantial cross-border markets. This, together with the little tangible evidence of material risk in respect of securities, supported the choice of a non-legislative initiative as the preferred policy option for securities.

In short, the main difference between the areas of claims and securities is that, while there is a complete absence of EU conflict of laws rules on the proprietary effects of assignments of claims which implies a need for a legislative measure to remove the legal risk from cross-

See Article 9(1) and (2) of the Financial Collateral Directive (FCD), Article 9(2) of the Settlement Finality Directive (SFD) and Article 24 of the Winding-Up Directive (WUD). While the FCD and the SFD refer to book-entry securities, the WUD refers to instruments the existence or transfer of which

3

border assignments of claims, three Directives already include conflict of laws rules on the proprietary effects of transactions in securities which, even if not uniformly worded, require only the adoption of soft law measures.

2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY

• Legal basis

The legal basis of the proposal is Article 81(2)(c) TFEU which, in the area of judicial cooperation in civil matters having cross-border implications, specifically empowers the Parliament and the Council to adopt measures aimed at ensuring “the compatibility of the rules applicable in the Member States concerning conflict of laws (…)."

By reason of Protocol No 22 to the TFEU, legal measures adopted in the area of freedom, security and justice, such as rules on conflict of laws, do not bind or apply in Denmark. By reason of Protocol No 21 to the TFEU, the UK and Ireland are also not bound by such measures. However, once a proposal has been presented in this area, these Member States can notify their wish to take part in the adoption and application of the measure and, once the measure has been adopted, they can notify their wish to accept that measure.

• Subsidiarity

The current legal uncertainty and the legal risk stemming therefrom are caused by divergent Member State substantive rules governing the third-party effects of assignments of claims. Member States acting individually could not satisfactorily remove the legal risk and barriers to cross-border assignments of claims as national rules and procedures would need to be the same or at least compatible in order to work in a cross-border situation. Action at Union level is needed to ensure that, throughout the Union, the same law is designated as the law applicable to the third-party effects of assignments of claims regardless of which Member State’s courts or authorities assess a dispute on the ownership of an assigned claim.

• Proportionality

Currently, each Member States has (i) its own substantive rules governing the third-party effects of assignments of claims, and (ii) its own conflict of laws rules designating which national substantive law governs such third-party effects. Both the substantive rules and the conflict of laws rules of the Member States are different and, in a number of cases, the conflict of laws rules are unclear or not laid down in statutory legislation. These divergences create legal uncertainty which results in legal risk, as the substantive laws of various countries can potentially apply to one cross-border assignment.

In order to provide legal certainty, the EU could propose to (i) harmonise the substantive rules of all Member States governing the third-party effects of assignments of claims, or (ii) harmonise the conflict of laws rules applicable to the third-party effects of assignments of claims. The solution proposed is to provide legal certainty through the harmonisation of conflict of laws rules. This is a more proportionate solution in line with the subsidiarity principle as it does not interfere with national substantive law and only applies to assignments of claims with a cross-border element.

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Such action relating to the third-party effects of assignment of claims is suitable to achieve the objective of providing legal certainty and removing the legal risk from cross-border


assignments of claims, thereby facilitating cross-border investment, access to cheaper credit and market integration, without going beyond what is necessary to achieve the aim.

Choice

of the instrument

The desired uniformity of the conflict of laws rules can only be achieved through a Regulation as only a Regulation ensures a fully consistent interpretation and application of the rules. In line with previous Union instruments on conflict of laws rules, the preferred legal instrument is thus a Regulation.

3. RESULTS OF STAKEHOLDER CONSULTATIONS AND IMPACT

ASSESSMENT

Stakeholder

consultations and collection and use of expertise

The Commission actively engaged with stakeholders and conducted comprehensive consultations throughout the impact assessment process. The consultation strategy set out a number of actions to be organised by the Commission, in particular an on-line public consultation; two meetings with Member State experts, one with experts on conflicts of laws and another with experts on financial markets; and a high-level Expert Group composed of academics, legal practitioners and industry members with expertise on both conflict of laws rules and financial markets. The consultation strategy also included a study contracted by the Commission and conducted by the British Institute of International and Comparative Law (BIICL) on the question of the effectiveness of assignments of claims against third parties and priority conflicts between competing claimants. The Inception Impact Assessment, published on 28 February 2017, received no feedback from stakeholders.

The study contracted by the Commission showed that the laws most commonly applied today to resolve conflicts of laws concerning the third-party effects of assignments of claims are the law of the assignor's habitual residence (for example, Belgium, France, Luxembourg in respect of securitisation), the law governing the assigned claim (for example, Spain, Poland) and the law of the contract between the assignor and the assignee (for example, the Netherlands).

The on-line public consultation opened on 7 April 2017 and closed on 30 June 2017, which complies with the standard of a minimum of 12 weeks for Commission public consultations. The objective of the public consultation was to receive input from all stakeholders concerned, in particular those involved in factoring, securitisation, collateralisation and trading of financial instruments, as well as from legal practitioners and experts on conflict of laws rules on the third-party effects of assignments of claims.

The Commission received 39 responses to the public consultation. Among the respondents were 5 governments, 15 industry associations, 4 companies, 2 law firms, 2 think tanks and 5 private individuals. From the financial sector, the interests of banks, fund managers, regulated markets, central counterparties (CCPs), central security depositories (CSDs), securities issuers and investors were represented. No replies were received from consumer organisations.

In terms of geographical coverage, responses came from different Member States: 13 responses from stakeholders located in the UK, 9 responses from France and Belgium, 3 responses from Germany and the Netherlands, 2 responses from Spain, 1 response from Finland, 1 response from the Czech Republic and 1 response from Sweden.


In general, when stakeholders were asked whether, in the previous five years, they had encountered difficulties in securing the effectiveness of cross-border assignments of claims against third parties other than the debtor, more than two thirds of the stakeholders that responded stated that they had encountered difficulties. Out of the sta keholders that responded to the question whether Union action would bring added value in addressing the difficulties encountered, 59% answered positively and 22% responded negatively.

Regarding the law that should be chosen in a Union legislative initiative, stakeholders were asked to indicate their preferences in three separate questions. Out of the stakeholders that responded to each of the three separate questions, 57% of stakeholders favoured the law of the

assignor’s habitual residence, 43% favoured the law of the assigned claim and 30% preferred

the law of the assignment contract. Some respondents based their replies on the conflict of laws rules applicable in their Member State, while others based their replies on the law that they apply in their current practice.

In support of the assignors habitual residence, stakeholders argued that this law can be determined easily, would provide greater legal certainty and respect more than any other solution the economic logic of im portant trade practices. Stakeholders that supported the law of the assigned claim argued that this law would respect the principle of party autonomy and potentially ower transaction costs.

• Im pact assessment

The options analysed in the Im pact Assess m ent are the following:

■' Option 1: Law applicable to the assignment contract

Under this connecting factor, the law that governs the contract of assignment between the assignor and the assignee would also govern the proprietary effects of the assignment of claims. The assignor and the assignee can choose any law to govern their assignment contract.

^ Option 2: Law of the assignor's habitual residence

Under this connecting factor, the third-party effects of the assignment of claims would be governed by the law of the country in which the assignor has its habitual residence.


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Option 3: Law governing the assigned claim


Under this connecting factor, the third-party effects of the assignment of claims would be governed by the law that governs the assigned claim, that is, the credit in the original contract between the creditor and the debtor which is subsequently assigned by the creditor (assignor) to a new creditor (assignee). The parties to the original contract can choose any law to govern the contract which includes the claim subsequently assigned.

S Option 4: Mixed approach combining the law of the assignor’s habitual residence and

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the law of the assigned claim


This mixed option combines the application of the law of the assignors habitual residence as a general rule and the application of the law of the assigned claim to certain exceptions, namely (i) the assignment of cash credited to an account in a credit institution (for example a bank, where the consumer is the creditor and the credit institution is the debtor), and (ii) the assignment of claims arising from financial i nstru ments. This mixed option also lays down the

possibility for the assignor and the assignee to choose the law of the assigned claim to apply to the third-party effects of assignments in the context of a sec uritisatio n. The possibility for parties in a sec uritisation to remain subject to the general rule based on the law of the

assignor’s habitual residence or choose the law of the assigned claim aims at catering for the

needs of both large and smaller securitisation operators.

■' Option 5: Mixed approach combining the law of the assigned claim and the law of the

assignor’s habitual residence

This mixed option combines the application of the law of the assigned claim as a general rule and the application, as an exception, of the law of the assignors habitual residence to the assignment of multiple and future claims. Under this option, the third-party effects of the assignment of trade receivables by a non -finan ci al company (for example, an SME) in the

context of factoring would remain subject to the law of the assignor’s habitual residence. The

third- party effects of the assignment of multiple claims by a financial company (for example,

a bank) in the context of securitisation would also be subject to the law of the assignor’s

habitual resi dence.

T his proposal is based on option 4, which chooses the law of the assignors habitual residence as a general rule but with certain assignments subject, as an exception, to the law of the assigned claim and with a choice of law possibility for securitisation. Given that the proposal does not deal with relationships between the parties to a contract but with the rights of third

parties, applying the law of the assignor’s habitual residence as a general rule is the most

suitable option because:

it is the only law that can be predicted and easily found by third parties concerned by the assignment, such as the creditors of the assignor. In contrast, the law that governs the assigned claim and the law that governs the contract of assignment cannot be predicted by third parties as such laws are most of the times chosen by the parties to the contract;

in the case of bulk assignments of claims, it is the only law that responds to the needs of factors and smaller operators of securitisation, who are not always equipped to check ownership requirements under the various countries laws which govern the various claims assigned in the bundle;

it is the only law that makes possible the determination of the applicable law when future claims are assigned, a common practice in factoring;

it is the only law which is consistent with the Union acquis on insolvency, that is, the Insolvency Regulation. The application of the same law to the third-party effects of assignments of claims and to insolvency facilitates the resolution of the assignor’s

insolvency32;

it is the only law which is consistent with the international solution enshrined in the 2001 United Nations Convention on the Assignment of Receivables in International Trade. This can create synergies and save legal due diligence and litigation costs for market participants who operate on a global basis.

For example, the French Banking Federation (FBF) states in its response to the public consultation that,

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In addition, even when, currently, the parties choose to apply the law of the assigned claim to the third-party effects of their cross-border assignment, most of the times they also look at the law of the assignor's habitual residence to make sure that the acquisition of legal title over the claims assigned will not be prevented by overriding mandatory rules of the country of the assignor's habitual residence, in particular the rules laying down publicity requirements such as the obligation to register the assignment of claims in a public register to make it known and effective towards third parties33.

On the other hand, the mixed nature of this option provides for an exception based on the law of the assigned claim to apply to certain specific assignments, namely the assignment of cash credited to an account in a credit institution and the assignment of claims arising from financial instruments, which accommodates the needs of market participants in these specific areas. This mixed option offers additional flexibility by laying down the possibility for the assignor and the assignee in the assignment of claims in a securitisation to choose the law applicable to the third-party effects of the assignment, thereby enabling both large and smaller operators to engage in cross-border securitisations.

A joint Impact Assessment report covering both the law applicable to the ownership of securities and the law applicable to the third-party effects of assignments of claims was submitted to the Regulatory Scrutiny Board (RSB) on 8 November 2017. The RSB issued a negative opinion on the impact assessment and made a number of common recommendations for improvements. With regard to claims, the RSB asked for more detailed information on the options that were being considered as to the law applicable to the third-party effects of assignments of claims. The impact assessment was revised and resubmitted to the RSB on 18 January 2018. On 1 February 2018 the RSB issued a positive opinion with reservations. With regard to claims, the RSB recommended that more information be provided on the one-off costs that some market participants would incur as a result of the adoption of uniform conflict of laws rules. The recommendations for improvement were taken into account in the impact assessment to the extent possible.

Fundamental

rights

The objectives of this initiative fully support the right to property enshrined in Article 17 of the Charter of Fundamental Rights of the European Union34. By clarifying which law governs the proprietary effects of assignments of claims, this proposal would contribute to upholding the right to property as it would diminish the risk that the ownership of investors or collateral takers over claims might be hindered.

By reducing cases of fall-outs and financial losses due to the absence of uniform provisions on the law applicable to the proprietary effects of assignments of claims, this proposal would positively impact the freedom to conduct a business set out in Article 16 of the Charter.

By harmonising the conflict of laws rules on the proprietary effects of assignments of claims, this proposal would discourage forum shopping as any Member State’s court or authority hearing a dispute would base its judgement on the same national substantive law. This would facilitate the right to an effective remedy set out in Article 47 of the Charter.

For example, the German Banking Industry Committee states in its response to the public consultation that, in securitisation transactions, parties need to check notice or registration requirements. The Association for Financial Markets in Europe (AFME) states in its response that parties must check whether the assignment will be effective under the law of the assignor.


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4. BUDGETARYIMPLICATIONS

The proposal will have no impact on the Union budget.

5. OTHERELEMENTS

Implementation

plans and monitoring, evaluation and reporting arrangements

The Commission will monitor the impact of the proposed initiative by way of a questionnaire sent to key stakeholders. The questionnaire will aim at gathering information on trends in the number of cross-border assignments, trends in due diligence costs further to the adoption of a uniform conflict of laws rule, and the one-off costs related to changes in legal documentation. The impact of the proposed solution will be evaluated in a report prepared by the Commission five years after the date of application of the proposed instrument.

The monitoring of the impact of the adoption of a uniform conflict of laws rule will cover the areas of factoring, collateralisation, securitisation and the specific assignments of cash credited to an account in a credit institution and the assignment of claims arising from financial instruments such as derivative contracts.

The analysis will take into account that the volume of assignments, the transaction costs and the nature of hidden risks in cross-border assignments of claims are influenced by a number of different economic, legal or regulatory factors unrelated to legal certainty on the law applicable to the third-party effects of such assignments.

• Detailed explanation of the specific provisions of the proposal

Article 1: Scope

This article defines the scope of the proposed Regulation taking into account existing Union legislation and, in particular, the scope of the Rome I Regulation.

Article 1(2) contains a list of exclusions from the scope of the proposed Regulation. These matters will be governed either by existing Union legislation or by national conflict of laws rules.

Article 2: Definitions

This article first defines the main concepts on which the proposed Regulation is based, namely “assignment”, “claim” and “third-party effects”. The definition of “assignment” is aligned with that contained in the Rome I Regulation. It refers only to a voluntary transfer of a claim, including contractual subrogation. It covers both outright transfers of a claim and also the transfer of a claim as collateral or security.

The definition of “claim” in the proposed Regulation codifies the general understanding of what a claim is under the Rome I Regulation, namely a broad concept referring to a debt of whatever nature, whether monetary or non-monetary, and whether arising from a contractual obligation governed by the Rome I Regulation or a non-contractual obligation governed by the Rome II Regulation. The definition of “third-party effects” is determined by the material scope of the proposed Regulation.


The article defines “habitual residence” in line with the definition contained in Article 19(1) of the Rome I Regulation, that is, as the place of central administration for companies and as the principal place of business for a natural person acting in the course of his business activity. The proposed Regulation does not include a definition of habitual residence equivalent to the definition contained in Article 19(2) of the Rome I Regulation, that is, as the place of location of a branch, because of the uncertainty that such a rule would create if the same claim was assigned by the assignor’s central management and also by the management of a branch located in a different country.

The concept of “habitual residence” will generally coincide with the centre of main interest (COMI) used in the Insolvency Regulation.

The article defines “credit institution” in accordance with Union legislation governing credit institutions; “cash” in accordance with the Financial Collateral Directive; and “financial instrument” in accordance with MiFID II.

Article 3: Universal application

This article establishes the universal character of the proposed Regulation by providing that the national law designated as applicable by the proposed Regulation can be the law of a Member State or the law of a third country.

Article 4: Applicable law

This article provides for uniform conflict of laws rules on the third-party effects of the assignment of claims. The article lays down in paragraph 1 a general rule based on the law of the assignor’s habitual residence, two exceptions in paragraph 2 based on the law of the assigned claim and, in paragraph 3, a possibility for the assignor and the assignee in a securitisation to choose the law of the assigned claim as the law applicable to the third-party effects of the assignment. A rule applicable to priority conflicts between assignees arising from the application of the law of the assignor's habitual residence and the law of the assigned claim to the third-party effects of two assignments of the same claim is laid down in paragraph 4.

According to the general rule, the law that governs the third-party effects of assignments of claims is the law of the country where the assignor has its habitual residence at the material time.

The article also deals, in the second subparagraph of paragraph 1, with the so-called conflit mobile, that is, the rare occurrence in which the assignor changes habitual residence between two assignments of the same claim as, in such cases, competing assignments could be subject to different national laws. The rule on conflit mobile provides that the applicable law will be the law of the assignor's habitual residence at the time at which one of the two assignments first becomes effective against third parties; in other words, at the time at which one of the assignees first completes the requirements to make the assignment effective against third parties.

When, as in the case of a syndicated loan (a loan offered by a group of lenders - referred to as a syndicate - to a single borrower for large projects), each creditor within a group of creditors owns a share of the same claim, the law of the assignor’s habitual residence will govern the third-party effects of an assignment made by a creditor of his own share of the claim.

Paragraph 2 of the article provides that the third-party effects of certain assignments are, as an exception, subject to the law of the assigned claim. The law of the assigned claim refers to the law that governs the contract between the original creditor/assignor and the debtor from which the claim arises. With this exception the proposed Regulation lays down a conflict of laws rule which adapts to the needs of market participants involved in these specific assignments. The assignments whose third-party effects are subject to the law of the assigned claim are: (i) the assignment of cash credited to an account in a credit institution; and (ii) the assignment of claims arising from financial instruments.

On the first exception: Where an account holder (for example, a consumer) places cash in an account in a credit institution (for example, a bank), there is an initial contract between the account holder (the creditor) and the credit institution (the debtor). The account holder is the creditor of a claim against the credit institution, the debtor, for the payment of the cash credited to the account in the credit institution. An account holder may wish to assign the cash credited to his account in a credit institution to another credit institution as security to obtain credit. In such cases, the law that will govern who has ownership title over the claim once the cash has been assigned as collateral will not be the law of the habitual residence of the account holder (the assignor) but the law that governs the assigned claim, that is, the law that governs the contract between the account holder and the first credit institution from which the claim arises. For third parties such as creditors of the assignor and competing assignees, greater predictability is provided if the law applicable to the third-party effects of the assignment of the cash credited to an account in a credit institution is the law applicable to the cash claim. This is because it is generally assumed that the claim that an account holder has over cash credited to an account in a credit institution is governed by the law of the country where the credit institution is located. This law is normally chosen in the account contract between the account holder and the credit institution.

As to the second exception: The third-party effects of assignments of claims arising from financial instruments, such as derivative contracts, should be subject to the law governing the assigned claim, that is, the law governing the financial instrument such as the derivative contract. A claim arising from a financial instrument could be, for example, the amount due after the calculation of the close-out in a derivative contract. Subjecting the third-party effects of assignments of claims arising from financial instruments to the law of the assigned claim rather than the law of the assignor’s habitual residence is essential to preserve the stability and smooth functioning of financial markets as well as the expectations of market participants. These are preserved as the law that governs the financial instrument from which the claim arises, such as a derivative contract, is the law chosen by the parties or the law determined in accordance with non-discretionary rules applicable to financial markets.

The third paragraph of the article deals with the law applicable to the third-party effects of assignments of claims pursuant to a securitisation. Securitisation enables the assignor, called ‘originatorʼ (for example, a bank or a company) to refinance a set of its claims (for example, motor vehicle rents, credit card receivables, mortgage loan payments) by assigning them to a ‘special purpose vehicleʼ (SPV). The special purpose vehicle (assignee) then issues debt securities (for example, bonds) in the capital markets reflecting the proceeds from these claims. As payments are made under the underlying claims, the special purpose vehicle uses the proceeds it receives to make payments on the securities to the investors. Securitisation can lower the cost of financing because the special purpose vehicle is structured in such a way as to make it insolvency-remote. For corporates, securitisation can provide access to credit at lower cost than bank loans. For banks, securitisation is a way to put some of their assets to better use and free up their balance sheets to allow for further lending to the economy.

Currently, large assignors and assignees (for example, large banks) involved in securitisations apply the law of the assigned claim to the third-party effects of the assignment. This means that the assignee (the special purpose vehicle) will need to comply with the requirements laid down in the law that governs the assigned claims (that is, the contract between the original creditor/assignor and the debtor) to ensure that it acquires legal title over the assigned claims. This reduces costs for operators that are able to structure their securitisations such that all claims included in the package to be assigned to the special purpose vehicle are subject to the law of one same country. The special purpose vehicle must then comply with the requirements laid down in the law of only one country to ensure that it acquires legal title over the bundle of assigned claims. Given that large operators often carry out securitisations on a cross-border basis, that is, with the originators being located in different Member States, applying the law of the assignor’s habitual residence to the third-party effects of the assignment of claims in these cases would be more cumbersome for the assignee as it would need to comply with the requirements laid down in the laws of various countries, that is, the laws of each of the countries where an originator is located.

In contrast, smaller operators (for example, smaller banks and corporates) most often need to apply the law of the assignor’s habitual residence to the third-party effects of the assignment of claims in a securitisation because the claims included in the package to be assigned to the special purpose vehicle are governed by the laws of different countries. In such cases, smaller assignees could not apply the law of the assigned claim to the third-party effects of the assignment as they would not be equipped to comply with the requirements to obtain legal title over the assigned claims under each of the laws governing each of the claims included in the package. Instead, it is easier for smaller assignees to comply with the requirements under only one law, namely the law of the assignor’s habitual residence.

In short, by providing for a choice of law, paragraph 3 of this article aims at not affecting the current practice of large banks of applying the law of the assigned claim to the third-party effects of assignments in securitisations where the assigned claims are all subject to the same country's law but the assignors (originators) are located in various Member States. At the same time, paragraph 3 aims at making it possible for smaller banks and corporates to enter or strengthen their position on the securitisation market by being able to become the assignees of multiple claims subject to different countries' laws.

In any event, the flexibility offered by paragraph 3 enables securitisation operators to decide for each securitisation whether to choose the law of the assigned claim or remain subject to the general rule based on the law of the assignor’s habitual residence depending on the structure of their securitisation, in particular on whether the assigned claims are subject to the law of one or various countries, and on whether there is one or more originators and they are located in one or various countries. Paragraph 4 of this article lays down a conflict of laws rule to resolve priority conflicts between assignees of the same claim when the third-party effects of the assignment of the claim have been subject to the law of the assigned claim in one assignment and to the law of the assignor’s habitual residence in another assignment. This situation can occur (normally accidentally and in no particular order) in case a claim has been first assigned in factoring, collateralisation or a (first) securitisation in which no choice of law has been made and, subsequently, in a (second) securitisation in which the parties chose the law of the assigned claim as the law applicable to the third-party effects of the assignment. The third-party effects of assignments of claims in factoring, collateralisation or a (first) securitisation in which no choice of law has been made would all be subject to the law of the assignor’s habitual residence. In contrast, the third-party effects of assignments of claims in a (second) securitisation where the parties chose the law of the assigned claim would be subject

to the law of the assigned claim. The proposed Regulation provides for an objective factor to determine which law should apply to resolve the priority conflict between assignees: the law that should apply would be the law applicable to the third-party effects of the assignment of claims which first became effective against third parties under its applicable law. This rule is consistent with the rule applicable to conflit mobile under paragraph 1 of this article and, like that rule, is based on the time at which the assignment of claims first becomes effective against third parties because the proposed Regulation concerns third-party effects.

Article 5: Scope of the

applicable law

This article harmonises a non-exhaustive list of issues that should be governed by the national substantive law designated as the law applicable to the third-party effects of the assignments of claims. This article therefore spells out the content of the concept “third-party effects” (or proprietary effects) of the assignment of claims. In general, the applicable law will determine who has acquired legal title over the assigned claim. In particular, the applicable law should govern two main issues in order to determine whether a person has acquired legal title over the assigned claim:

(i) the effectiveness of the assignment of the claim against third parties: that is, the steps

that need to be taken by the assignee in order to be able to assert his right over the claim towards third parties – for example, registering the assignment with a public authority or registry, or notifying the debtor in writing of the assignment; and

(ii) priority issues: that is, the determination of whose right has priority in cases of conflict

between competing claimants – for example, between competing assignees when the same claim has been assigned more than once, or between an assignee and another right-holder, for example a creditor of the assignor or the assignee in insolvency cases.

The term ‘third parties’ should be understood as third parties other than the debtor, as all aspects affecting the debtor are, pursuant to Article 14(2) of the Rome I Regulation, governed by the law of the assigned claim (that is, the law that governs the original contract from which the assigned claim arises).

The modalities for the creation of rights and the transfer of rights may vary under the legal orders of the Member States. Given that the proposed Regulation has a universal character and can therefore designate as the law applicable to the third-party effects of assignments of claims the law of any country, the proposed Regulation aims at covering a variety of possible priority conflicts between competing claimants. The proposed Regulation covers priority conflicts arising not only from assignments of claims (for example, between two assignees of the same claim) but also from legally or functionally equivalent mechanisms, in particular the transfer of a contract and the novation of a contract, which can be used to pass on a contract and thus both the rights (the claim) and obligations arising from that contract. The law designated as applicable by the proposed Regulation should therefore govern not only priority conflicts between competing assignees but also priority conflicts between an assignee and a competing claimant who has become the beneficiary of a claim further to the transfer of a contract or the novation of a contract. It should be stressed that the proposal does not designate the law applicable to the transfer of contracts or the novation of contracts (for example, the law applicable to the novation of derivative contracts), but only the law applicable to possible priority conflicts over a claim first assigned and then transferred again (the same claim or the economically equivalent claim) by means of a transfer of contract or a novation of contract. If the proposed Regulation did not cover priority conflicts between an assignee and a beneficiary of a claim further to the transfer of a contract or the novation of a contract, a situation of legal uncertainty could arise whereby both an assignee and the

competing beneficiary of the claim further to the transfer or novation of a contract would require payment from the debtor and no common conflict of laws rule could apply to resolve that conflict.

Article 6: Overriding mandatory provisions / Article 7: Public policy

These articles provide for possibilities to apply the law of the forum instead of the law designated as the applicable law by Article 4. Overriding mandatory provisions could refer, for example, to the obligation to register the assignment of claims in a public registry.

Articles 8 to 12: General issues of application of conflict of laws rules

These articles deal with general issues of application of conflict of laws rules in line with other Union instruments on applicable law, in particular the Rome I Regulation.

Article 10: Relationship with other provisions of Union law

This article aims at safeguarding the application of lex specialis laying down conflict of laws rules on the third-party effects of assignments of claims in relation to particular matters.