Asset segregation is essential for protecting clients’ assets in case of insolvency of the financial institution where the client holds its assets (the ‘intermediary’). To protect clients against this ‘intermediary risk’, intermediaries such as banks, payments services providers and investment firms must at least segregate or ‘ring-fence’ the assets belonging to their clients from their own assets. Imagine an investment bank goes bust: a great number of people may lose their investments if the assets the bank holds for its clients were to fall within the investment bank’s bankruptcy estate. The investors would have to stand in line with all other creditors, risking being faced with an empty estate, or with insufficient assets to cover their full claims.
Asset segregation is hence of crucial importance for the trust society has in intermediaries and for the economy. Many legislative acts, both at the national level and, to an increasing extent, at the European level, were introduced in order to effectuate asset segregation. What is the current state of affairs with regard to the regulation of asset segregation? What are the challenges? And, what lies ahead? These questions were addressed in presentations provided by academics and practitioners from both the Netherlands and Belgium, during a mini-seminar on ‘asset segregation’, organised on 7 March 2019 by the Hazelhoff Centre for Financial Law at the historic Academy Building in Leiden.
The seminar was on invitation only basis, and its 40 participants were all senior members of Central Securities Depositories (CSDs), banks, pension funds, regulators, law firms and academics. The seminar was chaired by Pim Rank (Hazelhoff Centre for Financial Law, Leiden University), who edited the book Vermogensscheiding in de financiële praktijk, 2018. The seminar was organised in the context of a research project being undertaken with the generous help of Stichting Capital Amsterdam.
Pim Rank gave the opening speech. He set the scene by describing the main characteristics of asset segregation, highlighting the important distinction between administrative or operational asset segregation and legal asset segregation. Administrative segregation concerns segregating clients’ assets ‘on the books’. Legal segregation refers to segregation that legally, and not just on the books, segregates the clients’ assets from the intermediary’s own assets. For an effective protection of clients’ assets in case of insolvency, legal segregation is key. Asset segregation is a legal area in which public and private law, and European and national law interact. Rank concentrated on Dutch law in particular. As Dutch law is not familiar with the legal concept of the trust, some creativity was necessary to provide for legal asset segregation under Dutch law. Legal asset segregation can be effectuated either by a separate legal entity that holds the assets, such as a securities depository (effectenbewaarbedrijf), or by creating a separation of assets within the financial intermediary itself. The latter is only possible if the law explicitly provides for such segregation as these constructions interfere with two main principles of Dutch property law: the principle that a creditor has recourse on all assets of a debtor and the principle of paritas creditorum. Finally, Rank showed that asset segregation is still a hot topic, by referring to the provisions on asset segregation under the new legislative proposal for the modernisation of partnerships (Wetsvoorstel Modernisering personenvennootschappen), published in February 2019.
Subsequently, Matthias Haentjens (Hazelhoff Centre for Financial Law) shed light on the international aspects of asset segregation. The question of ‘who owns what’ in the international context is extremely important, considering that 40 per cent of the securities transfers in the EU in 2016 had a cross-border character, representing a total value of EUR 10.6 trillion. Serious problems may arise in the current absence of a harmonised regime. EU law only prescribes administrative asset segregation and it will depend on the applicable law whether administrative asset segregation also leads to legal asset segregation. National regimes vary widely on this issue. These differences in substantive law render rules of Private International Law of crucial importance. Yet, also in Private International Law, there is no consensus and the rules are highly fragmented. The rules to determine the applicable national law, for instance, depend on whether the relevant assets involve money, derivatives or securities. Overall, asset segregation is extremely complex in international situations. Haentjens concluded by stating that the harmonisation of rules on administrative segregation in the area of asset segregation is necessary, although insufficient. In an international context, he also pleaded for harmonisation of the rules on legal asset segregation.
Vincent Sagaert (KU Leuven and Eubelius) discussed the current draft Bill for the introduction of the fiducie in Belgium. The fiducie will provide for legal asset segregation under Belgian law and it is currently pending as part of the legislative proposal to reform the Belgian Civil Code. Sagaert explained that the fiducie resembles the trust, but is something different. So what is it then? The fiducie provides for property law protection of the fiduciary assets from personal creditors of the ‘bewindvoerder’, i.e. the intermediary. The fiducie remains neutral to the question whether the ‘bewindvoerder’ or the ‘beneficiary’ is the owner of the assets. The scope of the figure of the fiducie is limited to certain parties, such as banks, lawyers and notaries, holding moneys for their clients. The fiducie is however not limited to moneys. It can also concern movable and immovable property. To strike a balance between client protection and the protection of other creditors, an essential element of the fiducie is publicity. A fiducie must be registered in the ‘registers of legal certainty’.
Emilie Kuijper (Euronext) discussed the development of the Dutch Wet giraal effectenverkeer (Wge, Securities Transfer Act): past, present and future. Should the Wge reach its 50th anniversary? In 1977, the Wge introduced a system for the transfer of securities through book entries and constituted a major change. Before 1977, in order to transfer bearer shares, physical delivery was necessary. Apart from the practical disadvantages of such a system of physical delivery, shareholders were exposed to the risk of insolvency of their bank. With the introduction of the Wge system, securities holders were no longer the owners of their individual securities certificates, but became the joint owners of a pool of securities that are credited on their intermediary’s books. This system results in legal asset segregation and thus protects securities account holders against insolvency of their intermediary. In 2000 and 2011, the scope of the Wge was extended, but nothing changed in the property law construction as introduced in 1977. Yet in 2016, a whole new property law construction for the legal segregation of derivatives was introduced. Kuijper also considered what the future might bring, taking into account the increasing Europeanisation and digitalization. Will intermediaries’ roles remain the same? Or, will the technological possibilities lead to a form of a direct holding system, where securities are again owned on an individual basis and where intermediaries and asset segregation become obsolete?
Bas Zebregs (APG Asset Management) explained the asset segregation requirements laid down in the Central Securities Depositories Regulation (CSDR). Article 38 CSDR provides that CSDs must segregate their assets from the assets of their participants and their clients, and that clients for that purpose should be offered a choice between two segregation models: (1) omnibus client segregation, whereby multiple clients make use of a single (omnibus) account which is held at the intermediary of the higher tier level or (2) individual client segregation, whereby each individual client has a separate account. According to recital 42 of the CSDR, this should enhance the protection of the assets of both participants and clients. Zebregs, however, doubted if there is any ‘enhanced protection’ under Dutch law as the segregation requirements are forms of administrative asset segregation and not legal asset segregation, and provide no additional protection under the existing Wge system. He therefore concluded that the CSDR segregation requirements should not be overestimated.
Finally, Hans van Meerten (University of Utrecht) discussed the Dutch implementation of the Institutions for Occupational Retirement Provision II Directive (IORP II Directive) concerning the IORP depositary. This segregation entity has replaced the former depositary for Premium Pension Institutions (PPI depositary), which was exclusively available for PPIs and had the sole task of safekeeping assets by means of legal segregation. The IORP depositary, on the other hand, is also available for use by pension funds and – as Van Meerten argued – seems to have an additional task, namely the administration of assets. For those reasons, Van Meerten considered the IORP depositary an attractive instrument for pension funds to cooperate as it could bring together, and segregate assets from, multiple funds without risking the loss of autonomy and simultaneously pool a variety of services. Stressing many potential benefits, such as the economies of scale, tax exemptions and pure ring-fencing, Van Meerten was positive about asset segregation through an IORP depositary.
The presentations and ensuing discussions vividly illustrated the importance of continuing research and dialogue on the ever-changing field of asset segregation. Although much has been accomplished with regard to client protection, effectuating asset segregation still faces many challenges, especially in an international context. Moreover, future technological developments are likely to affect how asset segregation is currently regulated. This seminar offered fruitful discussions and provided new perspectives for future developments in asset segregation. Haentjens closed the seminar by thanking the speakers and audience, and by promising to organise a follow-up seminar in the future.