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The London School of Economics and Political Science Proprietary Rights The London School of Economics and Political Science Proprietary rights in indirectly held securities: legal risks and future challenges Elena Christine Zaccaria A thesis submitted to the Department of Law of the London School of Economics and Political Science for the degree of Doctor of Philosophy, London, April 2015. Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 69,572 words. Statement of use of third party for editorial help I confirm that my thesis was copy edited for conventions of language, spelling and punctuation by Babette Pragnell and Rachel Murray. 2 Abstract Over the centuries, English law has developed a ‘flexible’ and ‘malleable’ idea of property - in particular through the rules of equity - which has proved capable of adapting to the continuing changes in market practice. The question now to be addressed is whether this ‘flexible’ idea of property can also adequately represent interests in indirectly held securities or whether (as suggested by the Financial Market Law Committee) the new financial practice requires statutory clarification. Unlike most civil law systems, English law has been able to accommodate many new issues arising from the practice of intermediated securities within the existing framework. For example, the complex indirect holding structure is built on the well-developed institution of trust and sub-trust which allows investors to obtain equitable proprietary rights in the assets held for them by the intermediary. The proprietary characterisation of these types of rights has recently been challenged by McFarlane and Stevens, on the grounds that they seem to establish the same level of protection against third parties, by classifying the investors’ rights as ‘persistent rights’ or ‘rights against rights’. The main advantage of using the concept of a persistent right (rather than a proprietary right) is that it provides a better understanding of the legal structure of intermediation, as well as showing that no statutory clarification is necessary within the United Kingdom. The thesis tests the theoretical foundation of McFarlane and Stevens’ argument, using the current Lehman insolvencies as a platform for evaluation. The primary objective is to consider whether the idea of ‘persistent rights’ or ‘rights against rights’ is better able to explain the precise functions of this new practice and overcome the legal uncertainties typically associated with the indirect holding system. 3 Acknowledgments The writing of this thesis would have been a far more arduous and less satisfying experience had it not been for my supervisors Michael Bridge and Eva Micheler. My profound gratitude goes to them for their guidance, encouragement and precious advice offered to me throughout my time as a Ph.D. student. I would also like to thank Emma Chell, Roy Goode, Gabriel Moens, Gabriel Moss, Habib Motani, Philipp Paech, Giorgio Resta, James Rogers and Giuseppe Tucci for having taken the time to share their valuable experience and give their answers to all my many questions. A special acknowledgement and my sincere gratitude goes to Joanna Benjamin who gave generously of her time and helped me to understand the more diverse complexities of this area of law. I am also grateful to the LSE Law Department and the Olive Stone Memorial Fund, whose financial support made the writing of the whole thesis possible. I take this opportunity to thank my parents for their constant attention and the great personal sacrifice made to support me over the years. Last but not least, I would like to thank my husband Roberto, for his patience and encouragement through this venture as well as my daughter Francesca Leah who was born in the final stages of the drafting of this thesis and has been so understanding as to allow me to sleep unawakened through many a night. All responsibility for the contents of this thesis, and any errors it may contain, is solely my own. Table of Contents 1. Introduction ........................................................................................................................... 8 Chapter 1: Intermediated interests in intangible assets ........................................ 13 1. A general background........................................................................................................... 13 2. The legal structure of intermediation and its implications on the investor’s rights ............................................................................................................................................ 16 Chapter 2: Re-conceptualising securities ownership ............................................ 21 1. The nature of the beneficiary’s rights under a trust: proprietary rights or purely personal rights? .............................................................................................................. 21 2. The proprietary nature of the beneficiary’s rights and the role of equity in English law ................................................................................................................................. 23 3. The theory proposed by McFarlane and Stevens: not proprietary rights but ‘rights against rights’ ................................................................................................................. 28 4. Criticism of McFarlane and Stevens’ approach to equitable rights ............................... 32 4.1 The proprietary theory is adequately capable of explaining English trust law ............................. 32 4.2 The concept of property entails a dynamic (and not static) relationship between an individual and a thing .................................................................................................................... 39 4.3 Difficulties in accepting the concept of a right against a right ...................................................... 42 5. The proprietary character of a right against a right .......................................................... 44 6. The nature of the investor’s rights in the practice of indirectly held securities: the application of the proprietary theory. .............................................................................. 46 6.1 The concept of an interest in securities ....................................................................................... 46 6.2 The theory of an indirect right in the underlying securities .......................................................... 50 7. A diverse explanation of the indirect holding system: the investor’s right as a right against the intermediary’s right ...................................................................................... 54 8. A choice between a right against a right, an indirect right in rem or an interest in securities ................................................................................................................................. 57 Chapter 3: The uncertainties surrounding omnibus accounts .............................59 1. The need to ensure an efficient functioning of indirect holding practices: individual segregated accounts or omnibus accounts? ........................................................... 59 2. The lack of sufficient certainty in omnibus accounts: is there a valid trust? ................... 62 5 3. The application of the idea of co-ownership to the theories of a right against a right, an interest in securities and an indirect right in rem .................................................... 72 4. Identifying legal sensitivities in the current legal framework .......................................... 75 5. The future of omnibus accounts in the aftermath of the Lehman Brothers’ collapse ........................................................................................................................................ 76 6. Summary of the analysis ....................................................................................................... 81 Chapter 4: Allocation of shortfalls: who bears the risk of loss? ............................83 1. A conflict of choice between the ‘first in, first out’ rule and the ‘pro-rata sharing’ solution. ....................................................................................................................... 83 2. The ‘tracing approach’ supported by McFarlane and Stevens: a more appropriate way of distributing losses? .................................................................................. 87 3. A right against a right, an interest in securities or an indirect right in rem in allocations of shortfalls? ........................................................................................................... 91 4. A response to McFarlane and Stevens’ considerations on the tracing approach ........ 92 5. Summary of the analysis ..................................................................................................... 104 Chapter
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