Gridel on Financial Markets and Financial Instruments
Augustin Gridel (University of Lorraine) has kindly prepared a presentation in English of his monograph titled Marchés et instruments financiers en droit international privé (Financial Markets and Financial Instruments in Private International Law), published by Bruylant in 2023.
The aim of this book is to describe the relationship between the law of financial markets and instruments and private international law.
In the presence of a foreign element, the rules of financial law are most often presented as overriding mandatory rules (lois de police) or administrative rules. The establishment of a national supervisory authority with executive, normative and repressive powers is likely to amplify this perception, as is the appearance of financial law rules in litigation where they seem to derogate from the normally applicable solution rather than coherently form a new category.
However, this presentation by means of the overriding mandatory law does not allow for an overall understanding of the body of legislation put in place by financial law, nor does it provide a key to the application of these rules, and even less does it allow for an overall understanding of the international application of financial law. This perception of financial law as a set of heterogeneous and derogatory rules, presented using the lois de police method, did in fact correspond to the reality of this law at the beginning of its development. It has now reached a stage of maturity.
As well as taking place in a new legislative and institutional environment, this study does not limit its scope to one or other aspect of the internationalisation of the law of financial markets and instruments. By taking a synthetic look at the rules studied, it aims to renew the presentation of financial law rules by placing them, if not within bilateral rules of conflict, at least within unilateral conflict rules whose unity derives not only from the links between the rules, but also from the common objective they pursue. The result of the thesis is to affirm that market infrastructures are subject to a singular connection to the State and that this connecting factor provides a basis for the connecting factor of transactions between private persons who make use of them (I.). On the one hand, such a connecting factor makes it necessary to delimit the field of financial market law (II.). On the other hand, this connecting factor makes it possible to establish the one of financial instruments: the securities settlement system would give a particularly secure connecting factor to the proprietary status of the securities admitted to it, while the clearing system already constitutes the connecting factor of the vast majority of financial contracts which use it (III.).
I. In these circumstances, the method followed was to base oneself on the substantive legislation in question, potentially applicable to the international financial relationship, to the financial instrument or to the regulated person, in order to analyse the objective pursued and the means used to achieve it in order to deduce the method of international application. Comparative law, particularly English and US law, was an essential source of inspiration for international solutions. The difficulty quickly identified, however, was that the rules of financial law are often based on market infrastructures, whose regulations are not those usually applicable to private individuals. It was therefore necessary to study private international law beyond private law relationships in order to observe how market infrastructures are connected to the State, even though there is no longer any apparent geographical connection. This difficulty has been exacerbated by the diversification of these infrastructures, which now rely on four different managers, each of whom provides a specific system: trading, clearing, settlement of securities and payment.
These systems are not subject to identical regimes and have their own conflict-of-laws rules; at the same time, their administrative supervision is not unequivocal. In this respect, the federalisation of administrative supervision has taken on an unprecedented scale: studying it was necessary because it is likely to have an influence on the international location of the market infrastructure. Finally, the relationship with infrastructures from third countries shows the political importance of issues traditionally left to private international law: the decision to recognise foreign infrastructures is now attributed to the European Commission, using a new method known as the “equivalence method”. The objectives pursued by this method, between coordination of legal orders and protection of the social order of the forum, are nevertheless those of private international law.
II. Once the institutional connecting factor had been defined, it was still necessary to determine its scope, i.e. the situations in which the law of the financial market actually applies on the basis of the trading platform, in order to promote the proper functioning of the system it establishes. A distinction was quickly made between cases where financial market law applies to issuers or to investors.
In the first case, the law of the financial market most often seeks to protect investors; its jurisdiction is then that of the law of the place of solicitation. In these circumstances, the law of the financial market does not seek to deprive the law of the issuer of its pre-eminence with regard to the issue of securities; at most, it imposes material requirements, compliance with which is a condition of admission to trading. It does, however, attach consequences to the negotia represented by the securities as soon as they have an impact on the control of the issuer, and may therefore affect the operation of the company, but also that of any restructuring procedure. These two aspects, which are specific to the relationship between financial market law and the issue of securities, are those in which the objectives of market operation are added to those of investor protection.
Traditionally, the law of the financial market alone has jurisdiction to regulate the marketing of foreign securities on its territory, the consequence of which is to impose disclosure obligations on the issuer. We have defended the idea that the pursuit of the objective of investor protection has an influence on the international regime of these rules: they are likely to be self-limiting when the company’s home regulations provide equivalent protection. However, it is argued that such rules should not have the consequence of limiting the jurisdiction of the local regulatory authority, which remains best placed to control such information.
Furthermore, the information provided should be such as to give rise to liability on the part of the issuer. The nature of this liability is variable and will depend, on the one hand, on the beneficial ownership of the financial instrument in the person of the claimant and, on the other hand, on the basis of the claim. If the investor’s liability action against the issuer is contractual, the applicable law will be, depending on the circumstances, that of the contract resulting from the acceptance of the offer to the public, or of the contract of issue, and the jurisdiction of the court will depend on the presence of a choice of court clause or of a consumer. On the other hand, the thesis is that if the liability action is in tort, the legal system of the place of the tort will have global jurisdiction, where its residents have been approached, in order to compensate them for the damage they have suffered, i.e. the effective alteration of their investment decision.
When it applies to investors, the law of the financial market pursues the objective of the proper functioning of the financial market. It is in this sense that there is a lex mercatus, subject to the law of the trading platform.
This body of law is primarily made up of obligations incumbent on the market operator and its members in order to encourage trading and enable price formation; however, it does not extend to contracts concluded between members and their clients. The protection of the latter is ensured by the rules of good conduct applicable to the professional status of members, irrespective of their membership status.
Secondly, the lex mercatus is identified with the regulation of market transactions, both those that relate to the control of the issuer, i.e. the law on threshold crossings and takeover bids, and those that aim to prevent the artificial alteration of price, such as the rules on the repurchase of shares by the company or short selling. All of these rules should therefore be subject solely to the law of the financial market, rather than to an inappropriate mix with the lex societatis.
Thirdly, the lex mercatus consists of the prohibition of market abuse. These rules, between the functioning of the market and the repression of criminal behaviour, are subject to criminal law. This is one of the reasons why market abuse can be understood in the light of “compétence réelle”, as this concept is understood in international criminal law, and should be subject to it as soon as a French trading platform is affected. Alternatively, “compétence réelle” could be used when a European trading venue is troubled and the French authority is best placed to act, particularly in cases where the French regulatory authority receives information that could detect market abuse. Market abuse are, however, subject to the inevitable interference of international criminal law, which makes it desirable, in certain residual cases, to apply local regulations on market abuse to offences committed on foreign markets in order to avoid possible impunity for the French.
III. Having studied the area of financial market law, it was appropriate to compare the institutional connecting factor identified with financial instruments. Admittedly, their status is, at first sight, independent of the law of the financial market. Nevertheless, the latter makes its influence felt by linking the fate of the instruments to the other market infrastructures, the securities settlement system and the clearing system.
In the case of financial securities, by requiring issuers to deposit their securities with a central depository, the law governing the financial market paradoxically renders their ownership structure unstable. Indeed, the latter is now subject to criteria that have the effect of multiplying the laws applicable to their transfer. The thesis seeks to demonstrate that these criteria, which arose under the direct holding system, were not necessary, and were even manifestly harmful, whereas it was possible and highly desirable to subject financial securities to a unitary law, that of the central depository’s securities settlement system.
The status of financial contracts is a response to the dynamics of contract law, between contractual freedom and public policy (ordre public). Projected into the international order, however, public policy follows different methodological paths depending on the interests involved. First, it restricts freedom of choice of law to genuinely international contracts, and excludes it in the case of consumers. Secondly, it intervenes to protect residents against contracts whose stakes are often beyond the comprehension of neophytes. Public policy operates in French law not through the enactment of an incapacity regime, but through the professional rules to which direct marketers and investment firms are subject, and which are applicable independently of the lex contractus. Moreover, financial contracts have the peculiarity of being able to disrupt the operation of companies and financial markets; the laws governing their operation are therefore likely, in a spirit of reciprocity, to disrupt the formation or performance of such contracts.
It is argued, however, that such laws are more often than not unable to apply to the contract itself, and are better suited to sanctioning the persons who enter into them. Nevertheless, it is in order to protect the legal order as a whole that public policy is most intense, and justifies the submission of financial contracts to prudential rules. These are applicable depending on the location of the parties involved, and require the intervention of a clearing house, whose operation conditions the very possibility of choice of law.
The book concludes with a list of one hundred and twenty proposals as to the positive or desirable international scope of financial law.
— I am preparing an English version of the book. I wanted to pay a tribute to the English doctrine, not only because I spent one of my fruitful year in Oxford during the PhD, thanks to the generosity of John Cartwright and Birke Haker at the Institute for European and Comparative Law, but because the depth of their thoughts have allowed for this book to flourish : the first inspiration of the book was Maisie Ooi’s incomparable essay, and then the writings of English professors, notably Louise Gullifer and Jennifer Payne, as well as all the authors of the Dicey&Morris who have been, through articles and books, a constant inspiration.