1 See on the concept of ‘financial system’, John Armour et al, Principles of Financial Regulation (OUP 2016) Ch 2.
2 The International Securities Lending Association (ISLA) published the Global Master Securities Lending Agreement (GMSLA), which is a document that may be used as a standard master agreement for securities lending transactions in the cross-border market. The International Capital Market Association (ICMA) has developed a standard master agreement for repo transactions in the cross-border market in conjunction with the Securities Industry and Financial Markets Association (SIFMA). The first version of the Global Master Repurchase Agreement (GMRA) was published in 1992 and followed by substantially revised versions in 1995, 2000, and 2011. The International Swap Dealer Association (ISDA) has developed the standard ISDA Master Agreement to document swap transactions.
3 The Giovannini Group, Cross-Border Clearing and Settlement Arrangements in the European Union (Brussels, November 2001) 56. (The consultative group chaired by Professor Giovannini was asked by the European Commission ‘to address the most basic pillar of the infrastructure that supports financial markets: the system that ensures that securities exchanged within the European economy are properly delivered from the seller to the buyer.’ The report lists a number of barriers to that objective.)
4 This taxonomy and its clarification draws on Andrew Von Nordenflycht, ‘What is a Professional Service Firm? Toward a Theory and Taxonomy of Knowledge-intensive Firms’ (2010) 35 Academy of Management Review 155.
5 Appendix A specifies ‘investment services and activities’ as:
6 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast),  OJ L173/349 (MiFID II).
7 Regulation (EU) 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012,  OJ L173/84 (MiFIR).
8 FCA, ‘Wholesale Banking Supervision’ (FCA, 2018), 10.
9 Edgar H Schein, Organisational Culture and Leadership (Wiley 2017) 6 has given an authoritative definition: ‘The culture of a group can be defined as accumulated shared learning of that group as it is solving problems external adaptation [(strategy)] and internal integration [(process)]; which has worked well enough to be considered valid [to be applied] … ; this shared learning evolves into a [shared] system of believes, values, behavioural norms’. Schein identifies the content of accumulated shared learning as the basic assumptions of a group, the cultural DNA, its legitimacy derived from the previous success of that group. That also means that if the group experiences a fundamentally new situation, eg Brexit, new shared experience is built, which will influence culture.
10 Group of Thirty (G30), Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform (July 2015) 17.
11 Although the thrust of the G30’s definition is clear, culture shapes conduct, it is perhaps not clear how the reference to ‘behaviour’ as a force that shapes ‘conduct’ should be understood. ‘Conduct’ and ‘behaviour’ are not separate and distinct concepts.
12 See Prudential Regulatory Authority, Corporate governance: Board responsibilities (Supervisory Statement, SS5/16, March 2016) 7.
13 In the context of culture as a set of norms that informs or requires a certain behaviour, the PRA is possibly referring to ‘ethics’ rather than ‘ethical behaviour’.
14 See the PRA’s Rulebook, Allocation of Responsibilities, 4.1(6) and (14).
15 FCA, Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms (CP17/25, July 2017) 2.14. See further on the role of culture in risk management, Lodewijk van Setten, ‘Risk, Risk Management, and Internal Controls’ in Danny Busch, Guido Ferrarini, and Gerard van Solinge (eds), Governance of Financial Institutions (OUP 2019) paras 9.20ff.
16 See also Schein (n 9) 14.
17 See Van Setten (n 15).
18 See: Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, as amended (Investment Services Directive)  OJ L141/27, Investment Services Directive (ISD); and Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC  OJ L145/1, Markets in Financial Instruments Directive (MiFID I).
19 Gerard McMeel and John Virgo (eds), McMeel and Virgo on Financial Advice and Financial Products (3rd edn, OUP 2014) paras 1.54–1.55, define ‘financial product’ slightly differently as ‘a contract or contractual package marketed or retailed to a recipient … , the characteristic of which is that any proprietary interest acquired by the recipient either consists of rights to purely intangible property, or else the entitlement is purely contractual’. That definition fits any financial asset acquired by an investor pursuant to a financial service provided by an investment firm.
20 See eg FSA, Product Intervention (Discussion Paper, DP11/01, January 2011) para 2.10.
21 See eg Joanna Benjamin, Financial Law (OUP 2007) paras 10.76–10.78, who observed in 2007 that there ‘is no significant product regulation of investment securities under FSMA’, and Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, OUP 2014) 825.
22 See McMeel and Virgo on Financial Advice and Financial Products (n 19) para 1.74.
23 See George Walker and Robert Purves (eds), Financial Services Law (4th edn, OUP 2018) para 19.29.
24 See arts 16(3) and 24(2) of MiFID II.
25 Articles 9 and 10 Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.
26 A prime example of an investment product that was riddled with inherent conflicts was ABACUS 2007 AC1, a securitization product offered to institutional investors by Goldman Sachs in early 2007. It concerned a synthetic CDO. (See Chapter 2, para 2.13ff, for a description of securitization products in the form of CLOs, CDOs, etc.) Investors in notes offered by ABACUS suffered considerable losses. The US Securities and Exchange Commission (SEC) filed a complaint against Goldman Sachs, alleging that the offering materials of ABACUS failed to disclose the involvement of a third party hedge fund, Paulson & Co, who influenced the composition of the reference portfolio of ABACUS. Paulson & Co later took a short position on ABACUS. Goldman Sachs was paid a very substantial fee, $15 million, to facilitate the short. Synthetic CDOs are composed of exposures to other financial assets, including securitized products. The exposure in a synthetic CDO is created through a ‘reference portfolio’, which serves as the conduit for calculating the pay-out structure. This particular reference portfolio was multi-layered and complex and therefore suffered from inexact risk calculations, which meant that the fact that the reference portfolio’s composition was based on the views of a third party hedge fund that was seeking to take a short position on that very same portfolio would have been material information for the long investors. In MiFID II terms, ABACUS would likely breach both disclosure and product governance requirements. Goldman Sachs settled the matter with the SEC, admitting that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information and that it was a mistake to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors.
27 Although there was a legislative debate around proposals made by Parliament that the intervention powers could be used pre-emptively, on a precautionary basis, before products were marketed or sold to clients, see Moloney (n 21) 828. See also Danny Busch, ‘Product Governance and Product Intervention under MiFID II/MiFIR’ in Danny Busch and Guido Ferrarini (eds) Regulation of EU Financial Markets – MiFID II and MiFIR (OUP 2017) para 5.41ff.
28 See art 69(2)(t) of MiFID II.
29 See for instance ESMA Decision (EU) 2018/796 of 22 May 2018 to temporarily restrict contracts for differences in the Union in accordance with art 40 of Regulation (EU) 600/2014 of the European Parliament and of the Council. ESMA reviewed the offering of contracts for the difference (CFDs) to retail investors in the EU and imposed a restriction by requiring that the marketing, distribution or sale of CFDs to retail investors be subject to: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardized way.
30 See Armour et al (n 1) 267, who note that from ‘an economic or functional perspective … there is little difference’ between prudential regulation and product regulation.
31 Although there is a requirement that the investment product be stress-tested, since risk and return properties are central to investment in financial assets, a requirement to assess the inherent risk management properties of the investment product would probably have been appropriate.
32 Similarly, Moloney (n 21) 829.
33 Articles 16(3) and 23 of MiFID II, and arts 33–35 of Delegated Regulation (EU) 2017/565.
34 Article 24(10) of MiFID II, and art 27 of Delegated Regulation (EU) 2017/565.
35 Article 25 of MiFID II, and arts 54–57 of Delegated Regulation (EU) 2017/565.
36 Recital 71 of MiFID II makes it clear that the product governance obligations for distributers ‘should apply without prejudice to any assessment of appropriateness or suitability to be subsequently carried out by the investment firm in the provision of investment services to each client, on the basis of their personal needs, characteristics and objectives’.
37 See Armour et al (n 1) 266, observing that the product governance rules target ‘firm rent-seeking’. See also McMeel and Virgo on Financial Advice and Financial Products (n 19) para 1.78, who observe that the complexity and consequent lack of intelligibility of financial products suggests that ‘there is a need for regulation of contract terms and product particulars in addition to controls on the quality of advice, in order to tackle the problem of “asymmetric information” between providers and consumers’.
38 Chapter 3 addresses default risk-mitigating aspects of the financials assets and money holding infrastructure.
39 Report to the G-20 Finance Ministers and Central Bank Governors, Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations (prepared by the Staff of the International Monetary Fund and the Bank for International Settlements, and the Secretariat of the Financial Stability Board, October 2009) 5–6.
40 Access to and cost of funding increasingly appear to be seen as the essence of systemic risk, see Jan H Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law – Volume 3 (Hart 2016) n 5 at 468 (questioning whether that covers the full picture). See also Steven Schwarcz, ‘Systemic Risk’ (2008) 97 Georgetown Law Journal 193, 204.
41 See ‘The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act’ 3, 2011 FDIC Quarterly (Volume 5, No 2), 31, 33: ‘The Lehman bankruptcy had an immediate and negative effect on U.S. financial stability and has proven to be a disorderly, time-consuming, and expensive process’.
42 Michael J Fleming and Asani Sarkar, ‘The Failure Resolution of Lehman Brothers’ 2014 FRBNY Economic Policy Review (December) 175, 185.
43 See Mark J Roe and Stephen D Adams, ‘Restructuring Failed Financial Firms in Bankruptcy: Selling Lehman’s Derivatives Portfolio’, 2015 Yale Journal on Regulation (‘Lehman’s failure exacerbated the financial crisis, especially after AIG’s collapse in the days afterwards prompted counterparties to close out positions, sell collateral, and thereby depress and freeze markets. Many financial players stopped trading for fear that their counterparty would be the next Lehman or that their counterparty had large unseen exposures to Lehman that would make the counterparty itself fail. Such was the case with the Reserve Primary Fund, a money market fund that held too many defaulting obligations of Lehman. That reaction led to a further panic, a threat of a run on money market funds, and a government guarantee of all money market funds to stem the ongoing financial degradation throughout the economy’) 385.
44 For instance, the key supervisor of the US banking system, the Board of Governors of the Federal Reserve System, adopted a rule imposing restrictions on default rights and transfer restrictions in certain derivative and securities financing contracts of systemically important banking organizations or their affiliates. Broadly similar rules have been issued by the other US bank regulators, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. This rule seeks to respond to the threat to financial stability posed by such default rights in two ways. First, the rule reduces the risk that courts in foreign jurisdictions would disregard statutory provisions that would stay the rights of a failed firm’s counterparties to terminate their contracts when the firm enters a resolution proceeding under one of the special resolution frameworks for failed financial firms. Second, the rule facilitates the resolution of a large financial entity under the US Bankruptcy Code and other resolution frameworks by ensuring that the counterparties of solvent affiliates of the failed entity cannot unravel their contracts with the solvent affiliate based solely on the failed entity’s resolution. Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed. Reg. 42882 (September 12, 2017) (the Adopting Release), available at <www.federalregister.gov/documents/2017/09/12/2017-19053/restrictions-on-qualifiedfinancial-contracts-of-systemically-important-us-banking-organizations-and>.
45 Clearing and CCP structures are discussed in Chapter 3.
46 Investment risk is discussed in Chapter 2.
47 See Peter G Watts (ed), Bowstead & Reynolds on Agency (21st edn, Sweet & Maxwell 2017) paras 1.001–1.007. (In turn, influenced by the definitions in §§1.01, 2.01, and 2.03 of The Restatement (Third) of Agency (2006). The Restatements are authoritative outlines of principles of American ‘multi-state’ common law, which are published by the American Law Institute (ALI) after extensive consultation of the American legal community by a ‘reporter’. The reporter commissioned by the ALI to take responsibility for The Restatement (Third) of Agency was Professor DA DeMott of Duke University School of Law.)
48 Bowstead & Reynolds on Agency (n 47) paras 9-001 to 9-002.
49 Bowstead & Reynolds on Agency (n 47) para 9-005 (citing Montgomerie v UK Mutual SS Assn  1 QB 370, 372 and ‘The Swan’  1 Lloyd’s Rep 5).
50 See Chapter 43, paras 4.50ff (on the implication of fiduciary duties in an agency relationship).
51 See Chapter 3, paras 3.90ff (on investor interests in CCP cleared contracts).
52 This is not different if the issue for interpretation is to ascertain who the contracting parties are; see Lord Bingham in Homburg Houtimport BV v Agrosin Private Ltd, ‘The Starsin’  1 AC 715, para 9, observing that ‘when construing a commercial document, in the ordinary way, the task of the court is to ascertain and give effect to the intentions of the contracting parties. Here, the task is to ascertain who, on one side, the contracting party was. But a similar approach is appropriate’.
53 Certain monetary authorities and other investors that manage very large portfolios may not want the market to know when they are trading, to minimize market-impact costs.
54 For the reasoning, see Bowstead & Reynolds on Agency (n 47) para 9-016 (observing that ‘there may be cases where the third party can be regarded as being willing to deal with the principal, whoever he is’, and, indeed, that ‘it has been said that in an ordinary commercial transaction such willingness may be assumed by the agent in the absence of other indications’, citing Diplock LJ, in Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd  2 QB 545, 555, and Lord Lloyd of Berwick in Siu Yin Kwan v Eastern Insurance Co Ltd  2 AC 199, 209).
55 Bowstead & Reynolds on Agency (n 47) para 8-069.
56  2 AC 199, 207 (see Lord Lloyd of Berwick), cited by Bowstead & Reynolds on Agency (n 47) para 8-069, considering Lord Berwick’s summary of the leading modern formulation of the features of the doctrine of undisclosed principal, and noting that the origin of the undisclosed principal’s right to intervene ‘is said to lie in the right of the principal of a factor to intervene in the factor’s bankruptcy, to claim his goods or the unpaid price of them; and later to sue in respect of the whole contract’, as well as that the right of intervention of the undisclosed principal ‘is certainly difficult to accommodate within standard theories of contract, which emphasize, even though under objective criteria, the consent of the parties’.
57 Bowstead & Reynolds on Agency (n 47) para 8-109.
58 Bowstead & Reynolds on Agency (n 47) para 9-012.
59 United Australia Ltd v Barclays Bank Ltd  AC 1.
60 Bowstead & Reynolds on Agency (n 47) para 8-010.
61 Bowstead & Reynolds on Agency (n 47) para 8-014 (citing Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  2 QB 480, 503, regarding a principal who permits an agent to act in the conduct of the principal’s business).
62  2 AC 349. (This concerned a swap transaction that was entered ultra vires. The bank was given the right to recover the initial payment, which was made under mistake of law rather than fact, by way of restitution, on grounds that the council had been unjustly enriched. Prior to the decision in Lincoln, payments made under mistake of law would not have been recoverable.)
63 Bowstead & Reynolds on Agency (n 47) para 8-022.
64 Bowstead & Reynolds on Agency (n 47) paras 8-015, 8-024.
65 Bowstead & Reynolds on Agency (n 47) para 8-047.
66 Bowstead & Reynolds on Agency (n 47) para 8-048. But note Lord Neuberger of Abbotsbury in the Hong Kong Court of Final Appeal in Akai Holdings Ltd v Thanakharn Kasikorn Thai Chamchat (2010) 13 HKCFAR 479 at  onwards (noted Lee and Ho (2012) 75 MLR 91) (‘Akai’) deciding that once apparent authority is established, the ability to rely on the representation so made out will be lost only if the third party has actual knowledge of the lack of actual authority or if that party’s belief in the agent’s authority was ‘dishonest or irrational’ (absence of apparent benefit and known conflict of interest meant the irrationality test was met on the facts in Akai). Bowstead & Reynolds on Agency (n 47, para 8-049) observe that ‘the new concept, in this context anyway, of “irrationality” was preferred to the older test of unreasonable reliance on the holding out’, but also submit (para 8-050), respectfully, that ‘this development is based on a misunderstanding of prior authorities and of general principle. … In short, the no-inquiries rule operates at common law only where what is sought is rescission (or other form of restitution), or, in cases of fraud, damages for reliance loss. It cannot be relied upon to make a contract. Even within the sphere of its operation, the cases conclude that, in the absence of obfuscation, the no-inquiries rule applies only to unequivocal representations, not to ones where there is ambiguity or a series of inconsistent statements.’
67 Bowstead & Reynolds on Agency (n 47) para 8-053 (observing that, for example, in the area of banking practice, it would be unusual for an agent to pay the principal’s money into his own personal bank account, or to use a signed blank transfer for what might well, to an outsider, be his own purposes).
68 Article 9 of the First Directive on Company Law (First Council Directive of 9 March 1968 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of art 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community (68/151/EEC), as amended,  OJ L65, 8) provides that ‘acts done by the organs of the company shall be binding upon it even if those acts are not within the objects of the company, unless such acts exceed the powers that the law confers or allows to be conferred on those organs’, which, if implemented correctly, removes ultra vires as a relevant factor in a company’s external relations, and thus from questions of apparent authority. See for an analysis of the implementation of art 9 into English company law, Bowstead & Reynolds on Agency (n 47) para 8-035.
69 Hazell v Hammersmith & Fulham London Borough Council  2 AC 1.
70 Westdeutsche Landesbank Girozentrale v Islington London Borough Council  1 AC 669 and Kleinwort Benson Ltd v Lincoln City Council and others  3 WLR 1095.
71 Westdeutsche Landesbank (n 70).
72  2 AC 349 (a decision that concerned a swap transaction that was judged to be entered into ultra vires by the local authority in question. The bank was given the right to recover the initial payment, which was made under mistake of law rather than of fact, by way of restitution, on grounds that the council had been unjustly enriched. Prior to the decision in Lincoln, payments made under mistake of law would not have been recoverable on that basis).
73 Geraint Thomas and Alastair Hudson, The Law of Trusts (2nd edn, OUP 2010) para 21.10 (neither the settlor nor the beneficiaries will be liable if the trustee acts as trustee) and 21.13 (it is possible for the trustee and a party with whom the trustee is transacting to agree that the trustee shall not be personally liable, or that the amount shall be limited, or that the other party shall only look to the trust assets for payment).
74 Section 31(1) Trustee Act 2000.
75 Thomas and Hudson (n 73) para 21.14.
76 Thomas and Hudson (n 73) para 21.17.
77 Bowstead & Reynolds on Agency (n 47) para 8-125 (noting that a principal is bound by dispositions of property made by his or her agent acting within the scope of such agent’s actual or apparent authority or which are ratified) and para 8-168 (noting that, where a purported transfer of property in goods is made to the agent of a disclosed principal, and the agent receives it as such acting within its actual or apparent authority, the property in the goods is transferred to the principal if such is the intention of the parties to the transfer; the position in relation to a transfer of land would be different).
78 See paras 6.50ff (on the discharge of payment and securities settlement obligations).
79 These matters are discussed in Chapter 3.
80 Bowstead & Reynolds on Agency (n 47) para 9-060.
81 Bowstead & Reynolds on Agency (n 47) para 9-062.
82 Bowstead & Reynolds on Agency (n 47) para 9-066.
83 Bowstead & Reynolds on Agency (n 47) para 9-069.
84 Bowstead & Reynolds on Agency (n 47) para 9-071 (noting that there is judicial authority, holding that, in case of apparent authority, there is no breach of warranty of authority at all, which can ‘only be justified on the rather doubtful ground that the agent warrants that he has actual or apparent authority’). This position could change if it is accepted that apparent authority may arise in cases of mistake of law.
85 Bowstead & Reynolds on Agency (n 47) paras 9-077 to 9-075.
86 See Chapter 5, paras 5.72ff (on remoteness of damages in contract).
87 See paras 5.93ff (on quantum of damages).
88 See paras 5.65ff (on causation in the event of investor complaints based on breach of warranty, representation, or negligence). See Bowstead & Reynolds on Agency (n 47) para 9-078.
89 Bowstead & Reynolds on Agency (n 47) paras 9-080 to 9-077.
90 In almost all cases, the mandate will contain an express—‘boiler plate’—choice of law provision. Under English principles of conflict of laws, the internal aspects of the agency relationship (the agent’s authority as between itself and its principal) is governed by the law that governs the creation of the agency, which usually means that it will be governed by the law that is chosen to apply to the client agreement that embeds the agency authority: see Lord Collins of Mapesbury and Professor Jonathan Harris (eds), Dicey, Morris & Collins—The Conflict of Laws (15th edn, Sweet & Maxwell 2017), Rule 243, 33R–407. This is a common principle: see art 5 of the Hague Convention on the Law Applicable to Agency (concluded on 14 March 1978 and entered into force on 1 May 1992), which provides that the ‘internal law chosen by the principal and the agent shall govern the agency relationship between them’, and that the ‘choice must be express or must be such that it may be inferred with reasonable certainty from the terms of the agreement between the parties and the circumstances of the case’.
91 SI 1991/707. See Dicey, Morris & Collins—The Conflict of Laws (n 90) para 33-434.
92 Note 50, Rule 244, 33R–432; for a general discussion, see paras 33-434 to 33-440.
93 See paras 1.46ff (on client classification duties under MiFID II).
94 Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012,  OJ L176/1, the Capital Requirements Regulation (CRR), provides capital requirement rules for authorized banks and investment firms and in that context, distinguishes between assets held as part of the trading book and other assets. The CRR defines ‘trading book’ in art 4(1)(86) as the portfolio of ‘financial instruments and commodities’ held ‘either with trading intent, or in order to hedge positions held with trading intent’. Article 4(1)(85) defines ‘held with trading intent’ as: ‘(a) proprietary positions and positions arising from client servicing and market making; (b) positions intended to be resold short term; (c) positions intended to benefit from actual or expected short term price differences between buying and selling prices or from other price or interest rate variations’.
95 Article 4(1)(11) of MiFID II.
96 Article 4(1)(10) of MiFID II.
97 A company that meets any two of the following criteria: balance sheet total of EUR 20 million; net turnover of EUR 40 million; or own funds of EUR 2 million.
98 Interestingly, Alternative Investment Funds (AIFs) and their management companies are not listed, but presumably fall within the scope of the term ‘other financial institutions’.
99 Burton G Malkiel, A Random Walk Down Wall Street (12th edn, WW Norton and Co 2015) 28.
100 Zvi Bodie, Alex Kane, and Alan Marcus, Investments and Portfolio Management (9th edn, Blackwell’s 2011) 189 (adding that ‘risk aversion and speculation are not inconsistent’).
101 Described in more detail in Chapter 2, paras 2.05ff.
102 Described in more detail in Chapter 2, paras 2.11ff.
103 Described in more detail in Chapter 2, paras 2.18ff.
104 Described in more detail in Chapter 2, paras 2.20ff.
105 This definition is inspired by Black’s Law Dictionary—Centennial Edition (1891–1991) (West 1990).
106 Ewan McKendrick (ed), Goode on Commercial Law (5th edn, Penguin Random House 2016) para 22.15, n 42, eloquently submits that the term ‘collateral’ should substitute the term ‘proprietary security’ on grounds that the term ‘security’ is ‘not ideal, since it is used in so many senses, being applied indifferently to describe the interest acquired in the asset, the instrument creating that interest and the asset which is the subject matter of the interest’, although it is also noted that ‘collateral’ is used to describe title transfer security arrangements.
107 Article 1(1) of MiFID II.
108 See Danny Busch, ‘Conduct of Business Rules under MiFID I and MiFID II’ in D Busch and C van Dam (eds), A Bank’s Duty of Care (Hart 2017) 13.
109 See art 4(1)(2) in conjunction with Appendix I, sub A, of MiFID II.
110 See the definition of ‘execution of orders on behalf of clients’ in art 4(1)(5) of MiFID II, which includes the issue of financial instruments by the investment firm or bank to a client.
111 See the definition of ‘dealing on own account’ in art 4(1)(6) of MiFID II, which refers to ‘trading against proprietary capital’, and ‘market maker’ in art 4(1)(7), which means a dealer ‘who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against that person’s proprietary capital at prices defined by that person’.
112 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (Capital Requirements Directive IV or CRD IV).
113 Investment firms authorized under MiFID II may be ‘institutions’ within the meaning of art 4 CRR.
114 Article 3(1)(1) CRD IV, which cross-refers art 4(1) CRR. It means that to be required to be regulated as a bank under CRD IV, the firm must engage both in a deposit-taking and in a lending business. In addition to authorization to engage in core banking business, a credit institution may apply under CRD IV for authorization to engage in activities specified as items (3) to (15) of the list in Annex I, which are, in summary: financial leasing; money transmission services; the issuing of payment instruments, such as credit cards and travellers’ cheques; the issuing of guarantees and commitments; dealing on own account or for the account of customers in securities, currencies, and financial derivatives; the underwriting of securities issues; investment banking; portfolio management and investment advice; the safekeeping and administration of securities; and credit reference services.
115 Banks authorized under CRD IV may also be authorized under CRD IV to provide MiFID II investment services in which case MiFID II’s conduct of business supervisory framework applies to that part of the bank’s business, see art 1(3) MiFID II and Recital (38) of MiFID II (observing that banks authorized under CRD IV are not required to seek separate authorization under MiFID II to engage in investment services or activities, but can be authorized under CRD IV provided that the competent authority, before granting an authorization under CRD IV, verifies that the bank complies with the relevant provisions of MiFID II).
116 Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, commonly referred to as ‘EMIR’.
117 See the definition of ‘central counterparty’ in art 2(1) of EMIR, and the requirement for CCPs to be authorized in art 14(1) of EMIR.
118 Section 22 of FSMA defines a ‘regulated activities’ as ‘an activity of a specified kind which is carried on by way of business and: (a) relates to an investment of a specified kind; or (b) in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.’ Section 22(1) in conjunction with s 22(5) FSMA provides that a ‘regulated activity’ is an activity of a kind specified in an order made by the Treasury. The Treasury specified the regulated activities in the Financial Services and Markets Act 2000 (Regulated Activities) Order, SI 2001/544 (RAO). Depending on the structure, the CCP services would be within the scope of art 14 RAO (dealing in investments as principal), art 21 RAO (dealing in investments as agent), or art 25 RAO (arranging deals in investments).
119 Section 19 provides that ‘[n]o person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is (a) an authorised person; or (b) an exempt person on grounds that the central counterparty engages in a regulated activity’, which is known as the ‘general prohibition’.
120 Section 285(3A) to (3C) of FSMA.
121 Section 285A(2) of FSMA.
123 Section 286(3) FSMA. Chapter 3, para 3.89ff, addresses the special market-default insolvency regime in pt VII of the Companies Act 1989 that sets aside certain insolvency provisions which would otherwise apply to ‘market contracts’ and ‘qualifying collateral arrangements’.
124 See the definition of ‘clearing’ in art 2(3) of EMIR.
125 Article 40 of FSMA 2000 (Regulated Activities) Order 2001, SI 2001/544.
126 Annex I, s B, under (1) of MiFID II. Investment firms within the meaning of 4(1)(1) of MiFID II which are authorized to provide the ancillary service referred to in point (1) of s B of Annex I to MiFID II (safekeeping and administration of instruments), which deal on own account, underwrite, or place instruments, or who are permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients are ‘institutions’ within the meaning of CRD IV and CRR and therefore subject to prudential supervision under CRD IV and CRR, see art 3(1)(3) CRD IV in conjunction with art 4(1)(2)(c) CRR.
127 Article 34 and 35 of MiFID II.
128 See art 2(1)(1) of Regulation (EU) 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) 236/2012 (CSD Regulation). Section A of the Annex to the CSD Regulation specifies as the ‘core services of central securities depositories’: (1) Initial recording of securities in a book-entry system (‘notary service’); (2) providing and maintaining securities accounts at the top-tier level (‘central maintenance service’); and (3) operating a securities settlement system (‘settlement service’).
129 See the definition of ‘central securities depository’ in Bank for International Settlements (BIS) and International Organization of Securities Commissions (IOSCO), ‘Principles for financial market infrastructures’ (BIS Committee on Payment and Settlement Systems and IOSCO Technical Committee, April 2012) para 1.11. See also, Christophe Bernasconi, Richard Potok, and Guy Morton, ‘General Introduction: Legal Nature of Interests in Indirectly Held Securities and Resulting Conflict of Laws Analysis’, in Richard Potok (ed), Cross-Border Collateral: Legal Risk and the Conflicts of Law (Butterworth/LexisNexis 2002) 2.18 and 2.19 (particularly at n 32).
130 Section 285(3D) to (3E) and (3G) of FSMA.
131 Compare the definition of ‘book-entry securities’ in art 1(g) of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (‘Collateral Directive’): ‘ “book entry securities collateral” means financial collateral provided under a financial collateral arrangement which consists of financial instruments, title to which is evidenced by entries in a register or account maintained by or on behalf of an intermediary’. The words ‘title to which’ could be interpreted to refer to title in the original securities, but should not be interpreted as such. See further the slightly more adaptable definition of ‘book-entry securities’ embedded in the definition of ‘transfer order’ in 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 (‘Settlement Finality Directive’) in respect of securities credited to a securities account: ‘an instruction by a participant to transfer the title to, or interest in, a security or securities by means of a book entry on a register, or otherwise’.
132 Eg the Dutch Book-Entry Securities Act (Wet giraal effectenverkeer, Stb 1977, 386) provides that account holders of a custodian that participates in the dedicated CSD are direct co-owners in the pool of securities held by the CSD, even though the custodian, and not its account holder, is the participant in the CSD. The fiction only holds up to the account holders at the level of the custodian. If that participating custodian acts as sub-custodian to another custodian, that other custodian as client of its sub-custodian will still be deemed to be a direct co-owner in the pool held by the CSD, but not that other custodian’s account holders. See on the Dutch Book-Entry Securities Act generally, Victor P.G. de Serière, Rechtspersonenrecht – Effectenrecht (Asser Serie, Wolters Kluwer, 2018), paras 640ff.
133 In accordance with the terminology adopted by the leading modern statutory restatement of the law applicable to securities accounts, Revised art 8 (1994 Revision) of the US Uniform Commercial Code, particularly Part 5, §§8-501 to 8-511.
134 See Chapter 3, paras 3.46ff below (on rights arising pursuant to securities accounts).