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| Unlike the look-through approach, PRIMA does not look through the various tiers of intermediaries to the underlying securities. Rather, it stops at the level of the intermediary immediately above the parties to the pledge or transfer. Its important advantage is that it subjects an investor's interest in securities to the law of a single jurisdiction, even where evidence of underlying securities is situated in many different countries, or where various issuers in a single portfolio is involved. This provides certainty and clarity for all parties involved. | Unlike the look-through approach, PRIMA does not look through the various tiers of intermediaries to the underlying securities. Rather, it stops at the level of the intermediary immediately above the parties to the pledge or transfer. Its important advantage is that it subjects an investor's interest in securities to the law of a single jurisdiction, even where evidence of underlying securities is situated in many different countries, or where various issuers in a single portfolio is involved. This provides certainty and clarity for all parties involved. | ||
| PRIMA has already been adopted in a number of ]s as the conflict of laws rule to be applied to the proprietary aspects of collateral transactions. Furthermore, it is at present being considered for enactment in various other jurisdictions. | |||
| == Type I PRIMA == | == Type I PRIMA == | ||
Revision as of 06:55, 14 May 2005
The Place of the Relevant Intermediary Approach, or PRIMA, is a conflict of laws rule applied to the proprietary aspects of security transactions, especially collateral transactions. It is an alternative approach to the historically important look-through approach, and forms the basis for the Hague Securities Convention.
Unlike the look-through approach, PRIMA does not look through the various tiers of intermediaries to the underlying securities. Rather, it stops at the level of the intermediary immediately above the parties to the pledge or transfer. Its important advantage is that it subjects an investor's interest in securities to the law of a single jurisdiction, even where evidence of underlying securities is situated in many different countries, or where various issuers in a single portfolio is involved. This provides certainty and clarity for all parties involved.
PRIMA has already been adopted in a number of jurisdictions as the conflict of laws rule to be applied to the proprietary aspects of collateral transactions. Furthermore, it is at present being considered for enactment in various other jurisdictions.
Type I PRIMA
The so-called Type I PRIMA dates back to the late 1960s, in Belgium. Under Belgian law, the interest in respect of the underlying securities held by an investor and recorded on the books of its intermediary is treated as a different asset from the underlying securities. Thus the Belgian approach is an application of PRIMA, as well as being linked to the lex rei sitae tradition.
Such an approach causes problems in some legal systems, notable of which are those of Japan and Germany. Under both their systems, an investor would be treated as the direct owner of the underlying securities even though the security is held through tiers of intermediaries. The direct ownership in the underlying securities makes it difficult to argue that the location of the asset is at the level of an intermediary.
Adoption in Europe
Article 9(2) of the European Union's Settlement Finality Directive of 1998 introduced PRIMA in all European Union member states. In Germany, where investors have direct ownership rights in underlying securities, implementing Art 9(2) into domestic law has severed the connection with the traditional lex rei sitae approach.
In 2002, the European Community passed the European Union's Collateral Directive, which is also based on a Type I application of PRIMA. Under Art 9, characterisation, perfection and other issues relating to the provisions of securities as collateral are governed by the law of the State where the securities account is maintained. The majority of member states have yet to implement this directive.
Type II PRIMA
In the United States, a different PRIMA solution has been adopted. Under Art 8 of the Uniform Commercial Code (UCC), the applicable law is not determined by reference to the location of the asset. Instead, parties to the relevant account agreement are able to choose the applicable law. This solution, no longer linked to the lex rei sitae, is still a PRIMA solution as its focus is at the level of the relevant intermediary.
Formulating a modified version of PRIMA
In January 2001, at the Hague, PRIMA was unanimously adopted as the appropriate basis for the Hague Securities Convention. The next two years of negotiations were spent determining an appropriate formulation of the PRIMA doctrine.
The fundamental issue during negotiations was to determine a test that would accurately locate the relevant intermediary. Given the complexities of modern securities transactions, securities accounts cannot be said to be maintained in a single location. Neither Art 9(2) of the Settlement Finality Directive nor Article 9 of the Collateral Directive provide an acceptable solution. The result of the analysis at the Hague Convention was that for large financial institutions with many offices, it is often not possible to point to one particular location. Delegates concluded that a test that tried to actually locate a particular securities account would result in an unacceptable level of uncertainty.
Over time a new approach was developed that was a mix of Type I and Type II PRIMA. Under this compromise approach:
- the account holder and relevant intermediary may choose in the acount agreement the law to govern the issues under the Convention;
- this choice will be respected under the Hague Convention provided that the chosen law is of a place where the relevant intermediary has an office that is involved in the maintenance of securities accounts (a "qualifying office").