Abstract
Three layers must be carefully considered in describing an equity market’s value chain, from processing orders for trading at an exchange to the clearing and settlement of transactions: the trading layer, the clearing layer and the settlement layer. These layers are technically integrated by straight-through processing (STP) of transactions. In this chapter, however, we will focus on the legal level, i.e. the regulatory and contractual relationships that are required. At minimum, these are the relationships that are usually established on each layer to execute and process securities transactions along the value chain.
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Notes
- 1.
Straight-through processing (STP) enables the entire trade process for capital market and payment transactions to be conducted electronically without the need for re-keying or manual intervention.
- 2.
In Germany, legal framework for the operation of exchanges is provided for in the Exchange Act. Under the Exchange Act, power is delegated to the exchanges to issue rules, e.g. on organisation of the exchange, trading models and settlement of exchange transactions. Such rules require approval of the stock exchange supervisory authority.
- 3.
In Germany, the exchange council is responsible for the issuance of the exchange rules. Pursuant to the German Exchange Act, trading participants and issuers must be represented in the exchange council.
- 4.
Capital increase is a method used by corporations to raise share capital by giving existing shareholders the right to subscribe to new shares for cash. Alternatively, capital can be raised by exchanging assets such as shares in another company or by raising the par value of existing shares.
- 5.
For example, trading of securities will be suspended if orderly determination of exchange prices or the orderly settlement of exchange transactions is not ensured.
- 6.
Pursuant to Section 48 (1) German Exchange Act, issuers whose securities were listed on the exchange without their consent may not be obligated through trading guidelines to publish information in regard of these securities.
- 7.
Pursuant to Section 15 German Securities Trading Act, before publication of inside information, the issuer shall notify the management of the exchange on which the securities are admitted to trading.
- 8.
General Terms and Conditions are general and special arrangements, provisions, requirements, rules, specifications and standards that form an integral part of an agreement.
- 9.
These connection agreements may further provide for details of the technical connection (access alternatives, interfaces and specifications), requirements to be met by the trading infrastructure of the trading participant, unilateral amendments to the agreements made by the securities exchange, confidentiality obligations, governing law and place of jurisdiction, termination as well as fees for the technical connection (by way of a price list incorporated into the agreement).
- 10.
Algorithmic trading means trading in securities where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention.
- 11.
Market maker agreements usually are setting forth the tasks of the market maker and requirements to be met by the market maker (reference will be made to the exchange rules insofar as such rules contain corresponding provisions), the requirements for the inclusion of securities into the agreement, unilateral amendments to the agreements made by the securities exchange, confidentiality obligations, governing law and place of jurisdiction, termination as well as fees or rebates to be paid by the exchange to the market maker.
- 12.
For bilateral settlement of securities transactions, the rules of the exchange may in particular provide for the settlement obligations of the seller and the buyer, the time of settlement and the procedure to be observed in case of late settlement.
- 13.
Comparable to exchange rules providing for a bilateral settlement of securities transactions, the rules of the CCP are setting forth the settlement obligations of the clearing members involved as seller and buyer to a transaction, the time of settlement and the procedure to be observed in case of late settlement (buy-in and cash settlement).
- 14.
Novation means the substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement.
- 15.
Art. 48 of the Regulation (EU) No. 648 2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) requires CCPs to have detailed procedures in place to be followed in case of default of a clearing member. A CCP is required to take prompt action to contain losses and liquidity pressures resulting from defaults and shall ensure that the closing out of any clearing member’s positions does not disrupt its operations or expose the non-defaulting clearing members to losses that they cannot anticipate or control. Where a CCP considers that a clearing member will be in default, it shall promptly inform the competent authority before the default procedure is declared or triggered. A CCP shall verify that its default procedures are enforceable. It shall take all reasonable steps to ensure that it has the legal powers to liquidate the proprietary positions of the defaulting clearing member and to transfer or liquidate the clients’ positions of the defaulting clearing member.
- 16.
These requirements include individual client segregation and omnibus client segregation as further explained in Sect. 8.2.4.2 of this chapter.
- 17.
Own fund requirements of clearing members and their clients for exposures to a CCP are provided for in detail in Art. 300 et seq. of the Regulation (EU) No. 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.
- 18.
Art. 37 (1) EMIR requires CCPs to establish, where relevant per type of product cleared, the categories of admissible clearing members and the admission criteria. Such criteria shall be non-discriminatory, transparent and objective so as to ensure fair and open access to the CCP and shall ensure that clearing members have sufficient financial resources and operational capacity to meet the obligations arising from participation in a CCP. Criteria that restrict access shall be permitted only to the extent that their objective is to control the risk for the CCP.
- 19.
The clearing obligation procedure for OTC derivatives transactions is set out in detail in Art. 4–6 EMIR.
- 20.
Liable capital means available own funds of the applicant pursuant to the Regulation (EU) No. 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 in an amount determined by the CCP. Applicants not subject to the own fund requirements under such regulation must have available equivalent regulatory capital. Regulatory capital is considered equivalent when it is (a) used as a measure of adequate solvency for the applicant by its competent supervisory authority, (b) reported to the applicant’s competent supervisory authority on a regular basis and (c) audited at least yearly.
- 21.
Pursuant to Art. 42 (1) EMIR, a CCP shall maintain a pre-funded default fund to cover losses that exceed the losses to be covered by margin payments of the clearing members, arising from the default, including the opening of an insolvency procedure, of one or more clearing members.
- 22.
Pursuant to Art. 39 (1) and (2) EMIR, the CCP (a) shall offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP the assets and positions of that clearing member from those held for the accounts of its clients (omnibus client segregation) and (b) shall offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP the assets and positions held for the account of a client from those held for the account of other clients (individual client segregation).
- 23.
In the settlement of securities transactions, a distinction must be made between (a) the finality of instructions to transfer securities and/or cash amounts in a clearing and settlement system in the meaning of 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 (EC Directive on Settlement Finality) and (b) the lawful settlement of securities and/or cash delivery obligations. Finality means the legal enforceability and irreversibility of such a transfer instruction, as defined by the rules of the CSD, once it has been entered into such a system, provided that there are sufficient positions of cash and securities. If the customer who enters a transfer instruction is insolvent, “finality” affords the other customers and the processing system itself protection against the unwinding risk, that is, the reversal of the cash and securities transactions, which are in the process of being settled. From a legal point of view, the settlement of delivery obligations takes place when the counterparties to a securities transaction have performed their entire obligations (such as the transfer of rights to a security or effecting a cash payment) so that all claims arising from the transaction have been satisfied in full and are consequently extinguished.
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Stötzel, M. (2017). Contractual Relationships Across the Value Chain. In: Francioni, R., Schwartz, R. (eds) Equity Markets in Transition. Springer, Cham. https://doi.org/10.1007/978-3-319-45848-9_8
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DOI: https://doi.org/10.1007/978-3-319-45848-9_8
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