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[Senate Treaty Document 112-6]
[From the U.S. Government Printing Office]


112th Congress
2d Session                      SENATE                     Treaty Doc.
112-6
_______________________________________________________________________
 
 THE CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF 

                  SECURITIES HELD WITH AN INTERMEDIARY

                               __________

                                MESSAGE

                                  from

                     THEPRESIDENTOFTHEUNITEDSTATES

                              transmitting

 THE CONVENTION ON THE LAW APPLICABLE TO CERTAIN RIGHTS IN RESPECT OF 
SECURITIES HELD WITH AN INTERMEDIARY (THE ``CONVENTION''), DONE AT THE 
HAGUE ON JULY 5, 2006, AND SIGNED BY THE UNITED STATES ON THAT SAME DAY




 May 17, 2012.--Treaty was read the first time, and together with the 
accompanying papers, referred to the Committee on Foreign Relations and 
            ordered to be printed for the use of the Senate
                         LETTER OF TRANSMITTAL

                              ----------                              

                                     The White House, May 17, 2012.
To the Senate of the United States:
    With a view to receiving the advice and consent of the 
Senate to ratification, I transmit herewith the Convention on 
the Law Applicable to Certain Rights in Respect of Securities 
Held with an Intermediary (the ``Convention''), done at The 
Hague on July 5, 2006, and signed by the United States on that 
same day. The report of the Secretary of State, which includes 
an Overview of the proposed Convention, is enclosed for the 
information of the Senate.
    The United States supported the development of the 
Convention, which provides uniform rules for determining the 
law applicable to certain rights in commercial transactions 
involving investment securities held through intermediaries 
(such as brokers, banks, and other financial institutions). The 
Convention incorporates modern commercial finance methods 
already market-tested in the United States through the Uniform 
Commercial Code. It would ensure that countries that become 
party to this Convention would also apply those methods. The 
Convention, once in force, would improve the functioning of 
investment securities markets, reduce uncertainty in cross-
border commerce, and reduce national and cross-border systemic 
risk.
    The Department of the Treasury, the U.S. Securities and 
Exchange Commission, the Commodities Futures Trading 
Commission, and the New York Federal Reserve Bank support 
ratification by the United States of this Convention, as do key 
private sector associations. I recommend, therefore, that the 
Senate give early and favorable consideration to the Convention 
and give its advice and consent to its ratification.

                                                      Barack Obama.
                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                         Washington, July 18, 2011.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmittal to the Senate for advice and consent to 
ratification, the Convention on the Law Applicable to Certain 
Rights in Respect of Securities Held with an Intermediary, done 
at The Hague on July 5, 2006 (the ``Convention'') and signed by 
the United States on that date. An overview of the Convention 
with a detailed article-by-article analysis is enclosed with 
this report.
    Modern investment securities markets, such as those of the 
United States, have moved from a paper-based system largely to 
electronic transfer of securities, which makes possible higher 
volumes of transactions through ``intermediaries'' (such as 
brokers, banks, and other financial institutions). Such 
transactions can cross borders rapidly. The Convention provides 
uniform rules for determining the law applicable to certain 
rights in commercial transactions involving investment 
securities held through intermediaries. The question of which 
law governs such intermediated securities has become a matter 
of significant concern to market participants as well as 
banking supervisors and regulators. The objective of the 
Convention is to provide greater legal certainty in this area, 
thereby reducing legal and systemic risk, enhancing efficiency 
in market transactions, and facilitating the global flow of 
capital. The Convention was formulated at The Hague Conference 
on Private International Law by forty-five countries with 
substantial participation of the U.S. private sector. The rules 
of the Convention are compatible with modern finance law in the 
United States as set out in the Uniform Commercial Code, which 
has been adopted by all U.S. states and the District of 
Columbia.
    The U.S. government and the U.S. financial community 
supported the Convention's negotiation. Its ratification by the 
United States is supported by the relevant U.S. regulatory 
agencies, including the Department of the Treasury, the U.S. 
Securities and Exchange Commission (SEC), the Commodity Futures 
Trading Commission (CFTC), and the New York Federal Reserve 
Bank. The Convention is also supported by securities clearance 
and settlement entities, including the Depository Trust & 
Clearing Corporation (the U.S. central securities depositary), 
commercial market interests including custodian banks, broker-
dealers, securities intermediaries, and securities industry 
associations including the Securities Industry and Financial 
Markets Association (SIFMA), the International Swaps and 
Derivatives Association (ISDA), the Emerging Markets Traders 
Association (EMTA), the Association of Global Custodians (AGC), 
and others. Experts from the National Conference of 
Commissioners on Uniform State Laws (ULC) were involved at all 
stages of the Convention's development and the ULC itself was 
represented at the Diplomatic Conference adopting the 
Convention. The American Bar Association has adopted a formal 
resolution recommending U.S. ratification on the recommendation 
of the Business Law and International law Sections.
    I recommend, therefore, that you transmit the Convention to 
the Senate for advice and consent to ratification.
            Respectfully submitted,
                                            Hillary Rodham Clinton.
    Enclosures: As stated.
                                Overview

    The Convention provides uniform rules for rapidly 
determining the law applicable to certain rights in commercial 
transactions involving investment securities held through 
intermediaries.
    In modern capital markets, investment securities are 
commonly held in electronic form by banks, securities brokers 
and other entities collectively known as ``securities 
intermediaries.'' Securities interests in computer data form 
move today through intermediaries in increasingly high volumes 
and cross borders frequently, and it is exceedingly difficult 
to determine in advance which law would apply to particular 
transactions or intermediaries if traditional choice of law 
principles are employed. Even when the initial parties may be 
located within the United States, the nature of computer-based 
transfers of securities through various intermediaries means 
that any transfer typically involves book-entries by a chain of 
intermediaries located in several countries all in the same 
day; securities moving between accounts thus may quickly 
involve dispositions of securities or collateral in other 
jurisdictions, raising issues as to which countries' laws may 
apply.
    The question of which law governs has become a matter of 
significant concern to market participants as well as 
securities and derivatives markets regulators, banking 
supervisors, and regulators. The objective of the Convention is 
to provide greater legal certainty in this area, thereby 
reducing legal and systemic risk, enhancing efficiency in 
market transactions and facilitating the global flow of 
capital.
    The rules adopted by the Convention reflect modern finance 
law in the U.S. as set out in Articles 8 and 9 of the Uniform 
Commercial Code (``UCC''), adopted by all U.S. states and the 
District of Columbia, which have provided the necessary legal 
certainty for domestic securities transactions. That certainty 
is absent today from most transactions that cross national 
borders or for other countries and foreign markets in their 
relations to securities interests in the U.S. The Convention's 
provisions would apply as stated to transactions within its 
scope, but would not otherwise displace applicable provisions 
of the UCC.
    An Explanatory Report on the Convention was prepared by the 
Conference Drafting Group on which U.S. government and 
securities industry experts were represented, which sets forth 
interpretations of the provisions of the Convention that were 
agreed to in the negotiation process.
    The Convention deals only with choice of law, and only with 
securities held with an intermediary and credited to a 
securities account. It has no effect on the substantive law 
that will be applied once the choice of law determination has 
been made. It does not otherwise deal with the relationship 
between an issuer and its registered owner or with interests in 
securities transferred by physical delivery or direct 
registration on the books of an issuer.
    Because of the transactional and regulatory risk incurred 
by the inability to rapidly determine applicable law in cross-
border securities-based commerce, U.S. agencies and financial 
and securities industries were active proponents of the 
negotiation, seeking to achieve sufficient certainty in world 
markets comparable to that already achieved in the U.S. by 
uniform state law through the Uniform Commercial Code.
    The Convention would be self-executing. No implementing 
legislation would be required. We note that although the 
Convention would be self-executing, existing U.S. laws, 
including the Securities and Exchange Act of 1934, already 
provide to U.S. Government regulatory and supervisory 
authorities, including the Treasury Department and the Federal 
Reserve, authority to act in areas covered by the Convention. 
The U.S. and Switzerland signed the Convention together on July 
5, 2006 in order to underscore the important level of support 
from two major banking and securities countries, and 
Switzerland has ratified it. U.S. ratification of the 
Convention is expected to have a positive effect on the 
willingness of other countries to take similar action.

                      Article-by-Article Analysis


                    chapter 1--definitions and scope


Article 1--Definitions and interpretation
    Article 1 contains definitions and interpretive provisions. 
``Securities'' (subparagraph (a)) are defined as ``any shares, 
bonds or other financial instruments or financial assets (other 
than cash), or any interest therein'', and ``intermediary'' 
(subparagraph (c)) is defined as ``a person that in the course 
of a business or other regular activity maintains securities 
accounts for others or both for others and its own account and 
is acting in that capacity'' (i.e., often brokers-dealers, 
banks and other financial institutions.
    The key Convention language, which together with Article 2 
determines scope of application, is the definition in 
subparagraph (1) (f) of ``securities held with an 
intermediary'' defined as ``the rights of an account holder 
resulting from a credit of securities to a securities 
account''. Those terms have the same meaning as the Revised 
Uniform Commercial Code (UCC) Article 8 (uniform investment 
securities law) concept of a ``securities entitlement.'' The 
Convention does not cover transfers or security interests in 
securities held directly, i.e., which do not enter the 
intermediated system. The definition of ``securities'' under 
the Convention is sufficiently broad to cover various forms of 
financial assets that laws in any country permit to be carried 
in a securities account. The exclusion of cash from the 
definition of ``securities'' preserves the distinction between 
securities accounts and ordinary bank deposit accounts.
    Article 1(2) clarifies that ``disposition of securities 
held with an intermediary,'' as defined in Article 1, 
subparagraph (h), covers both outright transfers of title and 
the grant of security interests. The term ``disposition'' 
includes a disposition of an entire securities account, as well 
as some or all of the securities credited to the account. 
Article 1(3) covers a holding pattern in which an entity that 
might otherwise be acting as a central securities depository is 
acting only as a transfer or registration agent. Article 1(4) 
clarifies that a central securities depository is treated as an 
intermediary for purposes of the Convention.
Article 2--Scope of the Convention and of the applicable law
    Article 2(1) sets forth the issues that are to be governed 
by the applicable law once that is determined pursuant to 
Articles 4 and 5 of the Convention. These issues parallel the 
securities transaction issues currently governed under Articles 
8 and 9 of the UCC once the ``securities intermediary's 
jurisdiction'' under UCC has been determined.
    Under the Convention, if the applicable law is the law of a 
particular state in the United States, the relevant law would 
be Articles 8 and 9 of the UCC dealing with indirect holdings 
and interests in securities entitlements. That will be so 
regardless of the location, if determinable, of any security 
certificates, any securities register, any securities account, 
any intermediary, any issuer or any office. That result will 
apply in any transaction subject to the Convention.
    The issues identified in Article 2(1)(d), whether a 
person's interest in securities held with an intermediary 
extinguishes or has priority over another person's interest, 
covers the issues that, in current U.S. law, are commonly 
referred to as ``bona fide purchase'' issues. The Convention 
would ensure that an investor to whose account securities are 
credited need look only to the law applicable pursuant to 
Article 4 or 5 of the Convention to determine whether the 
investor acquires its interest free from adverse claims. 
Existing choice of law rules in jurisdictions outside the 
United States often leave that in considerable doubt.
    Article 2(1)(e) ensures that the law applicable pursuant to 
Article 4 or 5 governs the question of whether the intermediary 
owes any duties to a person who asserts an adverse claim to 
position held through that intermediary. This provision is very 
important to the safe and sound operation of the international 
and national central securities depositories and securities 
settlement systems. It ensures that an intermediary can look to 
the law applicable pursuant to Articles 4 or 5 alone to 
determine whether it owes any duties to persons asserting 
adverse claims. UCC Article 8-115 achieves a similar result 
with respect to intermediary protection against adverse claims. 
Article 2(1)(e) would ensure predictability for U.S. 
intermediaries, whenever U.S. law is the governing law, 
regardless of where the transaction takes place.
    Article 2(2) clarifies that the Convention determines the 
law applicable to all of the issues identified in paragraph 1, 
irrespective of whether the rights resulting from the credit of 
the securities to a securities account are determined to be 
contractual in nature. This is consistent with Article 2(3), 
which provides that the Convention does not otherwise determine 
the law applicable to the purely contractual or personal rights 
and duties arising from the credit of securities to a 
securities account or of parties to a disposition.
    Article 2(3)(c) provides that the Convention does not 
determine the law applicable to the rights and duties of an 
issuer of securities or the issuer's registrar or transfer 
agent.
Article 3--Internationality
    Article 3 provides that the Convention applies ``in all 
cases involving a choice between the laws of different 
States.'' This broad application provision means the Convention 
would determine the applicable law regarding issues that arise, 
among other things, in transactional, credit assessment and 
other circumstances in addition to any matters in dispute or 
litigation. The reference in the text to ``cases'' means in 
U.S. usage ``situations''--it does not mean that the Convention 
applies only in a judicial proceeding or formal dispute.
    The Explanatory Report on the Convention issued by the 
Hague Conference states that Article 3 would mean that the 
Convention would generally apply whenever any two of the 
following factors are in different States:
          (i) the account holder;
          (ii) any of the parties to a disposition of the 
        securities or the securities account, or an interest in 
        either;
          (iii) the relevant intermediary; or
          (iv) the issuer or issuers of the securities.
    The foregoing list is not exclusive; particular fact 
patterns may raise additional factors that make the choice of 
which countries' law applies necessary to resolve, which then 
would result in the application of the Convention. By avoiding 
a fixed rule on timing, Article 3 also means that the 
Convention's application is not limited temporally to the 
moment of litigation or other occurrence of a particular 
transaction, but can apply at any time to a later party in 
interest when it acquired its rights.

                       CHAPTER II--APPLICABLE LAW

Article 4--Primary Rule on Applicable Law

    Article 4 sets forth the primary rule for determining the 
law applicable to the matters covered by the Convention, a 
straightforward choice of law rule, wherein the law of a single 
State applies. The basic Article 4 rule provides that the law 
applicable to the issues specified in Article 2(1) is ``the law 
in force in the State expressly agreed in the account agreement 
as the State whose law governs the account agreement or, if the 
account agreement expressly provides that another law is 
applicable to all such issues, that other law.''
    The second clause was included primarily to cover cases 
where the law of one State is selected for contractual matters 
under the account agreement, but another law is expressly 
selected to govern the issues listed in Article 2(1) of the 
Convention. Under section 8-110(e)(1) and (2) of the UCC, the 
parties are permitted to select as the ``securities 
intermediary's jurisdiction'' the law of a jurisdiction 
different from the law selected to govern the account agreement 
itself. The Article 4 rule determining the applicable law turns 
on the agreement between the customer and the intermediary that 
maintains the account. If a customer holds securities through 
an account with a broker and wishes to use its holdings as 
collateral for a loan from a lender, the Article 4 test 
provides that the governing law is determined by the agreement 
between the customer and the broker concerning the account, not 
the loan or collateral agreement between the customer and the 
lender.
    While under the UCC, the securities intermediary's 
jurisdiction can be determined entirely by agreement between 
the intermediary and the customer, there is an additional 
requirement under Convention Article 4 that the selection of 
governing law is effective only if certain minimal conditions 
are met, including the requirement that the intermediary had, 
at the time the law is selected, an office in that country that 
engaged in relevant securities work. Under Article 1(1), 
``office'' is defined to mean a place of business of the 
intermediary that carries out functions relating to the 
maintenance of securities accounts. It does not have to have 
dealt with the particular accounts or securities at issue in 
order to qualify for this purpose. As an alternative to the 
activities related to securities account maintenance, a 
qualifying office can also be established by identification 
through an account number, bank code, or other specific means 
of identifying the office as one which maintains securities 
accounts in the chosen State.

Article 5--Applicable law fall-back rules

    Article 5 of the Convention contains a set of ``fall-back'' 
rules that apply when Article 4 does not determine the law 
applicable to the Article 2(1) issues. This can occur if the 
parties have not expressly agreed upon a governing law in the 
account agreement, or if the agreement as to governing law is 
ineffective for purposes of the Convention by reason of failure 
to meet the qualifying office test. Article 5 also provides the 
fall-back rules when the analysis of pre-Convention account 
agreements and securities accounts under Article 16 fails to 
produce a result. These fall-back rules, as do their 
counterparts in the UCC, are designed to provide a rapid means 
of determining applicable law.
    Article 5(1) provides that, if the parties expressly agree 
in writing that the intermediary entered into the account 
agreement through a particular office, then the law applicable 
to all the Article 2(1) issues is to be the law where that 
office was then located, provided that the office then 
satisfied the qualified office test in Article 4. In order to 
simplify the diligence process, Article 5(1) also lists a 
series of provisions commonly found in account agreements that 
are not to be considered as implying such an agreement, such as 
notice provisions and consents to jurisdiction for legal 
process.
    If Article 5(1) is not applicable, Article 5(2) provides 
that the law under which an intermediary is incorporated or 
organized will govern the Article 2(1) issues, unless that law 
is the national law of a country with a federal structure, such 
as the United States, in which case the law of the place of its 
business (or its principal place of business if it has more 
than one place of business) will govern.
    If Article 5(2) is not applicable, Article 5(3) provides 
that the law applicable in the intermediary's place of business 
will apply or if the intermediary has more than one place of 
business, its principal place of business.
    The choice of law in both of the Article 5(2) or 5(3) fall-
back rules is fixed at the time the account agreement is 
executed or, in the absence of a written agreement, at the time 
the relevant securities account is opened.

Article 6--Factors to be disregarded

    Article 6 sets forth factors to be disregarded in a manner 
similar to the list of factors to be disregarded under UCC 
Section 8-110(f) in determining the ``securities intermediary's 
jurisdiction,'' including (1) the place where the issuer is 
incorporated, or otherwise organized or has its statutory seat 
or registered office, central administration or place or 
principle place of business, (2) the place where security 
certificates are located, (3) the place where any securities 
register is located, or (4) the place where any intermediary 
other than the relevant intermediary is located. The Convention 
reflects the view of the United States and others that the 
``look-through'' approach that has in the past been applied 
even in the United States to choice of law for securities held 
with intermediaries, and which requires a detailed and time-
consuming analysis, is impractical in an age of rapidly moving 
electronic transactions.
    Absent the Convention or laws similar to the UCC, use as 
collateral of a portfolio of securities issued by companies 
around the globe would be costly and difficult, even if held 
through a single account with an intermediary, since a lender 
could not be assured that appropriate steps had been taken to 
perfect an interest unless the transaction were examined under 
(1) the laws of all of the various jurisdictions of the issuers 
of all of the securities held through the account, (2) the 
location in which certificates representing the underlying 
securities might be held, (3) the various places where the 
account might be deemed to be located, and (4) the various 
offices that might be deemed to maintain the account.

Article 7--Protection of rights on change of the applicable law

    Article 7 deals with the situation in which an account 
agreement is amended so as to change the applicable law. The 
Convention includes rules to protect a secured party or other 
transferee against potential adverse effects of such a change, 
and was included in the Convention primarily for the benefit of 
countries, unlike the United States, where establishing a 
security interest does not as readily permit a secured party to 
eliminate the problem of change in law. In the United States, 
Article 9 of the UCC generally provides certain grace periods 
to address these issues.
    Article 7 uses the terms ``old law'' and ``new law'' as, 
respectively, the law determined under the Convention before 
and after the change in the agreement. The most important part 
of Article 7 is subsection (3), which provides that, except as 
stated in subsection (4) to Article 7, the new law governs all 
of the issues governed by the Convention. Exceptions to that 
general rule are set forth in Article 7(4).

Article 8--Insolvency

    The Convention is consistent with U.S. insolvency laws. The 
Convention provides that the applicable law determined under 
Articles 4 or 5 will govern the Article 2(1) issues with 
respect to any event that occurred prior to the opening of an 
insolvency proceeding. This is consistent with the U.S. 
Bankruptcy Code. It is also consistent with Section 210 of the 
Dodd-Frank Wall Street and Consumer Protection Act and with the 
bank resolution provisions of the Federal Deposit Insurance Act 
and the resolution provisions applicable to the GSEs and the 
Federal Home Loan Banks under the Housing and Economic Recovery 
Act.
    Article 8(1) thus provides that the applicable law 
determined by Articles 4 or 5 governs the Article 2(1) issues 
with respect to any event that occurred prior to the opening of 
an insolvency proceeding (a defined term in Article 1), subject 
to Article 8(2) which provides that the ``substantive or 
procedural'' insolvency rules of the insolvency forum State 
shall govern the ranking of claims, voidable transactions such 
as preferences and fraudulent conveyances and statutory or 
judicial stays on realization of collateral. Thus, under the 
Convention (as in the case under the U.S. Bankruptcy Code), a 
creditor's security interest perfected under the law governing 
the Article 2(1) issues would be subject to the automatic stay 
and to avoidance rules on preferential transfers.

                    CHAPTER III--GENERAL PROVISIONS

Article 9--General applicability of the Convention

    Under Article 9, the Convention applies in a ratifying 
State or when the law of such a State is being applied, whether 
or not the law determined to be applicable under the Convention 
is that of a State party to the Convention.

Article 10--Exclusion of choice of law rules (renvoi)

    Article 10 provides that the law to be applied by operation 
of the Convention's rules is the law in force in a State other 
than its choice of law rules. This is also consistent with the 
choice of law rules in Articles 8 and 9 of the UCC.

Article 11--Public policy and internationally mandatory rules

    Article 11 deals with the extent to which a forum court may 
decline to apply the Convention's choice of law rules on 
grounds of public policy of the forum. Subsection (1) provides 
that a forum state can refuse to apply the substantive law 
determined under the Convention only if application of that law 
would be ``manifestly contrary to the public policy of the 
forum.'' The Explanatory Report clarifies that this public 
policy exception applies only in the admittedly extremely rare 
cases where the relevant foreign rule, as applied to the facts 
of the case, would produce a result that departs so radically 
from the forum's concepts of fundamental justice that its 
application would be intolerably offensive to the forum's basic 
values. Subsection (2) provides that the Convention does not 
preclude application of any rules of the forum that must be 
applied irrespective of conflict of law rules.
    The more significant feature of Article 11 is found in 
subparagraph (3), which provides that the exception for rules 
of public policy and internationally mandatory rules does not 
apply to rules of the forum relating to perfection and 
priorities. Those are key factors on which parties must be able 
to rely for the treaty to be effective, and were specifically 
requested by the United States and other countries that wanted 
the Convention to provide an adequate level of legal certainty 
for secured transactions.

Article 12--Determination of the applicable law for Multi-unit States

    Article 12 contains a number of interpretive rules for 
Multi-unit States. The term Multi-unit State is defined in 
Article 1 as ``a State within which two or more territorial 
units of that State, or both the State and one or more of its 
territorial units, have their own rules of law governing the 
issues specified in Article 2(1).'' The United States qualifies 
as such a ``Multi-unit State,'' given that there are U.S. 
federal laws that apply to U.S. government and agency 
securities, and state laws that apply to state, municipal and 
private sector corporate securities.
    The fundamental interpretive rule of Article 12 provides 
that, when an account agreement specifies that it is to be 
governed by the laws of a territorial unit, (1) the laws of 
that territorial unit are to be the law applicable to the 
Article 2(1) issues, but (2) that the local office requirement 
of Article 4 applies to the Multi-unit State as a whole. Thus, 
if an account agreement specifies that it is governed by the 
law of a particular U.S. state, that designation will be 
effective under Article 4 if the intermediary has a qualifying 
office anywhere within the United States.
    Article 12(2)(a) provides that, in applying the Convention, 
the law in force in a territorial unit of a Multi-unit State 
(such as the law of a particular U.S. state) will include not 
only the law of that unit but also national law of that country 
to the extent applicable in the territorial unit. This would 
preserve the application of federal law in the context of U.S. 
government and agency securities. Article 12(2) also preserves 
choice of law rules applicable pursuant to the law in force in 
a territorial unit in respect of perfection by filing.

Article 13--Uniform interpretation

    Article 13, a standard provision in Hague Conventions and 
other international private law conventions, provides that in 
interpreting the Convention regard is to be had to its 
international character and to the need to promote uniformity 
in its application.

Article 14--Review of practical operation of the Convention

    Article 14, also a standard provision in Hague Conventions, 
provides for the Permanent Bureau (Secretariat) of the Hague 
Conference to convene meetings to review the operation of the 
Convention.

                   CHAPTER IV--TRANSITION PROVISIONS

Article 15--Priority between pre-Convention and post-Convention 
        interests

    Article 15 addresses one situation involving pre-Convention 
interests, but does not provide a general rule as to 
prospective effect of the Convention. It provides that the 
substantive law determined under the Convention rules will 
determine whether an interest acquired after the Convention 
enters into force extinguishes or has priority over an interest 
acquired prior to the Convention entering into force. The 
effect of this provision is that the law determined applicable 
under the Convention will apply to disputes on matters covered 
by the Convention as between other post-Convention interests, 
and to such disputes between the post-Convention interest and 
any pre-Convention interests. This is consistent with the 1994 
revision of UCC Article 8 and the subsequent revision of UCC 
Article 9.

Article 16--Pre-Convention account agreements and securities accounts

    Under the basic rule of Article 4, the parties to an 
account agreement can include an explicit provision specifying 
the law that will govern the issues covered by the Convention. 
The Convention will also apply, however, to transactions where 
the relevant account agreement was entered into before the 
Convention came into force. Article 16 provides transitional 
rules on the extent to which the Convention applies to pre-
Convention account agreements and securities accounts. Article 
16(1) provides that references in the Convention to account 
agreements and securities accounts include those entered into 
or opened before the Convention entered into force. Article 
16(2) makes clear that the transitional rules contained in that 
subparagraph do not apply if the account agreement makes 
express reference to the Convention.
    Article 16(3) sets out a transitional rule designed 
primarily with U.S. account agreements in mind, that is, 
agreements that were entered into in contemplation of the 
choice of law rules contained in UCC Articles 8 and 9. Article 
16(3) provides that if the agreement contains a provision that 
would have the effect under its governing law--e.g., under U.S. 
law as set out in the UCC--that the issues covered by the 
Convention are governed by a particular law, then the agreement 
shall be treated as if it referred to the Hague Convention and 
selected that law. For example, if parties operating under 
Articles 8 and 9 of the UCC include in their account agreement 
a provision specifying that ``the securities intermediary's 
jurisdiction'' is a particular U.S. state, the fact that the 
Hague Convention uses a different formulation could, absent 
this provision, create doubt whether that pre-Convention 
agreement has the expected effect under the Convention. Article 
16(3) is designed to remove doubt on this point.
    Article 16(4) sets out a transitional rule intended 
primarily for non-U.S. agreements. Under Article 16(4), if the 
parties to an account agreement have agreed that the securities 
account is maintained in a particular State, then the law of 
that State shall be the law applicable to the Article 2(1) 
issues, provided that the relevant intermediary satisfied the 
qualified office test in Article 4(1) at the time it entered 
into the agreement. Unlike the rules in Articles 4, 5 and 
16(3), the agreement as to the account location in pre-
Convention agreements may be express or implied from the 
circumstances.
    Article 16 also provides that a State may, upon 
ratification of the Convention, make various declarations 
limiting the effect of Article 16. We do not recommend that the 
United States make such declarations, so that the applicable 
transitional rules would be those set out in Article 16(2) or 
16(3).

                      CHAPTER V--FINAL PROVISIONS

Article 17--Signature, ratification, or accession

    This article, standard in Hague Conventions, provides the 
technical rules describing the way in which a State can become 
bound by the Convention, thus becoming a ``Contracting State''.

Article 18--Regional Economic Integration Organizations

    Article 18 deals with the way in which a Regional Economic 
Integration Organization (such as the European Union) can 
become bound by the Convention to the extent such Organization 
has competence over matters governed by the Convention. The 
United States supports the possible assumption by the European 
Union of the obligations of a Contracting State in view of the 
shared competence in securities law and regulation between the 
European Union and its member states.

Article 19--Entry into force

    This article provides that the Convention will enter into 
force three months after three States have become Contracting 
States, and provides for the date of entry into force for 
subsequent ratifying States.

Article 20--Multi-unit States

    Article 20 permits Multi-unit States to apply the 
Convention by way of declaration only to certain of its 
territorial units. We do not recommend that the United States 
make such a declaration in view of the need of securities 
markets to apply common rules to transactions throughout the 
U.S.

Article 21--Reservations

    Article 21 states that reservations to this Convention are 
not permitted.

Article 22--Declarations

    Article 22 provides the technical rules governing the 
manner in which the various declarations permitted to be made 
under the terms of the Convention become effective, modified or 
withdrawn. No declarations are recommended to be made by the 
United States.

Article 23--Withdrawal

    Article 23 permits a Contracting State to withdraw from the 
Convention by notification in writing to the Depositary, which 
will become effective twelve months after the date on which the 
notification is received by the Depositary.