Those skilled at making the enemy move do so
by creating a situation to which he must conform;
they entice him with something he is certain to take,
and with lures of ostensible profit, they await him
in strength.
Sun Tsu

What was the purpose of seemingly out-of-control financialization? The threat of financial collapse, and the promise of continued financial profits have been used to herd the nations.

An imperative has been created that certain secured creditors must be given legally certain claims to client assets, globally, without exception, with the further assurance of near instantaneous cross-border mobility of legal control of such collateral. The global push for conformance to the U.S. model for achieving such legal certainty and mobility began in earnest more than twenty years ago in the aftermath of the dot-com bust. Financial instability and the threat of “collateral shortages” were used as justification. Deliberate efforts were sustained, globally, over many years. People were paid to do this, to betray the vital interests of their own people. It was done first in the U.S., and then demanded globally under the name of “harmonization”; perhaps the emphasis should be on “harm.”

The “Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary” [7] was drafted in 2002 and signed in 2006. It is an international multilateral treaty intended to remove, globally, legal uncertainties for cross-border securities transactions.

The Convention introduced a newly invented conflict-of-laws rule to be applied to security transactions, especially collateral transactions, namely the “Place of the Relevant Intermediary Approach” (or PRIMA). This was designed to avoid problematic national law, which might allow owners to recover their assets taken by a creditor as collateral, by setting the place of law in the account agreements with intermediaries.

One of the people most involved was James S. Rogers (perhaps a distant cousin of mine), who, according to his own biography [8],

‘served as one of the United States delegates to the Hague Conference on Private International Law project to negotiate and draft a Convention on Choice of Law for Securities Holding Through Securities Intermediaries and as a member of Drafting Group for that Convention.

Interestingly, Rogers also notes that he had

served as Reporter (principal drafter) for the Drafting Committee to Revise UCC Article 8, which established a new legal framework for the modern system of electronic, book-entry securities holdings through central depositories and other intermediaries.

Very few people were involved in the drafting of the 1994 revisions to articles 8 and 9 of the UCC. A report by the Financial Markets Law Committee (a “charity” affiliated with the Bank of England) contains this illuminating quote [9]:

Professor Rogers, Reporter to the Article 8 1994 revision Drafting Committee, recalls how “at the outset of the Article 8 revision one could probably have counted on one hand—with a few fingers unused—the number of people among those appointed to the Article 8 Drafting Committee, or among the full membership of the sponsoring organisations that would ultimately have to approve the work of the Drafting Committee, who had any familiarity with either old [1978 version] Article 8 or the modern securities holding system.”

If Professor Rogers was one finger, Professor Egon Guttman was the other. As the author of “Modern Securities Transfers” [10], he was the foremost expert on security transfers and secured transactions under Articles 8 and 9 of the UCC. Professor Guttman passed away in 2021, and so, description of his activities are disappearing. But I have saved references to his work dating back to 2012:1

Professor Guttman has been involved in the revisions of various Articles of the Uniform Commercial Code, and as a member of U.S. Department of State Working Groups in the drafting of conventions relating to international commercial transactions.

And so, Harmonization of this regime giving control globally to a select group of secured creditors was pushed from the highest level of the U.S. government. The Department of State was the first administrative arm of the U.S. executive branch, with Thomas Jefferson becoming the first Secretary of State in 1789. It is the foremost executive power globally.

After years of effort, the Hague Securities Convention was signed by only the United States, Switzerland and Mauritius. The EU did not sign the Convention due to the identification of problematic European law, which assured property rights to the owners of securities in some jurisdictions. Europe has the ancient legal principle of lex rei sitae (the law where the property is situated), and could not easily accept the work-around of “Place of the Relevant Intermediary Approach” (or PRIMA), invented in the Hague Securities Convention.

However, the manifest objective of providing legal certainty to creditors was not in dispute and was clearly accepted by EU authorities, as evidenced by Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements [11]. This document, which was published roughly contemporaneously with the drafting of the Hague Securities Convention, contains the following statements:

In order to improve the legal certainty of financial collateral arrangements, Member States should ensue that certain provisions of insolvency law do not apply to such arrangements, in particular, those that would inhibit the effective realization of financial collateral …

The principle in Directive 98/26EC, whereby the law applicable to book entry securities provided as collateral is the law of the jurisdiction where the relevant register, account or centralized deposit system is located, should be extended in order to create legal certainty regarding the use of such securities held in a cross-border context and used as financial collateral under the scope of this Directive.

The objective of Legal Certainty for creditors was to be pursued by other means. Where they could not easily change problematic local law in which investors had property rights to securities, they structured around it. This is what lawyers, investment bankers, and, apparently, government officials are paid to do.

Euroclear is one of two European International Central Security Depositories (ICSD), the other being Clearstream. The Brussels office of Morgan Guaranty Trust Company of New York (Morgan Guaranty) founded the Euroclear System in December 1968. Morgan Guaranty began operating as JP Morgan in 1988.

In 2004, the Deputy General Counsel of Euroclear, Diego Devos, sent a memorandum with “Preparatory information regarding European Legal Harmonisation” to ”DG Internal Market” [12]. Here are some excerpts:

This note describes Euroclear’s recommendations with regard to the legal barriers that should be addressed as priority items by the Legal Working Group that the Commission intends to set up as a follow-up of its Communication on Clearing and Settlement in the European Union dated April 28, 2004 … In particular, we identify issues that complicate and prevent the full implementation of major initiatives that the market is undertaking on platform consolidation and harmonization. …

Recommended … Removal or modification of requirements that do not recognise the multi-layer holding structure that is the norm in cross-border activity, including:

  • recognition in the EU of the pooled holding of registered assets through a nominee structure (and the different nature of legal and beneficial ownership) in order to keep registered securities on a fungible basis at local level and protection of the rights of the nominee;
  • elimination or modification of requirements that directly or effectively require the maintenance of individual records or accounts per beneficial owner …

Recommended … Eliminate impediments to free use of collateral cross-border …

Diego Devos went on to be appointed General Counsel of the Bank for International Settlements (BIS) in 2009.

As noted in the preceding chapter, in April of 2004, The European Commission Internal Markets and Services Director General proposed setting up a “group of legal experts, as a specific exercise intended to address problems of legal uncertainty identified in the context of considering the way forward for clearing and settlement in the European Union.”

It took ten years of conniving, but in 2014 the way forward was made certain with the Central Securities Depository Regulation (CSDR).

I had arranged to speak at a hedge fund conference in Zürich in January of 2014 to warn the “professionals” about the undermining of property rights to securities, and of the implications. I thought perhaps the tide could be turned in Europe. Believe it or not, this was in large part my purpose in moving to Europe. Prior to the conference, I had sent personal emails with the outline of my points to all of the attendees. While I was speaking, by the bright light of the projection screen, I could see that the eyes of the people in the room were as wide as saucers. When I finished, there was complete silence. In the coffee break that followed, I asked people what they had thought about what I had said. I asked if they understood what I was explaining. One person merely replied, “Oh, yes.” I asked him what he would do about it. He simply said, “Nothing.” I asked him why he would do nothing. His reply was, “My clients don’t care about this.” I said, “They don’t care about it, because they don’t know about it.”

Six months later, the Central Securities Depository Regulation (CSDR) was implemented by the EU directive No. 909/2014 [13].

A Central Security Depository (CSD) operates a book entry system for electronic settlement of trades and maintains a record of “ownership.” An International Central Security Depository (ICSD) is linked to national CSDs, and it handles securities lending and collateral management. As noted by the European Securities and Markets Authority [14]:

CSDR plays a pivotal role for post-trade harmonization efforts in Europe, as it enhances the legal and operational conditions for cross-border settlement in the EU.

And thus, the desired goal of cross-border mobility of collateral has been achieved. How was that engineered?

CSDR provides for links between CSDs. National CSDs, which hold the record of ownership, are linked to the International Central Security Depositories; the transfer of legal title to customer collateral from the national CSD to the ICSD, and the use of customer collateral are thus enabled. The customer has “ownership” in the book-entry system of the national CSD, while the collateral is held in pooled form at the ICSD level. This allows the “cross-border services”, i.e. the use of customer collateral. This is essentially the U.S. model, in which all custodians have accounts at DTC, which holds all securities in pooled form. DTC functions as an ICSD.

We will see how that has worked in looking specifically at Euroclear and developments in Finland and Sweden.

Once upon a time, Finland and Sweden had legal systems and national registries of securities ownership, which assured owners that their securities could not be used as collateral without express agreement. It had been possible to own and hold Swedish government bonds, for example, with absolute certainty that they could not be lost in an insolvency of a custodian. In 2006, the Legal Certainty group identified Sweden and Finland as having problematic law.

In 2008, Euroclear was allowed to acquire one hundred percent of Nordic Central Security Depository (NCSD), which owned the central security depositories of both Finland and Sweden, Suomen Arvopaperikeskus Oy (APK) and VPC AB (VPC), respectively. These are now local CSDs linked to Euroclear Bank SA/NV which operates as an ICSD under Belgian law.

CSDR requires an account provider to publicly disclose the levels of protection and costs associated with the different levels of segregation of securities accounts at the central securities depositories. Skandinaviska Enskilda Banken AB (SEB) makes such a disclosure with respect to central securities depositories in Sweden, Denmark, Finland, Norway, Euroclear Bank SA/NV and Clearstream Banking S.A. [15]. Here are the shocking key passages from that disclosure:

In the unlikely event of a shortfall of securities the client in question will not be able to claim a right of separation but will likely be considered as an unsecured creditor without priority to the assets of the bankruptcy estate.

In the case of securities held at Euroclear Bank SA/NV Belgian law (the Royal Decree no 62) applies provisions following the principal that all securities deposited by Euroclear Bank SA/NV participants (i.e. SEB) with Euroclear Bank SA/NV are deposited on fungible basis. By virtue of the Royal Decree, Euroclear Bank SA/NV participants have been given by law a co-ownership right of an intangible nature on a pool of book-entry securities of the same category held by Euroclear Bank SA/NV on behalf of all Euroclear Bank SA/NV participants having deposited securities of the same category. The said Decree provides for a loss sharing provision for the underlying clients of a Euroclear Bank SA/NV participant in case such Euroclear Bank SA/NV participant goes into default. Furthermore, Belgian law gives the National Bank of Belgium privilege over Euroclear Bank SA/NV’s own proprietary securities to cover e.g. a situation where securities that are held by Euroclear Bank SA/NV with any depositary on behalf of its participants are not enough to cover the actual holdings of such securities by the participants.

Thus, over a period of six years, property rights to securities in Sweden and Finland were deliberately subverted. These countries went from having the strongest property rights to securities to having no property rights to securities beyond an artificial appearance of ownership.

In 2014, coincident with the EU directive on central securities depositories, shocking changes were made to Swedish law. Very few know about this, other than the people who did it.

I tracked this down through a cryptic reference in a Euroclear document, “General Terms and Conditions Account Operations and Clearing” [16]. Buried in there, on page 38, is the following clue:


The real right consequence of disposals relating to VPC accounts and financial instruments registered in VPC accounts are governed by the provisions in Chapter 6 of LKF.

This quote refers to Sweden’s law on central security depositories and accounting for financial instruments [17]. Chapter 6 of this law is titled, in translation, “Legal effect of registration, Presumption of ownership.” Buried at the bottom of this chapter is found the further direction:

Special provisions on pledging of financial instruments are found in the Act (1991:980) on trading in financial instruments.

[Särskilda bestämmelser om pantsättning av finansiella instrument finns i lagen (1991:980) om handel med finansiella instrument.]

Within Act (1991:980), Chapter 3 is titled, “Disposal of financial instruments belonging to someone else” [Förfoganden över finansiella instrument som tillhör någon annan].

Now we are getting warm!

The first paragraph states that, “The intended disposal must be specified carefully.” That seems like a good thing, but it goes on to state the following:

The first paragraph does not apply if the company’s counterparty or the parties to an agreement in which the company participates is another company that is under the supervision of the Financial Supervisory Authority or a foreign company within the EEA that is allowed to run comparable activities in its home country and that is under the reassuring supervision of an authority or other competent body.

This gives the local CSD legal authority, and broad latitude to pass legal control of customer assets as collateral to the ICSD without the knowledge or approval of the account holder.

The implementation of this is now so thorough that a Swedish citizen cannot hold Swedish government bonds in Sweden as property without exposure to insolvency of the account provider, the local CSD, or of the ICSD. The securities of Swedish citizens are certainly pooled with securities being used as collateral elsewhere.

I came to Sweden in 2009 in order to be able to hold Swedish government bonds in Sweden with property rights. I was able to do that using a VP konto (account) at Handelsbanken. However, following the legal changes made in 2014, Handelsbanken completely discontinued the VP konto structure, and offered clients only custody accounts.

SEB also discontinued its long-standing VP konto structure, which had assured direct ownership of specific securities, but then introduced something they called a Service VP konto, which is held with the local CSD, Euroclear Sweden. I called into SEB about this, and was told that a VP konto specialist would call me. When I received the call, I asked two simple questions:

  1. Are securities held in a Service VP konto specifically identified under the name of the account holder?
  2. Can the securities held in a Service VP konto be re-vindicated in the event of the failure of SEB or of Euroclear.

The VP konto specialist put me on hold for a long time while he investigated my questions. When he came back, his answer was simply that, while there might be a small risk of failure of Euroclear, the account was insured for 250,000kr. He confirmed that holding of securities at Euroclear was the change made with the new Service VP konto structure, and he confirmed that there is a risk of loss of securities with the new structure. He seemed shocked himself to have learned this.

In 2011, a friend who had been a State Secretary in the Swedish government arranged for me to meet with the Minister and the State Secretary for Financial Markets. I was so moved when I received the email informing me of this, tears came to my eyes; it gave me hope that in Sweden it might be possible to make a difference, and thus to turn the tide somewhere. I am forever grateful to them for that meeting; such a thing would never be allowed in the land of my birth. They heard me out about the implications of conforming to the U.S. model, and did not disagree. They said it might be possible to avoid this if the Germans would stand against it, the implication being that little Sweden could not do it alone.

The juggernaut rolled on. We are all in its path.