Law 32/2011 of 4 October amending Law 24/1988 on the Securities Market

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Document BOE-A-2011-15622

Document BOE-A-2011-15622

Law 32/2011, of 4 October, amending Law 24/1988, of 28 July, on the Securities Market.

Published in:

« BOE » No. 240, of 5 October 2011, pages 104583 to 104592 (10 pages)

Section:

I. General Provisions

Department:

Head of State

Reference:

BOE-A-2011-15622

ELI Permalink:

https://www.boe.es/eli/es/l/2011/10/04/32

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Text

ORIGINAL TEXT

JUAN CARLOS I

KING OF SPAIN

To all those who see and understand this.

Know: that the General Courts have approved and I come to sanction the following law.

PREAMBLE

I

The clearing, settlement, and registration of securities transactions constitute essential components of any financial system. They refer to all activities encompassing the processes that take place after negotiation or contracting, and which essentially culminate in the change of ownership of the securities and their registration. In short, they allow for the exchange of securities for cash.

Although much less visible than the mechanisms of the contracting phase, the gears of post-trade activities are equally important. It is imperative that they function properly and provide the necessary legal certainty to guarantee the efficiency, competitiveness, and stability of the financial system as well as the protection of investors.

The fundamental elements of post-trade activities are regulated by Law 24/1988, of 28 July, on the Securities Market, and by Royal Decree 116/1992, of 14 February, on the representation of securities by book entries and the clearing and settlement of stock market transactions, and by Royal Decree 505/1987, of 3 April, creating a book-entry system for State Debt. Additionally, the Securities Market Law gives a leading role to the Management Company of Securities Registration, Clearing and Settlement Systems (hereinafter, the Systems Company) and its participating entities, without excluding the possibility that their activities may be carried out by other entities.

This legislation and the corresponding regulatory development have allowed the construction of a clearing, settlement, and registration structure for securities transactions that has functioned adequately for the last two decades, but which, however, needs to be reformed to adapt to a new environment. Indeed, considering that Spanish post-trade activities will develop in a context of greater integration at the European Union level, it is necessary to update their regulation.

For the sake of greater competitiveness, it is convenient to have some homogenization of Spanish post-trade activities with those structures of our main European partners. Additionally, new players are expected to emerge in the sector, such as the TARGET2-Securities project of the Eurosystem, which aims to facilitate centralized central bank money settlement of euro-denominated securities transactions or in other currencies, equalizing European cross-border securities settlement to national settlement in terms of efficiency and costs, thereby becoming a relevant step towards the achievement of an integrated single securities market for financial services.

The reform is therefore necessary to maintain and increase the level of competitiveness of our post-trade system and, consequently, the financial sector. In addition to this manifest intention, the modifications include elements that reinforce the robustness of the clearing, settlement, and registration system.

The content of the reform must be reflected in a wide variety of normative texts that simultaneously constitute the different stages through which the reform will be materialized. Although many of these elements exceed the scope of this Law and will be subject to regulatory modifications, it is convenient here to highlight the main axes on which the reform of the clearing, settlement, and registration system is based.

As a first axis, the introduction of the figure of the Central Counterparty (CCP) in post-trade services is established. These entities will perform functions of interposition on their own account between buyers and sellers of transactions carried out on securities, assuming counterparty risk, and will perform the clearing of securities and cash derived from them. Their intervention in the process intervening between negotiation on the stock exchange or in a multilateral trading facility and the settlement of the transaction will allow the substitution of a multilateral net securities settlement system by a bilateral model, based exclusively on balances. This should result in a reduction in settlement costs and facilitate the elimination of the concept of delivery assurance, as investors remain protected by dealing in practice with a special agent that is a CCP with high technical and financial solvency, rather than dealing bilaterally subject to higher counterparty risks.

As a second axis, it is a matter of eliminating the current delivery assurance mechanisms within the Systems Company. Delivery assurance has traditionally been interpreted as the commitment to settle all purchase and sale transactions, always delivering securities in kind in exchange for cash. To achieve this, a system of collective guarantees was established, with which to finance the procedures for obtaining securities or cash in transactions that could not be settled in time. Although this institution has provided a high level of protection to investors, it is necessary to review it to guarantee the robustness of the system. The elimination of delivery assurance means allowing, in the last resort, the resolution of incidents through cash settlements if it is impossible to access the securities, which improves the stability of the system. However, the investor will also maintain a high level of protection since, essentially, they deal only with the Central Counterparty which minimizes, although does not eliminate, the risk of delivery failure. Additionally, in the event of a failure, cash settlements must be adequate to the value concerned and the price variation that has occurred in the process.

As a third axis, it is intended to eliminate the current control system based on registration references in favor of a system based exclusively on balances, establishing alternative control procedures. Registration references have been a specificity of our clearing, settlement, and registration system. They have satisfactorily performed their exclusive function as a control mechanism, although they also entail certain drawbacks. Therefore, the substitution of these references by the use of balances will result in greater system efficiency, but at the same time, it must be accompanied by alternative mechanisms of control, responsibility, and incident resolution that ensure that the new system offers at least the same guarantees as the current one. The referred increase in system efficiency will be reinforced by the unification of equity registration systems, as mentioned, with those corresponding to fixed income and public debt, which will be carried out at the end of this reform process.

II

This Law aims to initiate this reform process of the securities clearing, settlement, and registration system, focusing on those issues that require the reform of the Securities Market Law. These are elements mainly related to the first of the three axes cited above, namely the interposition of a Central Counterparty, leaving the rest of the issues for the appropriate regulatory modifications.

Initially, the Law defines a more precise framework for the case of insolvency of entities in charge of the registration of securities represented by book entries or of custodian entities. This is a necessary element for the transition from a control system based on registration references to a balance-based system. Thus, the right of separation of holders is established, while regulating derived aspects such as pending registration transactions. This is a step coherent with the current powers of the National Securities Market Commission (CNMV) to transfer accounting records of securities to other entities in the event of insolvency of any of them, and respectful of the insolvency principle that goods not belonging to the insolvent entity must be delivered to third-party owners.

Next, the Law introduces the obligation of the intervention of the Central Counterparty for equity transactions traded multilaterally both in an official secondary market and in a multilateral trading facility. This obligation responds to the need to provide legal certainty to the relationships between investors and the Central Counterparty.

The reform of the clearing, settlement, and registration system also requires modifications in the regime applicable to the Systems Company. In this regard, this Law eliminates references to delivery assurance. Furthermore, it takes the opportunity to establish corporate law rules that will facilitate relations between this entity and the rest of the agents in the contracting and post-trade scheme. In particular, the regulation of the agreements that the Systems Company can enter into is completed to provide better legal coverage for the TARGET2-Securities project mentioned.

To meet the first pillar of the reform indicated, this Law develops a regulatory regime for Central Counterparties that must be created. Indeed, these must have high levels of financial and technical solvency to perform their function of interposition between buyer and seller through clearing members. This requires great technical capabilities for the calculation of net positions and good financial solvency to face incidents. However, the fundamental variable is to have an adequate guarantee system and a legal regime with complete legal certainty that protects the Central Counterparty, its participating entities, the calculated net positions, as well as the rest of the pieces of the clearing, settlement, and registration system, with the successful completion of operations being the ultimate objective to be achieved.

This Law aims to provide such legal certainty to the system by referring on multiple occasions to the fundamental pillar provided by Law 41/1999, of 12 November, on payment systems and securities settlement systems. Among the various issues addressed, the obligation that Central Counterparties must be legal entities separate from the Systems Company must be highlighted, with the aim of ensuring adequate management of assumed risks.

Finally, the reform initiated with this Law has a high number of milestones and requires the modification of various normative texts. This must happen in a regulated and harmonious manner so that the transition to the new clearing, settlement, and registration system takes place with all guarantees, although to meet the objective of the reform, the main milestones should be reached before 2014.

The Law consists of a single article amending Law 24/1988, of 28 July, on the Securities Market, divided into seven sections, a repealing provision, and six final provisions. Such provisions empower the Government to establish deadlines for Stock Exchange Regulatory Companies and the Systems Company to adapt to the new regulation, grant the CNMV certain supervisory powers, empower the Government to proceed with the unification of equity, fixed income, and public debt registration systems, establish competence titles, the authorization for regulatory development of what is provided in the Law, and its entry into force.

The modifications provided for in this Law will also be applicable to the clearing, settlement, and registration services created by the Autonomous Communities with competencies in this matter pursuant to what is provided in section 2 of Article 44 bis of this Law.

Single Article. Amendment of Law 24/1988, of 28 July, on the Securities Market.

Law 24/1988, of 28 July, on the Securities Market, is amended as follows:

One. Article 12 bis is introduced, which shall have the following wording:

«Article 12 bis. Right of separation in the event of insolvency of entities in charge of keeping the register and participating entities in the registration system and pro rata rule.

1. Once insolvency is declared for an entity in charge of keeping the register of securities represented by book entries or for a participating entity in the registration system, the holders of securities recorded in such registers shall enjoy the right of separation with respect to the securities registered in their favor and may exercise it by requesting their transfer to another entity, all without prejudice to what is provided in Articles 44 bis.9 and 70 ter. 1 f) of this Law.

2. For the purposes of this Article, the Insolvency Judge and the insolvency administration bodies shall safeguard the rights derived from transactions in the process of liquidation at the moment insolvency is declared for an entity in charge of keeping the register of securities represented by book entries or for a participating entity in the registration system, taking into account the rules of the corresponding clearing, settlement, and registration system.

3. The registration system must offer the greatest guarantees so that there are no discrepancies between the recorded securities and the securities actually deposited in the entities in charge of keeping the register and in the participating entities in the registration system. Regulations may establish the situations in which possible incidents must be notified to the supervisory authorities, as well as the mechanisms and deadlines for their resolution.

In any case and without prejudice to what is provided in the previous paragraph, when securities with the same ISIN (International Securities Identification Number) code separated from the mass are not sufficient to fully satisfy the rights of the registered holders of securities with the same ISIN code, the deficit shall be distributed pro rata among all of them, without prejudice to the claim for compensation against the entity for the value of the unsatisfied portion in securities, which shall be satisfied pecuniarily.

4. When there are limited real rights or other types of encumbrances on the securities, and without prejudice to agreements between the guarantor and the beneficiary of the guarantee, once the pro rata rule is applied, such encumbrances shall be understood to be constituted on the result of the pro rata distribution and on the credits for the unsatisfied portion in securities.»

Two. Section 7 is introduced into Article 31 bis, which shall have the following wording:

«7. Transactions on shares and other negotiable securities equivalent to or giving the right to acquire shares, carried out in the multilateral trading segments of official secondary markets and multilateral trading facilities, shall be subject to mechanisms that allow their orderly settlement and successful completion through the necessary intervention of a Central Counterparty.»

Three. Sections 3, 4, and 7 of Article 44 bis are drafted as follows:

«3. The direct or indirect participation in the capital of the Systems Company shall be subject to the significant participation regime provided for in Article 69 of this Law for investment firms, as determined by regulation, understanding that any participation that reaches, directly or indirectly, at least 1 percent of the capital or voting rights of the Systems Company, or that, without reaching that percentage, allows exercising notable influence on the Company, as determined by regulation, shall always have such character.

Without prejudice to the powers of the National Securities Market Commission (CNMV) to oppose a significant participation as provided for in section 6 of said Article 69, the Minister of Economy and Finance, upon proposal of the CNMV, may oppose the acquisition or transfer of a significant participation in the capital of the Systems Company when deemed necessary to ensure the proper functioning of the markets or of the securities registration, clearing, and settlement systems, or to avoid distortions therein, as well as for the lack of equivalent treatment to Spanish entities in the acquirer's country of origin.

The bylaws of the Systems Company and their modifications, with the exceptions established by regulation, shall require prior approval by the CNMV. The appointment of the members of the Board of Directors, General Managers, and equivalent positions of the Systems Company shall be subject to prior approval by the CNMV.

The Systems Company must have at least an audit committee, a risk committee, and a nominations and remuneration committee. Additionally, it must have mechanisms for users and other interested parties to express their opinions on the performance of its functions and rules aimed at avoiding possible conflicts of interest to which it might be exposed as a consequence of its relations with shareholders, administrators and executives, participating entities, and clients. The Government, prior to the report of the CNMV and the Bank of Spain, may develop regulation on what is provided in this paragraph.

Furthermore, the specific functions of surveillance and control that it must exercise over its participating entities, solvency requirements, technical means, specific information obligations to the CNMV, and any other aspects considered necessary for its proper functioning, always taking into account proportionality criteria based on their level of activity, shall be determined by regulation.»

«4. The Systems Company shall be governed by this Law and its development regulations, as well as by a Regulation whose approval corresponds to the Minister of Economy and Finance, prior to the report of the CNMV, the Bank of Spain, and the Autonomous Communities whose Statutes of Autonomy recognize competencies in the matter of regulation of trading centers for securities. Said Regulation shall govern the operating regime of the Systems Company, the services provided by it, as well as its economic regime, the procedures for fixing and communicating tariffs, and the conditions and principles under which the Systems Company will provide the aforementioned services, and the legal regime of the participating entities in the systems managed by the Systems Company. In particular, it shall establish the legal regime of those participating entities that keep individualized accounts corresponding to the securities of those who do not hold such status. Likewise, the Regulation shall govern the procedures for managing the delivery of securities and their payment, as well as the guarantees of all types that participating entities may have to constitute based on the activities they develop in the systems managed by the Systems Company.»

«7. The Systems Company may establish agreements with resident and non-resident entities, public or private, that perform all or some analogous functions, Central Counterparties, or others, subject to what is provided in this Law, its development regulations, and the Regulation referred to in the previous section 4, for the opening and keeping of accounts, for the technical provision of clearing and settlement services for securities and cash, or for other activities of the Systems Company.

These agreements shall not alter the liability regime regarding the fulfillment of their obligations, nor may they imply the loss of control of the activity by the Systems Company.

The adoption and modification of these agreements shall require prior approval by the CNMV, prior to the report of the Bank of Spain or the Autonomous Community with competence in the matter, in the case of markets of autonomous scope.»

Four. Article 44 ter is drafted as follows:

«1. The Minister of Economy and Finance, prior to the report of the CNMV and the Bank of Spain, shall authorize Central Counterparties to perform functions of interposition on their own account, with respect to the clearing and settlement processes of obligations derived from the participation of member entities in the clearing and settlement systems of securities or financial instruments recognized in accordance with Law 41/1999, of 12 November, on payment systems and securities settlement systems, as well as with respect to transactions not carried out in official markets. The entity or entities thus authorized shall develop their activities subject to what is established regarding this matter in the corresponding Internal Regulation, which must be approved by the Minister of Economy and Finance prior to the report of the CNMV, the Bank of Spain, and the Autonomous Communities whose Statutes of Autonomy recognize competencies in the matter of regulation of trading centers for securities.

2. The regimes managed by Central Counterparties and their members shall be recognized as systems for the purposes of Law 41/1999, of 12 November, on payment systems and securities settlement systems, performing the function of receiving and accepting orders for the transfer of securities and money, clearing them, giving firmness to said operations, and communicating the results to a settlement system, to complete the corresponding execution operations.

The entities that are part of each of these systems shall be responsible for the functions they perform in such capacity.

To facilitate the exercise of their functions, Central Counterparties may access the status of participant in the Systems Company.

3. Central Counterparties shall take the form of a joint-stock company legally separate from the Systems Company. Their bylaws and their modifications, with the exceptions established by regulation, shall require prior authorization by the holder of the Ministry of Economy and Finance, prior to the report of the CNMV. Likewise, they must have the minimum capital and own resources adequate to their activity that regulates