16Legal doctrine and market infrastructure

The first conclusion derived from the analysis contained in this book is that legal doctrine determines the form of future legal development. Having determined the influence of incumbent legal doctrine on future legal doctrine, a second observation can be made.

It has already been noted in section 1.2.1 that a view exists that incumbent institutions have an influence on the development of future institutions. Mark Roe makes the point that the shareholder structure prevailing in one jurisdiction exercises an influence to prevent change which would be efficient from an overall market perspective, but which would cause incumbent power-holders to lose influence. Roe refers to this phenomenon as ‘structure-driven path-dependence’. In addition to structure-driven path-dependence, rule-driven path-dependence also exists. Rule-driven path-dependence occurs because law determines the framework within which institutions act. Law is, however, subject to politics and also to institutional pressures. Institutions will use their influence to cause the law to suit their own political objectives. In Mark Roe’s analysis, institutions come first; they are themselves a function of politics or even historical accidents. Law is a secondary indirect factor which facilitates political influence and can be modified to any desired degree.

The analysis contained in this book sheds further light on the relationship between law and institutions. It confirms the theory that the institutions prevailing in a jurisdiction influence future development. In England, for example, the process of eliminating paper from securities transfers was beset with difficulties because of institutional lobbying.1 The first attempt to put in place reform had to be abandoned and

1 See section 3.2.

231

232 C O N C L U S I O N S

the Bank of England had to step in to take over the reform process. Institutional pressures operated to delay market infrastructure reform.

When institutional pressures were overcome and the Bank of England succeeded in dematerialising securities transfers, the legal form in which dematerialisation was carried out was determined by the legal doctrinal rules governing securities prior to dematerialisation. Law in this context did not operate as a factor which could have been modified to any degree at the discretion of political institutions. Legal doctrine rather set the boundaries within which institutions felt compelled to remain. This does not prejudice the outcome of change, but it determines the form which the rules facilitating reform take. Legal doctrine does not prevent England from replacing registrars with a central register; but legal doctrine requires English law to organise securities transfers around a register in which the names of securities holders are entered.

Moreover, the type of institutions that have emerged in England, Germany and Austria can be explained by the legal doctrinal rules in place in all three jurisdictions. In England, there exist registrars which administer securities transfers on behalf of issuers. For uncertificated securities the issuer register is kept centrally by CREST, which serves as the registrar for some, but not all, purposes. The existence of this particular branch of the financial services industry can be explained by the fact that English securities are registered securities which require the issuer to maintain a record of the names and certain particulars of securities holders. The analysis presented in this book showed that the involvement of the issuer in securities transfer historically occurred because securities were originally transferable only by novation. The legal doctrinal rules that were in place when securities were first issued in England caused a certain financial infrastructure to arise.2

The same observation is true for German and Austrian law.3 In both jurisdictions, legal doctrine protects transferees against adverse claims by limiting the entitlements of previous owner. This created a need for investors to keep securities documents safe, which in turn led to the emergence of a financial services provider offering depository services.

The second thesis advanced in this book is that law not only receives impulses from politics, economics, culture, social and commercial norms that trigger future legal development. Law also sends impulses to other subsystems of society: legal doctrine can determine the form of market infrastructure prevailing in a jurisdiction.

2 See chapter 4. 3 See section 10.3.