UNIDROIT Legislative Guide

on Intermediated Securities

Implementing the Principles and Rules

of the Geneva Securities Convention

UNIDROIT
 
 
 
 
 
 
Suggested form of citation:
Guide on Intermediated
Securities

 
 
 
 
 
 
 

Published by the
International Institute for the Unification of Private Law
(UNIDROIT)
Via Panisperna, 28 - 00184 Rome - ITALY
 
 
 
 
 
 
Copyright
 International Institute for the Unification of Private Law (UNIDROIT)
 
 

PREFACE

It gives us great pleasure to present, on behalf of the International

Institute for the Unification of Private Law (UNIDROIT), the
UNIDROIT Legislative Guide on Intermediated Securities, which
the UNIDROIT Governing Council adopted at its 96th session
(Rome, 10-12 May 2017).

The Guide is the third instrument resulting from UNIDROIT’s work

in the area of capital markets law, which has sought to promote
legal certainty and sustainable growth in this very significant
area of economic activity. The Guide is intended to complement
and promote the first instrument – the UNIDROIT Convention on
Substantive Rules for Intermediated Securities, which was
adopted at the final session of the diplomatic Conference to adopt
a Convention on Substantive Rules regarding Intermediated
Securities (Geneva, 5-9 October 2009) – by summarising the
Convention’s key principles and rules and by offering guidance
on choices to be made and matters to be addressed or clarified in
establishing an intermediated securities holding system or
evaluating an existing one. The Guide also complements and
promotes the second instrument – the UNIDROIT Principles on the
Operation of Close-Out Netting Provisions, which were adopted
by the UNIDROIT Governing Council at its 92nd session (Rome,
8-10 May 2013) – by offering guidance consistent with those
Principles and incorporating references to them.

The Guide is the result of extensive research, deliberations and

teamwork. In addition to adopting the Geneva Securities
Convention, the diplomatic Conference established a Committee
on Emerging Markets Issues, Follow-Up and Implementation to
assist with the Convention’s promotion and implementation. That
Committee – made up of governmental experts and
representatives, observers and interested stakeholders – provided
guidance on the development of the Guide at its first three
meetings (Rome, 6-8 September 2010; Rio de Janeiro, 27-28
March 2012; and Istanbul, 11-13 November 2013). Using the
Committee’s guidance, an informal group of renowned experts
iv GUIDE ON INTERMEDIATED SECURITIES

prepared and reviewed, with the assistance of the UNIDROIT

Secretariat, a draft of the Guide over the course of three meetings
at UNIDROIT’s seat in Rome (23-24 October 2015; 16-17 May
2016; and 12-13 December 2016), as well as via
videoconferences. The draft Guide was twice circulated broadly
for review and comments by States, international organisations
and stakeholders: first, in advance of the informal experts
group’s third meeting for consideration at that meeting; and
second, in advance of the Committee’s fourth meeting. At the
latter meeting (Beijing, 29-30 March 2017), the Committee
considered in detail the draft Guide and the comments received,
agreeing upon certain amendments and additions and
ultimately recommending that the Guide, as revised, be submitted
to the UNIDROIT Governing Council for review and adoption at
its 96th session (Rome, 10-12 May 2017).

UNIDROIT would like to express its deepest gratitude to the

members of the informal experts group and to the members,
observers and representatives of the Committee, without whom
the successful preparation of the Guide would not have been
possible. Particular mention is deserved by Mr Hideki Kanda
(Member, UNIDROIT Governing Council), who provided
tremendous leadership and expertise in chairing the informal
experts group, and by Ms Niu Wenjie (People’s Republic of
China) and Mr Alexandre Pinheiro dos Santos (Brazil), who
kindly served as co-chairs of the Committee and very ably led the
Committee’s work.

Special thanks go to the translation team at the China Securities

Depository and Clearing Corporation Ltd., including Ms Niu, Mr
Zhang Yunhui, Ms Jiang Lan, Ms Wu Jing, Ms Wei Qing, Ms Li
Weiye and Ms Li Nan, for preparing the Chinese version of the
Guide; Mr Jesús García Aparicio (Cuatrecasas, Madrid) for
preparing the forthcoming Spanish version of the Guide in
co-operation with Mr Francisco J. Garcimartín Alférez (Faculty
of Law, Universidad Autónoma of Madrid); and Mr Solomon
Ngoladi (Securities and Exchange Commission, Nigeria) and Mr
Matteo Solinas (Faculty of Law, Victoria University of

 
 PREFACE v

Wellington) for their contributions to the Guide during their

fellowship and consultancy with UNIDROIT respectively.

Special thanks also go to the members of the Secretariat, in

particular Mr Neale Bergman for providing outstanding
assistance by ensuring consistency in style, offering crucial input
on substance to the informal experts group and writing some
portions of the Guide; Ms Frédérique Mestre for her thorough
and extensive work in preparing the French version of the Guide
in co-operation with Mr Luc Thévenoz (Faculty of Law,
University of Geneva); and Ms Isabelle Dubois for her excellent
secretarial support.

Last but by no means least, UNIDROIT would like to express its

sincere appreciation to the generous hosts of the Committee’s
meetings, in particular the Brazilian Securities and Exchange
Commission, the Capital Markets Board of Turkey, the China
Securities Regulatory Commission and the China Securities
Depository and Clearing Corporation Ltd.

José Angelo Estrella Faria Alberto Mazzoni

Secretary-General President
UNIDROIT UNIDROIT
 
 THE UNIDROIT GOVERNING COUNCIL
(2014-2018)
Alberto MAZZONI President of UNIDROIT
Stefania BARIATTI Italy
Radu Bogdan BOBEI Roumania
Hans-Georg BOLLWEG Germany
Núria BOUZA VIDAL Spain
Baiba BROKA Latvia
B. Bahadir ERDEM Turkey
Henry D. GABRIEL United States of America
Arthur S. HARTKAMP Netherlands
Monique JAMETTI Switzerland
Hideki KANDA Japan
Miklós KIRÁLY Hungary
Alexander S. KOMAROV Russian Federation
Antti T. LEINONEN Finland
LYOU Byung-Hwa Republic of Korea
José Antonio MORENO RODRÍGUEZ Paraguay
Jan Lambert NEELS South Africa
Monika PAUKNEROVÁ Czech Republic
Wojciech POPIOŁEK Poland
Jorge SÁNCHEZ CORDERO DÁVILA Mexico
Rachel SANDBY-THOMAS United Kingdom
Álvaro SANDOVAL BERNAL Colombia
SHI Jingxia People’s Republic of China
Daniel TRICOT France
Spyridon VRELLIS Greece
Roger WILKINS Australia
 

vii
 
 CONTENTS

PREFACE iii 
THE UNIDROIT GOVERNING COUNCIL (2014-2018) vii 
LIST OF CONTRIBUTORS xvii 
LIST OF ABBREVIATIONS xix 
GLOSSARY xxi 
LIST OF LEGISLATIVE PRINCIPLES xxxi 
GENERAL INTRODUCTION 1 
PART I - OVERVIEW ON SECURITIES 3 
A.  Basics of securities and securities holding 3 
1.  Non-intermediated securities 4 
2.  Intermediated securities 5 
3.  Common securities transactions 6 
4.  Securities holding chains 7 
a.  Non-intermediated holding 8 
b.  Intermediated holding 9 
5.  Risks associated with intermediated securities 16 
B.  Intermediated securities holding models 16 
1.  Individual ownership model 17 
2.  Co-ownership model 18 
3.  Trust model 19
 

ix
x GUIDE ON INTERMEDIATED SECURITIES
 

4.  Security entitlement model 20 

5.  Contractual model 21 
6.  Identification of the investor: transparent and non-
transparent systems 22 
7.  Cross-border holdings involving multiple systems 26 
PART II - THE GENEVA SECURITIES CONVENTION 28 
A.  Purpose 28 
1.  Legal and systemic risk 28 
2.  Harmonisation to reduce risk and promote
sustainable economic growth 29 
B.  Approach 30 
C.  Terminology 32 
D.  Scope 34 
E.  Law outside of the Convention 35 
PART III - RIGHTS OF ACCOUNT HOLDERS AND DUTIES
AND LIABILITIES OF INTERMEDIARIES 38 
A.  Rights of account holders 38 
1.  Core Convention principles and rules 39 
2.  Choices to be made by declaration 40 
3.  Matters to be addressed or clarified 40 
a.  Rights accruing to account holders 41 
b.  Limited interests 44 
c.  Cross-border situations 45 
B.  Measures to enable the exercise of rights of
account holders 46 
 

 
 CONTENTS xi
 

1.  Core Convention principles and rules 47

2.  Choices to be made by declaration 48 
3.  Matters to be addressed or clarified 49 
a.  Passing on information and distributions
received 50 
b.  Enabling the exercise of other rights against
the issuer 50 
c.  Giving effect to authorised instructions 51 
d.  Specifying the manner of complying with
Convention obligations 52 
C.  Liability of intermediaries 53 
PART IV - TRANSFER OF INTERMEDIATED
SECURITIES 55 
A.  Acquisition and disposition of intermediated
securities 55 
1.  Transfer by debit and credit method 55 
a.  Core Convention principles and rules 55 
b.  Choices to be made by declaration 56 
c.  Matters to be addressed or clarified 57 
2.  Transfer by other methods 59 
a.  Core Convention principles and rules 59 
b.  Choices to be made by declaration 60 
c.  Matters to be addressed or clarified 63 
B.  Unauthorised dispositions and invalidity, reversal
and conditions 65 
1.  Core Convention principles and rules 65 
2.  Choices to be made by declaration 67 
3.  Matters to be addressed or clarified 67 

xi
xii GUIDE ON INTERMEDIATED SECURITIES

a.  Defining authorisation of dispositions and the

consequences of unauthorised dispositions 67 
b.  Clarifying validity requirements and
conditions of book-entries 68 
C.  Protection of an innocent acquirer 68 
1.  Core Convention principles and rules 68 
2.  Choices to be made by declaration 72 
3.  Matters to be addressed or clarified 72 
D.  Priorities 72 
1.  Core Convention principles and rules 73 
2.  Choices to be made by declaration 74 
a.  Declaration regarding priority of interests
granted by designating entry 74 
b.  Declaration regarding transitional provision 74 
3.  Matters to be addressed or clarified 75 
a.  Non-consensual security interests 75 
b.  Priorities regarding interests granted by non-
Convention methods 76 
c.  Priorities of interests granted by an
intermediary 76 
PART V - INTEGRITY OF THE INTERMEDIATED
HOLDING SYSTEM 77 
A.  Prohibition of upper-tier attachment 77 
1.  Core Convention principles and rules 77 
2.  Choices to be made by declaration 78 
3.  Matters to be addressed or clarified 80 
B.  Prevention of shortfalls and allocation of securities 80 
1.  Core Convention principles and rules 81 
a.  Sufficient securities 81 
 CONTENTS xiii

b.  Allocation 81 

2.  Choices to be made by declaration 84 
a.  Sufficient securities 84 
b.  Allocation 84 
3.  Matters to be addressed or clarified 85 
a.  Sufficient securities: Available methods, time
frame for action, and allocation of costs and
other consequences 85 
b.  Allocation and segregation 86 
C.  Securities clearing and settlement systems 86 
1.  Core Convention principles and rules 86 
2.  Choices to be made by declaration 88 
3.  Matters to be addressed or clarified 88 
D.  Issuers 89 
1.  Core Convention principles and rules 89 
2.  Choices to be made by declaration 94 
3.  Matters to be addressed or clarified 94 
PART VI - INSOLVENCY PROTECTION 96 
A.  Core Convention principles and rules 96 
1.  Effectiveness in insolvency in general 97 
2.  Effectiveness in the insolvency of the relevant
intermediary 97 
3.  Loss sharing in case of insolvency of
the intermediary 98 
B.  Choices to be made by declaration 98 
C.  Matters to be addressed or clarified 98 
1.  General observations 98 
2.  Loss sharing 99 
xiv GUIDE ON INTERMEDIATED SECURITIES

3.  Priority of interests granted by intermediary 100 

4.  Account holder protection fund or insurance 100 
5.  Transfer of account holder securities accounts
to solvent intermediary 101 
6.  Rights of an intermediary’s creditors and
segregation 101 
7.  Limitations on ranking of categories of claims
and avoidance powers 101 
8.  Stay of enforcement and close-out netting 102 
9.  Special provisions in relation to collateral
transactions 102 
10.  Return of account holder assets and funds 102
11.  Intermediary access to SCSs and SSSs and assets
held in such systems or otherwise as collateral 103 
12.  Intermediary access to information, records, and
information technology systems 103 
13.  Enhanced regulation and supervision of
intermediaries, exchanges and alternative
trading systems, SCSs, and SSSs 103 
PART VII - SPECIAL PROVISIONS IN RELATION
TO COLLATERAL TRANSACTIONS 104 
A.  Core Convention principles and rules 104 
B.  Choices to be made by declaration 107 
C.  Matters to be addressed or clarified 108 
1.  Extra rights for collateral takers 108 
2.  Commercial reasonableness 108 
3.  New regulatory framework 109 
4.  Close-out netting 109 
5.  Secured transactions law 109 
 CONTENTS xv

PART VIII - CONFLICT OF LAWS ASPECTS 110 

A.  The Convention’s sphere of application 111 
B.  Traditional conflict of laws rules and their
modernisation 112 
C.  The Convention’s “tier-by-tier” approach and its
interaction with conflict of laws rules 113 
D.  Other conflict of laws rules 115 
PART IX - OTHER INSTRUMENTS AND REGULATIONS
AND IMPLEMENTATION 117 
A.  Links to other international instruments or
regulations 117 
B.  Overview of implementation in a domestic legal
framework 119 
ANNEX 1 - REFERENCES TO “NON-CONVENTION LAW” 123 
ANNEX 2 - REFERENCES TO “APPLICABLE LAW” 131 
ANNEX 3 - REFERENCES TO RULES RELATING
TO INSOLVENCY 133 
ANNEX 4 - REFERENCES TO UNIFORM RULES OF
SCSS AND SSSS 136 
 
 LIST OF CONTRIBUTORS

Hideki KANDA, Emeritus Professor, University of Tokyo and

Professor of Law, Gakushuin University, member of the
UNIDROIT Governing Council, Chair of the Informal Group of
Experts

Philippe DUPONT, Partner, Arendt & Medernach

Dorothee EINSELE, Professor of Law, University of Kiel

Francisco J. GARCIMARTÍN ALFÉREZ, Professor of Law,

Universidad Autónoma de Madrid

Philippe GOUTAY, Partner, Jones Day

Thomas KEIJSER, Senior Researcher, Radboud University

Maria Chiara MALAGUTI, Professor of Law, Catholic

University of the Sacred Heart

Charles W. MOONEY, JR, Professor of Law, University of

Pennsylvania

Luc THÉVENOZ, Professor of Law, University of Geneva

WU Jing, Senior Manager, Legal Department, China Securities

Depository and Clearing Corporation Ltd.

xvii
 
 

 
 
LIST OF ABBREVIATIONS
 
 
BCBS Basel Committee on Banking Supervision
 
BIS Bank for International Settlements
 
CCP Central counterparty
 
CPMI Committee on Payments and Market
Infrastructure, Bank for International Settlements
 
CSD Central securities depository
 
ESMA European Securities and Markets Authority
 
EU European Union
 
FMI Financial markets infrastructure
 
FSAP Financial Sector Assessment Program
 
FSB Financial Stability Board
 
Geneva The UNIDROIT Convention on Substantive Rules
Securities for Intermediated Securities (2009)
Convention
 

Hague Convention on the Law Applicable to Certain

Securities Rights in Respect of Securities held with an
Convention Intermediary (2006)
 
 

xix 
xx GUIDE ON INTERMEDIATED SECURITIES
 

 
IMF International Monetary Fund
 
IOSCO International Organization of Securities
Commissions
 
PRIMA Place of relevant intermediary approach
 
SCS Securities clearing system
 
SSS Securities settlement system
 
UNCITRAL United Nations Commission on International
Trade Law
 
UNIDROIT International Institute for the Unification of
Private Law

 
 GLOSSARY

The Glossary contains brief definitions or descriptions for key

terms in the Guide. It includes the definitions or descriptions
provided by the Geneva Securities Convention and the Official
Commentary and, for other terms, relies to the extent possible on
the definitions provided by CPMI’s glossary of terms used in
payments and settlements systems.
Account agreement
The agreement between the account holder and the relevant
intermediary governing the securities account. See paragraph 108.
Account holder
A person in whose name an intermediary maintains a securities
account, whether that person is acting for its own account or for
others (including in the capacity of intermediary). See
paragraph 70.
Applicable law
The law that is applicable by virtue of the private international
law rules of the forum. The applicable law may, or may not, be
the law of a Contracting State to the Geneva Securities
Convention (i.e. the non-Convention law). See paragraph 75.
Book entry
An electronic recording of securities or other financial assets. The
transfer of book-entry securities and other financial assets does
not involve the physical movement of paper documents or
certificates. See paragraph 16.
Book-entry system
A mechanism that enables market participants to transfer assets
(for example, securities) without the physical movement of paper
documents or certificates. See paragraph 16.

xxi
xxii GUIDE ON INTERMEDIATED SECURITIES

Central counterparty (CCP)

An entity which operates as the buyer for every seller and as the
seller for every buyer so that the parties only bear the credit risk
of the CCP. See paragraph 20.
Central securities depository (CSD)
An entity that provides the initial recording of securities in a
book-entry system or that provides and maintains the securities
accounts at the top tier of the intermediated holding chain. The
entity may provide additional services such as clearing,
settlement and processing corporate actions. It plays an important
role in helping to ensure the integrity of securities issues. See
paragraph 16.
Claw back
A statutory provision entitling an insolvency administrator to
recover benefits, funds or other assets which have been unduly
transferred to third parties before filing for insolvency. Claw back
can also refer to a contractual provision regarding the benefits,
funds or other assets which have been given out but need to be
returned due to certain special circumstances which were
predefined in the contract. See paragraph 274.
Clearing
The process of transmitting, reconciling and, in some cases,
confirming transactions prior to settlement, potentially including
the netting of transactions and the establishment of final positions
for settlement. Sometimes this term is also used (imprecisely) to
cover settlement. See paragraph 21.
Close-out netting provision
A provision of a collateral agreement, or of a set of connected
agreements of which a collateral agreement forms part, under
which, on the occurrence of an enforcement event, either or both
of the following shall occur, or may at the election of the collateral
taker occur, whether through the operation of netting or set-off or
otherwise: (a) the respective obligations of the parties are
accelerated so as to be immediately due and expressed as an
obligation to pay an amount representing their estimated current
 GLOSSARY xxiii

value or are terminated and replaced by an obligation to pay such

an amount; (b) an account is taken of what is due from each party
to the other in relation to such obligations, and a net sum equal to
the balance of the account is payable by the party from whom the
larger amount is due to the other party. See paragraphs 272
and 289.
Control agreement
An agreement in relation to intermediated securities between an
account holder, the relevant intermediary and another person or,
if so provided by the non-Convention law, between an account
holder and the relevant intermediary or between an account
holder and another person of which the relevant intermediary
receives notice, which includes either or both of the following
provisions: (a) that the relevant intermediary is not permitted to
comply with any instructions given by the account holder in
relation to the intermediated securities to which the agreement
relates without the consent of that other person; or (b) that the
relevant intermediary is obliged to comply with any instructions
given by that other person in relation to the intermediated securities
to which the agreement relates in such circumstances and as to such
matters as may be provided by the agreement, without any further
consent of the account holder. See paragraph 141.
Corporate actions
Events called or initiated by an issuer of securities concerning the
securities and the holders of the securities. See rights attached to
the securities and paragraph 110.
Corporate law
The area of law dealing with the formation and operation of a
company, which in particular includes the rights of shareholders.
See paragraph 72.
Dematerialisation
The issuance (or re-issuance) of securities which are not
represented by a physical certificate. The issue is usually
documented by a record maintained by the issuer or a CSD or
some other intermediary. The securities issued are credited to
xxiv GUIDE ON INTERMEDIATED SECURITIES

securities accounts and held and transferred by way of book

entries in securities accounts. See paragraph 17.
Designating entry
An entry in a securities account made in favour of a person
(including the relevant intermediary) other than the account
holder in relation to intermediated securities, which, under the
account agreement, a control agreement, the uniform rules of a
SSS or the non-Convention law, has either or both of the
following effects: (a) that the relevant intermediary is not
permitted to comply with any instructions given by the account
holder in relation to the intermediated securities as to which the
entry is made without the consent of that person; or (b) that the
relevant intermediary is obliged to comply with any instructions
given by that person in relation to the intermediated securities as
to which the entry is made in such circumstances and as to such
matters as may be provided by the account agreement, a control
agreement or the uniform rules of a SSS, without any further
consent of the account holder. See paragraph 141.
Functional approach
An approach using language that is as neutral as possible and
which formulates rules by reference to their results. For example,
because confusion can easily arise from the varying traditions and
conceptual frameworks of different systems of law, under the
functional approach adopted by the drafters of the Geneva
Securities Convention, terms such as “property” and “proprietary
interests” were avoided, and instead more generic language such
as “effects against third parties” was used. See paragraph 67.
Global or jumbo certificate
In the context of the immobilisation of securities, a certificate
held in a book-entry system that represents all or part of the
securities of a particular issue. See paragraph 16.
Immobilisation
The act of durably concentrating the holding of securities
certificates with a depository to allow the crediting of an equal
amount of securities to securities accounts and the transferability
of such securities by way of book entry. See paragraph 16.
 GLOSSARY xxv

Intermediary
A person (including a CSD) who in the course of a business or
other regular activity maintains securities accounts for others or
both for others and for its own account and is acting in that
capacity. See paragraph 70.
Intermediated holding chain
A term used to describe the relationship and interaction among
the (possibly many) tiers of participants in an intermediated
securities holding system. See paragraph 15.
Intermediated securities
Securities credited to a securities account or rights or interests in
securities resulting from the credit of securities to a securities
account. See paragraph 15.
Investor
A person or entity, such as individuals, companies, pension funds
and collective investment funds, who acquire securities to make
a profit or gain an advantage. See paragraph 22.
Issuer
A government or entity such as a company which issues
securities. See paragraph 22.
Law outside the Convention
Law which may include non-Convention law, applicable law,
insolvency rules or uniform rules of the SCSs and SSSs. See
paragraph 75 and Annexes 1-4.
Negative control
A type of control in which the relevant intermediary is not
permitted to comply with any instructions given by the account
holder in relation to intermediated securities for which a
designating entry or control agreement has been made without the
consent of the person in whose favour such entry or agreement
was made. See paragraph 146.
xxvi GUIDE ON INTERMEDIATED SECURITIES

Netting arrangements
An arrangement by which debits and credits in respect of
securities of the same description may be effected on a net basis.
See paragraph 136.
“No credit without debit” rule
A rule whereby any credit to a securities account must have a
corresponding debit to another securities account. See paragraph
130 et seq.
Non-Convention law
The law in force in the Contracting State referred to in Article 2
of the Geneva Securities Convention other than the provisions of
that Convention. See paragraph 75 and Annex 1.
Omnibus account
An account of a relevant intermediary with its own (next-tier)
intermediary in which securities held for more than one customer
of the relevant intermediary are commingled. See paragraphs 51
and 213. This term may also refer to such an account in which
securities held for customers of the relevant intermediary are
commingled with securities the relevant intermediary holds for its
own account.
Positive control
A type of control in which the relevant intermediary is obliged to
comply with any instructions given by the person in whose favour
a designating entry or control agreement had been made in
relation to intermediated securities in such circumstances and for
such matters as may be provided by the account agreement, a
control agreement or the uniform rules of a SSS, without any
further consent of the account holder. See paragraph 146.
Priority
Ranking among competing interests with respect to the same
intermediated securities. See paragraph 182.
 GLOSSARY xxvii

Private law
The area of law which regulates the relationships between
individuals and private entities (e.g. contract law, tort law, etc.).
See paragraph 75.
Relevant intermediary
The intermediary that, in relation to a securities account,
maintains that securities account for the account holder. See
paragraph 43.
Rights attached to the securities
Rights which accrue to a holder of securities by virtue of holding
the securities, such as dividends, other distributions, and voting
rights, as well as the right to receive information necessary for
account holders to exercise those other rights. See paragraph 24.
Securities account
An account maintained by an intermediary to which securities
may be credited or debited. See paragraphs 15 and 70.
Securities clearing system (SCS)
A system that clears, but does not settle, securities transactions
through a CCP or otherwise and is operated by a central bank or
central banks or is subject to regulation, supervision or oversight
by a governmental or public authority in relation to its rules. To
qualify as a SCS under the Geneva Securities Convention, it must
also be identified as such in a declaration made by the Contracting
State the law of which governs the system on the ground of the
reduction of risk to the stability of the financial system. See
paragraph 70.
Securities settlement system (SSS)
A system that settles, or clears and settles, securities transactions
and is operated by a central bank or central banks or is subject to
regulation, supervision or oversight by a governmental or public
authority in relation to its rules. To qualify as a SSS under the
Geneva Securities Convention, it must also be identified as such
in a declaration made by the Contracting State the law of which
xxviii GUIDE ON INTERMEDIATED SECURITIES

governs the system on the ground of the reduction of risk to the

stability of the financial system. See paragraph 70.
Security interest
A limited interest in assets (such as a lien, pledge, charge, or title
transfer) which secures an obligation. See paragraph 19.
Segregated account
An account structure in which a specific intermediary holds the
securities belonging to one or more account holders in an account
with its own (relevant) intermediary that is distinct (segregated)
from the securities its holds for itself or for other account holders.
See paragraph 213.
Settlement
A process which discharges the obligations arising out of the
agreement of the parties to transfer securities. Securities
settlement may represent the conclusion and fulfilment of a stock
exchange transaction between two or more parties (i.e. a trading
object is exchanged for a cash counter value). Resulting
obligations can be redeemed either in central bank or book
money. Settlement is normally preceded by clearing. See
paragraph 21.
Transfer
The acquisition and disposition of intermediated securities and
any limited interests (e.g. security interests) therein. See
paragraph 123 et seq.
Transparent systems
Systems in which an investor’s particular holdings are identified
by, or known to, the CSD primarily because the role of
maintaining a securities account is shared between the CSD
(which is the relevant intermediary for the purpose of the Geneva
Securities Convention and the Guide) and other persons often
called account operators, such as investment firms, securities
dealers, etc. See paragraph 51.
 GLOSSARY xxix

Upper-tier attachment
An attachment of intermediated securities at any level in the chain
above its debtor’s immediate intermediary, which is generally
prohibited in the Geneva Securities Convention. See paragraph
199.
Usufruct

A limited and temporary proprietary interest in intermediated

securities which the owner of those securities confers on a person
and which entitles that person to derive income or benefit from
that property. See paragraph 94.
 LIST OF LEGISLATIVE PRINCIPLES

Legislative Principle 1 (Rights of account holders): The

Convention provides any account holder with a core set of rights
resulting from the credit of securities to a securities account. The
law should establish additional rights consistent with how it
characterises the legal position of account holders. It may
distinguish between the rights enjoyed by an investor (including
an intermediary acting for its own account) and those accruing to
an intermediary acting in its capacity of intermediary.

Legislative Principle 2 (Measures to enable the exercise of

rights of account holders): The Convention provides one general
and four specific obligations of intermediaries to their account
holders. The law should establish specific contents for these
duties and, if necessary, expand them in a manner consistent with
its own characterisation of an account holder’s legal position. The
law should also specify the manner in which an intermediary may
comply with its obligations and determine the conditions under
which an intermediary becomes liable. In transparent systems,
where intermediary functions are shared between the CSD and
account operators, the law should clearly allocate the respective
responsibilities, and the Contracting State must make a
declaration in this respect.

Legislative Principle 3 (Liability of intermediaries): The

Convention does not specify the liability of intermediaries. The
law should clearly establish the conditions and the extent of such
liability, and whether it may be exempted by way of contractual
provisions.

Legislative Principle 4 (Acquisition and disposition of

intermediated securities): The Convention provides that
intermediated securities or any limited interests therein may be
transferred by debits and credits. The law also may adopt any one
or more of the other methods specified by the Convention.

xxxi
xxxii GUIDE ON INTERMEDIATED SECURITIES

Legislative Principle 5 (Unauthorised dispositions and

invalidity, reversal and conditions): The Convention provides
that an intermediary may only dispose of intermediated securities
with the authorisation of the person(s) affected by the disposition.
The law may provide for other cases of authorised dispositions,
and it should establish the consequences of unauthorised
dispositions. The law should also determine whether and in what
circumstances a book entry is invalid, reversible, or conditional,
and the consequences thereof.

Legislative Principle 6 (Protection of an innocent acquirer):

The Convention provides that an innocent acquirer who acquires
for value is protected against adverse claims. This protection
covers instances in which (a) another person has an interest in
intermediated securities which is violated by the acquisition, and
(b) the acquisition could be affected by an earlier defective entry.
The law may extend the scope of this protection.

Legislative Principle 7 (Priorities): The Convention provides

clear priority rules that apply among competing claimants to the
same intermediated securities. The law may supplement and
adjust these priority rules. The law should address priority
contests that are not resolved by the Convention.

Legislative Principle 8 (Prohibition of upper-tier attachment):

The Convention, with limited exceptions, prohibits any attachment
of intermediated securities of an account holder against, or so as
to affect (a) a securities account of any person other than that
account holder, (b) the issuer of any securities credited to a
securities account of that account holder, or (c) a person other than
the account holder and the relevant intermediary.

Legislative Principle 9 (Prevention of shortfalls and allocation

of securities): The Convention requires intermediaries to prevent
shortfalls, notably by holding or having available sufficient
securities to cover credits to securities accounts that these
intermediaries maintain. The law should regulate the method,
manner, and time frame for compliance.
 LIST OF LEGISLATIVE PRINCIPLES xxxiii

The Convention also requires intermediaries to allocate securities

to account holders’ rights. The law may establish a specific form
of segregation as a method of allocation.

Legislative Principle 10 (Securities clearing and settlement

systems): The Convention recognises the systemic importance of
securities clearing or settlement systems, and in some instances
allows derogations to the rules of the Convention to the extent
permitted by the law applicable to the system. The law should
only allow for derogations to the Convention rules where such
derogations are necessary to ensure the integrity of the local
securities clearing or settlement systems.
The law should clearly determine when an instruction or a
transaction within a securities clearing or settlement system
becomes irrevocable and final, notwithstanding the insolvency of
the operator of the system or one of its participants.

Legislative Principle 11 (Issuers): The Convention generally

does not deal with the relationships between account holders and
issuers. The law should clearly define the persons entitled to
exercise the rights attached to the securities vis-à-vis the issuer
and the conditions for such exercise. The law should facilitate the
exercise of those rights by the ultimate account holder, in
particular, by allowing intermediaries who act on behalf of
account holders to exercise voting rights or other rights in
different ways, and should recognise holding through
representatives other than intermediaries (i.e. nominees).
In the insolvency proceeding of an issuer, the Convention
provides that an account holder is not precluded from exercising
a right of set-off merely because it holds securities through
intermediaries.

Legislative Principle 12 (Insolvency protection): The

Convention establishes important insolvency proceeding-related
rules on the interests made effective against third-parties and
provides loss- sharing rules in case of a shortfall of account
holder securities.
xxxiv GUIDE ON INTERMEDIATED SECURITIES

However, the law should address many other important and

relevant features of insolvency and regulatory law that the
Convention leaves to it.

Legislative Principle 13 (Special provisions in relation to

collateral transactions): The law should establish clear and
sound rules in relation to collateral transactions involving
intermediated securities. The Convention provides optional rules
in relation to such transactions, whether by way of security
collateral agreement or title transfer collateral agreement. Other
international instruments and documents, reflecting lessons of the
financial crisis, provide further guidance on regulatory, private
and insolvency law issues involved.

Legislative Principle 14 (Conflict of laws aspects): As the

Convention does not contain conflict of laws rules, the law should
establish clear and sound conflict of laws rules in relation to
intermediated securities.

Legislative Principle 15 (Other instruments and regulations and

implementation): Lawmakers should consider the various
instruments and guidance that is available in order to develop and
implement an intermediated securities holding system which is
tailored to their legal and economic context and consistent with
the principles and rules contained in the Guide. 
 GENERAL INTRODUCTION

The UNIDROIT Legislative Guide on Intermediated

Securities (the Guide) addresses important matters to be
considered in the creation of an intermediated securities holding
system or the evaluation of an existing system. The Guide
summarises the key principles and rules from the UNIDROIT
Convention on Substantive Rules for Intermediated Securities
(the Geneva Securities Convention or the Convention) and offers
recommendations and guidance on those principles and rules as
well as related matters not addressed in the Convention.

As the Convention’s drafters adopted a core and

functional harmonisation approach, the Convention provides
harmonised rules regarding certain intermediated securities
issues, but also leaves various issues to be defined and determined
by other rules of law in force in a Contracting State. The Guide
complements the Convention by addressing these issues and, like
the Convention, seeks to improve the legal framework for holding
and transfer of intermediated securities, in order to enhance the
internal soundness of domestic financial markets and their cross-
border compatibility and, as such, to promote sustainable capital
formation. In particular, the Guide explains what is and what is
not covered by the Convention and provides guidance for States
to consider in creating an intermediated securities holding system
or evaluating an existing one. The Guide thus makes clear that the
Convention is capable of accommodating different domestic
holding systems and rendering their interactions significantly less
risky and more predictable.

The Guide further seeks to promote the creation of

comprehensive and coherent sets of legal rules for intermediated
securities in two ways. First, in complementing the Convention,
it is hoped that the Guide will promote its adoption and
implementation. Second, in summarising the Convention’s key
principles and rules, it is hoped that, even where the Convention
is not adopted, such principles and rules could be chosen and

1
2 GUIDE ON INTERMEDIATED SECURITIES

implemented in those systems. Either way, the end result would

be enhanced legal certainty and economic efficiency with respect
to the holding and transfer of intermediated securities, in both
domestic and cross-border situations.

The Guide is structured in nine Parts. Part I provides an

overview on securities, describing their origins and development
and identifying five general models of intermediated securities
holding systems. Part II describes in brief the Geneva Securities
Convention, including its purpose to reduce legal uncertainty and
risk, its core and functional harmonisation approach, and the
important role of law outside the Convention. Parts III-VII
identify legislative principles, summarise key principles and rules
regarding holding and transfer of intermediated securities, and
explain their interaction with law outside the Convention. These
Parts include coverage of the rights of account holders and the
duties and liabilities of intermediaries (Part III), the transfer of
intermediated securities (Part IV), the integrity of the
intermediated holding system (Part V), insolvency protection
(Part VI), and special provisions in relation to collateral
transactions (Part VII). Lastly, Parts VIII-IX also identify
legislative principles and provide overviews on conflict of laws
aspects (Part VIII) and on other instruments and regulations and
the implementation of the Convention or its principles and rules
in a domestic legal framework (Part IX). In addition, model
examples of legislative or regulatory texts or related descriptions,
as well as bibliographic references, are included on UNIDROIT’s
webpage for the Guide, which is available at:
http://www.unidroit.org/instruments/capital-markets/legislative-
guide.

Lastly, it must be noted at the outset that the Guide is not

intended to assist judges, arbitrators or practitioners in
interpreting the Convention’s principles and rules or
understanding its implications. The Official Commentary on the
UNIDROIT Convention on Substantive Rules for Intermediated
Securities (the “Official Commentary”) provides such
comprehensive guidance and the Guide, accordingly, draws from
it extensively.
 PART I - OVERVIEW ON SECURITIES

This Part provides an overview on securities. First, Part

I.A describes the basics of securities and securities holding.
Second, Part I.B identifies and briefly discusses five general
models of intermediated securities holding systems.

A. Basics of securities and securities holding

Governments and companies need money to finance their

activities, and they often raise money from the public. For that
purpose, they may issue bonds, which are bought and sold by
investors in capital markets. The investors commit to lend money,
known as the principal, to the issuers and, in exchange, the issuers
commit to pay interest and repay the principal amount of the bond
when it matures.

Companies, in addition, may issue shares, which are also

bought and sold by investors in capital markets. Investors who
purchase and hold shares commit to provide the money to the
issuers and, in exchange, the issuers commit to pay the investors
dividends (e.g. a portion of a company’s profit) and to grant them
particular participatory rights in the company, such as voting
rights in shareholder meetings.

Bonds and shares, as well as other financial instruments

or assets, are generally known as securities, although the
definition varies from system to system. There are thus many
different types of securities, including bonds and other debt
instruments traded in the capital markets; shares and other equity
instruments, whether or not they are traded on an exchange; and
transferable units – other than shares – in collective investment
schemes.

Securities holding, which may be non-intermediated or

intermediated, is both a mainstay of the international financial
system and a major component of the world’s economy. For
instance, BIS estimated in December 2016 that the total
outstanding amount of global debt securities was USD 102.3
trillion, of which USD 80.6 trillion was from domestic debt

3
4 GUIDE ON INTERMEDIATED SECURITIES

securities and USD 21.7 trillion was from international debt

securities. See BIS Quarterly Review (December 2016), Graph
C.1 and related statistics.

1. Non-intermediated securities

Securities were traditionally issued in the form of physical

certificates or by recordation in the issuer’s register, or both. Non-
intermediated securities generally can be unregistered or
registered and be certificated or uncertificated.

Unregistered non-intermediated securities are those where

the holder of the securities, usually referred to as the bearer, is not
known to the issuer, but holds physical certificates. In this kind of
holding, ownership of the securities generally vests in the holder,
who may sell them by delivery of the physical certificates to a
buyer in exchange for the payment of an agreed price and, where
necessary, an agreement to transfer ownership to the buyer.

Registered non-intermediated securities are those where

the holder of the securities is known to the issuer, which records
ownership of the securities in the name of the holder in its
register. The issuer’s recordation of securities ownership enables
it to send, for example, dividend payments or voting information
directly to the holder of the securities.

Registered non-intermediated securities can be either

certificated or uncertificated. If certificated, the issuer, in addition
to recordation of the holder’s ownership of the securities in its
register, issues a securities certificate to evidence such ownership.
Delivery of the securities certificate to a buyer with a contractual
agreement to transfer generally transfers ownership to the buyer.
Usually the securities would be endorsed to the buyer, with the
issuer to record such transfer from the seller to the buyer in its
register, or the securities may be endorsed in blank. If
uncertificated, no securities certificates are issued and the holder
of such securities can sell them by contractual agreement with a
buyer, in which case the issuer would record that transfer from
the seller to the buyer in its register.
 OVERVIEW ON SECURITIES 5

2. Intermediated securities

Due to technological advances, it is no longer necessary

to hold securities in physical paper form or to register ownership
or transfers directly in an issuer’s paper register. Holding and
transfer of securities are now generally registered as electronic
book-entries in securities accounts maintained by intermediaries,
such as banks and other financial institutions, and they are
referred to as intermediated securities. The intermediaries are an
important link between the issuer and the investor in what are
referred to as intermediated holding chains.

The emergence of the book-entry system, based on

electronic book entries in securities accounts, is also connected
with the immobilisation and dematerialisation of securities.
Immobilisation involves durably concentrating the holding of
securities in a central securities depository (CSD) – which is an
intermediary that provides the initial recording of securities in a
book-entry system or that provides and maintains the securities
accounts at the top tier of the intermediated holding chain – to
allow the crediting of an equal amount of securities to securities
accounts and the transferability of such securities by way of book
entries in securities accounts. The deposit of securities at the CSD
may be done in the form of individual certificates, a combined
certificate, known as a global or jumbo certificate which
represents all or part of the securities of a particular issue, or a
letter by the issuer evidencing entrustment with the CSD of a
certain quantity of securities of a specific type. Transfers of
immobilised securities thus can take place by electronic book-
entries by intermediaries and do not require actual movement of
certificates.

Dematerialisation goes further than immobilisation and

eliminates certificates altogether. The securities are represented
by book-entries alone throughout the intermediated holding
chain.

Intermediation, immobilisation and dematerialisation

have reduced significantly and, in some systems, even eliminated
the paperwork traditionally necessary for securities transfers.
6 GUIDE ON INTERMEDIATED SECURITIES

These developments have accordingly allowed for greater

numbers of holdings and transfers and increased the size of capital
markets.

3. Common securities transactions

Securities are bought and sold on capital markets, and

there are many types of securities transactions. Some common
transactions are so-called “plain” sales of securities, creation of a
security interest, repurchase transactions, and securities lending
transactions:

(a) A “plain” sale of securities against payment.

(b) A transaction that involves a security interest in

securities. For example, if Company A loans cash to
Company B for the purchase of securities, a security interest
may be created in those securities in favour of Company A,
in order to ensure that A can recover the value of the loan.
In the event that Company B defaults in repaying the loan,
Company A could obtain the securities and sell them to
recover what Company B owes.

(c) In a repurchase (or “repo”) transaction, a seller

seeking cash transfers securities to a buyer outright in
exchange for cash at the purchase date, while the seller
returns the cash together with an interest component at the
repurchase date in exchange for equivalent securities. See,
e.g., diagram 279-1 below.

(d) A securities lending transaction is similar to a repo,

except that the borrower seeks transfer of ownership of
specific securities with a promise to return equivalent
securities, which may be collateralised with cash or
securities. For example, a lender transfers securities (e.g.
100 shares of Company A) to a borrower who transfers
securities (e.g. 100 shares of Company B) to the lender and,
at a later date, both parties transfer equivalent securities and
the borrower pays a fee.
 OVERVIEW ON SECURITIES 7

Market participants may enter into multiple transactions

every day. Such transactions occur on various exchanges or
trading platforms, or on the so-called “over-the-counter” market.
Many transactions are cleared, settled, or both cleared and settled
through a central counterparty (CCP), an entity which operates as
the buyer for every seller and as the seller for every buyer so that
the parties only bear the credit risk of the CCP. Where multiple
transactions are made each day, it makes sense not to transfer
gross quantities per transaction but, where possible, to net transfer
obligations at predetermined times and to transfer only the
resulting net amount.

The transaction process involves what is known as

clearing and settlement. First, clearing refers to the process of
transmitting, reconciling and, in some cases, confirming
transactions prior to settlement, potentially including the netting
of transactions and the establishment of final positions.
Sometimes this term is also used imprecisely to cover settlement.
Second, settlement implies the process which discharges the
obligations arising out of the agreement of the parties to transfer
securities (e.g. the exchange of cash counter value for the traded
securities and the credit of securities to the account of the buyer).

4. Securities holding chains

In the context of securities holding, as mentioned above,

there are various key participants, which occupy different places
in securities holding chains. These participants include:

(a) Issuers – at the origin of the chain – such as a

government issuing bonds or a company issuing bonds or
shares;

(b) Intermediaries – in the middle of the chain – such as

a CSD, which is responsible for keeping paper securities, if
any, maintaining electronic records, and administering
them, and banks or other financial institutions which
maintain accounts on behalf of investors or on their own
behalf; and
8 GUIDE ON INTERMEDIATED SECURITIES

(c) Investors – at the end of the chain – such as

individuals, companies, pension funds and collective
investment funds who acquire securities.

The following is an overview, together with basic

securities holding diagrams, of (a) non-intermediated holding and
(b) intermediated holding.

a. Non-intermediated holding

In traditional non-intermediated securities holding, there

are no intermediaries between the issuer and the investor. Such
holding may encompass, for example, certificated securities held
physically by the investor (diagram 24-1), securities directly
registered in the issuer’s register in the investor’s name (diagram
24-2) or both (diagram 24-3). The advantage of such a direct
connection between the issuer and the investor is that the issuer is
able to identify the investor (except for unregistered (bearer)
securities) and the investor is able to exercise the rights attached
to the securities (e.g. rights which accrue to a holder of securities
by virtue of holding the securities, such as dividends, other
distributions, and voting rights, as well as the right to receive
information necessary for account holders to exercise those other
rights) directly with the issuer. The investor also does not bear the
risks attendant to the insolvency of an intermediary as there is no
intermediary.

Diagram 24-1: Non-intermediated securities holding – physical

certificates
 OVERVIEW ON SECURITIES 9

Diagram 24-2: Non-intermediated securities holding – entries in

the issuer’s register

Diagram 24-3: Non-intermediated securities holding – physical

certificates and entries in the issuer’s register

b. Intermediated holding

In an intermediated holding chain, there is at least one

intermediary – and possibly more – between the issuer and the
investor. Such chains may involve, for example, immobilised
securities certificates held by the CSD (diagram 25-1) or
dematerialised securities represented solely by electronic book-
entries recorded by the CSD (diagram 25-2). In addition, an
issuer’s register may be run by a CSD or an agent, whether the
chain involves immobilised securities certificates or
dematerialised securities.

Diagram 25-1: Intermediated securities holding chain –

immobilised securities certificates
10 GUIDE ON INTERMEDIATED SECURITIES

Diagram 25-2: Intermediated securities holding chain –

dematerialised securities

The following provides examples of domestic and

international intermediated holding chains. Because of the
possible variations, the diagrams are simplified to show basic,
static links in holding chains between issuers, intermediaries, and
investors.

(i) Domestic examples

Domestic intermediated holding chains can be simple. As

shown in diagram 25-1 and 25-2 above, the CSD, for example,
may be the only intermediary between the issuer and the investor.
In some systems, there are no intermediaries involved other than
the CSD, and the investors hold their securities directly with the
CSD. Apart from safekeeping of securities, in some systems, the
CSD may act merely as a conduit for communications between
the issuer and the investor. In others, the CSD may have more
responsibilities and play a greater role in a particular securities
clearing or settlement system for the efficient transfer of
securities, depending on how such responsibilities are divided
among CSDs, stock exchanges, central banks, and other market
participants.

Domestic intermediated holding chains, however, can also

be rather long, with several links of intermediaries between the
issuer and the investor. In such chains, investors are at the end of
the chains, with their securities accounts maintained by their
intermediaries. For instance, an investor may enter into an
agreement with an intermediary to manage the relationship with
the CSD (e.g. serve as the technical interface between the investor
 OVERVIEW ON SECURITIES 11

and the CSD). Diagram 28-1 shows an example where a top-tier

intermediary (CSD) holds the securities in an account on behalf
of another Intermediary (2), and the latter holds them on behalf
of the investor.

Diagram 28-1: Domestic intermediated securities holding chain

with two intermediaries

Naturally, holding chains may become even more

complex as the number of intermediaries increases, as diagram
29-1 shows. The CSD keeps the securities and maintains an
account for Intermediary 2, which in turn maintains an account
for Intermediary 3, which in turn maintains an account for the
investor. Such chains are actually quite common in the book-entry
system. Regulation of intermediaries, as a result, becomes very
important and, in some systems, intermediaries are extensively
regulated. In markets, intermediaries can be broker-dealers, banks
or investment entities and can also be referred to as “custodians,”
“sub-custodians,” or by other terms. The Guide, however,
generally refers to them as intermediaries. See paragraph 70.
12 GUIDE ON INTERMEDIATED SECURITIES

Diagram 29-1: Domestic intermediated securities holding chain

with three intermediaries

Even in these domestic examples, the presence of

intermediaries between the issuers and investors means that the
issuers and investors may not have a direct relationship. Absent
proper laws and regulations within a domestic system, it may be
difficult to determine who is entitled to exercise the rights
attached to the securities. It depends, for example, on whether that
system enables an investor at one end of the chain to exercise its
rights directly with the issuer, or whether those rights are passed
along and exercised via the chain of intermediaries.

(ii) International examples

In today’s capital markets, investors in securities are no

longer confined within domestic boundaries. On the contrary,
investors often buy securities from issuers based in other
jurisdictions. Cross-border holding chains often involve several
intermediaries, and the following examples are included in this
regard.
 OVERVIEW ON SECURITIES 13

In some international holding chains, the CSD is located

in a different State than the issuer. For example, as shown in
diagram 32-1 below, a company in State A opts to register its
securities with a CSD in State B for various reasons. In such a
case, that company registers and deposits the securities with State
B’s CSD, which is the first intermediary in the holding chain.
Intermediary 2 has an account with the CSD, to which the
securities are credited. Intermediary 2 credits those securities to
the account that it maintains on behalf of Intermediary 3, and
Intermediary 3 credits those securities to the account it maintains
on behalf of the investor.

Diagram 32-1: Cross-border intermediated securities holding

chain spanning two States in which the issuer opted to use a
foreign CSD

In most international holding chains, however, the CSD is

located in the same State as the issuer. As shown in diagram 33-
1 below, the securities are issued by a company in State A and
deposited with the CSD (Intermediary 1). There is another
intermediary in State A, a local investment firm (Intermediary 2),
14 GUIDE ON INTERMEDIATED SECURITIES

which has an account with the CSD, to which the securities are
credited. The investment firm allocates those securities overseas
to an international bank based in State B (Intermediary 3), which
credits them to the securities account of an investor in that State.

Diagram 33-1: Cross-border intermediated securities holding

chain spanning two States

International holding chains, as shown in diagram 34-1

below, can reach across more than one border. In this example,
the securities are issued by a company in State A. Under State A’s
law, all securities issued by companies in that State must be kept
and registered at State A’s CSD. This CSD is the first
intermediary and monopolises the market for registering
securities in State A. There is another intermediary in State A, a
local investment firm (Intermediary 2), which has an account with
the CSD, to which the securities are credited. The investment firm
allocates those securities overseas, to an international bank based
in State B (Intermediary 3). A local bank in State C (Intermediary
4) acquires those securities on behalf of an investor from State C.
As soon as the intermediary in State B allocates those securities
to the local bank’s securities account, the local bank in turn credits
them to the investor’s securities account.
 OVERVIEW ON SECURITIES 15

Diagram 34-1: Cross-border intermediated securities holding

chain spanning three States

In these international examples, the investor’s exercise of

the rights attached to the securities may prove to be difficult. A
particular domestic law, for example, may not recognise the rights
or interests of investors located in another jurisdiction, may
prevent intermediaries from acting on behalf of those investors,
or may not facilitate sufficiently the exercise of the investors’
rights via the holding chain. In addition, the relationship between
intermediaries across borders is governed by contractual
arrangements. Subject to laws and regulations in a particular
system, it is the contract itself which defines the rights and
obligations between the intermediaries involved. If the contract
does not contemplate the obligation to pass the rights attached to
the securities via those intermediaries, the exercise of such rights
by the investor at the end of the chain may be disrupted. These
examples, moreover, generally involve simplified, static holdings
and not transfers. In reality, securities holding chains can
fluctuate on a daily basis and involve many intermediaries and
account holders, and different laws may be applicable to
particular links in the chain. See generally Part VIII below.
16 GUIDE ON INTERMEDIATED SECURITIES

5. Risks associated with intermediated securities

There are risks associated with the holding and transfer of

intermediated securities, ranging from unauthorised disposition to
the insolvency of intermediaries. Especially in the cross-border
context, the most central risk to the holding of intermediated
securities arises from legal uncertainty surrounding how different
jurisdictions treat the rights of account holders in relation to their
intermediated securities.

Investors want to be certain about the legal regime which

will determine their rights in intermediated securities, for
example, in the event of disputes or the insolvency of an
intermediary. If an intermediary is financially distressed and
becomes insolvent, there may be a shortfall in securities, whereby
the intermediary does not have enough securities on hand to
satisfy those credited to its account holders’ securities accounts.
In this way, an intermediary’s insolvency, depending for instance
on the size of the shortfall, can both put the holdings of investors
at the end of the chain at risk and pull other intermediaries into
insolvency as well, thereby threatening systemic effects. Such
effects may be compounded where there are multiple
intermediaries located in different jurisdictions with different
applicable insolvency laws.

Harmonisation efforts like the Geneva Securities

Convention and the Guide aim to reduce legal uncertainty and
thus the risks associated with intermediated securities. It must be
noted, however, that such efforts are not a panacea for all risks
associated with intermediated securities.

B. Intermediated securities holding models

At present, there is no international uniform legal

approach for intermediated securities holding systems. In some
instances, reference is made to two very broad categories of
holding systems – “direct” holding models, in which
intermediaries only serve as bookkeepers for investors and have
no interest in investors’ securities, and “indirect” holding models,
in which intermediaries have an interest in investors’ securities.
The Guide, however, identifies and makes reference to, albeit still
 OVERVIEW ON SECURITIES 17

at a broad level, five general models of holding systems (i.e.

individual ownership, co-ownership, trust, security entitlement,
and contractual), which are discussed briefly below. Diagrams are
provided for each of them, though they are not necessarily
representative of every system under a particular model and show
only the static holding of intermediated securities and not the flow
of rights, such as voting rights and distributions, via the holding
chain. The models, moreover, are neither exhaustive nor mutually
exclusive, as some systems might be mixed systems because, for
instance, different models may be used for particular types of
securities. Indeed, systems evolve over time, and there is
accordingly a need for flexibility in the legal approaches
governing them. Following discussion of the five general models,
an important distinction regarding identification of the investor in
the holding chain is discussed in greater detail and a more
complicated cross-border example is provided.

1. Individual ownership model

Under the individual ownership model, neither the CSD

nor any of the other intermediaries have any interest in the
securities as the investor has full, individual ownership over the
securities, which are deemed to be located directly in the
investor’s securities account. In the French system, for example,
in which all domestic securities issued are dematerialised,
securities are recorded by way of book-entries at the CSD, which
acts simply as a register for the issuer and other participants acting
on behalf of the issuer. Neither the CSD nor any of the other
intermediaries have any interest in the securities as the investor
has full, individual ownership over the securities, which are
deemed to be located directly in the investor’s securities account.
The investor accesses its securities through its own account with
its intermediary and not through any other intermediary.

In the event the CSD or any other intermediary becomes

insolvent, the investor, as the owner of the securities, has the right
to require a new recording of those securities in the investor’s
name. Intermediaries, including the CSD, do not have any right
over such an investor’s securities, except in specific situations
where a security interest is provided to an intermediary.
18 GUIDE ON INTERMEDIATED SECURITIES

Diagram 41-1: Individual ownership model

Some systems following this model are so-called

transparent systems, which are described in paragraph 51 below.

2. Co-ownership model

Under the co-ownership model (e.g. Austria, Germany

and several other civil law jurisdictions), securities are typically
deposited by the issuer with the CSD in the form of a global
certificate. The CSD, in turn, credits the securities accounts of its
participants, typically banks acting as intermediaries for other
intermediaries and investors. In this model, an investor has a
shared interest. The investor has fractional ownership or, in other
words co-ownership, corresponding to its holdings of a pool of
securities held by the CSD. The investor accesses its securities
through its intermediary and, as a result of the pooling of
securities, the CSD and any other intermediaries above the
investor’s intermediary (i.e. relevant intermediary) would be
unable to identify a particular investor’s specific holdings.

In the event the CSD or another intermediary becomes

insolvent, an investor’s securities do not become part of the
insolvency estate, as neither the CSD nor the other intermediaries
own the securities. The investor is entitled to exercise and, if
necessary, enforce the rights attached to the securities.
 OVERVIEW ON SECURITIES 19

Diagram 44-1: Co-ownership model

3. Trust model

In the trust model (e.g. Australia, England and Wales, and

Ireland), issuers’ securities are provided to the CSD for
safekeeping, and the CSD acts as the issuers’ register and has no
legal interest in the securities. The CSD’s participants, typically
intermediaries such as banks and other financial institutions, are
considered to be the legal owners of the securities, whether for
themselves or on behalf of their clients. Once those intermediaries
credit those securities to their account holders’ securities
accounts, they act as trustees for the account holders, who become
beneficiaries and receive an equitable interest in the securities.
Investors access their securities through their relevant
intermediaries and not through those further up the holding
chains.

In the event an intermediary becomes insolvent, the

investor as a beneficiary has a proprietary interest over the
securities, which cannot be claimed by the creditors of the
intermediary.
20 GUIDE ON INTERMEDIATED SECURITIES

Diagram 46-1: Trust model

4. Security entitlement model

Under this model (e.g. Canada and the United States of

America), every securities account holder receives a security
entitlement (i.e. a sui generis bundle of rights against the
intermediary and over the assets held by the intermediary) against
its relevant intermediary. In other words, there are security
entitlement holders at each level of the holding chain below the
CSD. The entitlement holder has no ability to exercise economic
or other rights to the financial asset directly against the issuer. The
intermediary, however, has an obligation to obtain and pass on
the rights attached to the securities to the entitlement holder and
to exercise such rights on the entitlement holder’s behalf.
Investors at the end of the holding chain, which hold a security
entitlement against their relevant intermediary, access the
securities through that intermediary and not through other
intermediaries in the chain.

In the event an intermediary becomes insolvent, the

account holder is protected as security entitlements are separated
from the intermediary’s estate.
 OVERVIEW ON SECURITIES 21

Diagram 48-1: Security entitlement model

5. Contractual model

Under the contractual model, investors do not acquire a

bundle of proprietary interests to the securities, but instead
acquire contractual rights vis-à-vis the relevant intermediary. The
entire holding system consists of a network of bilateral contracts
among different market participants, from the CSD to the
investor. The CSD or other intermediaries appear in the issuer’s
book as the registered holders and, thereafter, the rights and
benefits are to flow through the holding chain from one
intermediary to another, eventually being available to the
investors.

The terms and conditions of the relevant contracts

between participants generally set out the legal framework on
various issues, including the exercise of the investor’s rights or
the consequences arising out of the insolvency of an intermediary.
Domestic insolvency laws, however, usually determine the
investor’s rights and claims against the intermediary’s estates
with respect to securities to a considerable extent. In some
systems, moreover, intermediaries may be structured so as to be
insolvency-remote (i.e. by engaging only in custody and not in
any other activity). For systems following this model, insolvency
22 GUIDE ON INTERMEDIATED SECURITIES

laws protecting investors or insolvent-remote intermediaries are

essential because an investor’s contractual rights alone may not
offer sufficient protection, for example, in the event of an
intermediary’s insolvency.

Diagram 50-1: Contractual model

6. Identification of the investor: transparent and non-

transparent systems

As noted above with respect to the individual ownership

model, some systems are known as transparent systems. In such
systems, an investor’s particular holdings are identified by, or
known to, the CSD primarily because the role of maintaining a
securities account is shared between the CSD (which is the
relevant intermediary for the purpose of the Convention and the
Guide) and other persons often called account operators, who are
securities firms maintaining commercial relationships with
investors. There are three general categories of transparent
systems, and diagrams are provided for each:

(a) When the investor’s holdings are held in an account

with the CSD: In such a system, there are separate accounts
maintained at the CSD for each investor and the
 OVERVIEW ON SECURITIES 23

intermediaries merely operate these accounts. Any

intermediaries thus serve the role of technical interface
between the investor and the CSD.

Diagram 51-1: Transparent system in which the investor’s

holdings are held in an account with the CSD

(b) When the investor’s holdings are identified in an

intermediary’s account with the CSD: In such a system, the
CSD maintains accounts in the name of intermediaries, and
these accounts are divided into sub-accounts for each client
of the intermediary and reflect each client’s holdings.
24 GUIDE ON INTERMEDIATED SECURITIES

Diagram 51-2: Transparent system in which the investor’s

holdings are identified in an intermediary’s account with the CSD

(c) When the investor’s holdings are held by an

intermediary in an omnibus account at the CSD and account
information is registered on a regular basis: In such a
system, there is an omnibus account at the CSD in the name
of intermediaries, which maintain separate accounts in their
register for their clients. Information regarding those
separate accounts is permanently or regularly consolidated
between the intermediaries and the CSD, thereby enabling
the CSD to determine what exactly the clients hold.
 OVERVIEW ON SECURITIES 25

Diagram 51-3: Transparent system in which the investor’s

holdings are held by an intermediary in an omnibus account at
the CSD and account information is registered on a regular basis

The common feature of these three categories is that investors and

their individual holdings are identified at the CSD level.

Non-transparent holding systems, on the other hand, refer

to those in which the investor’s interest in securities is not
identified at the level of the CSD, but only at the level of the
relevant intermediary.

In some cases, as mentioned above, systems may be

considered as “mixed” because one part of a holding chain in that
system is transparent while the other part is non-transparent. In
addition, most cross-border holding chains originating in a
transparent system are mixed, in that a chain generally ceases to
be transparent once it reaches across a border and becomes an
international one.
26 GUIDE ON INTERMEDIATED SECURITIES

7. Cross-border holdings involving multiple systems

Even between two internally sound and reliable domestic

systems, holding securities through a chain of intermediaries
across borders may give rise to various problems. First, the legal
frameworks in which each market participant (issuers,
intermediaries or investors) operates are different and they may
not be calibrated to work together, thereby jeopardising the
exercise of investors’ rights. Second, some jurisdictions have in
place legal frameworks based on traditional models of capital
markets and concepts of property law. Traditional models, even
if perfectly developed from a legal point of view, may not match
the standards required by increasingly modern, interconnected,
and even paperless capital markets. Third, in most cases, a
conflict of laws issue may arise when trying to determine the
applicable law with respect to particular participants and aspects
of the holding chain.

For example, as shown in diagram 55-1 below,

Intermediary 2 holds securities in State A, which has a transparent
individual ownership system. Such securities holding functions
well under the domestic legal framework because that system is
internally sound. Once some of those securities are transferred
and held via Intermediaries 3 (in State B, which follows the trust
model) and 4 (in State C, which follows the co-ownership model),
however, the exercise of certain rights attached to the securities
may become difficult.
 OVERVIEW ON SECURITIES 27

Diagram 55-1: Varying ownership rights and interests in a cross-

border intermediated securities holding chain spanning three
States

In particular, each of the account holders in diagram 55-1

– which includes Intermediaries 2, 3, and 4 and the investor as
they each have accounts with the respective intermediary above
them in the holding chain – receives the legal position attributed
to it under the relevant domestic legal analysis. Accordingly,
various laws (e.g. property, commercial, insolvency) of different
jurisdictions might apply to various parts of the same holding
chain, creating uncertainty and possible incompatibilities.
 PART II - THE GENEVA SECURITIES
CONVENTION

This Part describes in brief the Geneva Securities

Convention, including its (a) purpose; (b) approach; (c)
terminology; (d) scope; and (e) references to law outside of the
Convention.

A. Purpose

Intermediation in securities holding and the simultaneous

developments of immobilisation and dematerialisation have
enabled the rapid expansion of capital markets by reducing
paperwork, allowing for an enormous volume of transactions
every day, and promoting economic growth. Specific risks related
to the physical existence of certificated securities have been
largely eliminated with the introduction of book-entry systems, as
such securities are no longer physically moved. Intermediated
securities holding and transfer, however, are not without risks, as
there may be significant legal uncertainty and even systemic risk,
especially when such holding and transfer occurs cross-border.
This section first describes these risks and then how the Geneva
Securities Convention addresses them.

1. Legal and systemic risk

Intermediated securities holding and transfer are not free

from risk. There may be legal risk in the application of existing
law, especially when that law is based on traditional legal
concepts not tailored to modern securities holding and transfer.
This risk may be compounded when securities are held and
transferred across borders because the various domestic systems
may not necessarily be compatible with one another, and different
substantive rules may apply to the various participants in a
holding chain. Upon the insolvency of an intermediary, moreover,
there could be significant risk regarding a potential shortfall in
securities and whether the investor’s interests in those securities
are protected from the claims of the intermediary’s general

28
 THE GENEVA SECURITIES CONVENTION 29

creditors as these issues may be handled differently in various

systems. Such risk, in some situations, may dissuade investors
from acquiring particular securities. In many situations, such risk
increases transaction costs and hampers economic growth.

These risks may even become systemic. In times of

financial stress, the insolvency of one intermediary could lead to
the insolvency of other intermediaries, thereby triggering
systemic effects.

2. Harmonisation to reduce risk and promote

sustainable economic growth

The Geneva Securities Convention, adopted in October

2009 and tailored to the modern book-entry system, was carefully
developed to address and minimise these risks. The Convention
provides the core legal framework for a modern intermediated
securities holding system, which is both internally sound and
compatible with other systems.

Regarding internal soundness, the Convention’s drafters

identified key features of intermediated holding systems which
must be present in order for a particular system to be considered
as sound, taking into account the objectives of investor protection
and efficiency. Holders of intermediated securities should, for
example, be confident that their interests are protected and subject
to simple and clear rules and procedures regarding holding,
transfer, and realisation. It was deemed essential, moreover, that
the investor’s interest not be exposed to risks such as the
insolvency of any intermediary in the holding chain or
interference by unrelated third parties.

Regarding compatibility, the drafters recognised that

different legal systems should be able to interconnect successfully
where intermediated securities are held and transferred across
borders. In a cross-border context, as differing rules and
approaches may apply in respect of property law issues,
supervision, corporate law, etc., it was recognised that
harmonisation of core issues was of the utmost importance.
30 GUIDE ON INTERMEDIATED SECURITIES

A sound and compatible legal framework governing

intermediated securities is essential for market stability and
investor protection. Indeed, the Convention’s clear and
transparent rules as to the effectiveness of an interest represented
by a book-entry credit, or about the effectiveness and finality of a
transfer made through book-entry debits and credits, are essential
to reduce uncertainty and systemic risk. The legal framework is
all the more important in light of the extremely high value of
securities held in intermediated systems and the enormous
volume of intermediated securities transactions carried out on a
daily basis. As that value and volume continues to increase, a
proper legal framework could enhance the flow of capital and
access to capital markets, thereby promoting sustainable
economic development.

B. Approach

In recognising the diversity of legal concepts underlying

securities holding around the world, the Convention embraces a
core and functional harmonisation approach in order to
accommodate different legal systems and traditions within a
unitary framework. Only elements essential to the establishment
of internal soundness and cross-border compatibility are
addressed.

The Convention’s approach is a core one in that it

harmonises certain key matters related, for example, to the rights
of account holders, securities transfers, and aspects of the
integrity of the intermediated holding system. Other law is thus
relied upon to cover matters not harmonised by the Convention.

The Convention’s approach is functional in that it uses

language that is as neutral as possible to formulate rules by
reference to their results. Under a functional approach,
harmonising rules are formulated by reference to facts rather than
particular legal terms or principles to allow operative results to be
reached without overriding the underlying domestic legal
traditions and doctrine. With the functional approach, for
example, the Convention is compatible with various
 THE GENEVA SECURITIES CONVENTION 31

characterisations of securities rights and interests and possesses

the necessary flexibility to accommodate new technological
advances and evolutions in intermediated securities holding
systems. See paragraph 76 below.

The Convention’s drafters also worked to ensure

compatibility with other relevant instruments, including recent
domestic reform legislation, EU directives, and international
instruments, in particular the Hague Securities Convention and
the UNCITRAL Legislative Guide on Secured Transactions.
Whereas the Hague Securities Convention provides conflict of
laws rules for intermediated securities as addressed in paragraphs
303 and 307 et seq. below, the Geneva Securities Convention
provides substantive rules for such securities, and the two
Conventions complement one another. The Geneva Securities
Convention also complements the UNCITRAL Legislative Guide
on Secured Transactions and the UNCITRAL Model Law on
Secured Transactions, which are to assist States in developing
modern secured transactions laws and are addressed in paragraph
290 below, because the UNCITRAL Legislative Guide does not
cover securities at all and the UNCITRAL Model Law contains
rules for non-intermediated securities only.

In addition, new technologies have been developed that

may be applied to securities holding. In particular, the so-called
distributed ledger technology is seen as being of particular
interest in the securities industry as a new approach for recording
assets on a non-centralised basis (i.e. in a distributed and opened
manner). See, for example, Discussion Paper, The Distributed
Ledger Technology Applied to Securities Markets
(ESMA/2016/773, 2 June 2016). However, this new
technological setting, which has its own challenges (such as
integrity or safety of information technology systems), should in
any case comply for the most part with the basic principles and
rules that are provided for in the Convention.
32 GUIDE ON INTERMEDIATED SECURITIES

C. Terminology

The Convention’s core and functional harmonisation

approach is readily apparent when examining the terminology
adopted by the Convention’s drafters. Article 1 of the Convention
sets forth definitions for terms used in the Convention and
comprehensive explanation of those terms is provided in the
Official Commentary. The Guide adopts that terminology as well
and, for ease of reference, the following key terms are briefly
described below and together with other important terms in the
Glossary:

 Securities: This term is defined in Article 1(a) of the

Convention as “any shares, bonds or other financial
instruments or financial assets (other than cash) which are
capable of being credited to a securities account and of
being acquired and disposed of in accordance with the
provisions of th[e] Convention.” That broad definition
covers any financial assets which meet the two functional
criteria of being able to be held in the intermediated holding
system and to be governed by the Convention. But it does
not cover cash (e.g. money deposited with a bank) or certain
types of financial assets, including some categories of
derivatives, as they do not meet those requisite criteria.

 Securities account: This term is defined in Article

1(c) as “an account maintained by an intermediary to which
securities may be credited or debited”. That definition
applies, for example, to accounts maintained by an
intermediary in the name of a natural or legal person who is
not an intermediary; by an intermediary in the name of
another intermediary; by a CSD in the name of an
intermediary; or in a transparent system, by a CSD in the
name of a natural or legal person (which may be an
intermediary that in another capacity holds intermediated
securities for its own account). It does not apply, however,
to accounts maintained directly by issuers in the name of
their shareholders or bondholders, or to issuer accounts (or
registers) maintained by CSDs or other persons such as
transfer agents on behalf of issuers.
 THE GENEVA SECURITIES CONVENTION 33

 Account holder: This term is defined in Article 1(e)

of the Convention as “a person in whose name an
intermediary maintains a securities account, whether that
person is acting for its own account or for others (including
in the capacity of intermediary)”. That definition covers
both investors and intermediaries, as intermediaries may be
account holders who hold securities with a higher-tier
intermediary in its own account or on behalf of their
account holders. In defining the term “account holder” in
this way, it was unnecessary to include a definition of the
term “investor” and, from this point forward, the Guide
generally uses the term “account holder”. Even the ultimate
account holder at the end of the chain, moreover, may not
be an investor. See paragraph 84 below. Even though the
term is in the singular, it does not purport to prohibit a
securities account from being maintained for several
persons acting jointly.

 Intermediary: This term is defined in Article 1(d) of

the Convention as “a person (including a [CSD]) who in the
course of a business or other regular activity maintains
securities accounts for others or both for others and for its
own account and is acting in that capacity”. Intermediaries
are usually entities such as banks, brokers, central banks
and similar persons that maintain securities accounts for
their account holders. In some systems, for example, an
intermediary may be referred to as an account operator or
account provider. Because of the functional definition,
virtually any natural or legal person is covered provided that
it maintains securities accounts for others in the course of
its business. CSDs, which are specifically mentioned but
not defined, are intermediaries only in relation to their
participants (i.e. their account holders) but not in relation to
the issuer.

 Securities clearing system (SCS): This term, which is

defined in Article 1(o) of the Convention, refers to market
infrastructures facilitating and enhancing the efficient
settlement of securities transactions among intermediaries.
See paragraph 21 above and the Glossary. They are, in
particular, market infrastructures, such as CCPs or clearing
34 GUIDE ON INTERMEDIATED SECURITIES

houses, that perform clearing functions (and possibly other

functions not covered by the Convention), but not
settlement.

 Securities settlement system (SSS): This term, which

is defined in Article 1(n) of the Convention, refers to market
infrastructures permitting the efficient transfer of securities
and funds among intermediaries, in particular by settling
them or by clearing and settling them. See paragraph 21
above and the Glossary.

 Issuer: This term is not defined in the Convention, as

it is understood to refer to a government or company which
issues securities. See paragraph 22 above.  

D. Scope

Further to the harmonisation approach adopted by the

Convention’s drafters, the Convention’s scope of application is
limited to only core aspects of intermediated securities holding
and transfer. In this regard, the Convention’s definitions play a
key role in establishing the Convention’s scope. As noted in
paragraph 70 above, the Convention applies to “securities” which
are capable of being credited to a “securities account” and of
being acquired and disposed of in accordance with the
Convention’s provisions. As the Convention does not specify a
list of securities falling within its scope, it therefore allows for the
evolution of market practice and the creation of new types of
securities capable of being held in the intermediated holding
system. For further discussion of what types of securities fall
within the Convention’s scope, see Official Commentary,
paragraph 1-10 et seq.

The Convention, however, generally excludes the area of

law usually (but not necessarily) called corporate law (see Article
8), in particular the relationship between issuers and account
holders. While the Convention generally does not cover this area
of law, there are a few exceptions, specifically minimal
provisions necessary to ensure integrity and achieve compatibility
of intermediated securities holding systems around the world.
 THE GENEVA SECURITIES CONVENTION 35

Like so-called corporate law, other legal and regulatory

aspects fall outside the scope of the Convention. In other words,
such aspects are to be addressed by each Contracting State’s legal
and regulatory system. The only constraint is that such aspects
must be addressed in ways which do not contravene the
Convention’s provisions.

E. Law outside of the Convention

As the Geneva Securities Convention addresses the core

issues necessary for achieving internal soundness and
compatibility in a functional way, there are various matters that
are to be addressed by law outside the Convention. In
implementing the Convention, States thus retain significant legal
and regulatory space, and there are important policy decisions to
be made. There are three particular aspects to the way in which
the Convention deals with law outside the Convention.

First, the Convention contains express references to law

outside the Convention. Such references include the following:

 Non-Convention law: This term, which is defined in

Article 1(m), refers to substantive law in relation to
intermediated securities (other than the Convention) of the
Contracting State. In many instances, the non-Convention
law is to work as a complement to a Convention rule. A list
of references to non-Convention law is included in
Annex 1.

 Applicable law: This term refers to the law applicable

by virtue of the private international law rules of the forum.
The applicable law may, or may not, be the law of a
Contracting State to the Convention (i.e. the non-
Convention law). A list of references to applicable law is
included in Annex 2.

 Insolvency rules: Insolvency law would be part of the

non-Convention law or the applicable law, but insolvency
is dealt with as a separate category because the
commencement of an insolvency proceeding may trigger
the mandatory application of special rules of law of the
36 GUIDE ON INTERMEDIATED SECURITIES

jurisdiction in which those proceedings are conducted that

displace, or deviate from, the rules that would otherwise be
applicable. A list of references to insolvency rules is
included in Annex 3.

 Uniform rules of securities clearing systems (SCSs)

and securities settlement systems (SSSs): The term
“uniform rules” is defined in Article 1(p) as rules of an SCS
or SSS which are common to the participants or to a class
of participants and are publicly accessible. Such rules may
derogate from or supplement the Convention’s rules. While
Contracting States may only have limited or indirect
influence over the rules of SCSs and SSSs, as they are
typically private entities, Contracting States generally
regulate such entities. Through such regulation, for which
the Convention provides no rules, Contracting States could
influence the content of these rules. A list of references to
uniform rules of SCSs and SSSs is contained in Annex 4.

Second, there are references for which Contracting States,

in properly implementing the Convention, have to make a
declaration. The system of declarations provided for under the
Convention gives Contracting States the possibility of making
choices regarding these matters so as to achieve the policy
objectives that they see fit in respect of intermediated securities
and facilitate the coordination between the Convention’s
provisions and their legal systems, which may follow one or more
of the general models discussed in Part I.B. The system of
declarations also provides the necessary flexibility to
accommodate technological developments and evolutions in
those models and legal systems. Model declaration forms are
included with the Explanatory Memorandum for the Assistance
of States and Regional Economic Integration Organisations on
the System of Declarations under the Geneva Securities
Convention, known as the Declarations Memorandum, which was
issued by UNIDROIT in its capacity as Depository for the
Convention and is available on UNIDROIT’s website (UNIDROIT
2012 – DC11/DEP/Doc. 1 rev.).
 THE GENEVA SECURITIES CONVENTION 37

For example, the Convention applies, in principle, to any

securities account maintained by an intermediary. Article 5 of the
Convention, however, permits a Contracting State to limit by
declaration the Convention’s scope of application to the securities
accounts maintained by “regulated” intermediaries or those
maintained by a central bank. The purpose of this rule is to offer
States the possibility of excluding application of the Convention
to securities accounts maintained by “unregulated”
intermediaries, if and to the extent Contracting States would deem
such exclusion appropriate. For more information on the optional
declaration under Article 5, including a model declaration form,
see the Declarations Memorandum, Section 4.B and
accompanying Form No. 2.

Third, there are other particular matters, including in the

field of corporate and regulatory law, which could have been
addressed in the Convention, but were not due to the core and
functional harmonisation approach adopted. Such matters are also
to be taken into account, to the extent necessary, by law outside
the Convention.

Law outside the Convention, in particular these three

aspects, is addressed in the following Parts of the Guide, which
inter alia offer guidance on the important policy choices to be
made in creating an intermediated securities holding system or
evaluating an existing one.
 PART III - RIGHTS OF ACCOUNT HOLDERS
AND DUTIES AND LIABILITIES OF
INTERMEDIARIES

This Part and those that follow identify principles and

rules capable of enhancing holding and transfer of intermediated
securities and explain their interaction with law outside the
Convention. To do so, each of these Parts identifies legislative
principles which generally summarise, as applicable, what is
covered by the Convention and what is to be addressed or
clarified in creating or evaluating an intermediated securities
holding system. The legislative principles, in addition to
appearing in boxes throughout the remainder of the Guide, are
also set forth together at pages xxxi-xxxiv above.

Following the legislative principles, each of these Parts

then reviews the core Convention principles and rules and, as
necessary, discusses the choices to be made by declaration and
the matters to be addressed or clarified. This Part, in particular,
addresses (a) the rights of account holders, (b) measures to enable
the exercise of rights of account holders, and (c) liability of
intermediaries.

A. Rights of account holders

Legislative Principle 1: The Convention provides any account

holder with a core set of rights resulting from the credit of
securities to a securities account. The law should establish
additional rights consistent with how it characterises the legal
position of account holders. It may distinguish between the
rights enjoyed by an investor (including an intermediary acting
for its own account) and those accruing to an intermediary
acting in its capacity of intermediary.

38
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  39
AND LIABILITIES OF INTERMEDIARIES

1. Core Convention principles and rules

The core principles and rules are the following:

 All account holders have the right to dispose of the

securities credited to their securities account and, to the
extent it is permissible and feasible, the right to hold the
securities otherwise than through a credit to their securities
account. Article 9(1)(b)–(c).

 In addition to these rights, the ultimate account holder

must receive and be able to exercise all the rights attached
to the securities. Article 9(1)(a)(i).

 The non-Convention law may provide additional

rights to all account holders, or to some of them. Article
9(1)(a)(ii) and 9(1)(d).

 The non-Convention law determines the limits to the

rights above when the credit in a securities account provides
the account holder with a security interest or another limited
interest. Article 9(3).

In the intermediated securities holding system, securities

are represented by credits made in the securities accounts
maintained by the intermediaries at each level of the holding
chain. A credit may also represent a security interest or another
limited interest.

At the bottom of the holding chain is an account holder,

who is not acting as an intermediary and is referred to as the
ultimate account holder. The ultimate account holder may be:

(a) an investor acting for its own account;

(b) a secured party holding the intermediated securities as a

result of a transaction involving a security interest;

(c) the beneficiary of a limited interest, such as an usufruct,

other than a security interest; or
40 GUIDE ON INTERMEDIATED SECURITIES
 

(d) a person holding intermediated securities as a fiduciary,

such as an agent, a trustee, etc.

Article 9 defines two basic packages of rights resulting

from a credit of securities to a securities account (hereafter: a
credit), one for the ultimate account holder, and a less extensive
one for account holders acting as intermediaries in the chain.
Under the Convention, the difference between the two packages
is the rights attached to the securities, which must accrue to the
ultimate account holder, but not necessarily to the intermediaries
in the chain.

Depending on how non-Convention law characterises

intermediated securities, each package of rights may be extended
by such law. Similarly, those packages may be restricted by such
law in line with the types of limited interests it allows the parties
to create.

2. Choices to be made by declaration

The Convention neither requires nor permits declarations

in respect of the matters discussed in this section.

3. Matters to be addressed or clarified

The following matters are to be addressed or clarified.

First, the law should supplement the rights accruing to account
holders in a manner consistent with its own characterisation of an
account holder’s legal position. See Article 9(1)(a)(ii) and
9(1)(d). In so doing, it may distinguish between the legal position
of the ultimate account holder and the legal position of account
holders acting as intermediaries in the chain. Second, the law
should clearly define which limited interests may be granted in
intermediated securities, and how these interests limit the rights
of account holders. Article 9(3). Third, the law should also
accommodate cross-border situations, where a domestic
intermediary holds securities through a securities account with
another intermediary in another jurisdiction, and thus likely holds
under some foreign law.
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  41
AND LIABILITIES OF INTERMEDIARIES

a. Rights accruing to account holders

There is a necessary relationship between:

(a) the characterisation of intermediated securities and the

additional rights conferred by the non-Convention law on all
or certain account holders; and

(b) the types of security interests and other limited interests

allowed by the non-Convention law and the restriction it
imposes on the rights of an account holder when the credit
represents such a limited interest.

Notably, the ensuing discussion elaborates upon this relationship,

in particular using diagrams 90-1 and 92-1, which go beyond the
basic static models set forth in Part I.B and show alternative ways
rights and interests flow through intermediated securities holding
chains.

For example, most legal systems of the civil law tradition

consider the ultimate account holder to have a proprietary interest
over the (certificated or uncertificated) securities held at the very
top of the holding chain. Ultimate account holders are the
“owners” or “co-owners” of the securities as well as the creditors
(or right holders) against the issuer. Such systems see the
intermediaries as depositories and bookkeepers. Unless an
intermediary has obtained a security interest, it does not have any
proprietary interest over the securities themselves. Intermediaries
do not receive or exercise the rights attached to the securities,
except where this is necessary to pass such benefits down the
chain all the way to the ultimate account holder.
42 GUIDE ON INTERMEDIATED SECURITIES
 

Diagram 90-1: Flow of specific rights and interests in the

individual ownership and co-ownership models

In such legal systems, the non-Convention law would

typically use Article 9(1)(d) to confer on the ultimate account
holder a proprietary interest over the securities. The holder of a
limited interest would also be recognised as having a (limited)
proprietary interest over the same securities. In respect of Article
9(1)(a), intermediaries may be authorised to receive and exercise
the rights attached to the securities registered in the name of the
investor. Similarly, for unregistered (bearer) securities,
intermediaries may receive and exercise the rights attached to the
securities, subject to an obligation to pass such benefit to their
own account holder.

Other legal systems, typically of the Anglo-American

tradition, characterise the legal position of each account holder as
including a proprietary interest in the securities or intermediated
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  43
AND LIABILITIES OF INTERMEDIARIES

securities held by the relevant intermediary. In some systems, this

is based on a cascade of trusts. The upper-most intermediary
holds the securities in trust for its account holders. These account
holders, who are usually second-tier intermediaries, are the
beneficiaries of this trust. The credit of securities in their
securities account represents their beneficiary interest under the
trust. They in turn hold this beneficial interest in trust for their
own account holders, and so on. In some other systems, the credit
of securities to a securities account creates a security entitlement.
What these systems have in common is that each intermediary has
a proprietary interest in certain assets (e.g. in securities, a
beneficiary interest under a trust, a security entitlement) and
creates a distinct proprietary interest when it makes a credit to the
securities account it maintains for a client.

Diagram 92-1: Flow of specific rights and interests in the trust

and security entitlement models
44 GUIDE ON INTERMEDIATED SECURITIES
 

In this second group, in accordance with Article

9(1)(a)(ii), the non-Convention law would provide for each
intermediary to receive the rights attached to the securities and
pass these benefits to its own account holders, so that they finally
reach the ultimate account holder. It would also define and
characterise the rights (benefit of a trust, security entitlement,
etc.) each account holder obtains in addition to the rights
conferred by the Convention. Article 9(1)(d).

b. Limited interests

As discussed below in paragraphs 131 and 158, the

Convention provides various methods for the granting of any type
of security interests and other limited interests in intermediated
securities, but does not prescribe which types may be so granted.
It is entirely for the non-Convention law to define the types of
(consensual and non-consensual) interest that can be granted (e.g.
pledge, lien, charge, title-transfer security interest, usufruct, etc.).

The non-Convention law may refer this matter to its

general provisions governing other types of assets (e.g. movable
assets, intangible assets, etc.).

Alternately, the non-Convention law may define one or

more types of limited interests that would apply exclusively to
intermediated securities.

One way or the other, when drafting or reforming the non-

Convention law in this area, lawmakers should be aware that
limited interests are likely to limit the rights that arise from the
credit of securities to a securities account. For example, if the
account holder is the pledgee of the securities credited to its
securities account, the non-Convention law regulating pledges is
likely to limit the right to dispose of the intermediated securities
to certain circumstances. It may also determine whether the
pledgee can exercise the voting rights attached to the securities.
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  45
AND LIABILITIES OF INTERMEDIARIES

c. Cross-border situations

When drafting or revising law governing intermediated

securities, lawmakers should design the bundle of rights created
by a credit to a securities account in a manner consistent with that
jurisdiction’s characterisation of the rights of investors, collateral
takers and other account holders. Top-down consistency may be
achieved for holding chains which are purely domestic, from the
upper-most to the last intermediary in the chain. However, this is
unlikely to be the case where the holding chain begins or ends in
another jurisdiction. This is due to the different characterisations
(and bundles of rights) that this or these other jurisdictions may
attach to a credit of securities.

Lawmakers should be aware of this frequent inconsistency

in cross-border holding chains, which is inherent in a global
intermediated securities holding system. Because non-
Convention law differs from one jurisdiction to another, and
because it generally provides rights in addition to Convention
rights, it is likely that the rights resulting from a credit of
securities with Intermediary 1 in diagram 99-1 below are different
from the rights resulting from a credit of the same securities with
Intermediary 2. While the non-Convention law applicable to
Intermediary 2 cannot unilaterally expand its application to
Intermediary 1, it can secure the position of account holders by
providing that, in cross-border situations, an account holder not
only has the rights it enjoys under the non-Convention law of
State B, but enjoys any additional rights that the relevant
intermediary (here: Intermediary 2) obtains from its own
intermediary at the upper level (here: Intermediary 1), provided
that the exercise of such rights by the foreign account holder
would be recognised by the non-Convention law of State A.
46 GUIDE ON INTERMEDIATED SECURITIES
 

Diagram 99-1: Different States laws in a cross-border

intermediated securities holding chain spanning two States

B. Measures to enable the exercise of rights of account

holders

The Convention provides that certain rights of account

holders may be exercised only against the intermediary. Article
9(2)(c). However, because the Convention does not make any
assumption about the legal structure and characterisation of
proprietary interests in intermediated securities, it does not
determine whether the rights attached to the securities can or must
be exercised by the account holder against its own intermediary
(“through the intermediated chain”) or directly against the issuer.
See Article 9(2)(b). This is why the law should clearly define the
persons entitled to exercise the rights attached to the securities
vis-à-vis the issuer and the conditions thereof. See paragraph 246
et seq. below.

Even when an account holder may or is required to

exercise the rights attached to the securities against the issuer, it
often must rely on the assistance of the intermediary chain. In
many respects, intermediaries must enable account holders to
exercise their rights. They have corresponding duties and
liabilities, which are only partially laid down by the Convention.
In this area, as in many others, the Convention leaves broad space
for non-Convention law.
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  47
AND LIABILITIES OF INTERMEDIARIES

Legislative Principle 2: The Convention provides one general

and four specific obligations of intermediaries to their account
holders. The law should establish specific contents for these
duties and, if necessary, expand them in a manner consistent
with its own characterisation of an account holder’s legal
position. The law should also specify the manner in which an
intermediary may comply with its obligations and determine the
conditions under which an intermediary becomes liable. In
transparent systems, where intermediary functions are shared
between the CSD and account operators, the law should clearly
allocate the respective responsibilities, and the Contracting
State must make a declaration in this respect.

1. Core Convention principles and rules

The core principles and rules are the following:

 An intermediary must generally take all appropriate

measures to enable its account holders to receive and
exercise their rights. Article 10(1).

 An intermediary must protect securities credited to a

securities account. Articles 10(2)(a) and 24.

 An intermediary must allocate securities or

intermediated securities to the rights of its account holders
so that they cannot be reached by the intermediary’s
creditors. Articles 10(2)(b) and 25.

 An intermediary must give effect to authorised

instructions. Articles 10(2)(c) and 23.

 An intermediary must not dispose of securities

credited to a securities account without an authorised
instruction. Articles 10(2)(d) and 15.

 An intermediary must regularly pass on information

necessary for the exercise of rights, dividends and other
distributions. Articles 10(2)(e)-(f).
48 GUIDE ON INTERMEDIATED SECURITIES
 

 An intermediary may not exclude liability for its

gross negligence or wilful misconduct. Article 28(4) and
see paragraphs 120 et seq. below.

2. Choices to be made by declaration

For transparent systems, where some functions of the

relevant intermediary (usually the CSD) are performed by other
persons often called account operators, Article 7 requires the
Contracting State to make a declaration. In particular, it requests
the Contracting State to:

(a) identify by name or description the CSD (or the

relevant intermediary) on one hand, and the persons
who are responsible for the performance of some
intermediary functions on the other;

(b) specify the functions for which these persons are

responsible and the Convention provisions that apply
to them; and,

(c) where applicable, specify the categories of securities

to which this function sharing applies.

In such transparent systems, the core principles and rules

summarised in paragraph 102 do apply to the CSD (or the relevant
intermediary) and to the other persons in accordance with the
sharing of functions described in paragraph 103, and lawmakers
may also wish to clarify in non-Convention law how the
responsibilities and functions are split. For more information on
Article 7 and the optional declaration thereunder, see paragraphs
206-207 below.

The Convention neither requires nor permits any other

declaration in respect of the matters discussed in this section.
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  49
AND LIABILITIES OF INTERMEDIARIES

3. Matters to be addressed or clarified

The following matters are to be addressed or clarified by

law outside the Convention. First, the law should determine the
extent of information that an intermediary must regularly pass on
to account holders relating to intermediated securities and to what
extent an intermediary must pass on to account holders any
distribution received in relation to intermediated securities.
Articles 9(1)(a)(ii) and 10(2)(e)-(f). Second, more generally, the
law should determine how an intermediary must enable account
holders to exercise the rights (if any) that they are entitled to
exercise vis-à-vis the issuer. Article 9(1)(a). Third, the law should
specify when a personal representative (such as the guardian of a
minor, the administrator of an estate or an insolvency, etc.) may
give instructions in lieu of the account holder. Article 23(2)(d).
Fourth, the law may impose additional duties on intermediaries
as required to support the exercise of account holders’ rights and
should specify the manner in which intermediaries may comply
with their legal and Convention duties. Article 28(1)-(2).

In transparent systems, moreover, law outside the

Convention should clearly allocate all those duties between the
CSD and the account operators who are responsible for the
performance of some intermediary functions.

At the outset, it is worth noting that, in the provisions

discussed in this section, the Convention refers generally to the
non-Convention law and, to the extent allowed by the non-
Convention law, to the account agreement between the
intermediary and the account holder or to uniform rules of a SSS.
See generally Part V.C below. It is impossible for legal provisions
to cover the entirety of the operational obligations of an
intermediary. It is thus quite frequent that legal provisions are
supplemented by contractual provisions in the account
agreement, and it is always the case that uniform rules of
settlement systems contain extensive and minute prescriptive
provisions regulating the respective obligations of the operator
and the participants to the system.
50 GUIDE ON INTERMEDIATED SECURITIES
 

One should also keep in mind that law outside the

Convention, including the term “non-Convention law”, not only
refers to statutory instruments but also to decrees and regulations.
In most systems, the duties of intermediaries are the subject
matter of a more or less extensive set of statutory provisions
supplemented by sometimes extensive regulations of a technical
nature issued by a ministry, a regulatory agency or the central
bank within the framework of their respective regulatory powers.

a. Passing on information and distributions received

For unregistered (bearer) securities, and often for

registered securities (where the shareholder or bondholder is
identified in a register maintained by or on behalf of the issuer),
information and payments provided by the issuer to the securities
holders will actually go down through the chain of intermediaries.
Other “corporate actions” may require or enable the account
holder to declare choices (such as providing voting instructions
concerning resolutions proposed to the general meeting,
accepting a tender offer, exercising an option, etc.), which must
be passed up the holding chain. It is generally so that the law
affirms a duty on each intermediary to pass on such information,
distribution or declaration, but leaves the particulars to be
regulated in the account agreement.

The duty to pass on distributions needs some

qualifications. There may be several reasons why a payment
received directly or indirectly from the issuer by an intermediary
should not be transferred to the account holder, such as when the
intermediary itself or a third party has a security interest in the
intermediated securities.

b. Enabling the exercise of other rights against the

issuer

Many rights attached to the securities cannot merely be

passed on to the account holder. To exercise such rights, the
account holder must make a choice or a declaration such as
issuing a vote or giving a power to vote to another person. Or the
account holder may need to take an action such as filing a claim
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  51
AND LIABILITIES OF INTERMEDIARIES

in the issuer’s bankruptcy or filing a derivative suit against the

issuer’s directors. In most cases, the account holder will need the
assistance of the relevant intermediary (and possibly other
intermediaries in the holding chain) to convey its declaration to
the issuer or to certify its position as a shareholder or bondholder.

While it is unlikely that all situations can be anticipated,

the law should deal with the most common situations and possibly
lay out a general principle or test to solve other situations as they
may come. More specific provisions in account agreements or in
the uniform rules of a SSS could supplement the legal provisions.
For various reasons, including to reduce risks inherent in holding
chains, the law might be permit a foreign intermediary to hold in
an intermediated holding system without the necessity of holding
through a local intermediary.

c. Giving effect to authorised instructions

First and foremost, an intermediary owes its duties to the

account holder, who is generally authorised to give instructions
for the intermediary to take action. Under certain circumstances,
however, another person may give binding instructions to the
intermediary. That person’s power to give instructions may be
additional to the general power of the account holder, or it may
limit (e.g. when the other person has negative control – see
paragraph 146 below – over intermediated securities as the result
of an interest granted to it) or exclude (e.g. when the account
holder is legally incapacitated) the validity of instructions given
by the account holder.

Article 23(2) contemplates situations in which another

person is authorised to give instructions to the intermediary. The
list includes persons to whom an interest has been granted in the
intermediated securities; a person who has power to give an
instruction under the account agreement or the uniform rules of a
SSS; and a court or administrative authority empowered by law
to issue an order in respect of intermediated securities.
52 GUIDE ON INTERMEDIATED SECURITIES
 

Many other situations are not contemplated by the

Convention but derive from general principles or specific rules of
the non-Convention law. They may include the power of a
guardian over the assets of its pupil or a ward of court, an executor
over the assets of an estate, an insolvency administrator over the
assets subject to the insolvency; the power of directors or officers
of an issuer; powers of attorney; etc.

The law should therefore clarify generally or by specific

provisions which and when such powers are effective against an
intermediary and to what extent such powers displace the account
holder’s own power to give instructions.

d. Specifying the manner of complying with

Convention obligations

The general duty of intermediaries to enable the exercise

of their account holders’ rights and the four specific obligations
laid down by the Convention are expressed in general terms. This
may create a degree of uncertainty for intermediaries. To reduce
this uncertainty, Article 28(1) provides that the non-Convention
law may specify the content and the manner in which an
intermediary complies with its Convention obligations. The law
may alternatively allow such issues to be specified in the account
agreement or, where applicable, in the uniform rules of a SSS.
One should keep in mind that any reference to the law is not
limited to statutory instruments but includes regulations as well.

Article 28(2) states that, where an intermediary complies

with a provision of non-Convention law – or alternatively the
account agreement or uniform rules of a SSS to the extent
permitted by such law – that specifies the substance of an
obligation under the Convention, it satisfies the Convention
obligation. However, such law cannot make the Convention
obligation so minimal that it amounts to no obligation in
substance. See Official Commentary, paragraph 28-14.
 RIGHTS OF ACCOUNT HOLDERS AND DUTIES  53
AND LIABILITIES OF INTERMEDIARIES

C. Liability of intermediaries

Legislative Principle 3: The Convention does not specify the

liability of intermediaries. The law should clearly establish the
conditions and the extent of such liability, and whether it may
be exempted by way of contractual provisions.

The Convention does not set out the conditions under

which an intermediary becomes liable to its account holders or to
other persons. Article 28(3). Non-Convention law should
therefore determine the conditions and the effects of a breach of
duty by an intermediary and by other persons such as account
operators in transparent systems, where duties may be split. Non-
Convention law may do so by providing a set of rules specific to
the functioning of the intermediated holding system, or by
referring to its general provisions and, where necessary,
supplement or modify them to reflect adequately the specificities
of the system.

Non-Convention law should specify whether that liability

may be modified or excluded by the account agreement or by the
uniform rules of a SSS. That law, however, cannot derogate from
Article 28(4), which states that an intermediary may not exclude
liability for its gross negligence or wilful misconduct.

Of particular concern is the liability of an intermediary for

a failure by its (own) relevant intermediary or other
intermediaries (which, as noted in paragraph 29 above, may be
referred to as “sub-custodians”) in a holding chain. Where
holding chains involve several intermediaries and, in particular,
cross national borders, an account holder may be exposed to risk
and loss due to the actions or omissions of intermediaries with
which it has no direct relationship. The non-Convention law
should address these risks by setting, at a minimum, a duty upon
a relevant intermediary to use care in the selection and monitoring
of intermediaries that it employs. But the non-Convention law
might set upon intermediaries duties (and corresponding liability)
beyond such a duty of care. Such law, for example, might require
a relevant intermediary to ensure that its account agreements with
other intermediaries impose on those intermediaries duties not less
protective than those the relevant intermediary has assumed under
54 GUIDE ON INTERMEDIATED SECURITIES
 

the non-Convention law and the account agreement with respect to

its account holders. It might reach even further by requiring this
other intermediary to impose similar duties on its own upper-tier
intermediaries. As a practical matter, however, States should
proceed with caution so as not to restrict unduly, geographically or
otherwise, the investments that account holders could feasibly
acquire.
 PART IV - TRANSFER OF INTERMEDIATED
SECURITIES

The ability to buy and sell intermediated securities and

create and grant interests in them is essential to the functioning of
capital markets. To promote the sound functioning of markets, as
set out in this Part of the Guide, States should establish or revise
their laws consistent with the following principles, rules, and
related guidance on transfer of intermediated securities, in
particular regarding (a) acquisition and disposition of
intermediated securities, (b) unauthorised dispositions and
reversal, (c) protection of an innocent acquirer, and (d) priorities.

A. Acquisition and disposition of intermediated securities

Legislative Principle 4: The Convention provides that

intermediated securities or any limited interests therein may be
transferred by debits and credits. The law also may adopt any
one or more of the other methods specified by the Convention.

The transfer of intermediated securities and any limited

interests (e.g. security interests) may occur by various methods.
Some methods for transfer rely on book-entries in securities
accounts, such as the debit and credit method and the designating
entry method. Not all methods for transfer, however, require such
entries. This section deals with transfer by the debit and credit
method and by other methods.

1. Transfer by debit and credit method

a. Core Convention principles and rules

The core principles and rules are the following:

 Intermediated securities are acquired when a credit is

entered in the securities account of the transferee, and they
are disposed of when a debit is made to the securities
account of the transferor. Article 11(1) and 11(3).

55
56 GUIDE ON INTERMEDIATED SECURITIES
 

 Limited interests in intermediated securities, such as

security interests, may also be transferred by debit and
credit entries in the securities accounts of the transferor and
the transferee respectively. Article 11(4).

 No further steps, such as publicity or registration

requirements, are necessary to make such acquisition
effective against third parties. Article 11(2).

As intermediated securities exist as book-entries in

securities accounts, debits to the transferor’s account and credits
to the transferee’s account play an essential role in intermediated
holding systems. Such debits and credits, however, do not occur
in a void as they are based on the transactions agreed between the
transferors and the transferees and generally result from
instructions issued by them to their respective intermediaries.
Based on that transaction and the underlying interests transferred,
the debits and credits may represent the transfer of a full interest
in intermediated securities or a limited one.

Debits and credits have become the universal method for

transferring intermediated securities. As a result, the Convention
requires that this method of transfer be available to all account
holders. The Convention further requires that, as discussed in Part
IV.B, a debit be authorised by the account holder and, to ensure
legal certainty for transferees against third parties, no further step
may be necessary to render that transfer effective.

Apart from these core harmonising rules, because of the

diversity of legal rules and operational systems in intermediated
holding worldwide, the Convention leaves to non-Convention
law various important issues, which are discussed below.

b. Choices to be made by declaration

The Convention neither requires nor permits declarations

in respect of the matters discussed in this section.
 TRANSFER OF INTERMEDIATED SECURITIES  57

c. Matters to be addressed or clarified

The following matters are to be addressed or clarified.

First, the law should determine whether a “no credit without
debit” rule, whereby any credit to a securities account must have
a corresponding debit to another securities account, is to apply to
transfers by this method. Second, the law should also determine
whether to permit net settlement of intermediated securities
transactions. Article 11(5). Third, consideration should be given
to whether the law should determine what constitutes a debit and
a credit.

Relatedly, what limited interests may be transferred by a

credit to a securities account – or by the other methods described
in paragraph 138 et seq. below – is entirely for the non-
Convention law to determine, as the Convention is silent in this
regard. See paragraphs 94-97 above and 158 below. In addition,
although no further steps may be required for effectiveness
against third parties, the law should clearly define when a debit
or credit is valid and when a debit is or can be made conditional.
Articles 11(1)-(2) and 16 and see paragraphs 165-168 below.

(i) The connection between debits and credits

The connection between debits and credits is an area of

significant divergence between various domestic legal and
regulatory regimes. Most legal systems of the civil law tradition,
for example, follow the “no credit without debit” rule and
consider that the intermediated securities debited from the
transferor’s account are the very same ones that are credited to
the transferee’s account. In other words, in a given securities
transaction, the equivalent property that is relinquished by the
transferor is acquired by the transferee and the book-entries for
that transaction should occur at the same time, though this does
not always occur in practice. If not simultaneous, the law ensures
that there is a single conceptual instance for the acquisition and
disposition and that any mismatch between the relevant securities
accounts is resolved as soon as possible. It may also provide that
the credit to the transferee’s account prevails over any remaining
credit to the transferor’s account.
58 GUIDE ON INTERMEDIATED SECURITIES
 

Legal systems of the common law tradition, however, do

not necessarily make such a connection. In a trust system, for
example, account holders acquire an equitable interest in the
assets held by their intermediary as beneficiaries of a trust. When
an account holder sells securities, that account holder is not
legally transferring its equitable interest to the transferee. Instead,
that equitable interest – derived from the intermediary’s holding
– is extinguished, and a comparable interest is created by the
transferee’s intermediary for the transferee. In a security
entitlement system, as another example, a similar analysis
applies. The transferor’s entitlement with its intermediary is
extinguished, and another entitlement is created by the
transferee’s intermediary for the transferee.

The Convention fully defers on these issues and,

depending on how intermediated securities are characterised (see
paragraph 85 et seq.), the non-Convention law should determine
whether a “no credit without debit” rule is to apply.

(ii) Debits and credits on a net basis

As noted in paragraph 20 above, where multiple

transactions are made every day, it makes sense not to transfer
gross quantities per transaction but, where possible, to net transfer
obligations at predetermined times and to transfer only the
resulting net amount. In systems in which net settlement of
intermediated securities transactions is permitted, to the extent
that there are matching debits and credits to accounts maintained
by the intermediary for its account holders, there need not be
precisely matching entries in the intermediary’s accounts
maintained with its upper-tier intermediary. Such entries,
however, should simply reflect the net overall change in the
aggregate balance of its account holders taken together.

The Convention does not mandate recognition of netting

arrangements. See Article 11(5). Non-Convention law thus may
allow or disallow debits and credits to be made on a net basis in
the accounts of an intermediary with an upper-tier intermediary
to reflect, for securities of the same description, the net result of
all movements in the accounts maintained by that intermediary
 TRANSFER OF INTERMEDIATED SECURITIES  59

for account holders and its own holdings. Such law should
address and determine whether to provide for recognition of
netting arrangements.

(iii) Definition of debit or credit

It is for the non-Convention law to determine what

constitutes entries such as debits and credits as the Convention is
silent in this regard. Such a definition, if necessary, may be found
in some legal or regulatory provisions of the non-Convention law
or, possibly, in the uniform rules of an SSS.

2. Transfer by other methods

a. Core Convention principles and rules

The core principles and rules are the following:

 The Convention expressly recognises three optional

additional methods for an account holder to transfer
intermediated securities or any interest therein.

 An account holder may grant an interest by entering

into a valid agreement with its intermediary (Article
12(3)(a)), with another person and by having a designating
entry (earmarking) made in favour of that person in its
security account (Article 12(3)(b)), or by entering into a
valid control agreement with the intermediary that permits
that person to exercise control over the securities (Article
12(3)(c)).

 For these methods, as for the debit and credit method,

no further steps may be required for effectiveness against
third parties. Articles 12(1)-(2). The non-Convention law
should be reviewed to determine whether any further step
or steps are required and, if any exist, they should be
eliminated. As to the invalidity or reversal of a designating
entry or other book-entry, see Article 16 and paragraphs
165-168 below.
60 GUIDE ON INTERMEDIATED SECURITIES
 

 Other methods for transfer may be maintained in the

non-Convention law. Article 13.

The Convention expressly provides four methods for

transferring intermediated securities or any limited interests
therein: the debit and credit method in Article 11 and three
additional methods in Article 12. The three additional methods,
although present to varying extents around the world, have not
reached the same level of universal acceptance as the debit and
credit method. Accordingly, under the Convention, the debit and
credit method must be recognised, whereas the three additional
methods are optional.

Apart from the methods expressly provided in the

Convention, Contracting States are entitled to use additional
methods under Article 13. Subject to certain limitations described
below, Article 13 permits States to accommodate alternative
methods for transfer (e.g. an existing one that a State may wish to
retain) in that State’s legal framework.

b. Choices to be made by declaration

Article 12 sets out a number of options with respect to the

three additional methods, and States may wish to consider
whether to provide for or retain one, two, all or none of these
methods in their non-Convention law. The additional methods
provided by Article 12 are the following:

(a) Designating entry (or earmarking): besides a valid

agreement between parties, this method requires a book-entry
in favour of the transferee in the transferor’s securities
account, made by the relevant intermediary according to the
transferor’s instructions;

(b) Control agreement: a valid agreement between the parties

is accompanied not by a book-entry in the transferor’s
securities account, but rather the control agreement directly
states those conditions or obligations under which the relevant
intermediary must act to the benefit of the transferee; and
 TRANSFER OF INTERMEDIATED SECURITIES  61

(c) Agreement with relevant intermediary (or automatic

perfection): an interest is created when the account holder
and its relevant intermediary enter into a valid agreement.
There is no other condition to be met because the agreement
binds the very same parties that would be needed for a
control agreement, and the position of the intermediary is
secured by the control it has over the securities account that
it maintains for the account holder.

All these methods have in common that the intermediated

securities in which interests are transferred remain credited to the
transferor’s securities account. Further, two steps are required for
each: (a) the transferor and the transferee enter into a valid
agreement regarding the interest to be granted; and (b) the
condition specific to the relevant method is satisfied.

(i) Positive and negative control

Because designating entries are book-entries like debits

and credits, they conform in many ways with this universal
method for transfer and are preferred in many systems. The book-
entry also serves as a form of publicity, but this is generally of
very limited value because securities accounts are not public
registries to be consulted without authorisation. Account
statements, moreover, may become out of date within minutes of
being generated.

Other systems prefer control agreements, which do not

require a book-entry in the transferor’s account and allow for
contractual provisions regulating the relationship between the
transferor, transferee and, in typical instances, the relevant
intermediary.

As the intermediated securities in relation to which an

interest is granted by designating entry or control agreement
remain in the transferor’s securities account, it is not enough that
a book-entry be made or an agreement be in place reflecting the
existence of that interest. That entry or agreement must also have
certain effects protecting the transferee against possible
unauthorised actions regarding the relevant securities.
62 GUIDE ON INTERMEDIATED SECURITIES
 

For protection in this regard, non-Convention law is to

determine whether a designating entry or a control agreement
provides the transferee of the interest with “positive” or
“negative” control, or both. Positive control requires the
intermediary maintaining the transferor’s account to comply with
any instructions given by the transferee in relation to those
intermediated securities as may be provided by the account
agreement, control agreement, or the uniform rules of an SSS,
without further consent of the transferor. Negative control
requires that the intermediary maintaining the transferor’s
account may not comply with any instructions given by the
transferor in relation to the relevant intermediated securities
without the transferee’s consent. See Articles 1(k) and 1(l).

(ii) Interests transferable by the three methods

In many systems, these three additional methods are

typically used to transfer limited interests in intermediated
securities, such as security interests. Like the debit and credit
method under Article 11, however, the three additional methods
provided in Article 12 are capable of granting any type of interest
in intermediated securities under the non-Convention law,
including a full interest, even though transferees of intermediated
securities typically prefer to have them credited to their securities
accounts.

Under the Convention, these three methods are not

restricted to transferring limited interests, despite the fact that
they are primarily used for doing so, because such a restriction
would require defining the content of particular concepts, such as
security interests. This would undermine the Convention’s
functional approach and interfere with the property notions of
various domestic systems.

In line with commercial practices in numerous markets,

Article 12(4) provides that any of these methods may be used to
grant an interest in respect of:

(a) an entire securities account, so that it applies to all

intermediated securities credited from time to time standing
to the credit of that account; or
 TRANSFER OF INTERMEDIATED SECURITIES  63

(b) a specified category of intermediated securities, or a

specified quantity or value of intermediated securities,
standing to the credit of a given securities account.

(iii) Declarations

What methods for transfer are available in which legal

systems is important information for investors and intermediaries.
This is why the Convention promotes the three optional methods
(in addition to the debit and credit method). If a Contracting State
wishes to adopt one or more of those methods, a declaration is
required regarding which methods they have chosen and, if
applicable, to specify the type of control resulting from a
designating entry or control agreement.

A Contracting State may also limit via declaration the

possibilities provided under Article 12(4). See paragraph 149.

The purpose of such declarations is to enhance

international transparency and legal predictability, and they may
be subsequently modified. For more information on these
optional declarations under Article 12(5)-(7), see the Declarations
Memorandum, Section 4.D and accompanying Forms No. 4A
to 4F.

Furthermore, if a State chooses both designating entries

and control agreements, it should also consider whether both
methods rank equally or if an interest granted by a designating
entry always has priority over an interest granted by way of a
control agreement, in which case this should be the subject matter
of a declaration. See Article 19(7) and paragraph 189 below.

c. Matters to be addressed or clarified

(i) Valid agreement required

Each of the three additional methods for transfer requires

that the account holder enter into an agreement with or in favour
of the person to whom an interest is granted. Non-Convention law
determines the nature, scope, and extent of the interest granted,
may establish formal requirements for such agreement, and may
distinguish among classes of account holders. It also determines
64 GUIDE ON INTERMEDIATED SECURITIES
 

the consequences for an agreement that is invalid or ineffective

for reasons such as lack of formality, lack of capacity, mistake,
and illegality.

(ii) Other methods for transfer under non-

Convention law

The four methods for transfer expressly identified in the

Convention are not exclusive. Indeed, additional methods, as
recognised by Article 13, are not precluded by the Convention.
There are a number of policy choices to be made with respect to
such non-Convention methods. States may wish to consider
whether these aspects of intermediated securities law are to be
standalone (with creation of special methods) or part of existing
laws or rules within their domestic system. States may preserve
existing methods or consider other approaches to ensure effective
transfers of interests.

Transfers according to such other methods are not eligible

for the protection of an innocent acquirer under Article 18, though
they may be protected by a similar provision of non-Convention
law. See paragraphs 180-181 below. Their priorities are
determined by the non-Convention law, except that they are
subordinated to all interests that become effective against third
parties under Article 12. See paragraphs 196-197 below.

A Contracting State should consider existing methods for

transfer falling under Article 13 and whether they should be
retained.

(iii) Limited interests that can be granted

What limited interests may be granted by a method under

Article 12 is entirely for the non-Convention law to determine.
For discussion, see paragraphs 94-97 above.

(iv) Non-consensual security interests

Article 12(8) references non-consensual security interests

(e.g. statutory liens, purchase-money liens, etc.), which are not
regulated by the Convention. Such interests arise, become
 TRANSFER OF INTERMEDIATED SECURITIES  65

effective against third parties and enjoy the priority determined

by the applicable law. As discussed in paragraphs 192-195 below,
States may wish to consider how these types of interests are
addressed in their law.

B. Unauthorised dispositions and invalidity, reversal and

conditions

Legislative Principle 5: The Convention provides that an

intermediary may only dispose of intermediated securities with
the authorisation of the person(s) affected by the disposition.
The law may provide for other cases of authorised dispositions,
and it should establish the consequences of unauthorised
dispositions. The law should also determine whether and in
what circumstances a book entry is invalid, reversible, or
conditional, and the consequences thereof.

1. Core Convention principles and rules

The core principles and rules are the following:

 Debits of securities to a securities account,

designating entries or the removal of designating entries or
any other disposition of intermediated securities may only
be made with the authorisation of the person(s) negatively
affected by the disposition. Article 15(1)(a)-(d).

 Such authorisation may also be contained in the non-

Convention law. Article 15(1)(e).

 The non-Convention law and, to the extent permitted

by the non-Convention law, the account agreement or the
uniform rules of a SSS determine the consequences of
dispositions lacking the required authorisation.
Article 15(2).

 This corresponds with the Convention’s general rule

that non-Convention law determines whether and in what
circumstances a debit, credit, designating entry or removal
of a designating entry is invalid, is liable to be reversed or
may be subject to a condition, and the consequences
thereof. See Articles 15(2) and 16.
66 GUIDE ON INTERMEDIATED SECURITIES
 

 With respect to unauthorised designating entries, the

consequences of unauthorised dispositions provided in the
non-Convention law are subject to the protection of
innocent acquirers. Article 18(2).

The general idea of Article 15 is that dispositions of

intermediated securities must be authorised by the person(s)
affected by those dispositions. Article 15(1)(a)-(d) specify such
dispositions, including dispositions in accordance with Articles
11, 12 and 13, and the persons by whom the intermediary must be
authorised. The prerequisites of a valid authorisation are not
regulated by the Convention. But the authorisation itself may be
given by any kind of express or implied consent under the
Convention, including instructions of the affected person.
Article 10(2)(c). The non-Convention law may additionally
provide authorisation by operation of law and not by the affected
person(s).

The consequences of unauthorised dispositions are

deferred to non-Convention law. Dispositions under Article 15(1)
are not necessarily associated with book-entries (e.g.
Articles 12(3)(a), 12(3)(c), 13). But insofar as unauthorised
dispositions implicate a (removal of a) book-entry in a securities
account, Article 15(2) replicates the general rule that the validity,
reversibility and conditionality of book-entries in securities
accounts are determined by the non-Convention law. Article 16.
The non-Convention law may permit that the account agreement
or the uniform rules of a SSS also determine the consequences of
unauthorised dispositions and whether book-entries are defective.
Articles 15(2), 16, 17(d).

The relevance of the non-Convention law is subject to the

protection of the innocent acquirer. Articles 15(2), 16, 18. The
reason why only unauthorised designating entries are mentioned
in Article 15(2) and expressly made subject to Article 18(2) is that
only such book-entries may directly result in defective entries. In
the case of other unauthorised dispositions, later resulting in a
defective (credit or designating) entry, however, an innocent
person may, by a subsequent transaction, also acquire an interest
in intermediated securities free of adverse claims.
 TRANSFER OF INTERMEDIATED SECURITIES  67

2. Choices to be made by declaration

The Convention neither requires nor permits declarations

in respect of the matters discussed in this section.

3. Matters to be addressed or clarified

a. Defining authorisation of dispositions and the

consequences of unauthorised dispositions

While the Convention states that an intermediary may

only dispose of intermediated securities with the authorisation of
the person affected by the disposition, the authorisation required
by Article 15 may also be contained in (general provisions of) the
non-Convention law.

The law should clarify the consequences of dispositions

that are not authorised by the person who is negatively affected
by the disposition. Article 15(2). The non-Convention law may
defer this decision to the general provisions of its law, to the
account agreement or the uniform rules of a SSS.

The non-Convention law may also regard such

unauthorised dispositions neither as void nor as liable to be
reversed but, for instance, as a mere breach of contract between
the intermediary and the person affected by the unauthorised
disposition.

To some extent, the consequences of unauthorised

dispositions may be dependent on the intermediated securities
holding model chosen by the respective State. See generally Part
I.B above. For example, in the co-ownership system of a
European civil law State, unauthorised debits are void, though the
subsequent acquisition by an innocent person may be protected,
having the result that the account holder of the wrongly debited
securities account would lose its proprietary interest. In the
security entitlement system of a North American common law
State, unauthorised debits are also void, and the relevant
intermediary is obligated to re-credit the securities account which
was wrongly debited, thereby re-establishing that account
holder’s security entitlement.
68 GUIDE ON INTERMEDIATED SECURITIES
 

b. Clarifying validity requirements and conditions of

book-entries

In general, the law should clarify whether and in what

circumstances book-entries are void, are liable to be reversed or
are conditional. Article 16.

The law should also address the consequences of the

reversibility of unauthorised or defective (credit or designating)
book-entries. In particular, the law has to determine whether the
reversal of book-entries has retroactive effect or ex nunc effect.
Likewise, decisions have to be made in case of conditional book-
entries when the condition is not fulfilled. The non-Convention
law may defer this decision to the general provisions of its law or
to the account agreement or the uniform rules of a SSS.
Articles 15(2), 16 and see paragraphs 132-134 above (regarding
the “no credit without debit” rule).

The law has to make clear that the consequences of

unauthorised dispositions and defective (credit or designating)
book-entries that are determined by the non-Convention law are
subject to the overriding principle of the protection of an innocent
acquirer. Article 18 and see also Articles 15(2), 16.

C. Protection of an innocent acquirer

Legislative Principle 6: The Convention provides that an

innocent acquirer who acquires for value is protected against
adverse claims. This protection covers instances in which (a)
another person has an interest in intermediated securities which
is violated by the acquisition, and (b) the acquisition could be
affected by an earlier defective entry. The law may extend the
scope of this protection.

1. Core Convention principles and rules

The core principles and rules are the following:

 The innocent acquirer who acquires for value is

protected against adverse claims. The innocent acquirer is
protected if another person has an interest in intermediated
 TRANSFER OF INTERMEDIATED SECURITIES  69

securities which is violated by the acquisition.

Article 18(1). The innocent acquirer is also protected
against the invalidity or reversibility of an earlier defective
entry. Article 18(2).

 With regard to earlier defective entries, the

acquisition by an innocent person is, to the extent permitted
by the non-Convention law, subject to the uniform rules of
a SSS or the account agreement. Article 18(5).

 The Convention also protects against other claims

(e.g. damages or unjust enrichment) that may be asserted
against the innocent acquirer by the person who holds the
right or interest or would otherwise benefit from the
invalidity or reversal of the defective entry. Article 18(1)(c)
and 18(2)(b).

 The protection of the innocent acquirer is limited to

instances in which the acquirer has given (any kind of)
value, which has to be understood in a broad sense. See
Article 18(3) and Official Commentary, paragraphs 18-15
to 18-16.

 The priority of interests in the same intermediated

securities is, however, not regulated by Article 18, but by
Articles 19 and 20(2). See Articles 18(6) and 19 and
paragraphs 182-188 below.

The general idea of Article 18 is not only to protect the

innocent acquirer, but also to immunise onward transfers against
the consequential risk of being removed or reversed based on
another person’s interest in the intermediated securities or on an
earlier defective entry. Article 17, for its part, provides definitions
which are relevant for the operation of Article 18, including the
following:

(a) The term “acquirer” is defined in a broad sense, including

the acquisition of a security interest or another limited interest.
Article 17(a).
70 GUIDE ON INTERMEDIATED SECURITIES
 

(b) The acquirer is innocent, unless the acquirer actually

knows or ought to know, at the relevant time, of another
person’s interest or of an earlier defective entry. Considering
the short time frame of transactions in intermediated securities
that are effectuated through impersonal markets, an acquirer
has no general duty of inquiry or investigation in order to meet
the standard of innocence. See Article 17(b) and, as to the
standard of “ought to know”, Official Commentary,
paragraphs 17-8 to 17-14.

(c) The question whether organisations actually know or

ought to know of an interest or fact has to be determined by
reference to the individual responsible for the matter to which
the interest or fact is relevant. Article 17(c).

(d) A defective entry is a credit of securities or designating

entry that is invalid or liable to be reversed. Article 17(d).

(e) The relevant time at which the acquirer must be innocent

is usually the time that the credit is made. Article 17(e). Since
interests in intermediated securities may become effective
without a credit entry in the securities account, the relevant
time is, in this case, determined by the time when those
interests have been made effective against third parties.
Article 19(3).

The protection of the innocent acquirer thus covers

situations in which the other person’s interest in the intermediated
securities is violated by the acquisition. Article 18(1).
Article 18(2) extends this protection to situations in which the
earlier defective entry does not constitute an interest in the
intermediated securities at the relevant time of acquisition, but
bears the risk of resulting in the innocent acquisition being
reversed. The scope of application of Article 18(1) and
Article 18(2) may overlap.

As the results under paragraphs 1 and 2 of Article 18 are

identical, the distinction between these paragraphs is usually not
relevant. The protection under Article 18(1) is not subject to law
 TRANSFER OF INTERMEDIATED SECURITIES  71

outside the Convention. The protection under Article 18(2),

however, may be subject to any provision of the uniform rules of
a SSS or the account agreement. See Article 18(5).

The function and meaning of Articles 18(1) and (2)

depend on the (general) provisions of the law of the respective
State for two reasons. First, Article 18(1) protects an innocent
acquirer of intermediated securities against any competing claim
from another person and ensures that he or she may acquire the
securities even if a corresponding debit has not been made. This
is relevant even in a so-called matching system (i.e. a system in
which credit entries have to correspond with an equivalent
number or amount of debits). In a system which allows for the
acquisition of intermediated securities without corresponding
debits, however, the innocent acquisition principle has more the
character of a limitation of the acquisition, which is generally
possible by the person to whose securities account the credit was
made. In such a system, the protection of an innocent acquirer
may create a shortfall or imbalance in securities that States might
decide to resolve by requiring regular or periodic reconciliation
by issuers or intermediaries (including CSDs) or by using the
intermediary’s securities, if any, to correct the shortfall. See
paragraph 217 below.

Second, in a Contracting State that regards the transfer (of

rights) as a contract that is separate and abstract from the
underlying contract, the transfer of intermediated securities is not
directly affected by the invalidity (rescission) of the underlying
contract (principle of abstraction). Hence, the transfer is, in
principle, valid, even though the acquired right or interest has to
be returned on the ground of unjust enrichment. The situation is,
of course, different if the transfer itself is void. But in this case
the acquirer will already be protected under Article 18(1).
Consequently, resort to Article 18(2) may not be necessary in
such a State.

Lawmakers should be aware that the rights and liabilities

of acquirers in case they are not protected by Article 18(1) or
Article 18(2) are determined by the applicable law. Article 18(4)
72 GUIDE ON INTERMEDIATED SECURITIES
 

replicates the general principle that, if the Convention does not

provide any special rules, the applicable law will determine the
rights and liabilities of the respective persons.

2. Choices to be made by declaration

The Convention neither requires nor permits declarations

in respect of the matters discussed in this section.

3. Matters to be addressed or clarified

The law should clarify whether and to what extent the

rules of a SSS or an account agreement may limit the innocent
acquisition principle of Article 18(2). If so, the consequence is the
reversal of (a series of) book-entries. The innocent acquisition
principle under Article 18(1), however, is applicable at any rate.
Because the Convention harmonises the “credit side” but not the
“debit side” of transactions, the non-Convention law may require
that, in the case of acquisition by an innocent person, a
corresponding debit must occur in order to avoid an “inflation” of
securities. See paragraph 176.

Lawmakers may also consider whether to extend the

scope of the protection offered to innocent acquirers under Article
18 and determine other circumstances in which an innocent
acquisition of intermediated securities will be protected. Indeed,
law outside the Convention may provide more generous
protection than that provided by Articles 18(1) and 18(2).

D. Priorities

Legislative Principle 7: The Convention provides clear priority

rules that apply among competing claimants to the same
intermediated securities. The law may supplement and adjust
these priority rules. The law should address priority contests
that are not resolved by the Convention.
 TRANSFER OF INTERMEDIATED SECURITIES  73

1. Core Convention principles and rules

The core principles and rules are the following:

 The Convention sets out basic priority rules for

interests made effective under Articles 12 and 13 with
respect to the same intermediated securities (i.e. securities
credited to the same securities account). Article 19.

 The Convention partially determines the priority

among an intermediary’s collateral taker and its account
holder. Article 20.

 The Convention contains a general transition rule,

which preserves the priority of interests created under the
non-Convention law of a Contracting State before the
Convention has entered into effect in relation to the
Contracting State. Article 39.

Subject to exceptions mentioned below, interests made

effective under Article 12 have priority over interests otherwise
effective under the non-Convention law (i.e. Article 13 interests).
Article 19(2).

Exceptions to the Article 19(2) priority rule are made for

non-consensual security interests, as to which the Convention
defers to priority rules under the non-Convention law under
Article 19(5), and for the priority of interests created by an
intermediary as against the rights and interests of the
intermediary’s account holders governed by Article 20.

Article 19(3) provides the baseline temporal priority rule.

Interests made effective under Article 12 rank according to the
time (a) of an intermediary’s acquisition of an interest under
Article 12(3)(a); (b) of the making of a designating entry; and (c)
that a control agreement is entered into or, if applicable, that the
relevant intermediary receives notice that a control agreement has
been entered into.
74 GUIDE ON INTERMEDIATED SECURITIES
 

Article 19(4) provides a special non-temporal priority

rule. If an intermediary holds an effective Article 12 interest and
subsequently makes a designating entry or enters into a control
agreement in favour of another person, the other person’s interest
has priority unless the parties expressly agree otherwise.

Article 19(6) permits parties to vary the otherwise

applicable priorities by agreement, except that applicable law
governs whether parties may vary the priority of a non-consensual
security interest. See paragraphs 192-195 below.

Under Article 20, an interest granted by an intermediary

under Article 12 has priority over the rights of the intermediary’s
account holders unless the intermediary’s grantee knew or ought
to have known that the interest violated the rights of one or more
account holders. Article 20(2). This is essentially the same test of
innocence provided in Article 18(1). The Convention leaves to
non-Convention law the relative priorities in the case of the grant
of an interest by the intermediary under Article 13. See
paragraphs 196-197 below.

2. Choices to be made by declaration

a. Declaration regarding priority of interests granted

by designating entry

A Contracting State may declare that an interest made

effective by a designating entry has priority over interests granted
by other methods, subject to the priority rule in Article 19(4). See
paragraph 186 above. For more information on the optional
declaration under Article 19(7), see the Declarations
Memorandum, Section 4.E and accompanying Form No. 5.

b. Declaration regarding transitional provision

Under the transition rule variation in Article 39(2), a

Contracting State may declare that a pre-existing interest will
retain its priority under Article 39(1) only if it is made effective
under Article 12 before the relevant date.
 TRANSFER OF INTERMEDIATED SECURITIES  75

Pre-existing interests are defined in Article 39(3)(a) to

mean consensual interests granted under the non-Convention law
other than by a credit to a securities account. The relevant date is
defined in Article 39(3)(b) to mean the date stated by the
Contracting State in its declaration, but not later than two years
after the declaration’s effective date. For more information on the
optional declaration under Article 39(2), see the Declarations
Memorandum, Section 4.J and accompanying Form No. 10.

3. Matters to be addressed or clarified

a. Non-consensual security interests

Because Article 19(5) leaves the priority of non-

consensual security interests to the applicable law, a Contracting
State should reconsider any such applicable priority rules for
consistency with and conformity to the policies embodied in the
Convention.

In particular, a Contracting State should consider whether

the priority of any or all applicable non-consensual security
interests may be varied by agreement. See Article 19(5)-(6).

If the non-Convention law of a Contracting State provides,

or if a Contracting State is giving consideration to the enactment
of a law which provides, that an intermediary acting as an agent
or broker obtains a non-consensual security interest in securities
to secure an account holder’s obligation to pay for the securities,
then the Contracting State should consider the priority given (or
to be given) to that security interest. The Contracting State should
consider giving first priority to such a non-consensual security
interest, subject to the operation of Article 19(4).

A Contracting State should consider whether a right of

retention or similar right or interest provided under the State’s
civil code, commercial code, or both applies to intermediated
securities for the benefit of the relevant intermediary. The State
should consider clarifying such provisions with respect to the
applicability or non-applicability to intermediated securities and,
if applicable, the priority of such a right or interest.
76 GUIDE ON INTERMEDIATED SECURITIES
 

b. Priorities regarding interests granted by non-

Convention methods

If and to the extent that the priority rules applicable to

interests created under the non-Convention law of a Contracting
State differ from those applicable under the Convention, the
Contracting State should consider conforming those rules to the
Convention’s rules.

In particular, a Contracting State should consider

conforming the priority rule for an interest granted by an
intermediary under the non-Convention law (i.e. an Article 13
interest) to be consistent with Article 20(2).

c. Priorities of interests granted by an intermediary

Except for the protection of an innocent acquirer

contained in Article 20(2), the Convention does not determine the
result of a priority contest between the interests of account holders
and an effective interest granted by the intermediary under
Articles 12 or 13. Such a priority contest may occur, for example,
in the case of an insolvent intermediary and the occurrence of a
shortfall in securities. As such a contest is to be determined by the
applicable law, a Contracting State may wish to consider its law
in this regard and, in particular, how that contest should be
resolved. See Article 20(1) and Official Commentary, paragraphs
20-7 to 20-10.
 PART V - INTEGRITY OF THE
INTERMEDIATED HOLDING SYSTEM

A. Prohibition of upper-tier attachment

Legislative Principle 8: The Convention, with limited exceptions,

prohibits any attachment of intermediated securities of an
account holder against, or so as to affect (a) a securities account
of any person other than that account holder, (b) the issuer of
any securities credited to a securities account of that account
holder, or (c) a person other than the account holder and the
relevant intermediary.

1. Core Convention principles and rules

The core principles and rules are the following:

 The Convention generally prohibits upper-tier

attachment, subject to an exception specified under Article
22(3). See Article 22(1).

 The phrase “upper-tier attachment” is commonly

used where a creditor of an account holder attempts to
attach securities credited to a securities account maintained
by an intermediary which is not the account
holder’s/debtor’s relevant intermediary.

 In other words, upper-tier attachment indicates that

the creditor tries to attach at an inappropriate tier of the
holding chain.

The prohibition of upper-tier attachment is based on an

important policy consideration. Permitting such attachment
would undermine the ability of an intermediary to perform its
functions and disrupt the integrity of the intermediated securities
holding system. What should be avoided is that such an
attachment order blocks securities accounts of other account
holders who have nothing to do with the subject matter of the
attachment. If upper-tier attachment is permitted, such blockage

77
78 GUIDE ON INTERMEDIATED SECURITIES
 

could happen because upper-tier intermediaries usually do not

know and are unable to specify what part of the securities or
intermediated securities are the relevant securities that should be
subject to the attachment. Even if upper-tier intermediaries can
identify the relevant securities or intermediated securities,
permitting upper-tier attachment could produce enormous costs
for the relevant upper-tier intermediary in identifying the relevant
securities or intermediated securities and could prevent efficient
operations of the intermediated securities holding system. Upper-
tier intermediaries will, in general, be unable to determine if the
relevant securities or intermediated securities may be subject to a
security interest or attachment order at the level of the relevant
intermediary. The prohibition of upper-tier attachment thus
ensures that the rights of the holders of such a security interest or
attachment will not be adversely affected, and the provided
exception to that prohibition is meant for transparent systems and
to be used with caution. See paragraph 203.

This policy is particularly important in the cross-border

context, inasmuch as if some systems permit upper-tier
attachment and others do not, it would seriously harm
compatibility and thus efficiency of cross-border holding of
intermediated securities.

The definition of attachment is broad. Article 22(2)

defines “attachment of intermediated securities of an account
holder” as “any judicial, administrative or other act or process to
freeze, restrict or impound intermediated securities of that
account holder in order to enforce or satisfy a judgment, award or
other judicial, arbitral, administrative or other decision or in order
to ensure the availability of such intermediated securities to
enforce or satisfy any future judgment, award or decision.”

2. Choices to be made by declaration

As an exception to the general prohibition of upper-tier

attachment, Article 22(3) allows a situation in which an
attachment is permitted to be made against a person other than the
relevant intermediary. This is often the case in the context of
holding patterns (the so-called “transparent systems”) where the
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  79

relevant intermediary shares its functions with a third person. See

Article 7 and paragraphs 51 and 103 et seq. above. However, the
exception of Article 22(3) can also apply where there is no
holding pattern built on such shared functions in the sense of
Article 7.

In particular, a Contracting State would have to declare

that, under its non-Convention law, an attachment of
intermediated securities of an account holder made against or so
as to affect a person other than the relevant intermediary has
effect also against the relevant intermediary. Any such
declaration would also have to identify that other person by name
or description and shall specify the time at which such an
attachment becomes effective against the relevant intermediary.

The rationale for this exception lies in the general purpose

of the prohibition of upper-tier attachment (i.e. upper-tier
attachment risks disrupting the holding chain). However, this
detrimental effect can be avoided where the applicable law
provides for special safeguards avoiding such disruption, in
particular reconciliation mechanisms which allow the relevant
intermediary and the other person to communicate with each
other and have procedures in place which guarantee that an
attachment made at the level of one entity is correctly reflected in
the accounts maintained by the other entity.

In many (probably most) cases, a Contracting State

making a declaration under Article 22(3) will also have made a
declaration under Article 7(1) with respect to the sharing of
intermediary functions. However, Article 22(3) does not limit its
applicability to such Contracting States as it is based on the
assumption that a Contracting State that elects to make a
declaration under Article 22(3) will do so rationally and only if a
system is in place (through the use of information technology or
otherwise) which ensures that the problems and risks that Article
22(1) is intended to prevent are adequately addressed.

Where a declaration under Article 22(3) is made, it must

identify the other person by name or description. Furthermore, it
must specify the time at which such an attachment becomes
80 GUIDE ON INTERMEDIATED SECURITIES
 

effective against the relevant intermediary. The latter requirement

shows that the decisive account at which to look remains under
all circumstances the one held for the debtor by the relevant
intermediary. Only if and when the attachment of intermediated
securities standing to the credit of that account takes legal effect,
the intermediated securities are validly frozen, restricted or
impounded. Until that point, the intermediated securities can be
disposed of. For more information on the optional declarations
under Articles 7 and 22(3), see the Declarations Memorandum,
Section 4.C and accompanying Forms 3.A and 3.B (regarding
Article 7) and Section 4.F and accompanying Form No. 6
(regarding Article 22(3)).

3. Matters to be addressed or clarified

To make a declaration under Article 22(3), a Contracting

state should make sure that, under its non-Convention law, an
attachment of intermediated securities of an account holder made
against or so as to affect a person other than the relevant
intermediary has effect also against the relevant intermediary. If
the relevant intermediary is a foreign entity, however, attachment
made against or affecting a person other than the relevant
intermediary should be permitted only if it has effect against the
relevant intermediary under the applicable law or as a result of
consent or contract.

B. Prevention of shortfalls and allocation of securities

Legislative Principle 9: The Convention requires

intermediaries to prevent shortfalls, notably by holding or
having available sufficient securities to cover credits to
securities accounts that these intermediaries maintain. The law
should regulate the method, manner, and time frame for
compliance.
The Convention also requires intermediaries to allocate
securities to account holders’ rights. The law may establish a
specific form of segregation as a method of allocation.
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  81

1. Core Convention principles and rules

The core principles and rules are the following:

 An intermediary should hold or have available

sufficient securities to cover credits made to securities
accounts it maintains. Article 24.

 An intermediary should allocate securities to account

holders’ rights. A common way to do this is segregation.
Article 25.

It is crucial for the integrity of an intermediated securities

holding system to prevent shortfalls as much as possible, to
provide for correction mechanisms when they occur, and to have
rules in place for the distribution of losses due to shortfalls in
insolvency. The Convention addresses these issues in Articles 24-
26. Lawmakers should ensure that intermediaries hold or have
available sufficient securities (Article 24) and that securities are
allocated to account holders, notably by way of segregation
(Article 25). The Convention rule regarding the distribution of
losses in insolvency (Article 26) and alternative solutions are
dealt with in paragraphs 264-265 and 268 below.

a. Sufficient securities

Lawmakers should ensure that an intermediary holds or

has available sufficient securities to cover credits to securities
accounts it maintains or, in technical and more precise terms,
“hold[s] or [has] available securities and intermediated securities
of an aggregate number or amount equal to the aggregate number
or amount of securities of that description credited to: (a)
securities accounts that it maintains for its account holders other
than itself; and (b) if applicable, securities accounts that it
maintains for itself”. Article 24(1).

b. Allocation

In addition to ensuring that intermediaries hold or have

available sufficient securities and intermediated securities
(Article 24), lawmakers should also make sure that these
82 GUIDE ON INTERMEDIATED SECURITIES
 

securities are allocated to the rights of the account holders of the

intermediary concerned (Article 25). This allocation is an
important tool in determining which assets belong to whom. The
allocation should take place to account holders other than the
intermediary itself. The default policy set out in the Convention
is that securities are deemed to be allocated to such account
holders up to the aggregate number or amount of their credits, and
that these securities are not available to the intermediary’s other
creditors in case of its insolvency. States may, however, deviate
from this policy by making a declaration.

The Convention does not determine exactly how

allocation takes place, which is thus left to domestic lawmakers.
Article 25(3). However, the Convention does mention the
commonly applied method of segregation. Article 25(4). Two
different types of segregation can be distinguished in the context
of holding through upper-tier securities accounts. In the first case
of pooled “omnibus accounts”, the securities of a certain
description that an intermediary holds for itself are distinguished
from those of all its account holders, whose securities of that
description are pooled in an omnibus account. In the second case
of so-called “individual segregation”, a distinction is made
between an intermediary’s own securities and those of particular
account holders or groups of account holders individually. It
should be noted that these different methods of segregation can
also be combined: an intermediary may hold securities of a certain
description for (a) itself, (b) one or more account holders
individually, and (c) remaining account holders in an omnibus
account.
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  83

Diagram 213-1: Omnibus account

In diagram 213-1, Intermediary 4 holds 10000 securities X in two

accounts with Intermediary 3. An omnibus account contains 5000
securities X held for Account Holders 1, 2, and 3; another account
contains 5000 securities X that Intermediary 4 intends to hold for
itself. Intermediary 3 only knows Intermediary 4, not the identity
of Account Holders 1, 2, and 3.
84 GUIDE ON INTERMEDIATED SECURITIES
 

Diagram 213-2: Individual segregation

In diagram 213-2, Intermediary 4 holds accounts with

Intermediary 3 for each of its account holders individually, as
well as for securities it holds for itself. Intermediary 3 knows the
identity of Intermediary 4 and of its account holders. In order for
the individual segregation to be effective throughout the chain, it
must also be ensured at upper-tiers (Intermediary 2, etc.).

2. Choices to be made by declaration

a. Sufficient securities

The Convention neither requires nor permits declarations

in respect of the requirement to hold or have available sufficient
securities.

b. Allocation

The default rule of the Convention is that securities that

are available under Article 24 are ex Conventione allocated to
account holders and are not available to the intermediary’s other
creditors in its insolvency. However, a State may decide to protect
the intermediary’s other creditors instead of the intermediary’s
account holders by giving “proprietary effect” to the segregation
by an intermediary of securities that it holds for its own account.
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  85

If the non-Convention law of a State so provides and if a

declaration is made to this end, only the securities allocated to the
intermediary’s account holders will be available to these account
holders, whereas all other “own account” securities are available
to the intermediary’s other creditors. For more information on the
optional declaration under Article 25(5), see the Declarations
Memorandum, Section 4.G and accompanying Form No. 7 and
Official Commentary, paragraph 25-20 and ex. 25-6.

3. Matters to be addressed or clarified

a. Sufficient securities: Available methods, time frame

for action, and allocation of costs and other
consequences

Lawmakers should decide on the different methods that

are made available for complying with the requirement to hold or
have available sufficient securities. Different methods are listed
in Article 24(2) and include registration in the issuer’s register
(either in the name or for the account of account holders or in the
intermediary’s own name), possession of certificates or other
documents of title, holding intermediated securities with another
intermediary, or any other appropriate method. The suitability of
these methods depends on the set-up of a given intermediated
system.

Lawmakers should also consider the time frame within

which corrective action should be undertaken in case the
requirement to hold or have available sufficient securities is not
complied with at any given moment. Article 24(3). Such
corrective action – to make up the difference – could include an
intermediary purchasing securities or intermediated securities
from the market or from one or more of its account holders, or
using a securities lending arrangement to borrow securities or
intermediated securities from the market or from its account
holders. Again, the policy decision on the time frame to be
provided depends on the set-up of a given system. Some systems
envisage an inseparable link between credits and debits (the so-
called “no credit without debit” rule) and any mismatch within
86 GUIDE ON INTERMEDIATED SECURITIES
 

the system is therefore conceptually impossible. Other systems

envisage some leeway as long as there is a form of financial
backup to protect account holders.

Another matter that is left to domestic lawmakers is the

allocation of cost and any other consequences of non-compliance
with the requirement to hold or have available sufficient
securities. Article 24(4).

b. Allocation and segregation

Lawmakers should decide on the available methods of

allocation, including by way of segregation. See paragraphs 212-
213 above.

C. Securities clearing and settlement systems

Legislative Principle 10: The Convention recognises the

systemic importance of securities clearing or settlement systems,
and in some instances allows derogations to the rules of the
Convention to the extent permitted by the law applicable to the
system. The law should only allow for derogations to the
Convention rules where such derogations are necessary to
ensure the integrity of the local securities clearing or settlement
systems.
The law should clearly determine when an instruction or a
transaction within a securities clearing or settlement system
becomes irrevocable and final, notwithstanding the insolvency
of the operator of the system or one of its participants.

1. Core Convention principles and rules

The core principles and rules are the following:

 The Convention contains definitions of an SCS and

an SSS. See Articles 1(n) and 1(o) and, for discussion, see
paragraph 70 above and the Glossary.

 Only SCSs or SSSs that (a) are central to the

reduction of risk to the stability of the financial system (i.e.
systemically important institutions) and (b) have been
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  87

identified as an SCS or SSS in a declaration of the

Contracting State qualify as such under the Convention.

The effective and safe operation of systemically important

systems requires their internal rules and procedures to be
enforceable with a high degree of certainty and tailored to their
particular legal context. This is why Articles 9(1)(c), 10(2)(c), (e),
(f), 15(1), 16, 18(5), 23(2)(e), 24(4), 26(3), 27(a)-(b), 28(1)-28(2)
and 28(3) of the Convention provide that the uniform rules of an
SSS may contain rules which either derogate from the Convention
or the ordinary laws of the Contracting State. Lawmakers should
thus give serious consideration to the establishment of SCSs and
SSSs as an integral part of the infrastructure for the operation of
an intermediated securities holding system.

SSSs which meet the above criteria can benefit from the
Convention’s exemptions. Although the SSS in its dealings with
the issuer is in some systems identified as a CSD, the reality is
that the SSS is a completely different financial market
infrastructure with a different function from the CSD. Except in
systems where the SSS is also a CSD, both financial market
infrastructures work closely to maintain the efficiency and
integrity of the intermediated securities holding system. To the
extent that those dealings include the creation, recording and
reconciliation of securities vis-à-vis the issuer, pursuant to Article
6, they are excluded from the scope of the Convention.

Article 27, in addition, recognises the effects of law

applying to SCSs or SSSs which provide for the irrevocability of
instructions and the finality of recordings in an insolvency
scenario of a participant to any such system or of the system itself.
Such irrevocability and finality is important because settlement of
securities within an SSS or SCS are particularly vulnerable to
being unwound in an insolvency scenario. There is often a delay
between entering instructions and the finalisation of the clearing
and settlement process, and the revocation of instructions once
they have been entered could create very significant practical
problems by causing the unwinding of already netted obligations
or settlement positions, with potential systemic consequences. In
order to avoid such consequences, it needs to be ensured that
88 GUIDE ON INTERMEDIATED SECURITIES
 

transfer orders entered into a system can be settled and that book-
entries would remain effective regardless of whether a participant
or the system operator becomes insolvent. See Official
Commentary, paragraph 27-20 et seq.

2. Choices to be made by declaration

To ensure predictability for intermediaries, it is important

that they can easily identify whether an entity or system can
derogate, either pursuant to the law applicable to it or by virtue of
its uniform rules, from the rules of the Convention. To that effect,
the Convention permits each Contracting State to identify in a
declaration the SCSs or SSSs which are to be subject to it, because
the effect is to extend the recognition afforded by the Convention
to uniform rules of a SCS or SSS to those systems specifically
identified.

Only the Contracting State, whose laws govern a system,

may make a declaration, not the Contracting State whose laws
govern the agreement between the SCS or SSS and their
participants (if different).

Only SCSs and SSSs that are central to the reduction of

risk to the stability of the financial system may be identified. This
means that only systemically important institutions may be listed
in a declaration. For more information on the optional
declarations under Articles 1(n)(iii) and 1(o)(iii), see the
Declarations Memorandum, Section 4.A and accompanying
Form No. 1 and Official Commentary, paragraph 1-106.

3. Matters to be addressed or clarified

Lawmakers should, with respect to each instance

mentioned in paragraph 221, carefully consider which
derogations to the Convention or to their domestic law they shall
allow for the operation of SCSs and SSSs. Bearing in mind the
complexities associated with SCSs and SSSs, lawmakers are
referred to the references to the Official Commentary contained
in Annex 4 on the uniform rules of SCSs and SSSs and to the
specialised guidance provided by, among others, BIS and IOSCO,
including the Principles for Financial Market Infrastructures.
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  89

In considering such guidance, Contracting States should

only allow derogations to the Convention rules if such
derogations are essential to ensure the integrity of the SCS or SSS
in light of their systemic importance.

Further to paragraph 223 above, Contracting States are

encouraged to introduce rules on irrevocability of instructions and
finality of recordings with respect to transactions settled through
an SCS or SSS, and in particular in the case of an insolvency
proceeding of a participant of the SCS or SSS, or of the SCS or
SSS itself, in order to ensure the integrity of both the national and
international financial systems.

D. Issuers

Legislative Principle 11: The Convention generally does not

deal with the relationships between account holders and issuers.
The law should clearly define the persons entitled to exercise
the rights attached to the securities vis-à-vis the issuer and the
conditions for such exercise. The law should facilitate the
exercise of those rights by the ultimate account holder, in
particular, by allowing intermediaries who act on behalf of
account holders to exercise voting rights or other rights in
different ways, and should recognise holding through
representatives other than intermediaries (i.e. nominees).
In the insolvency proceeding of an issuer, the Convention
provides that an account holder is not precluded from
exercising a right of set-off merely because it holds securities
through intermediaries.

1. Core Convention principles and rules

The core principles and rules are the following:

 The Convention generally does not deal with the

relationships between account holders and issuers.
Article 8.
 However, the Convention contains a few exceptions to
that principle that are considered necessary to achieve
90 GUIDE ON INTERMEDIATED SECURITIES
 

compatibility of intermediated securities holding systems

around the world. Articles 29 and 30.
 Contracting States should permit the holding of
publicly traded securities through one or more
intermediaries, and the effective exercise of the rights
attached to such securities that are so held; in particular,
they shall recognise the holding of such securities by a
person acting in its own name but on behalf of another
person or other persons and shall permit such a person to
exercise voting or other rights in different ways. Article 29.
 Contracting States should not discriminate between
non-intermediated and intermediated securities with regard
to set-off rights in relation to the insolvency of the issuer.
Article 30.

As discussed in paragraph 24 above, securities give

investors certain rights that the Convention refers to as “the rights
attached to the securities”. See, e.g., Articles 8(2), 9(1)(a)).

Investors must be in a position to exercise the rights

attached to the securities. In intermediated holding systems,
however, investors may be unable to exercise directly those rights
against the issuer, because the person who appears in the issuer’s
register or in the CSD (when this institution replaces that register)
may not be the ultimate account holder. Issuers may not know
who the investors are and, accordingly, investors may not be
entitled to exercise the rights attached to the securities directly
against the issuers.

In this context, the Convention takes as a starting point the

difference between the exercise of the rights attached to the
securities (a) vis-à-vis the relevant intermediary and (b) vis-à-vis
the issuer. The Convention focuses on the relationship between
the account holder and its intermediary and establishes that the
rights attached to the securities belong to the account holder and
that the intermediary must ensure the exercise of those rights. See
Articles 9-10 and Part III.A-B above.
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  91

However, the Convention, in principle, does not deal with

the relationship between account holders and issuers. Article 8
enshrines this principle. On the one hand, from the account
holder’s standpoint, the Convention does not affect any right of
the account holder against the issuer of the securities. Article 8(1).
On the other hand, from the issuer’s standpoint, the Convention
does not determine whom the issuer is required to recognise as
the shareholder, bondholder or other person entitled to receive
and exercise the rights attached to the securities. Article 8(2).

The Convention is therefore neutral as to whether the

rights attached to the securities are to be exercised by the ultimate
account holder, its intermediary or any other upper-tier
intermediary. This is a matter governed by the law applicable to
the securities. This law also governs the conditions to exercise
those rights. For example, the law governing the issuer may
establish that, when the shareholders exercise their voting rights
by proxy, a valid proxy card must be prepared, signed and
submitted to the issuer within a certain number of days before the
shareholders meeting. These rules are not affected by the
Convention.

This law will usually be the law of the issuer with regard
to shareholders and the law governing the bonds with regard to
bondholders (together, sometimes referred to here as the law
governing the securities). This law can be the law of a Contracting
or non-Contracting state. That is why on this point Article 9(1)(c)
refers, among others, to the applicable law and the terms of the
securities.

The shareholder or bondholder must be in a position to

exercise rights attached to the securities. The exercise of those
rights can, under applicable law, be done directly through
intermediaries or through representatives other than
intermediaries (i.e. nominees).

As shown in diagram 238-1 below, for example, an

account holder has a securities account with an intermediary. The
account is located in State B, but the securities credited to that
account are issued under the law of State A. The Convention does
not say anything about whether the ultimate account holder, his
92 GUIDE ON INTERMEDIATED SECURITIES
 

Intermediary (3) or any other intermediary at an upper-tier

(Intermediary 2 or the CSD (Intermediary 1)) is entitled vis-à-vis
the issuer to exercise the rights attached to those securities. The
law of State A may, for example, only recognise as shareholder
the persons whose names appear in the issuer’s register at a
certain date. Unless and until the name of the account holder
appears on such register, the issuer is not obliged to treat that
ultimate account holder as shareholder. This means the account
holder’s right over the securities are effective against the
intermediary and third parties (see Article 9), but the account
holder will not be entitled to exercise those rights against the
issuer.

Diagram 238-1: Application of State A’s law to relationships

between the Issuer and CSD (Intermediary 1) and the CSD and
Intermediary 2

Even if under the law governing the securities, however,

the account holder is not entitled to exercise the rights attached to
such securities against the issuer, Article 10 establishes that
intermediaries must take appropriate measures to enable their
account holders to receive and exercise those rights. As an
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  93

example of such measures, intermediaries should exercise voting

rights following their instructions or should appoint them as
proxy holders to attend and vote at the general meeting.

Articles 29 and 30 include exceptions to the principle laid

down by Article 8. Though the Convention does not generally
apply to the relationships between issuers and account holders,
Articles 29 and 30 contain certain exceptions to this principle that
were considered necessary to achieve compatibility of
intermediated securities holding systems around the world.

Article 29(1) establishes an element that is crucial for the

well-functioning of exchanges or regulated markets, in particular
to ensure cross-border compatibility of the various models of
holding systems: the recognition of intermediated holding
systems. Contracting States shall permit publicly traded securities
(i.e. the securities traded on exchanges or regulated markets of the
corresponding Contracting State) to be held through one or more
intermediaries and recognise the effective exercise of the rights
attached to those securities, and such recognition works with all
the models, as well as mixed and transparent systems, described
in Part I.B above. Contracting States, however, are not obliged to
require that all securities are issued on terms that allow them to
be held through intermediaries. See Article 29(1) in fine.

Furthermore, Article 29(2) adds that Contracting States

shall recognise the holding of securities by a person acting in its
own name but on behalf of another, and to permit that person to
exercise voting rights or other rights in different ways. In
particular in cross-border scenarios, it is common that
intermediaries act in their own name (as nominees) but also on
behalf of third parties (beneficiaries). The purpose of this
provision is to ensure recognition of this nominee holding fact-
pattern to ensure the interoperability of different systems.

The Convention, however, does not prevent the non-

Convention law from establishing certain conditions for a person
(the nominee) to be able to exercise those rights. For instance, the
law governing the issue (that of State A in diagram 238-1) may
require the nominee to disclose the name of its clients in order to
vote in different ways.
94 GUIDE ON INTERMEDIATED SECURITIES
 

Article 30 provides an equal footing rule between

intermediated and non-intermediated securities with regard to set-
off but only in relation to the insolvency of the issuer. If a set-off
right would have existed and would have been exercisable in a
non-intermediated context (e.g. when the investors hold a
certificate of bonds), such rights must also exist and be recognised
where the securities are held through one or more intermediaries.
The reach of this provision is very limited, as it only prevents
Contracting States from discriminating on the mere fact of the
intermediation. Whether set-off rights exist and are enforceable
in the insolvency of the issuer is outside the scope of the
Convention.

2. Choices to be made by declaration

The Convention neither requires nor permits declarations

in respect of the matters discussed in this section.

3. Matters to be addressed or clarified

The non-Convention law must define the persons entitled

to exercise the rights attached to the securities vis-à-vis the issuer
and the conditions thereto when the securities are held through
one or more intermediaries. From a conflict of laws perspective,
the Contracting State should make it clear that these provisions
only apply to the securities governed by its own law. See
generally Part VIII below.

The conditions for the exercise of those rights vis-à-vis the

issuer should be clearly stated so that they provide legal certainty
and predictability to: (a) the issuer, in particular regarding whom
it is required to recognise as entitled to exercise those rights; (b)
and the intermediaries and account holders, in particular
regarding who is entitled to exercise them against the issuer. This
includes the determination of the date relevant for the
identification of the person entitled to a specific corporate action.

Furthermore, the non-Convention law should facilitate the

exercise of the rights attached to the securities by the ultimate
account holders, in particular establishing a transparent, smooth
and effective process of proxy voting. Thus, if the person entitled
 INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM  95

to exercise the corporate rights vis-à-vis the issuer is acting as a

nominee, the law should clearly establish under what conditions
such person may exercise the rights stemming from the securities
on behalf of clients.

The law should also clearly establish that nominees will

not be prevented from granting a proxy to each of their clients or
to any third party designated by a client.

As a corollary of the recognition of intermediated

securities holding systems, the non-Convention law should
ensure a general principle of non-discrimination with regard to
the exercise of the rights attached to the securities wider than the
simple exercise of voting rights. The law governing the securities
should not discriminate against the exercise of the rights attached
to the securities on the sole grounds that the securities are held
through a chain of intermediaries. And this principle should apply
not only to nominee systems but also to alternative systems of
holding securities indirectly (e.g. by means of omnibus accounts).
 PART VI - INSOLVENCY PROTECTION

Legislative Principle 12: The Convention establishes important

insolvency proceeding-related rules on the interests made
effective against third-parties and provides loss-sharing rules in
case of a shortfall of account holder securities. However, the
law should address many other important and relevant features
of insolvency and regulatory law that the Convention leaves
to it.

A. Core Convention principles and rules

The core principles and rules are the following:

 The Convention deals generally with the

effectiveness of interests made effective under Articles 11,
12, or 13 as against an insolvency administrator and
creditors in an insolvency proceeding. Article 14.

 The Convention partially determines the priority

among an intermediary’s collateral taker and its account
holders. Article 20 and see paragraph 188 above.

 The Convention deals generally with the

effectiveness of interests made effective under Articles 11,
12, or 13 as against an insolvency administrator and
creditors in an insolvency proceeding of the relevant
intermediary. Article 21.

 The Convention provides a loss-sharing mechanism

in case of a shortfall of securities credited to account
holders’ securities accounts in an insolvency proceeding of
an intermediary. Article 26.

 The Convention shields the legal effects of certain

provisions in the uniform rules applied in respect of the
operation of SCSs and SSSs from adverse consequences
flowing from the insolvency of the system operator or a
system participant. Article 27.

96 
 INSOLVENCY PROTECTION  97

1. Effectiveness in insolvency in general

Article 14(1) provides affirmatively that interests made

effective under Articles 11 and 12 are effective in an insolvency
proceeding.

Article 14(2) provides that Article 14(1) does not affect

substantive or procedural rules applicable by virtue of an
insolvency proceeding such as ranking of categories of claims,
avoidance powers for preferences and fraudulent transfers, and
the enforcement of rights to property under the control or
supervision of an insolvency administrator.

Article 14(3) provides that Article 14(1) does not apply to

the situation of an intermediary insolvency proceeding addressed
by Article 21.

Under Article 14(4), the Convention does not impair the

effectiveness in an insolvency proceeding of an interest that is
effective under Article 13.

2. Effectiveness in the insolvency of the relevant

intermediary

Article 21(1) provides affirmatively that interests made

effective under Articles 11 and 12 are effective in an insolvency
proceeding of the relevant intermediary.

Article 21(2) provides that Article 21(1) does not affect

rules applicable in an insolvency proceeding of the relevant
intermediary relating to avoidance powers for preferences and
fraudulent transfers and procedural rules relating to the
enforcement of rights to property under the control or supervision
of the insolvency administrator. The exceptions in Article 21(2)
are narrower than those provided by Article 14(2).

Article 21(3) provides that nothing in Article 21 impairs

the effectiveness in an insolvency proceeding of an interest that
is effective under Article 13.
98 GUIDE ON INTERMEDIATED SECURITIES
 

3. Loss sharing in case of insolvency of the intermediary

Article 26 applies regarding loss sharing unless there is a

conflicting rule applicable in the insolvency proceeding of the
intermediary. Article 26(1).

If the securities of a description (i.e. a particular issue)

allocated under Article 25 are insufficient to cover the securities
of that description credited to securities accounts, the shortfall is
to be borne (a) if the securities are allocated to a single account
holder, by that account holder, and (b) otherwise by the account
holders to whom the securities have been allocated in proportion
to the number or amount of securities credited to securities
accounts. Article 26(2). This is a pro rata allocation on an issue-
by-issue basis.

If the intermediary is the operator of a SSS, the uniform

rules of the SSS determine who bears the shortfall if the rules so
provide.

B. Choices to be made by declaration

The Articles primarily addressed here do not involve

choices to be made by declaration. However, the optional
declaration under Article 25(5) regarding segregation is relevant
in the context of an intermediary’s insolvency proceeding. See
paragraphs 212 and 215 above and 270 below.

C. Matters to be addressed or clarified

1. General observations

Many of the matters that must be addressed by the non-

Convention law may fall within the realm of securities
regulation—the regulation of securities markets and market
participants such as intermediaries, exchanges and other trading
systems, SCSs, and SSSs. Other matters are squarely in the field
of insolvency law, but involve many complex and highly
technical issues in the context of the insolvency of an
intermediary. In this connection, many lessons have been learned
through the recent financial crisis and in particular from the
 INSOLVENCY PROTECTION  99

insolvency proceedings of various Lehman Brothers entities.

There is a wealth of recent literature that should be consulted as
well. The most important available resources are listed on
UNIDROIT’s webpage for the Guide. A State wishing to reform its
legal and regulatory infrastructure should consult these resources.
While this section of the Guide endeavours to identify the most
important areas of inquiry for such a reform process, it cannot
provide detailed, specific recommendations.

2. Loss sharing

As Article 26 defers to a conflicting loss-sharing rule

applicable in an intermediary insolvency proceeding, a
Contracting State should consider whether it should retain or
adopt any such different rule.

By way of example, assume that the intermediary has two

Account Holders, 1 and 2. The intermediary has credited 100
units of A securities valued at 100 to Account Holder 1. It has
credited 100 units of B securities valued at 100 to Account Holder
2. However, the intermediary only has 90 units available of A
securities. Under the loss-sharing rule of Article 26(2), Account
Holder 1 would bear the loss of the shortfall. Diagram 265-1
illustrates this result.

Diagram 265-1: Loss sharing under Article 26(2)

100 GUIDE ON INTERMEDIATED SECURITIES
 

Under the loss-sharing rule in the security entitlement

system of a North American common law State, all account
holders share in the entire pool of securities to the extent of their
net equity, which is the value of the securities credited to their
accounts. This is so even if there is a shortfall. Diagram 266-1
illustrates this result. It reflects the fact that it normally would be
purely fortuitous that there would be a shortfall in one issue of
securities as opposed to another and would treat similarly situated
account holders in the same manner.

Diagram 266-1: Loss sharing in the insolvency law for broker-

dealers acting as intermediaries of a North American common
law State

3. Priority of interests granted by intermediary

The priority of intermediary-granted interests as against

the rights of the intermediary’s account holders is relevant
primarily in the case of an intermediary insolvency proceeding.
See generally paragraph 198 above.

4. Account holder protection fund or insurance

A Contracting State should consider adopting a scheme

that provides a fund or insurance for the protection of “retail”
account holders up to a specified value of securities carried in a
securities account. If a Contracting State already has such a
system, it should consider and assess its adequacy.
 INSOLVENCY PROTECTION  101

5. Transfer of account holder securities accounts to

solvent intermediary

An important technique for the protection of account

holders in the insolvency proceeding of an intermediary is the
transfer of securities accounts (and the underlying securities) to a
solvent intermediary that assumes the insolvent intermediary’s
duties and obligations to the account holders. An account holder
protection fund or insurance typically would provide assurances
against losses to the transferee intermediary. A Contracting State
should ensure that the relevant insolvency law facilitates this
approach.

6. Rights of an intermediary’s creditors and

segregation

A Contracting State’s decision on whether or not to make

a declaration under Article 25(5) regarding segregation and the
corresponding impact on an intermediary’s account holders and
unsecured creditors primarily is relevant in an intermediary’s
insolvency proceeding. See generally paragraphs 212 and 215
above.

7. Limitations on ranking of categories of claims and

avoidance powers

A Contracting State should consider whether to adjust

ranking of claims and whether to adopt or retain protection from
avoidance as a preference or fraudulent transfer of certain
transfers as a mechanism to ensure that securities settlements are
not invalidated merely because, for example, they take place
mechanically during a relevant suspect period. Payments made to
or within a SSS for the settlement of securities transactions, for
instance, might be protected. In evaluating any such adjustments,
Contracting States should take into account, in particular, the
potential impact on systemic risk in financial markets.
102 GUIDE ON INTERMEDIATED SECURITIES
 

8. Stay of enforcement and close-out netting

Related to the discussion in the preceding paragraph and

the limitations discussed in Part VII below, and as a means of
reducing systemic risk, in some States, enforcement against
securities collateral and in connection with repo transactions and
the operation of close-out netting is exempt from any stay or other
injunction in an insolvency proceeding. See UNIDROIT Principles
on the Operation of Close-Out Netting Provisions. A Contracting
State should consider whether to adopt, retain, or adjust any such
exemptions. See FSB, Key Attributes of Effective Resolution
Regimes for Financial Institutions, paragraphs 4.1 et seq. and I-
Annex 5 (October 2014, “FSB Key Attributes”) and, regarding a
regulatory stay, paragraph 281 below.

9. Special provisions in relation to collateral

transactions

If a Contracting State declares under Article 38 that

Chapter V does not apply, it may nonetheless consider whether it
should enact as a part of the non-Convention law the protection
of collateral takers in connection with insolvency proceedings as
under Articles 33, 36, and 37. See generally paragraph 278 et seq.

10. Return of account holder assets and funds

As to securities accounts that are not transferred to a

solvent intermediary, a Contracting State should ensure that
insolvency law provides means of promptly returning to account
holders securities credited to their securities accounts and credit
cash balances in such accounts. The law should provide for
flexible solutions such as partial returns pending resolution of
complex relationships and the potential for an insolvency
administrator to claw back securities and funds to the extent
returns were not justified or were made in error. Such solutions
are necessary for ensuring that an account holder’s rights are
respected in an intermediary’s insolvency proceeding, as under
Articles 14(1) and 21(1), but are not alone sufficient for
protecting the rights of account holders.
 INSOLVENCY PROTECTION  103

11. Intermediary access to SCSs and SSSs and assets

held in such systems or otherwise as collateral

In order to provide proper protection and treatment of

account holders and creditors generally, insolvency law should
ensure that an insolvency administrator of an intermediary has
access to information and records and access to assets held in such
systems or otherwise held as collateral, such as by a clearing
lender or derivatives counterparty. Of course, the interests of the
operators of and participants in such systems and of those holding
collateral must be protected as well. But it is important to ensure
the transparency of all of these relationships. As to the insolvency
of SCSs and SSSs, see Article 27 and paragraphs 227-229 above.

12. Intermediary access to information, records, and

information technology systems

An intermediary’s insolvency administrator must have

access to all relevant information, records, and information
technology systems to the extent available to the intermediary
prior to an insolvency proceeding. A lack of access could be
especially problematic in the case of a multinational financial
corporate group in which an affiliate other than the intermediary
manages information centrally and may be subject to a separate
insolvency proceeding. Such access and other appropriate
contingency plans for an intermediary’s insolvency proceeding
could be imposed or encouraged by the rules of an SSS. A
Contracting State’s supervisory or regulatory authority also
should consider whether to impose or encourage relevant
reporting or disclosure requirements.

13. Enhanced regulation and supervision of

intermediaries, exchanges and alternative trading
systems, SCSs, and SSSs

The optimal approach to the problem of intermediary

financial distress would be to ensure that an intermediary does not
suffer from financial distress in the first place. Ex ante regulation
and supervision of intermediaries and the market structures and
participants with which they interact may play an important role
in this respect.
 PART VII - SPECIAL PROVISIONS IN
RELATION TO COLLATERAL
TRANSACTIONS

Legislative Principle 13: The law should establish clear and

sound rules in relation to collateral transactions involving
intermediated securities. The Convention provides optional
rules in relation to such transactions, whether by way of security
collateral agreement or title transfer collateral agreement.
Other international instruments and documents, reflecting
lessons of the financial crisis, provide further guidance on
regulatory, private and insolvency law issues involved.

A. Core Convention principles and rules

The core principles and rules are the following:

 The Convention covers collateral consisting of

intermediated securities provided by way of a title transfer
or a security collateral agreement. See Article 31.

 A title transfer collateral agreement should be able to

take effect in accordance with its terms. Article 32.

 Enforcement of collateral may be effected by way of

sale or, if agreed, appropriation or close-out netting. Article
33(1)-(2).

 It should be possible to enforce collateral relatively

easily and quickly (i.e. without prior notice, approval by a
court or other person, or a public auction), also in the case
of insolvency. Articles 33(3) and 35.

 The collateral taker may be given the right to “use” or

“re-hypothecate” the collateral (i.e. to dispose thereof as if
it were the owner). Article 34.

104
 SPECIAL PROVISIONS IN RELATION  105
TO COLLATERAL TRANSACTIONS

 Collateral agreements and the provision of collateral

thereunder are protected against timing claw back rules in
insolvency (such as “zero hour rules”). Articles 36 and 37.

Chapter V of the Geneva Securities Convention contains

optional, private and insolvency law oriented rules on
transactions with collateral consisting of intermediated securities,
including repurchase (or “repo”), securities lending, and
collateralised derivatives transactions. See, e.g., paragraph 19
above and diagram 279-1 below. The choice to incorporate the
rules of Chapter V in a given jurisdiction can be made
independent of the choice to adopt the other rules of the
Convention concerning basic features of the intermediated
system. If opted into, the detailed character of the rules set out in
Chapter V means that there are only a few instances for States to
make declarations or determine the content of non-Convention
law.

Diagram 279-1: Repurchase transaction

In a repo, a seller in need of cash transfers securities to a buyer

outright in exchange for cash at the purchase date, while the seller
returns the cash together with an interest component at the
repurchase date in exchange for equivalent securities.
106 GUIDE ON INTERMEDIATED SECURITIES
 

The global financial crisis of 2007 and onwards has

triggered a range of regulatory standards in relation to securities
financing transactions and other transactions involving financial
collateral (in the regulatory-inspired debate on shadow banking
the term “securities financing transactions” is common, which
overlaps largely, but not entirely, with the transactions covered
by Chapter V of the Geneva Securities Convention). Key
documents with international regulatory guidance include: (a) the
FSB’s Strengthening Oversight and Regulation of Shadow
Banking: Policy Framework for Addressing Shadow Banking
Risks in Securities Lending and Repos (August 2013, “FSB
Shadow Banking Framework”); (b) the FSB Key Attributes, to
which reference is also made in paragraph 272 above; and (c)
BCBS-IOSCO’s Margin Requirements for Non-Centrally
Cleared Derivatives (March 2015). As indicated above in
paragraph 263, as a result of the financial crisis, there has been
debate which in some jurisdictions could lead to limitations as to
the enforcement and exercise of certain rights.

The FSB Shadow Banking Framework (including also

some follow-up FSB guidance documents) envisages enhanced
transparency obligations regarding securities financing
transactions, providing regulators with data to detect and address
systemic risk; limits on cash collateral reinvestment; limits on the
right of use or re-hypothecation; guidelines regarding collateral
valuation and management; minimum regulatory haircuts for
non-centrally cleared securities financing transactions; and
standards for indemnification-related risks in the context of
securities lending. The FSB Shadow Banking Framework also
contemplates the possibility of a revision of insolvency law rules.
In addition, the FSB Key Attributes envisage, among other things,
a temporary regulatory stay, so as to provide resolution authorities
with a window for decision-making regarding financial
institutions in distress. The guidance contained in the UNIDROIT
Principles on the Operation of Close-Out Netting Provisions, for
example, refers to the FSB Key Attributes and takes the
regulatory stay into account. See UNIDROIT Principles on the
Operation of Close-Out Netting Provisions, paragraph 117.
 SPECIAL PROVISIONS IN RELATION  107
TO COLLATERAL TRANSACTIONS

The international regulatory standards are developed at

the international level by the FSB and other bodies, such as the
BCBS, and have been taken into account by regional and
domestic legislation and guidelines. Regional and domestic
lawmakers may, and in practice do, provide rules and guidelines
that specify and go beyond the standards proposed by the
international bodies.

B. Choices to be made by declaration

Various choices may be made by declaration. First, the

personal scope of Chapter V may be limited. Second,
intermediated securities that are not permitted to be traded on an
exchange or a regulated market may be excluded. Third,
categories of relevant obligations (i.e. the obligations of a
collateral provider or another person for whom collateral is
provided) may be excluded. Fourth, top-up or substitution
arrangements may not receive protection if they are triggered by
criteria relating to creditworthiness, financial performance, or the
financial condition of the collateral provider.

Article 38 addresses the first three choices and provides

lawmakers with possibilities to limit the scope of Chapter V. The
first option is to limit the personal scope in order to protect natural
persons or other categories of entities, notably entities that are not
financial market participants, which are deemed to need
protection. Article 38(2)(a). The second option is to apply the
regime of Chapter V only to intermediated securities that are
traded on an exchange or a regulated market (i.e. to securities that
potentially have a significant impact on the liquidity of financial
markets). Article 38(2)(b). The third issue that lawmakers should
decide is whether there are relevant obligations that should not
fall within the regime of Chapter V of the Convention. Article
38(2)(c). For more information on the optional declarations under
Article 38, see the Declarations Memorandum, Section 4.I and
accompanying Form No. 9 and Official Commentary, paragraphs
38-1 to 38-11.

Article 36 addresses the fourth choice and protects the

provision of collateral in the course of a transaction under “top-
up” and substitution arrangements against timing claw back rules.
108 GUIDE ON INTERMEDIATED SECURITIES
 

The declaration envisaged in Article 36(2) addresses the specific

situation where top-up collateral should be provided as a
consequence of changes to the creditworthiness, financial
performance, or the financial condition of the collateral provider
or another person owing the relevant obligations concerned. Such
changes may be a prelude to the insolvency of the collateral
provider. Lawmakers should decide on the policy question of
whether in such a case the collateral taker receives the top-up
collateral, or whether it is left to the collateral provider’s general
creditors. See paragraph 274 above and, for more information on
the optional declaration under Article 36(2), see the Declarations
Memorandum, Section 4.H and accompanying Form No. 8 and
Official Commentary, paragraphs 36-17, 36-20, and 36-26.

C. Matters to be addressed or clarified

1. Extra rights for collateral takers

The basic approach underlying Chapter V is that the

liquidity of financial markets should be enhanced by eliminating
traditional rules of private and insolvency law that strike a balance
between collateral provider and collateral taker, and by extending
extra rights to the collateral taker. Chapter V contains a minimum
regime. Article 31(2) provides for the possibility that non-
Convention law envisages additional rights and powers of
collateral takers and additional obligations of collateral providers.
However, in their decision to go beyond the minimum regime
envisaged in Chapter V, lawmakers should take into account the
lessons learned during the global financial crisis.

2. Commercial reasonableness

The concept of commercial reasonableness is key where

securities need to be valued, notably in the context of
enforcement. Article 35 determines that non-Convention rules
regarding commercial reasonableness are not affected by the
Convention rules on enforcement and the right of use. The content
of the concept of commercial reasonableness is not specified in
the Convention, and it is thus up to the domestic lawmaker to
determine whether a specification of this content is necessary in
the context of securities markets.
 SPECIAL PROVISIONS IN RELATION  109
TO COLLATERAL TRANSACTIONS

3. New regulatory framework

As mentioned in paragraphs 280-282, lawmakers should

take into account new regulatory standards regarding securities
financing transactions and other transactions involving financial
collateral as developed by bodies such as the FSB and the BCBS
on issues such as transparency, cash collateral reinvestment, the
right of use or re-hypothecation, collateral valuation and
management, minimum haircuts, indemnification-related risk,
ipso facto clauses, the regulatory stay and insolvency safe
harbours.

4. Close-out netting

Lawmakers can find specific guidance on close-out

netting in the UNIDROIT Principles on the Operation of Close-Out
Netting Provisions.

5. Secured transactions law

In case lawmakers decide not to adopt Chapter V as a

whole, but only to draw inspiration from its provisions in
structuring their legal framework, they could also look at the
guidelines regarding general secured transactions law in the
UNCITRAL Legislative Guide on Secured Transactions and the
UNCITRAL Model Law on Secured Transactions. It should,
however, be noted that the UNCITRAL Legislative Guide does
not cover securities at all, whereas the UNCITRAL Model Law
contains rules for non-intermediated securities only. Policy
considerations relating to intermediated securities markets, such
as those enshrined in the Geneva Securities Convention, therefore
merit special attention. For example, besides the provisions of the
UNCITRAL instruments on the creation of interests and their
third party effectiveness, the considerations underlying Articles
11, 12 and 13 of the Geneva Securities Convention remain
relevant. Where priority contests are concerned, Articles 19 and
20 of the Convention should be considered and, in the case of
enforcement, Articles 33 and 35 of the Convention should be
taken into account.
 PART VIII - CONFLICT OF LAWS ASPECTS

Legislative Principle 14: As the Convention does not contain

conflict of laws rules, the law should establish clear and sound
conflict of laws rules in relation to intermediated securities.

Many intermediated securities transactions take place in

an international context and therefore entail the presence of
foreign elements. For example, the issuer may be incorporated in
another State, the securities may be governed by a foreign law or
the holding chain may begin, pass through or end in another State.
These situations could raise problems of conflict of laws.

Such problems are resolved by what are known as conflict

of laws rules. These rules determine which State’s law applies to
a transaction or to one particular aspect of it. Conflict of laws
rules usually employ one or more elements of the transaction, the
so-called “connecting factor”, to link the transaction or the legal
issue to a particular State law.

The Convention establishes uniform rules on

intermediated securities but does not completely eliminate
problems of conflict of laws. Indeed, the Convention does not
contain conflict of laws rules. Thus, its sphere of application is
not determined by itself but by the conflict of laws rules
applicable in each State (i.e. the conflict of laws rules of the
forum).

As a result, adoption of the Convention or its

incorporation into domestic law should therefore be accompanied
by a set of clear and sound conflict of laws rules that reflect the
reality of how securities are held and transferred. This is
particularly important because – as the Convention is based on a
core and functional harmonisation approach – it leaves various
matters to be governed by State laws, and these laws may still
vary to a large extent. With respect to these non-harmonised
aspects, identification of the applicable law becomes critical.

110
 CONFLICT OF LAW ASPECTS  111

This Part deals with conflict of laws, specifically (a) the

Convention’s sphere of application; (b) traditional conflict of
laws rules and their modernisation; (c) the Convention’s “tier-by-
tier” approach and its interaction with conflict of laws rules; and
(d) other conflict of laws rules.

A. The Convention’s sphere of application

The Convention does not lay down conflict of laws rules.

Its application is determined instead by the conflict of laws rules
of the forum. This idea is stated in Article 2(a) of the Convention.
The Convention applies whenever the conflict of laws rules of the
forum designate the law in force in a Contracting State as the
applicable law.

The reason for this approach is clear. In some systems,

once the Convention has been ratified by a State or incorporated
into its domestic law, it becomes part of the substantive domestic
law of that State. Therefore, the Convention’s rules will apply
insofar as the substantive law of that State is the applicable law
under the conflict of laws rules of the forum.

As a result, even if the forum is a Contracting State to the

Convention, the Convention does not apply when its conflict of
laws rules point to the law of a non-Contracting State as the law
applicable on an issue. And vice versa, even if the forum is a non-
Contracting State, the Convention will apply if the conflict of
laws rules of the forum point to the law of a Contracting State as
the applicable law. As an example, let us assume that State A is
the forum state and its conflict of laws rules point to State B’s law
as applicable: if State B has ratified the Convention, the
Convention will apply, regardless of whether State A has ratified
the Convention.

Together with Article 2, Article 3 clarifies the effect of

conflict of laws rules on declarations. Because the declarations
established by the Convention are related to its substantive rules
– mainly allowing Contracting States to opt into or out of the
harmonising rules – the application of such declarations is also
determined by the conflict of laws rules of the forum.
112 GUIDE ON INTERMEDIATED SECURITIES
 

B. Traditional conflict of laws rules and their modernisation

The application of traditional conflict of laws rules to

intermediated securities can give rise to difficulties. The law
should therefore establish modernised conflict of laws rules to
address the particularities raised when securities are not held
directly but with an intermediary.

Traditional conflict of laws rules – mainly based on the

lex rei (cartae) sitae principle – have not proved to be very useful
for intermediated securities, because those rules entail the
attribution of an artificial location to an asset which by its nature
may have no physical manifestation. Furthermore, it has also
resulted in legal uncertainty and serious practical difficulties,
because a prima facie application of that principle may lead to the
law of the State where the issuer of the securities is incorporated
or where the original securities are physically held by a CSD or
registered (“look-through approach”), even though the ultimate
account holder is not registered there.

Therefore, some States have modernised their conflict of

laws rules to go beyond that principle and offer a more
appropriate solution taking into account the way intermediated
securities are held and transferred. In the EU, for example, the
Directives on Settlement Finality and Financial Collateral provide
conflict of laws rules based on the Place of the Relevant
Intermediary Approach (PRIMA), that is, the law of the place
where the account holder’s relevant intermediary maintains the
securities account for the account holder.

At the international level, the Hague Securities

Convention, which was concluded on 5 July 2006 and entered
into force on 1 April 2017, is the only instrument. The Hague
Securities Convention represents an evolution beyond the initial
formulation of PRIMA in that it too is based upon the notion of
the relevant intermediary. However, it avoids any attempt to
locate where the relevant intermediary maintains the securities
account and instead gives effect to an agreement on governing
law between an account holder and its intermediary as long as a
qualifying office requirement is met (the “Hague approach”).
Thus, the State law chosen by the parties is to apply only if the
 CONFLICT OF LAW ASPECTS  113

relevant intermediary has an office – involved in the maintenance

of securities accounts – in that State. See Hague Securities
Convention, Article 4.

C. The Convention’s “tier-by-tier” approach and its

interaction with conflict of laws rules

The Convention relies on a “tier-by-tier” approach for

intermediated securities holdings systems. Though the
Convention does not, as discussed in Part III.A above,
characterise the legal nature of the rights and interests arising
from a credit of securities to a securities account and at which
level such rights and interests arise, the Convention does view
intermediated holding chains as made up of distinct relationships.
In particular, it divides the holding chain into tiers and looks at
each link in that chain: for each account holder there is one, but
only one, relevant intermediary. The building blocks of the
Convention are each relationship between an account holder and
its relevant intermediary.

This substantive approach works well with a conflict of

laws approach whereby the applicable law is determined
separately for each tier of the chain of intermediaries (i.e. for each
relationship between an account holder and its relevant
intermediary), as is generally the case for approaches based on
the notion of the relevant intermediary. There may only be one
applicable law for each tier and, therefore, in a multi-tier structure
there may be two or more layers of laws. And this perfectly suits
a substantive law regime that focuses on establishing the rules
governing each relationship.
114 GUIDE ON INTERMEDIATED SECURITIES
 

Diagram 305-1: Application of law in an intermediated securities

holding chain spanning three States

Let us imagine that Intermediary 1 is in State A, Intermediary 2

is in State B and Intermediary 3 is in State C. According to either
the initial formulation of PRIMA or the Hague approach: (a) the
law governing the rights of the ultimate account holder vis-à-vis
the securities account maintained by Intermediary 3 is State C’s
law, (b) the law governing the rights of Intermediary 3 vis-à-vis
the securities account maintained by Intermediary 2 is State B’s
law; (c) and the law governing the rights of Intermediary 2 vis-à-
vis the securities account maintained by Intermediary 1 is State
A’s law. There are, therefore, three layers of rights, each set of
which is governed by a different law. It can be said that the
ultimate account holder has a set of rights governed by State C’s
law over a set of rights acquired by Intermediary 3 with
Intermediary 2 under State B’s law, and over a set of rights
acquired by Intermediary 2 with Intermediary 1 under State A’s
law.

Lawmakers should modernise the conflict of laws rules to

avoid the ambiguities raised by traditional solutions (i.e. the lex
rei (carta) sitae principle), and introduce a solution based on the
relevant intermediary as the main connecting factor. Additionally
a specification of that solution may be recommendable. Article
4(1) of the Hague Securities Convention, for example, calls for
 CONFLICT OF LAW ASPECTS  115

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” provided that the
relevant intermediary has an office in that State. In the EU, as
another example, the Directives on Settlement Finality and
Financial Collateral establish that the applicable law is that of the
place where the relevant intermediary maintains the securities
account for the account holder. In transparent systems, in
particular, lawmakers should be aware that additional
clarifications may be required. In principle, in these systems, the
“relevant intermediary” for the purpose of determining the
applicable law may be the CSD, where the accounts are
maintained in the name of the ultimate investors.

D. Other conflict of laws rules

Both the initial formulation of PRIMA and the Hague

approach determine the law applicable to intermediated
securities, but only for certain issues; for example, in the Hague
Securities Convention, only for the issues enumerated in its
Article 2(1)(a)-(g). If according to the Hague Securities
Convention, the law applicable is that of a Contracting State to
the Geneva Securities Convention, the Geneva Securities
Convention would govern all substantive issues included in
Article 2(1)(a)-(g) of the former.

However, the substantive scope of application of the

Hague Securities Convention is not exactly the same as the
substantive scope of the Geneva Securities Convention. Article
2(1)(a)-(g) of the Hague Securities Convention contains an
exhaustive list of all the issues falling within the scope of the
Hague Securities Convention, which is narrower than the scope
of the Geneva Securities Convention. Although the concept is
avoided, the Hague Securities Convention applies mainly to
“proprietary” issues. However, purely contractual or personal
rights which arise solely from the contractual relationship
between the account holder and its intermediary or the parties to
a disposition inter se are not included within the scope of the
Hague Securities Convention. See Hague Securities Convention,
Article 2(3)(a)).
116 GUIDE ON INTERMEDIATED SECURITIES
 

The law applicable to other issues that are outside the

substantive scope of the Hague Securities Convention but which
may fall within the scope of the Geneva Securities Convention is
determined by the corresponding conflict of laws rules of the
forum. For example, the law applicable to the contractual
obligations of the intermediary vis-à-vis its account holder is
determined by the conflict of laws rules on contractual
obligations. In the EU, this is the Rome I Regulation, which is
based on the principle of party autonomy (“A contract shall be
governed by the law chosen by the parties”). The same principle
inspires the Hague Principles on Choice of Law in International
Commercial Contracts. In application of this principle, if the law
chosen by the parties is that of a Contracting State to the Geneva
Securities Convention, the provisions of that instrument on
contractual obligations (e.g. Article 10) would apply.

Finally, the determination of the law applicable in

insolvency proceedings (i.e. “insolvency conflict of laws rules”)
should be designed to ensure the effectiveness of the rights over
intermediated securities in such proceedings as established, in
particular, by Articles 14 and 21 of the Convention. See, e.g.,
Hague Securities Convention, Article 8.
 PART IX - OTHER INSTRUMENTS AND
REGULATIONS AND IMPLEMENTATION

Legislative Principle 15: Lawmakers should consider the

various instruments and guidance that is available in order to
develop and implement an intermediated securities holding
system which is tailored to their legal and economic context and
consistent with the principles and rules contained in the Guide.

It is important for lawmakers to consider the links between

the Geneva Securities Convention and other international
instruments and how best to implement changes made in order to
create or improve an intermediated securities holding system.
Other instruments and guidance documents are available for
consideration in establishing or evaluating an intermediated
securities holding system, which is just one important part of a
State’s broader and interconnected financial system. States
should consider the various instruments and documents available
– which may address particular aspects in greater detail – in order
to tailor and implement legal reforms which correspond best to
their system and are consistent with the principles and rules set
forth in the Guide.

A. Links to other international instruments or regulations

The modernisation of domestic legislation on financial

markets is essential to a State’s economic development. At the
international level, many standard-setting bodies have adopted
standards to ensure financial stability and mitigate risk, to
improve efficiency and to favour cross-border transactions. The
FSB, for instance, keeps a regularly-updated compendium of
standards relating to financial markets. In particular, the FSB
selected a number of “Key Standards for Sound Financial
Systems” (“FSB Key Standards”), concerning three macro-areas:
(a) macroeconomic policy and data transparency, (b) financial
regulation and supervision, and (c) institutional and market
infrastructure. These are elaborated by different international
standard-setting bodies, according to relevant competences, but

117
118 GUIDE ON INTERMEDIATED SECURITIES
 

are jointly used as a basis for evaluation of the soundness of a

State (e.g. FSAP by the IMF and the World Bank are based on
those standards).

On the one hand, these exercises are done to reduce

systemic risk and to prevent financial distress from spreading
from one State to another, but also to support investment and
reinforce the infrastructure of domestic markets. On the other
hand, emerging markets offer extremely interesting opportunities
for foreign investments, which in turn may favour the
development of domestic sectors of the economy. In order to
strengthen their internal markets, as well as incentivise foreign
investments by accruing trust, States endeavour to sustain their
own economies with adequate infrastructures according to such
standards.

International standards consider as a first requirement to

attaining the above objectives of development and stability that a
sound legal system be in place. For instance, Principle One of the
Principles for Financial Market Infrastructures, which are
included in the FSB Key Standards, establishes that any FMI
needs to have a sound legal basis. This requirement, however,
should not be simply interpreted as meaning that legal obstacles
to the working of specific systems or business schemes be
eliminated. This is of course one of the priorities to reduce risk
and its diffusion to foreign markets, but it cannot stand alone. A
State needs to have modern legislation that offers a legally sound
environment, conducive to modernisation, and in which operators
can act on a level playing field while relevant interests are duly
protected and stability is adequately taken care of. International
standards not only require elimination of legal barriers, but also
the building of a sound legal environment conducive to
development and stability.

Many States use international standards, and in particular

those concerning or affecting their internal legal order, as an
effective benchmark for reform. On the other hand, it is generally
understood that a State that respects international standards and
possesses a sound legal environment receives positive rankings in
the various international comparative exercises that are
performed by international bodies (such as the World Bank’s
 OTHER INSTRUMENTS AND REGULATIONS  119
AND IMPLEMENTATION

Doing Business reports), which can make a difference regarding

foreign investments actually received in a State because respect
of such standards has proven to favour concretely market
development and ensure stability. The World Bank’s Doing
Business reports, for example, include evaluation of the legal
environment of a State in many contexts, and uses international
Conventions and other international instruments for
harmonisation as benchmarks.

Indeed, the exercises done at the international level by

international organisations and bodies to harmonise domestic
legislation in specific fields has the objective, among others, to
provide guidance in this direction, and offer models that are the
result of international harmonisation. It is not a specific State’s
model that is diffused by these bodies, but the synthesis of various
legal experiences and traditions. Because of this, they usually
reflect balanced solutions, to be taken into serious consideration
in any domestic reform efforts.

The adoption of international instruments such as the

Geneva Securities Convention is thus a fundamental step within
a wider scenario of domestic legal reforms for modernisation and
openness of a State’s economy using international standards as
benchmarks, and international instruments for harmonisation of
law as the most balanced and unbiased models to be used to that
end.

B. Overview of implementation in a domestic legal

framework

Each State has its own tradition and is situated within a

specific regional context. As a result, each needs to implement a
tailor-made legal reform. However, there are high-level principles
that are usually recognised as commonly shared, and thus
included in international instruments. When principles are
generally shared and can be sufficiently detailed, a Convention is
adopted. In other cases, a Model Law or a Legislative Guide is
issued because these instruments, although not offering hard law
solutions, permit convergence by leaving more flexibility in the
means to be used to reach such convergence.
120 GUIDE ON INTERMEDIATED SECURITIES
 

Ways to adopt a Convention, a Model Law or a

Legislative Guide into a domestic legal order are different, but in
all cases the international instrument has to be understood within
the more general context of both other fields of legislation that
are not covered by the specific international instrument, and the
institutional and legal order of the State, with its own existing
legal tradition and institutions.

As mentioned, in the case of financial markets, various

international standards and measures of a regulatory nature exist.
The Convention recognises this variety and excludes such matters
from its own scope, as it does for other matters of a purely legal
nature (such as corporate law).

However, these regulations and standards need to be

considered by the domestic lawmaker not only to avoid the risk
of leaving essential aspects unregulated, but also because each
piece of reform needs to be drafted in a consistent manner and
policy choices taken as much as possible under an holistic
approach. When other international instruments exist in these
fields, these need to be adequately implemented. When
international standards do not exist, there is still a need for
modernisation, and the State should rely on its own general
principles of law and institutional framework. This may involve
cooperation by many public bodies in the State according to their
individual functions and scope of responsibility.

While corporate law generally does not fall within the

Convention’s scope, that law affects the working of book-entry
systems for securities and some rights and duties of account
holders found in such body of law might unpredictably affect the
application of the Convention. In the same vein, rules on money
laundering or market abuse, which are excluded by the scope of
the Convention, need to be put in place if concrete modernisation
is to be achieved.

Finally, legal reform coming from international

instruments may require the adoption of articulated implementing
measures. Indeed, international rules may be better reflected in a
legal system by way of a statutory act, a secondary measure,
contractual agreements by the market, or finally a combination of
 OTHER INSTRUMENTS AND REGULATIONS  121
AND IMPLEMENTATION

these options. Adoption of a reform not only implies evaluation

of rules to be adopted into a legal system, amendment of existing
specific provisions or adaptation of legal institutions, but also
determination of the most appropriate legal mechanisms to be
adopted. For example, for legal reforms by statutory act, there are
two main approaches. First, a statutory act could address the core
aspects of an intermediated securities holding system and then
cross-reference to the relevant statutes or authority on related
aspects, such as innocent purchasers or insolvency. Secord, a
standalone statutory act on intermediated securities could be
developed, which addresses comprehensively all the necessary
aspects in an intermediated securities holding system. For newer
or lesser developed securities markets, the latter approach could
enhance the attractiveness of a particular market by clearly laying
out the applicable legal framework and thereby reducing the
perceived legal risk.

With respect to undertaking reforms consistent with the

Convention and the Guide, there are two aspects that need to be
kept in mind. First, in creating or evaluating an intermediated
securities holding system, a State could use the Guide, for
example, to prepare for signing and adopting the Convention or
to select and implement all or certain principles and rules set forth
in the Guide. Signature and adoption of the Convention, however,
may be a State’s preferred option, as the Convention offers the
advantage of a streamlined, functional, core package of principles
and rules governing intermediated securities. As discussed
throughout the Guide, if the Convention is signed and is to be
adopted, a Contracting State may need to make certain
declarations under the Convention and address or clarify certain
aspects of law outside the Convention. Regarding declarations
specifically, they include not only those discussed above in the
relevant subsections entitled “Choices to be made by
declaration”, but also those concerning technical treaty matters,
in particular competence of Regional Economic Integration
Organisations under Article 41(2) and territorial units under
Article 43. For more information on these latter declarations, see
the Declarations Memorandum, Sections 4.K and 4.L and
accompanying Forms No. 11 and No. 12 respectively. Whether a
State opts to sign and adopt the Convention or to select and
122 GUIDE ON INTERMEDIATED SECURITIES
 

implement the Convention’s principles and rules, legal certainty

and economic efficiency would be enhanced.

Second, for the specific matters governed by the

Convention, some provisions might need to be included in a
statutory act, because they would establish rights and obligations
against third parties. Other provisions can be addressed by
regulations or other secondary measures by relevant authorities.
This is surely the case for regulatory matters outside the scope of
the Convention but still to be covered by a wider legal reform of
the sector. In this case, as briefly mentioned, the issue gives rise
to the question of which relevant authorities would be competent
for such exercise. Standard contractual rules by the market are
often the best normative tool, as the Convention recognises in the
case of internal rules of securities systems or other bodies, usually
authorised to operate following satisfaction of various conditions
verified by the regulator. All these choices need to be made not
only according to principles of efficiency but also in light of the
existing institutional framework of the State.

Whereas technical assistance can substantially help the

State to consider all of these elements and address them
consistently and in light of international best practice, the reform
belongs to the individual State and is its own product, as a result
of efforts usually involving many domestic stakeholders.

* * * 
 
 ANNEX 1
REFERENCES TO “NON-CONVENTION LAW”

References in the Convention For discussion

Preamble, recital 7: Official
Commentary:
HAVING due regard for non-Convention law in matters
not determined by this Convention, Para P-8
Article 1(k): Official
Commentary:
“control agreement” means an agreement in relation to
intermediated securities between an account holder, the Paras 1-52, 1-54
relevant intermediary and another person or, if so
provided by the non-Convention law, between an account Legislative
holder and the relevant intermediary or between an Guide:
account holder and another person of which the relevant
intermediary receives notice, which includes either or Paras 141 to 146
both of the following provisions: […]
Article 1(l): Official
Commentary:
“designating entry” means an entry in a securities
account made in favour of a person (including the relevant Paras 1-53 to 1-54
intermediary) other than the account holder in relation to
intermediated securities, which, under the account Legislative
agreement, a control agreement, the uniform rules of a Guide:
securities settlement system or the non-Convention law,
has either or both of the following effects: […] Paras 141 to 146

Article 1(m): Official

Commentary:
“non-Convention law” means the law in force in the
Contracting State referred to in Article 2, other than the Paras 1-55 to 1-60
provisions of this Convention;
Legislative
Guide:
Para 75
Article 1(p): Official
Commentary:
“uniform rules” means, in relation to a securities
settlement system or securities clearing system, rules of Paras 1-100 to
that system (including system rules constituted by the non- 101
Convention law) which are common to the participants or
to a class of participants and are publicly accessible. Legislative
Guide:
Para 75
 

123
124 GUIDE ON INTERMEDIATED SECURITIES
 

Article 7(1): Official

Commentary:
A Contracting State may declare that under its non-
Convention law a person other than the relevant Para 7-19
intermediary is responsible for the performance of a
function or functions (but not all functions) of the relevant Legislative
intermediary under this Convention, either generally or in Guide:
in relation to intermediated securities, or securities
accounts, of any category or description. Paras 103, 203 to
207
Declarations
Memorandum:
Section 4.C and
accompanying
Forms 3.A and
3.B
Article 9(1)(a)(ii): Official
Commentary:
The credit of securities to a securities account confers on
the account holder: Para 9-16
(a) the right to receive and exercise any rights attached to Legislative
the securities, including in particular dividends, other Guide:
distributions and voting rights: (i) if the account holder is
not an intermediary or is an intermediary acting for its Paras 82, 88 to 93
own account; and (ii) in any other case, if so provided by
the non-Convention law;
Article 9(1)(c): Official
Commentary:
The credit of securities to a securities account confers on
the account holder: […] (c) the right, by instructions to Paras 9-21 to 9-26
the relevant intermediary, to cause the securities to be
held otherwise than through a securities account, to the Legislative
extent permitted by the applicable law, the terms of the Guide:
securities and, to the extent permitted by the non-
Convention law, the account agreement or the uniform Paras 82 et seq.,
rules of a securities settlement system; 236

Article 9(1)(d): Official

Commentary:
The credit of securities to a securities account confers on
the account holder: […] (d) unless otherwise provided in Paras 9-27 to 9-30
this Convention, such other rights, including rights and
interests in securities, as may be conferred by the non- Legislative
Convention law. Guide:
Paras 82, 88 et
seq.
 
 ANNEX 1  125

Article 9(3): Official

Commentary:
If an account holder has acquired a security interest, or a
limited interest other than a security interest, by credit of Paras 9-31 to 9-33
securities to its securities account under Article 11(4), the
non-Convention law determines any limits on the rights Legislative
described in paragraph 1 of this Article. Guide:
Paras 82, 88, 94
to 97
Article 10(2)(c), (e), and (f): Official
An intermediary must, at least: […] (c) give effect to any Commentary:
instructions given by the account holder or other Paras 10-10, 10-
authorised person, as provided by the non-Convention 13, 10-15 to 10-
law, the account agreement or the uniform rules of a
securities settlement system; […] (e) regularly pass on to 17
account holders information relating to intermediated Legislative
securities, including information necessary for account Guide:
holders to exercise rights, if provided by the non-
Convention law, the account agreement or the uniform Paras 101 to 119,
rules of a securities settlement system; and (f) regularly 221
pass on to account holders dividends and other
distributions received in relation to intermediated
securities, if provided by the non-Convention law, the
account agreement or the uniform rules of a securities
settlement system.
Article 11(2): Official
Commentary:
No further step is necessary, or may be required by the
non-Convention law or any other rule of law applicable Paras 11-17 to 11-
in an insolvency proceeding, to render the acquisition of 19
intermediated securities effective against third parties.
Legislative
Guide:
Paras 125, 131
Article 12(2): Official
Commentary:
No further step is necessary, or may be required by the
non-Convention law or any other rule of law applicable Para 12-31, which
in an insolvency proceeding, to render the acquisition of also refers to
intermediated securities effective against third parties. paras 11-17 to 11-
19
Legislative
Guide:
Para 138
 
126 GUIDE ON INTERMEDIATED SECURITIES
 

Article 13: Official

Commentary:
This Convention does not preclude any method provided
by the non-Convention law for: (a) the acquisition or Paras 13-5 to 13-6
disposition of intermediated securities or of an interest in
intermediated securities; or (b) the creation of an interest Legislative
in intermediated securities and for making such an Guide:
interest effective against third parties, other than the
methods provided by Articles 11 and 12. Paras 138 to 140,
155 to 157, 183,
188, 197, 255
Article 15(1)(e): Official
Commentary:
An intermediary may make a debit of securities to a
securities account, make or remove a designating entry or Para 15-17
otherwise dispose of intermediated securities only if it is
authorised to do so: […] (e) by the non-Convention law. Legislative
Guide:
Para 160 et seq.
Article 15(2): Official
Commentary:
The non-Convention law and, to the extent permitted by
the non-Convention law, the account agreement or the Paras 15-18 to 15-
uniform rules of a securities settlement system determine 21
the consequences of: an unauthorised debit; an Legislative
unauthorised removal of a designating entry; subject to Guide:
Article 18(2), an unauthorised designating entry; or any
other unauthorised disposition. Paras 160 to 171

Article 16: Official

Commentary:
Subject to Article 18, the non-Convention law and, to the
extent permitted by the non-Convention law, the account Paras 16-9 to 16-
agreement or the uniform rules of a securities settlement 23
system determine whether and in what circumstances a Legislative
debit, credit, designating entry or removal of a Guide:
designating entry is invalid, is liable to be reversed or may
be subject to a condition, and the consequences thereof. Paras 160 to 171,
221
Article 18(5): Official
Commentary:
To the extent permitted by the non-Convention law,
paragraph 2 is subject to any provision of the uniform Paras 18-11 to 18-
rules of a securities settlement system or of the account 14
agreement. Legislative
Guide:
Paras 172, 221
 ANNEX 1  127

Article 19(2): Official

Commentary:
Subject to paragraph 5 and Article 20, interests that
become effective against third parties under Article 12 Para 19-13
have priority over any interest that becomes effective
Legislative
against third parties by any other method provided by the
Guide:
non-Convention law.
Paras 183 to 184
Article 19(7): Official
Commentary:
A Contracting State may declare that under its non-
Convention law, subject to paragraph 4, an interest Para 19-17
granted by a designating entry has priority over any Legislative
interest granted by any other method provided by Guide:
Article 12.
Paras 153, 189
Declarations
Memorandum:
Section 4.E and
accompanying
Form No. 5
Article 22(3): Official
Commentary:
A Contracting State may declare that under its non-
Convention law an attachment of intermediated securities Paras 22-19 to 22-
of an account holder made against or so as to affect a 22
person other than the relevant intermediary has effect also Legislative
against the relevant intermediary. Any such declaration Guide:
shall identify that other person by name or description and
shall specify the time at which such an attachment Paras 203 to 208
becomes effective against the relevant intermediary. Declarations
Memorandum:
Section 4.F and
accompanying
Form No. 6
Article 23(2)(d): Official
Commentary:
Paragraph 1 [which states that “[a]n intermediary is
neither bound nor entitled to give effect to any instructions Paras 23-26 to 23-
in relation to intermediated securities of an account 27
holder given by any person other than that account
Legislative
holder”] is subject to: […] (d) any applicable provision
Guide:
of the non-Convention law; and
Paras 106, 114-
117
128 GUIDE ON INTERMEDIATED SECURITIES
 

Article 24(3): Official

Commentary:
If at any time the requirements of paragraph 1 are not
complied with, the intermediary must within the time Paras 24-20 to 24-
permitted by the non-Convention law take such action as 21
is necessary to ensure compliance with those
Legislative
requirements.
Guide:
Para 217
Article 24(4): Official
Commentary:
This Article does not affect any provision of the non-
Convention law, or, to the extent permitted by the non- Para 24-22
Convention law, any provision of the uniform rules of a
Legislative
securities settlement system or of the account agreement,
Guide:
relating to the method of complying with the requirements
of this Article or the allocation of the cost of ensuring Para 218
compliance with those requirements or otherwise relating
to the consequences of failure to comply with those
requirements.
Article 25(3): Official
Commentary:
The allocation required by paragraph 1 shall be effected
by the non-Convention law and, to the extent required or Para 25-15
permitted by the non-Convention law, by arrangements
Legislative
made by the relevant intermediary.
Guide:
Para 213
Article 25(5): Official
Commentary:
A Contracting State may declare that, if all securities and
intermediated securities held by an intermediary for its Paras 25-19 to 25-
account holders, other than itself, are in segregated form 20
under arrangements such as are referred to in paragraph
Legislative
4, under its non-Convention law the allocation required
Guide:
by paragraph 1 applies only to those securities and
intermediated securities and does not apply to securities Paras 212, 215,
and intermediated securities held by an intermediary for 262, 270
its own account.
Declarations
Memorandum:
Section 4.G and
accompanying
Form No. 7
 
 ANNEX 1  129

Article 26(3): Official

Commentary:
To the extent permitted by the non-Convention law, if the
intermediary is the operator of a securities settlement Para 26-12
system and the uniform rules of the system make provision
Legislative
in case of a shortfall, the shortfall shall be borne in the
Guide:
manner so provided.
Para 221
Article 28(1) and (2): Official
Commentary:
(1) The obligations of an intermediary under this
Convention, including the manner in which an Paras 28-10 to 28-
intermediary complies with its obligations, may be 13
specified by the non-Convention law and, to the extent
Legislative
permitted by the non-Convention law, the account
Guide:
agreement or the uniform rules of a securities settlement
system. Paras 106, 118 to
(2) If the substance of any such obligation is specified by 119, 221
the non-Convention law or, to the extent permitted by the
non-Convention law, the account agreement or the
uniform rules of a securities settlement system,
compliance with it satisfies that obligation.

Article 28(3): Official

Commentary:
The liability of an intermediary in relation to its
obligations is governed by the non-Convention law and, Paras 28-15 to 28-
to the extent permitted by the non-Convention law, the 17
account agreement or the uniform rules of a securities
Legislative
settlement system.
Guide:
Paras 106, 120 to
122, 221
Article 31(2): Official
Commentary:
Nothing in this Chapter impairs any provision of the non-
Convention law which provides for additional rights or Paras 31-17 to 31-
powers of a collateral taker or additional obligations of a 18
collateral provider.
Legislative
Guide:
Para 286
 
130 GUIDE ON INTERMEDIATED SECURITIES
 

Article 34(4): Official

Commentary:
The exercise of a right of use shall not render invalid or
unenforceable any right of the collateral taker under the Para 34-17
relevant security collateral agreement or the non-
Convention law. Legislative
Guide:
Para 278

Article 35: Official

Commentary:
Articles 33 and 34 do not affect any requirement of the
non-Convention law to the effect that the realisation or Paras 35-8 to 35-
valuation of collateral securities or the calculation of any 11
obligations must be conducted in a commercially
reasonable manner. Legislative
Guide:
Para 287
Article 36(1)(a)(iii): Official
Commentary:
If a collateral agreement includes: (a) an obligation to
deliver additional collateral securities: […] (iii) to the Para 36-21
extent permitted by the non-Convention law, in any other
circumstances specified in the collateral agreement; or Legislative
Guide:
Para 285
 ANNEX 2
REFERENCES TO “APPLICABLE LAW”

References in the Convention For discussion

Article 2(a): Official
Commentary:
This Convention applies whenever: (a) the applicable
conflict of laws rules designate the law in force in a Paras 2-6 to 2-9
Contracting State as the applicable law; Legislative Guide:
Para 296
Article 3: Official
Commentary:
If the law of the forum State is not the applicable law,
the forum State shall apply the Convention and the Paras 3-5 to 3-7
declarations, if any, made by the Contracting State the Legislative Guide:
law of which applies, and without regard to the
declarations, if any, made by the forum State. Para 299

Article 9(1)(c): Official

Commentary:
The credit of securities to a securities account confers
on the account holder: […] (c) the right, by instructions Paras 9-8, 9-21 to
to the relevant intermediary, to cause the securities to 9-26
be held otherwise than through a securities account, to Legislative Guide:
the extent permitted by the applicable law, the terms of
the securities and, to the extent permitted by the non- Paras 82, 236
Convention law, the account agreement or the uniform
rules of a securities settlement system;
Article 9(2)(b): Official
Commentary:
Unless otherwise provided in this Convention: […] (b)
the rights referred to in paragraph 1(a) may be Para 9-17
exercised against the relevant intermediary or the issuer Legislative Guide:
of the securities, or both, in accordance with this
Convention, the terms of the securities and the Paras 100 to 101
applicable law;
Article 12(8): Official
Commentary:
The applicable law determines in what circumstances a
non-consensual security interest in intermediated Para 12-20
securities may arise and become effective against third Legislative Guide:
parties.
Para 159
 

131 
132 GUIDE ON INTERMEDIATED SECURITIES
 

Article 18(4): Official

Commentary:
If an acquirer is not protected by paragraph 1 or
paragraph 2, the applicable law determines the rights Paras 18-17 to 18-
and liabilities, if any, of the acquirer. 18
Legislative Guide:
Para 178
Article 19(5): Official
Commentary:
A non-consensual security interest in intermediated
securities arising under the applicable law has such Para 19-15
priority as is afforded to it by that law.
Legislative Guide:
Paras 192 to 195
Article 19(6): Official
Commentary:
As between persons entitled to any interests referred to
in paragraphs 2, 3 and 4 and, to the extent permitted by Para 19-16
the applicable law, paragraph 5, the priorities provided
Legislative Guide:
by this Article may be varied by agreement between
those persons, but any such agreement does not affect Para 187
third parties.
 ANNEX 3
REFERENCES TO RULES RELATING TO
INSOLVENCY

References in the Convention For discussion

Preamble, recital 9: Official
CommentarY:
Emphasising that this Convention is not intended to
harmonise or otherwise affect insolvency law except to Para P-10
the extent necessary to provide for the effectiveness of
rights and interests governed by this Convention,
Article 1(h): Official
Commentary:
“insolvency proceeding” means a collective judicial or
administrative proceeding, including an interim Para 1-46
proceeding, in which the assets and affairs of the debtor
are subject to control or supervision by a court or other
competent authority for the purpose of reorganisation
or liquidation;
Article 1(i): Official
Commentary:
“insolvency administrator” means a person (including
a debtor in possession if applicable) authorised to Para 1-47
administer an insolvency proceeding, including one
authorised on an interim basis;
Article 11(2): Official
Commentary:
No further step is necessary, or may be required by the
non-Convention law or any other rule of law applicable Paras 11-17 to 11-
in an insolvency proceeding, to render the acquisition of 19
intermediated securities effective against third parties.
Legislative Guide:
Paras 125, 131
Article 12(2): Official
Commentary:
No further step is necessary, or may be required by the
non-Convention law or any other rule of law applicable Para 12-12
in an insolvency proceeding, to render the interest
effective against third parties. Legislative Guide:
Para 138 et seq.
 

133
134 GUIDE ON INTERMEDIATED SECURITIES
 

Article 14(2): Official

Commentary:
Paragraph 1 [which states that “[r]ights and interests
that have become effective against third parties under Para 14-6 to 14-11
Article 11 or Article 12 are effective against the
insolvency administrator and creditors in any Legislative Guide:
insolvency proceeding] does not affect the application
Para 253
of any substantive or procedural rule of law applicable
by virtue of an insolvency proceeding, such as any rule
relating to: (a) the ranking of categories of claims; (b)
the avoidance of a transaction as a preference or a
transfer in fraud of creditors; or (c) the enforcement of
rights to property that is under the control or
supervision of the insolvency administrator.
Article 21: Official
Commentary:
(1) Rights and interests of account holders of a relevant
intermediary that have become effective against third Paras 21-10 to 21-
parties under Article 11 and interests granted by such 14
account holders that have become effective under
Article 12 are effective against the insolvency Legislative Guide:
administrator and creditors in any insolvency
Paras 256 to 258
proceeding in relation to the relevant intermediary or in
relation to any other person responsible for the
performance of a function of the relevant intermediary
under Article 7.
(2) Paragraph 1 does not affect: (a) any rule of law
applicable in the insolvency proceeding relating to the
avoidance of a transaction as a preference or a transfer
in fraud of creditors; or (b) any rule of procedure
relating to the enforcement of rights to property that is
under the control or supervision of the insolvency
administrator.
(3) Nothing in this Article impairs the effectiveness of an
interest in intermediated securities against the
insolvency administrator and creditors in any
insolvency proceeding referred to in paragraph 1, if that
interest has become effective by any method referred to
in Article 13.
 

 
 ANNEX 3  135

Article 26(1): Official

Commentary:
This Article applies in any insolvency proceeding in
relation to an intermediary unless otherwise provided Paras 26-1, 26-9
by any conflicting rule applicable in that proceeding.
Legislative Guide:
Para 259
Article 27: Official
Commentary:
To the extent permitted by the law governing a system,
the following provisions shall have effect Paras 27-1 to 27-3,
notwithstanding the commencement of an insolvency 27-19
proceeding in relation to the operator of that system or
any participant in that system and notwithstanding any Legislative Guide:
invalidation, reversal or revocation that would Para 223
otherwise occur under any rule applicable in an
insolvency proceeding: (a) any provision of the uniform
rules of a securities settlement system or of a securities
clearing system in so far as that provision precludes the
revocation of any instruction given by a participant in
the system for making a disposition of intermediated
securities, or for making a payment relating to an
acquisition or disposition of intermediated securities,
after the time at which that instruction is treated under
the rules of the system as having been entered
irrevocably into the system; (b) any provision of the
uniform rules of a securities settlement system in so far
as that provision precludes the invalidation or reversal
of a debit or credit of securities to, or a designating
entry or removal of a designating entry in, a securities
account that forms part of the system after the time at
which that debit, credit, designating entry or removal of
a designating entry is treated under the rules of the
system as not liable to be reversed.
 ANNEX 4
REFERENCES TO UNIFORM RULES OF SCSs AND SSSs

References in the Convention For discussion

Article 1(l): Official
Commentary:
“designating entry” means an entry in a securities
account made in favour of a person (including the Paras 1-50 to 1-54
relevant intermediary) other than the account holder
in relation to intermediated securities, which, under Legislative Guide:
the account agreement, a control agreement, the
Paras 141 to 146
uniform rules of a securities settlement system or the
non-Convention law, has either or both of the
following effects:
[…]
(ii) that the relevant intermediary is obliged to comply
with any instructions given by that person in relation
to the intermediated securities as to which the entry is
made in such circumstances and as to such matters as
may be provided by the account agreement, a control
agreement or the uniform rules of a securities
settlement system, without any further consent of the
account holder;
Article 1(n): Official
Commentary:
”securities settlement system” means a system that: (i)
settles, or clears and settles, securities transactions; Paras 1-61 to 1-88
(ii) is operated by a central bank or central banks or
is subject to regulation, supervision or oversight by a Legislative Guide:
governmental or public authority in relation to its
Paras 70, 220 et
rules; and (iii) has been identified as a securities
settlement system in a declaration made by the seq.
Contracting State the law of which governs the system Declarations
on the ground of the reduction of risk to the stability Memorandum:
of the financial system;
Section 4.A and
accompanying
Form No. 1
 

136
 ANNEX 4  137

Article 1(o): Official

Commentary:
”securities clearing system” means a system that: (i)
clears, but does not settle, securities transactions Paras 1-89 to 1-99
through a central counterparty or otherwise; (ii) is
operated by a central bank or central banks or is Legislative Guide:
subject to regulation, supervision or oversight by a
Paras 70, 220 et
governmental or public authority in relation to its
rules; and (iii) has been identified as a securities seq.
clearing system in a declaration made by the Declarations
Contracting State the law of which governs the system Memorandum:
on the ground of the reduction of risk to the stability
of the financial system; Section 4.A and
accompanying
Form No. 1
Article 1(p): Official
Commentary:
”uniform rules” means, in relation to a securities
settlement system or securities clearing system, rules Paras 1-100 to 1-
of that system (including system rules constituted by 107
the non-Convention law) which are common to the
participants or to a class of participants and are Legislative Guide:
publicly accessible.
Para 75
Article 9(1)(c): Official
Commentary:
The credit of securities to a securities account confers
on the account holder: […] (c) the right, by Paras 9-24 to 9-26
instructions to the relevant intermediary, to cause the
securities to be held otherwise than through a Legislative Guide:
securities account, to the extent permitted by the
Paras 82, 236
applicable law, the terms of the securities and, to the
extent permitted by the non-Convention law, the
account agreement or the uniform rules of a securities
settlement system;
138 GUIDE ON INTERMEDIATED SECURITIES
 

Article 10(2)(c), (e) and (f): Official

Commentary:
An intermediary must, at least: […] (c) give effect to
any instructions given by the account holder or other Paras 10-13, 10-15
authorised person, as provided by the non-Convention to 10-17
law, the account agreement or the uniform rules of a
securities settlement system; […] (e) regularly pass on Legislative Guide:
to account holders information relating to Paras 100 to 119,
intermediated securities, including information
necessary for account holders to exercise rights, if 221
provided by the non-Convention law, the account
agreement or the uniform rules of a securities
settlement system; and (f) regularly pass on to account
holders dividends and other distributions received in
relation to intermediated securities, if provided by the
non-Convention law, the account agreement or the
uniform rules of a securities settlement system.
Article 15(2): Official
Commentary:
The non-Convention law and, to the extent permitted
by the non-Convention law, the account agreement or Paras 15-18 to 15-
the uniform rules of a securities settlement system 19
determine the consequences of: an unauthorised debit;
an unauthorised removal of a designating entry; Legislative Guide:
subject to Article 18(2), an unauthorised designating
Paras 165 to 171
entry; or any other unauthorised disposition.
Article 16: Official
Commentary:
Subject to Article 18, the non-Convention law and, to
the extent permitted by the non-Convention law, the Para 16-1 and 16-
account agreement or the uniform rules of a securities 22
settlement system determine whether and in what
circumstances a debit, credit, designating entry or Legislative Guide:
removal of a designating entry is invalid, is liable to
Paras 165 to 171
be reversed or may be subject to a condition, and the
consequences thereof.
 

 
 ANNEX 4  139

Article 18(5): Official

Commentary:
To the extent permitted by the non-Convention law,
paragraph 2 (which states that “[u]nless an acquirer Paras 18-11 and 18-
actually knows or ought to know, at the relevant time, 12
of an earlier defective entry: (a) the credit or interest
is not rendered invalid, ineffective against third Legislative Guide:
parties or liable to be reversed as a result of that Paras 172, 221
defective entry; and (b) the acquirer is not liable to
anyone who would benefit from the invalidity or
reversal of that defective entry”) is subject to any
provision of the uniform rules of a securities
settlement system or of the account agreement.
Article 23(2)(e): Official
Commentary:
Paragraph 1 [which states that “[a]n intermediary is
neither bound nor entitled to give effect to any Para 23-28
instructions in relation to intermediated securities of
an account holder given by any person other than that Legislative Guide:
account holder”] is subject to […] (e) if the
Para 221
intermediary is the operator of a securities settlement
system, the uniform rules of that system.
Article 24(4): Official
Commentary:
This Article does not affect any provision of the non-
Convention law, or, to the extent permitted by the non- Para 24-22
Convention law, any provision of the uniform rules of
a securities settlement system or of the account Legislative Guide:
agreement, relating to the method of complying with Para 218
the requirements of this Article or the allocation of the
cost of ensuring compliance with those requirements
or otherwise relating to the consequences of failure to
comply with those requirements.
Article 26(3): Official
Commentary:
To the extent permitted by the non-Convention law, if
the intermediary is the operator of a securities Para 26-12
settlement system and the uniform rules of the system
make provision in case of a shortfall, the shortfall Legislative Guide:
shall be borne in the manner so provided. Para 221
140 GUIDE ON INTERMEDIATED SECURITIES
 

Article 27: Official

Commentary:
To the extent permitted by the law governing a system,
the following provisions shall have effect Paras 27-1 to 27-8
notwithstanding the commencement of an insolvency
proceeding in relation to the operator of that system Legislative Guide:
or any participant in that system and notwithstanding
Para 223
any invalidation, reversal or revocation that would
otherwise occur under any rule applicable in an
insolvency proceeding:
(a) any provision of the uniform rules of a securities
settlement system or of a securities clearing system in
so far as that provision precludes the revocation of any
instruction given by a participant in the system for
making a disposition of intermediated securities, or
for making a payment relating to an acquisition or
disposition of intermediated securities, after the time
at which that instruction is treated under the rules of
the system as having been entered irrevocably into the
system;
(b) any provision of the uniform rules of a securities
settlement system in so far as that provision precludes
the invalidation or reversal of a debit or credit of
securities to, or a designating entry or removal of a
designating entry in, a securities account that forms
part of the system after the time at which that debit,
credit, designating entry or removal of a designating
entry is treated under the rules of the system as not
liable to be reversed.
Article 28(1), (2) and (3): Official
Commentary:
(1) The obligations of an intermediary under this
Convention, including the manner in which an Paras 28-1 to 28-3
intermediary complies with its obligations, may be
specified by the non-Convention law and, to the extent Legislative Guide:
permitted by the non-Convention law, the account Paras 106 to 122,
agreement or the uniform rules of a securities
settlement system. 221

(2) If the substance of any such obligation is specified

by the non-Convention law or, to the extent permitted
by the non-Convention law, the account agreement or
the uniform rules of a securities settlement system,
compliance with it satisfies that obligation.
 ANNEX 4  141

(3) The liability of an intermediary in relation to its

obligations is governed by the non-Convention law
and, to the extent permitted by the non-Convention
law, the account agreement or the uniform rules of a
securities settlement system.