Property Interests in Intermediate Securities

Status: Our involvement in this project is now complete

Increasingly, investors no longer hold stocks, shares and other investment securities directly. Instead securities are "intermediated", that is they are held indirectly through a chain of one or more intermediaries. In this way, global custodians and securities brokers hold and trade huge volumes of securities on behalf of their customers. At the same time, computerised records have largely replaced paper share and stock certificates.

In England, as in many countries around the world, the law has sometimes lagged behind these developments.

International Harmonisation: The Role of UNIDROIT

The legal issues raised by intermediated securities have international ramifications. Change is being led by the International Institute for the Unification of Private Law, commonly known as "UNIDROIT". This is an independent intergovernmental organisation of 61 member states, based in Rome.

The UNIDROIT Convention on Substantive Rules for Intermediated Securities was adopted in Geneva, Switzerland on 9 October 2009 by the diplomatic Conference to adopt a Convention on Substantive Rules regarding Intermediated Securities. The Treasury led the UK negotiations in this area.

Our Advice to HM Treasury on the UNIDROIT Convention

From 2006 to 2008, the Law Commission analysed successive drafts of the UNIDROIT Convention, and provided advice to the UK Government on the issues raised.

Our "Further Updated Advice", published in May 2008, reported on developments at the fourth plenary session and considers issues to be resolved at or before the full Diplomatic Conference in September 2008. We also prepared a draft of the Convention as it stood following the May 2007 meeting, showing our suggested amendments.

This followed our "Updated Advice", which was published just before the fourth plenary session in May 2007.

Our first "Interim Advice", published in October 2006, advised the Treasury prior to the third plenary session in November 2006.

Seminar papers

In 2006 the Law Commission held a series of seminars on this topic.

The first seminar, to discuss general policy issues and the needs of market participants, was held on 22 March 2006. See Seminar paper 1.

The second seminar, held on 23 June 2006, considered:

  • the scope and enforceability of account holders' rights
  • the protection of account holders' securities from claims of an insolvent intermediary's creditors
  • the application of the 'no look through' principle in relation to claims against intermediaries as well as the related issue of upper tier attachment, and
  • the treatment of shortfalls.

The third seminar, held on 27 July 2006, considered:

  • the formalities of transfer
  • the moment at which securities are deemed to have been transferred
  • the finality of transfer, and
  • the defences available to a transferee against adverse claims.

Links to background reports

In July 2004, the Financial Markets Legal Committee issued a report on the need for legislation relating to directly held securities.

In 2006, the European Commission's Legal Certainty Group published an advice in which it set the principles that it proposed should be adopted in new legislation to govern the legal effect of intermediated securities.