Intermediated Securities, Legal Risk, and the International Harmonization of Commercial Law

By Thévenoz, Luc | Stanford Journal of Law, Business & Finance, Spring 2008 | Go to article overview

Intermediated Securities, Legal Risk, and the International Harmonization of Commercial Law


Thévenoz, Luc, Stanford Journal of Law, Business & Finance


Investors do not physically hold their investment securities any more. Securities are held and transferred through a complex, sophisticated, and international network of financial intermediaries, including central securities depositories, investment banks, and brokers-dealers. Investors buy and sell their holdings by having book-entries made to their securities accounts; they provide collateral to secured lenders by book-entries or by control agreements. Because transfers and collateral transactions are critical to the liquidity of the financial markets and to financial stability, market participants and regulators have become increasingly concerned with the legal soundness, the internal consistency, and the international compatibility of national laws regulating the holding and transfer of securities held with an intermediary. This article examines how the international harmonization of key rules of commercial law can contribute to the reduction of legal risk and discusses a draft convention prepared by the International Institute for the Unification of Private Law (UNIDROIT). Rather than addressing the numerous features of that draft, the author focuses on its methodology - the "functional approach" - and finds that it is possible to create effective international treaty provisions, which contracting States may implement without disrupting their property law with respect to the structure and characterization of investors' interests in securities. This article tests the robustness of the functional approach by examining two critical issues: the definition of intermediated securities as the building block of international substantive rules and the choice among four internationally recognized methods for the transfer of intermediated securities and for their use as collateral.

Introduction

Investment securities are intangible rights against issuers. Transferring intangible rights often requires cumbersome formalities and exposes investors to significant uncertainties regarding the validity of their acquisition and the content of the rights so acquired. One of the critical innovations of modern capital markets was the incorporation of investors' intangible rights into certificates, which could be transferred in accordance with the rules governing negotiable instruments. Transforming intangible rights into tangible property allowed investors to prove their ownership through the possession of certificates and to dispose of their investment by delivering them to purchasers or to secured lenders. By treating certificated securities as negotiable instruments, the law protected innocent subsequent investors against unknown defenses of the issuer (holder in due course doctrine) and against adverse claims (bona fide purchaser doctrine),1 even though residual risks -such as the risk of dealing with forged certificates-still required some degree of caveat emptor. The circulation of certificated securities materialized the capital flowing between investors and issuers through increasingly sophisticated intermediaries and markets.

In the mid-20th century however, these flows of physical certificates outgrew the plumbing through which ever increasing stocks of financial assets were issued, re-sold, and pledged. The sheer volume, number of issues, and turnover speed made the delivery of certificated securities impractical and too costly, and also increased the operational risk associated with the physical handling of certificates to unacceptable levels. The pipes were clogged, the highways were jammed, or, as it was later described, the markets faced a "paper crunch."2 Two innovative approaches were used, alternately or cumulatively, to unclog the pipes: immobilization and dematenalization of securities. Certificated securities do not need to move if they are immobilized in the custody of reliable depositories and represented by entries in securities accounts maintained by financial intermediaries for investors. When needed, immobilized securities can be transferred by way of book-entries in investors' accounts, which substitute for their physical delivery. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Intermediated Securities, Legal Risk, and the International Harmonization of Commercial Law
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.