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VII ACSDA General AssemblyVII ACSDA General Assembly
29 – 31 March 2006 San Salvador, El Salvador29 – 31 March 2006 San Salvador, El Salvador
UNIDROITUNIDROIT
CONVENTION ON INTERMEDIATED SECURITIESCONVENTION ON INTERMEDIATED SECURITIES
The Brazilian Clearing The Brazilian Clearing and Depository Corporationand Depository Corporation
Margarida BaptistaMargarida Baptista
BackgroundBackground
• Last two decades:Last two decades:
• Financial InnovationsFinancial Innovations
• Growth of the estimated value of securities held in custody Growth of the estimated value of securities held in custody
worldwide: US$ 50 tri (2004)worldwide: US$ 50 tri (2004)
• Expansion of cross-border securities transactionsExpansion of cross-border securities transactions
• Enlarging complexity of the intermediation chainEnlarging complexity of the intermediation chain
Increasing awareness of the legal risks inherent to the securities transactions
Increasing awareness of the legal risks inherent to the securities transactions
In fact...In fact...
Credit riskCredit riskCredit riskCredit risk
2000s2000s
Operational riskOperational riskOperational riskOperational risk
Liquidity riskLiquidity riskLiquidity riskLiquidity risk
Market riskMarket riskMarket riskMarket risk
Legal riskLegal riskLegal riskLegal risk
1980/90s1980/90s
Cross border situationCross border situation
CSDCSDCSDCSD
Country ACountry A
IntermediaryIntermediaryIntermediaryIntermediary
Country BCountry B Country CCountry C
InvestorInvestor InvestorInvestor Secured Secured creditorcreditorSecured Secured creditorcreditor
Problem: growing of legal uncertainty in Problem: growing of legal uncertainty in cross-border securities transactionscross-border securities transactions
Problem: growing of legal uncertainty in Problem: growing of legal uncertainty in cross-border securities transactionscross-border securities transactions
IntermediaryIntermediaryIntermediaryIntermediary
CollateralCollateral
LoanLoan
Solutions in a cross-border contextSolutions in a cross-border context
• International Private Law elements are used to define which is the International Private Law elements are used to define which is the
applicable law (jurisdiction) in case of conflicts.applicable law (jurisdiction) in case of conflicts.
Conflict-of-laws
Conflict-of-laws
Substantive lawSubstantive law
• Harmonization of statutory or written law that governs rights and Harmonization of statutory or written law that governs rights and
obligations of those who are subject to it.obligations of those who are subject to it.
Conflict of LawConflict of Law
Hague ConventionHague ConventionHague ConventionHague Convention
Substantive LawSubstantive Law
UNIDROIT ConventionUNIDROIT ConventionUNIDROIT ConventionUNIDROIT Convention
Hague and UNIDROIT ConventionsHague and UNIDROIT Conventions
Benefits:Benefits:
• Protection of market Protection of market
participantsparticipants
• Protection of financial Protection of financial
systemsystem
• Gains in economic efficiencyGains in economic efficiency
• Lower transaction costs
• Lower credit costs
Hague Convention - OverviewHague Convention - Overview
• International multilateral treaty intended to remove, at a global International multilateral treaty intended to remove, at a global
scale, legal uncertainties for cross-border securities transactionsscale, legal uncertainties for cross-border securities transactions
• Basic purpose: update and unify conflict of laws principles to:Basic purpose: update and unify conflict of laws principles to:
• Reduce Legal Risks Reduce Legal Risks
• Better reflect market reality in securities holdingsBetter reflect market reality in securities holdings
• Final version: December 2002Final version: December 2002
• Principle: PRIMA – Place of the Relevant Intermediary ApproachPrinciple: PRIMA – Place of the Relevant Intermediary Approach
• Article 4 – Article 4 – Primary RulePrimary Rule:: the law governing the main proprietary issues of the law governing the main proprietary issues of
indirect securities holding systems is the law agreed upon as governing the indirect securities holding systems is the law agreed upon as governing the
account agreement between the investor and his direct intermediary, account agreement between the investor and his direct intermediary,
provided several factual conditions are met.provided several factual conditions are met.
• Incorporated in the G-30 Recommendations (rec. 15)Incorporated in the G-30 Recommendations (rec. 15)
• Relevant questions:Relevant questions:• Is the domestic law identified by the international rule clear and Is the domestic law identified by the international rule clear and
satisfatory?satisfatory?
• Does the domestic law combine, i.e. work effectively with other Does the domestic law combine, i.e. work effectively with other
juristictions, in a cross-border context?juristictions, in a cross-border context?
• Complementary solutions:Complementary solutions:
Hague Convention – Limited solution?Hague Convention – Limited solution?
Hague Convention cannot address issues of substantive lawHague Convention cannot address issues of substantive lawHague Convention cannot address issues of substantive lawHague Convention cannot address issues of substantive law
EU DirectivesEU DirectivesEU DirectivesEU Directives
UNIDROITUNIDROITUNIDROITUNIDROIT
Unidroit Convention - OverviewUnidroit Convention - Overview
• Objectives:Objectives:
• ““Promote Promote internal soundnes and cross-border system internal soundnes and cross-border system
compatibilitycompatibility through the provision of a basic legal framework through the provision of a basic legal framework
for the modern intermediated securities holding system”for the modern intermediated securities holding system”
• Suggests a framework that comprehensively adressess issues Suggests a framework that comprehensively adressess issues
of substantive law related to intermediated securitiesof substantive law related to intermediated securities
Reduction of Legal RiskReduction of Legal RiskReduction of Legal RiskReduction of Legal Risk
Unidroit Convention – History (I)Unidroit Convention – History (I)
• September 2002: September 2002: • First Meeting of the UNIDROIT Study Group on Harmonized Substantive First Meeting of the UNIDROIT Study Group on Harmonized Substantive
Rules Regarding Intermediated SecuritiesRules Regarding Intermediated Securities
• 2003/2004: 2003/2004: • Consultations in 20 countriesConsultations in 20 countries
• 2004:2004:• Preliminary Draft Convention and Explanatory Notes (UNIDROIT 2004 - Preliminary Draft Convention and Explanatory Notes (UNIDROIT 2004 -
Study LXXVIII – Docs. 18 and 19) Study LXXVIII – Docs. 18 and 19)
• May 2005: May 2005: • First Session of the Committee of Governmental ExpertsFirst Session of the Committee of Governmental Experts
• Delegations of 33 countries and 10 international organizationsDelegations of 33 countries and 10 international organizations
• Amended Draft Convention (Doc. 24)Amended Draft Convention (Doc. 24)
Unidroit Convention – History (II) Unidroit Convention – History (II)
• Inter-Sessional Regional Meetings (2005/2006):Inter-Sessional Regional Meetings (2005/2006):
• Europe: Europe: • September 2005: Bern/SwitzerlandSeptember 2005: Bern/Switzerland• January/February 2006: Paris/FranceJanuary/February 2006: Paris/France
• Latin America:Latin America:• October 2005: São Paulo/BrazilOctober 2005: São Paulo/Brazil
• Organized by UNIDROIT, CBLC, Caja de Valores, BM&F, and Comisión Organized by UNIDROIT, CBLC, Caja de Valores, BM&F, and Comisión Nacional de ValoresNacional de Valores
• Participation of ACSDA’s representatives (Brazil, Argentina and South Participation of ACSDA’s representatives (Brazil, Argentina and South Africa)Africa)
Unidroit Convention – History (III) Unidroit Convention – History (III)
• March 2006: Second Session of the Committee of March 2006: Second Session of the Committee of
Governmental ExpertsGovernmental Experts• Delegations of 39 countries and 11 international organizationsDelegations of 39 countries and 11 international organizations
• Participation of 8 ACSDA member countries:Participation of 8 ACSDA member countries:• ArgentinaArgentina
• BrazilBrazil
• CanadaCanada
• ChileChile
• ColombiaColombia
• MexicoMexico
• South AfricaSouth Africa
• USAUSA
• Preliminary Draft Convention (UNIDROIT 2006 - Study LXXVIII Doc. 42)Preliminary Draft Convention (UNIDROIT 2006 - Study LXXVIII Doc. 42)
ACSDA’s Members States of ACSDA’s Members States of Unidroit:Unidroit:
ArgentinaArgentina BoliviaBolivia
BrazilBrazil CanadáCanadá
ChileChile ColombiaColombia
MexicoMexico NicaraguaNicaragua
South AfricaSouth Africa USAUSA
UruguayUruguay
ACSDA’s Members States of ACSDA’s Members States of Unidroit:Unidroit:
ArgentinaArgentina BoliviaBolivia
BrazilBrazil CanadáCanadá
ChileChile ColombiaColombia
MexicoMexico NicaraguaNicaragua
South AfricaSouth Africa USAUSA
UruguayUruguay
Scope: cross-border and domestic transactionsScope: cross-border and domestic transactionsScope: cross-border and domestic transactionsScope: cross-border and domestic transactions
Neutrality, functionality, accomodation of distinct legal approachesNeutrality, functionality, accomodation of distinct legal approachesNeutrality, functionality, accomodation of distinct legal approachesNeutrality, functionality, accomodation of distinct legal approaches
Compatibility with other relevant instruments, like the Hague Compatibility with other relevant instruments, like the Hague ConventionConventionCompatibility with other relevant instruments, like the Hague Compatibility with other relevant instruments, like the Hague ConventionConvention
Unidroit ConventionUnidroit Convention
• Main Principles:Main Principles:
Credit/debit of book-entry accounts: pre-condition for Credit/debit of book-entry accounts: pre-condition for acquisition and disposition of securities and securities’ acquisition and disposition of securities and securities’
interest in intermediated systemsinterest in intermediated systems
Credit/debit of book-entry accounts: pre-condition for Credit/debit of book-entry accounts: pre-condition for acquisition and disposition of securities and securities’ acquisition and disposition of securities and securities’
interest in intermediated systemsinterest in intermediated systems
Unidroit Convention – Issues coveredUnidroit Convention – Issues covered
• Core-issues:Core-issues:
Fruits, voting rights, etcFruits, voting rights, etcFruits, voting rights, etcFruits, voting rights, etc
Investor protection in case of insolvency of the intermediaryInvestor protection in case of insolvency of the intermediaryInvestor protection in case of insolvency of the intermediaryInvestor protection in case of insolvency of the intermediary
Integrity of the account holder / intermediary relationshipIntegrity of the account holder / intermediary relationshipIntegrity of the account holder / intermediary relationshipIntegrity of the account holder / intermediary relationship
Finality and irrevocabilityFinality and irrevocabilityFinality and irrevocabilityFinality and irrevocability
Net settlementNet settlementNet settlementNet settlement
Relations with issuers of securities Relations with issuers of securities Relations with issuers of securities Relations with issuers of securities
Creation and realisation of security interestsCreation and realisation of security interestsCreation and realisation of security interestsCreation and realisation of security interests
Right to use clients’ assets for own purposesRight to use clients’ assets for own purposesRight to use clients’ assets for own purposesRight to use clients’ assets for own purposes
Clear and simple rules for acquisition and disposition of securitiesClear and simple rules for acquisition and disposition of securitiesClear and simple rules for acquisition and disposition of securitiesClear and simple rules for acquisition and disposition of securities
Articles 1 to 3Articles 1 to 3Articles 1 to 3Articles 1 to 3
Articles 4 and 9Articles 4 and 9Articles 4 and 9Articles 4 and 9
Unidroit Convention – Structure*¹Unidroit Convention – Structure*¹
Definitions, Scope of Application and InterpretationDefinitions, Scope of Application and InterpretationDefinitions, Scope of Application and InterpretationDefinitions, Scope of Application and Interpretation
Rights Attached to the SecuritiesRights Attached to the SecuritiesRights Attached to the SecuritiesRights Attached to the Securities
Acquisition and Disposition of SecuritiesAcquisition and Disposition of SecuritiesAcquisition and Disposition of SecuritiesAcquisition and Disposition of Securities Articles 5, 7 and 11Articles 5, 7 and 11Articles 5, 7 and 11Articles 5, 7 and 11
Security Interests in Intermediated SecuritiesSecurity Interests in Intermediated SecuritiesSecurity Interests in Intermediated SecuritiesSecurity Interests in Intermediated Securities Articles 6, 7, 10 and Articles 6, 7, 10 and 1111Articles 6, 7, 10 and Articles 6, 7, 10 and 1111
Exemptions for SSS/ClearinghousesExemptions for SSS/ClearinghousesExemptions for SSS/ClearinghousesExemptions for SSS/Clearinghouses Articles 8 and 13Articles 8 and 13Articles 8 and 13Articles 8 and 13
Insolvency of IntermediaryInsolvency of IntermediaryInsolvency of IntermediaryInsolvency of Intermediary Articles 12 and 14Articles 12 and 14Articles 12 and 14Articles 12 and 14
Duties of Intermediary and Loss Sharing of Securit. in Case of Duties of Intermediary and Loss Sharing of Securit. in Case of InsolvencyInsolvencyDuties of Intermediary and Loss Sharing of Securit. in Case of Duties of Intermediary and Loss Sharing of Securit. in Case of InsolvencyInsolvency Articles 15 to 18Articles 15 to 18Articles 15 to 18Articles 15 to 18
Relations with Issuers of SecuritiesRelations with Issuers of SecuritiesRelations with Issuers of SecuritiesRelations with Issuers of Securities Articles 19 and 20Articles 19 and 20Articles 19 and 20Articles 19 and 20
Special Provisions on Collateral Transactions (Chapter 7)Special Provisions on Collateral Transactions (Chapter 7)Special Provisions on Collateral Transactions (Chapter 7)Special Provisions on Collateral Transactions (Chapter 7) Articles 21 to 25 *²Articles 21 to 25 *²Articles 21 to 25 *²Articles 21 to 25 *²
*¹ There are proposals for a new structure (France and USA)*¹ There are proposals for a new structure (France and USA)
*² Fall Back Rules – Chapter 7*² Fall Back Rules – Chapter 7
Unidroit Convention – Article 8Unidroit Convention – Article 8
[[Overriding effect of certain rules os securities settlement Overriding effect of certain rules os securities settlement [[or clearingor clearing]] system system]]
Any provision of the rules or agreements governing the operation of a securities Any provision of the rules or agreements governing the operation of a securities
settlement settlement [[or clearingor clearing]] system system [[which is directed to the stability of the system or the which is directed to the stability of the system or the
finality of transactions effected through the systemfinality of transactions effected through the system]] shall, to the extend of any shall, to the extend of any
inconsistency, prevail overinconsistency, prevail over [ [any provision of Articles 7, X, Y,...any provision of Articles 7, X, Y,...]] this Convention this Convention]]..
Unidroit Convention – Article 13Unidroit Convention – Article 13
[[Effectiveness of debits, credits etc. and instructions on insolvency of operator or Effectiveness of debits, credits etc. and instructions on insolvency of operator or participant in securities settlement participant in securities settlement [[or clearingor clearing] ] systemsystem]]
1. – Any provision of the rules or agreements governing the operation of a securities 1. – Any provision of the rules or agreements governing the operation of a securities settlement settlement [[or clearingor clearing]] system system [[which is directed to the stability of the system or the which is directed to the stability of the system or the finality of transactionsfinality of transactions]] shall have effect notwithstanding the commencement of an shall have effect notwithstanding the commencement of an insolvency proceeding in respect of [the operator ofinsolvency proceeding in respect of [the operator of]] the system or any participant in the system or any participant in the system in so far as that provision:the system in so far as that provision:(a) precludes the invalidation or reversal of a debit or credit of securities to, or a (a) precludes the invalidation or reversal of a debit or credit of securities to, or a designating entry in, a securities account which forms part of the system after the time designating entry in, a securities account which forms part of the system after the time at which that debit, credit or designating entry is treated as final under the rules of the at which that debit, credit or designating entry is treated as final under the rules of the system;system;(b) Precludes the revocation of any instruction given by a participant in the system for (b) Precludes the revocation of any instruction given by a participant in the system for making a disposition of securities, or for making a payment relating to an acquisition or making a disposition of securities, or for making a payment relating to an acquisition or disposition of securities, after the time at which that instruction is treated under the disposition of securities, after the time at which that instruction is treated under the rules of the system having been entered irrevocably into the system.rules of the system having been entered irrevocably into the system.2. – Paragraph 1 applies notwithstanding that any invalidation, reversal or revocation 2. – Paragraph 1 applies notwithstanding that any invalidation, reversal or revocation referred to in that paragraph would occur by mandatory operation of the insolvency law referred to in that paragraph would occur by mandatory operation of the insolvency law of a Contracting State.of a Contracting State.
Unidroit Convention – Next steps...Unidroit Convention – Next steps...
• Discussions of the new version of the Draft Convention Discussions of the new version of the Draft Convention
and proposed amendments (Unidroit 2006 - Study LXXVIII and proposed amendments (Unidroit 2006 - Study LXXVIII
Doc. 42)Doc. 42)
• Production/publication of comments by National Production/publication of comments by National
GovernmentsGovernments
• November 6-15, 2006: Third Session of the Committee of November 6-15, 2006: Third Session of the Committee of
Governmental ExpertsGovernmental Experts
For more information...For more information...
http://www.unidroit.org/english/workprogramme/study078/item1/main.htm
http://www.unidroit.org/english/workprogramme/study078/item1/main.htm
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