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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