Recent technological developments require a reconsideration of intermediated securities holding systems. This post presents two recent papers that examine aspects of this issue.
Current intermediated securities holding systems have been shaped over the past decades as the result of impracticalities (think of the so-called ‘paper-crunch’) associated with older systems in which securities were held and transferred in the form of paper certificates and/or by way of registration in the issuer’s register. Such ‘direct’ systems, in which investors and issuers are typically connected, have been replaced by systems in which financial intermediaries (banks, custodians etc.) are placed between investors and issuers. This relatively new intermediated securities holding system is now being challenged by fintech developments, including distributed ledger/blockchain technology.
Charles Mooney advocates for the development of a 'from-soft-law-to-hard-law' approach by IOSCO for securities holding systems in his paper Global Standards for Securities Holding Infrastructures: A Soft Law/Fintech Model For Reform. Soft law norms developed at the international level should be implemented as hard law by national authorities. The paper proposes a holistic approach encompassing standards of a functional and regulatory nature, but also standards relating to the private law, insolvency law, and the technical aspects of infrastructures for securities holding systems. Whereas fintech developments necessitate the reconsideration of the legal and regulatory market infrastructure and call for a coordinated approach, market participants may be inclined to stick to the status quo. Regulators thus have a key role to play.
Different types of current intermediated securities holding systems have developed around the world. One way to distinguish them is by transparent systems (in which issuers and investors are connected, although intermediaries fulfil certain functions) and non-transparent, tiered systems (in which there is typically no direct connection between issuers and investors, but in which each investor can only address its own intermediary).
A second paper by Charles Mooney and Thomas Keijser, Intermediated Securities Holding Systems Revisited: A View Through the Prism of Transparency, explains several benefits of adopting information technology systems enhancing transparency in the context of existing tiered, intermediated securities holding infrastructures. Such transparent technology systems could ameliorate prevailing problems that confront such tiered holding systems, including problems related to corporate actions (dividends, voting), claims against issuers and upper-tier intermediaries, loss sharing and set-off in insolvency proceedings, as well as money laundering and terrorist financing. Transparency in holding systems needs to be balanced with considerations of privacy, data protection, and confidentiality. Importantly, transparent technology systems could improve the functions of intermediated holding systems even without changes in laws or regulations. They could also provide a catalyst for law reform and a roadmap for substantive content of reforms. Among potential areas of law reform that transparent technology systems might inspire is the prospect for disintermediation of holding systems through new technologies, including digital ledger/blockchain technology.
Charles Mooney Jr. is the Charles A. Heimbold, Jr. Professor of Law at the University of Pennsylvania Law School
Thomas Keijser is Senior Researcher at the Business and Law Research Centre of the Radboud University (Netherlands)