On 15 September 2016, a small scale invited workshop was held by the Commercial Law Centre at Harris Manchester College on the holding of securities through an intermediary.  The workshop covered two issues: ‘The Enforcement of Debt Securities held through Intermediaries’ and ‘Securities Holding and Settlement: The Future’.  The workshop was chaired by Professor Louise Gullifer and Mr Guy Morton.

In the first session, the enforcement of debt securities held through an intermediary was discussed.  Various participants presented papers which addressed aspects of this issue.  In particular, the ‘no look through’ principle, which limits significantly the rights of the ultimate investor against the issuer, was discussed in the context of the recent first instance decision in Secure Capital SA v Credit Suisse AG.  This decision appeared to demonstrate a lacuna in the protection available for indirect investors, and participants discussed whether action was necessary to address this and, if so, what form this should take.  Various suggestions were mooted and discussed, including statutory rights for investors against the issuers of debt securities, greater disclosure of the consequences of holding debt securities through the intermediated system, greater use of the deed poll mechanism bolstered by action by the ratings agencies, and improving enforcement rights against intermediaries in the chain.  It was noted that none of these solutions was straightforward and that, ultimately, there was a balance to be struck between the benefits of intermediation and protection for investors.

The second session focused on the highly topical issue of the potential application of blockchain technology in the context of securities settlement.  Blockchain technology has been propelled into the spotlight over the past few years owing to its status as the technology underlying Bitcoin, the (in)famous virtual currency.  The technology behind blockchain and its operation were outlined, including key techniques such as cryptology, hashing and consensus algorithms.  The potential advantages which blockchain might offer were discussed, including security of transfers and removing the need for a centralised system, although it was noted that a completely distributed ledger system would probably be inappropriate for the settlement and holding of securities.  However, it was noted that attempts to apply blockchain in this context would face a variety of legal, regulatory and practical obstacles. In particular, the necessity of a permission-based system and a ‘golden node’ controlling this system were discussed; in particular, whether these if required would significantly reduce any advantages offered by blockchain.  Potential conflict of law issues were also identified.

A key theme that emerged in the course of both sessions was the interconnectivity of many of the issues involved – while changing one aspect of the structure might ameliorate one difficulty, it could have a negative impact in other areas.  Legal certainty, cross-border and conflict of laws issues and systemic risk were mentioned as examples of three, sometimes conflicting, concerns.

This workshop is intended to be the first in a series, and forms part of a research project entitled Intermediation and Beyond.  There will be further workshops as part of the project, leading to a publication discussing the history of intermediation, the benefits and problems caused by the system, and how future legal and technological developments can help solve these problems while retaining the benefits.

Further information about the Intermediation and Beyond project can be found here.