Indirect holding system
Encyclopedia
The indirect holding system (also multi-tiered holding system) is a system of securities
clearance, settlement and ownership system most widely used in the world today. It consists of one or more tiers of intermediaries between issuer and investor. It is an evolution from the "direct holding system
" in which owners of securities had a direct relationship with the issuer.
The system is made up of various tiers, often with an increasing number of entries involved in each of the tiers. The top tier comprises "national" and "international central securities depositories" (CSDs), where large pools of securities of different issuers are immobolised or otherwise concentrated.
The next tier consists of a limited number of financial institution
s, broker
s, depositories and other professional investor
s who have direct contract
ual relationships with the CSDs and who hold their interests in securities in book-entry accounts with a CSD. These intermediaries (sometimes called participants of the CSD) in turn, hold in their accounts interests in or in respect of securities either for themselves or for their customers, such as institutional or retail investors or further intermediaries, and so forth until accounts are held for the investors.
For reasons of efficiency, depositories that hold securities for investors generally do so through commingled omnibus customers accounts.
This structure allows the issuer to deal with a single entity, the CSD. The investors do not appear on any register of ownership maintained by or on behalf of the issuer, nor do they have actual possession of certificates. It is the "account" rather than the "certificates" that is the source of the investor's entitlement.
The system reduces the processing and settlement costs and risks of loss, theft
and counterfeiting associated with the direct holding system. The transfer of securities by mere accounting entries allows for a rapid and efficient disposition of those interests. The velocity of transactions has grown and continues to grow.
In most jurisdictions around the world, neither the substantive laws governing securities transactions nor the conflict of laws
rules determining the law applicable to cross-border transactions have been updated adequately to deal with the indirect holding system. The concept of direct property right, the basic legal model of ownership of the direct holding of securities, is difficult to apply in the indirect system. Under traditional legal principles commingling fungible property terminates direct property rights of owners of the individual commingled items.
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
clearance, settlement and ownership system most widely used in the world today. It consists of one or more tiers of intermediaries between issuer and investor. It is an evolution from the "direct holding system
Direct holding system
The direct holding system is a traditional system of securities clearance, settlement and ownership in which owners of securities had a direct relationship with the issuer...
" in which owners of securities had a direct relationship with the issuer.
The system is made up of various tiers, often with an increasing number of entries involved in each of the tiers. The top tier comprises "national" and "international central securities depositories" (CSDs), where large pools of securities of different issuers are immobolised or otherwise concentrated.
The next tier consists of a limited number of financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s, broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
s, depositories and other professional investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s who have direct contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
ual relationships with the CSDs and who hold their interests in securities in book-entry accounts with a CSD. These intermediaries (sometimes called participants of the CSD) in turn, hold in their accounts interests in or in respect of securities either for themselves or for their customers, such as institutional or retail investors or further intermediaries, and so forth until accounts are held for the investors.
For reasons of efficiency, depositories that hold securities for investors generally do so through commingled omnibus customers accounts.
This structure allows the issuer to deal with a single entity, the CSD. The investors do not appear on any register of ownership maintained by or on behalf of the issuer, nor do they have actual possession of certificates. It is the "account" rather than the "certificates" that is the source of the investor's entitlement.
The system reduces the processing and settlement costs and risks of loss, theft
Theft
In common usage, theft is the illegal taking of another person's property without that person's permission or consent. The word is also used as an informal shorthand term for some crimes against property, such as burglary, embezzlement, larceny, looting, robbery, shoplifting and fraud...
and counterfeiting associated with the direct holding system. The transfer of securities by mere accounting entries allows for a rapid and efficient disposition of those interests. The velocity of transactions has grown and continues to grow.
In most jurisdictions around the world, neither the substantive laws governing securities transactions nor the conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
rules determining the law applicable to cross-border transactions have been updated adequately to deal with the indirect holding system. The concept of direct property right, the basic legal model of ownership of the direct holding of securities, is difficult to apply in the indirect system. Under traditional legal principles commingling fungible property terminates direct property rights of owners of the individual commingled items.
External links
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017206 – history and current state of IHS by David C. Donald (Chinese University of Hong Kong, Faculty of Law) from September 26, 2007