The Unidroit convention on substantive rules for intermediated securities, also known as the Geneva Securities Convention, was adopted on 9 October 2009. It has been signed by only one of the 40 negotiating States (Bangladesh), but not entered into force. The official commentary was published in 2012.
This convention adopted under the aegis of the International Institute for the Unification of Private Law (Unidroit) complements the "Hague Securities Convention" adopted on 17 January 2002 by the Hague Conference on Private International Law, which entered into force in 2017.
Context
"Dematerialisation" and the development of "intermediated securities"
As for the Hague Securities Convention, the Geneva Securities Convention concerns only securities that are not traded under a paper form. These securities, sometimes called "dematerialised securities", constitute in many States, more than 99% of the securities issued by listed companies on the so-called "regulated markets".
The move towards "dematerialization" started partially in the United States in the late sixties, and has been generalised in France during the eighties, followed by the rest of Europe during the years 2000. Today, only the United States and the United Kingdom, due to more ancient and more extended infrastructures, maintain a substantial minority of securities under a paper form. The dematerialisation of securities incurs that most securities, even though they are sometimes characterised as "bearer securities", do not take any more the form of paper forms held at home by the investor or deposited in a vault with a bank. Instead of this, these securities take the form of a credit, that is to say a simple book entry written on an account statement characterised as "securities account".Luc Thevenoz. 2007. "Intermediated Securities, Legal Risk, and the International Harmonisation of Commercial Law" Express Available at
These securities accounts may be opened: Either directly with the issuer, in its own books ("dematerialised securities in pure registered form"), or, more often, with an intermediary, which in most countries must be licensed in order to open securities accounts to its clients. In most EU Member States, these intermediaries are, either credit institutions, or investment firms governed respectively by the banking directive and by the Markets in Financial Instruments Directive (MiFID). When it is "maintained" by an intermediary, the security is characterised, either as "simply registered dematerialised security" where the name of the final investor is known by the issuer, or as "bearer dematerialised security", where the name of the investor is not known by the issuer. In the latter case, the final investor will be able to participate to shareholder or bondholder General Meetings organised by the issuer only if it gets from the intermediary a certificate providing that it is the right shareholder or bondholder.
Distinction between "substantive right" and "intrinsic right" The Unidroit convention focuses on the harmonisation of the sole rules governing "substantive rights", as opposed to "intrinsic rights".
This distinction characterises "intrinsic rights" as the rights stemming from the issue of the security (voting rights, perception of dividends, ... as provided under company law), whereas "substantive rights", are characterised as the rights resulting from the incorporation of the latter intrinsic rights in the securities (right to dispose and to acquire without the consent of the other shareholders or bondholders): these so-called "substantive rights" are closely linked to the "rights in rem", which itself pertains to financial law, and, if not, to civil law. Making it short, "intrinsic rights" focus the content, whereas "substantive rights" focus on the external envelope constituted by the security. The Geneva Securities Convention, is thus limited to the external aspect of the security, that is to say the way securities are handled, in particular in case of acquisition (purchase, securities borrowing, receiving a collateral on securities) and in case of disposition (sell, security lending, constitution of a collateral on the security).
The underlying idea is that, while "intrinsic law" is intangible, since it is tributary to the legislation under which the issuer is incorporated, "substantive law" is, on the contrary, quite volatile, since it is subject to the place where the security is localised and/or traded. This distinction is ancient and draws back to the time where foreign investors used to repatriate paper securities subscribed with issuers incorporated under a different constituency. The title transfer of these securities (whether as a final transfer, or as a collateral) outside their constituency of origin could therefore be submitted to a law different from the law of the issuer: either the law convened by the parties (lex contractus), or, more often, the law of the place where the securities where located at the time of the transfer (lex rei sitae).John J.A. Burke, Anatoly Ostrovskiy: "The intermediated securities system / Brussels I breakdown" / In: The European legal forum: Forum iuris communis Europae 2007, v. 7, n. 5, September/October, p. [I-197]-I-205 Such distinction between "intrinsic rights" subject to issuer law and "substantive rights" subject either to the "lex contractus" or to the "lex rei sitae", is still valid in the context of dematerialization of securities and has been undertaken in the Hague Securities Convention concerning conflicts of laws, which in particular, provides for a "lex contractus" solution.Sandra M. Rocks and Kate A. Sawyer on "Hague Securities Convention & the Applicable Choice of Law Rules" available at
Distinction between "conceptual approach" and "functional approach" Thus, Unidroit has chosen to harmonise only a part of the "substantive law" on securities. Indeed, certain proprietary aspects concerning securities are governed in too different ways by the negotiating states. This is in particular the case of what is considered to be the "heart of proprietary law", that is to say the question whether an investor that has "deposited" a security with an intermediary continues to exercise on such deposited security a right in rem or if its right is transformed, as from the deposit, into a simple claim. Such distinction becomes crucial when an insolvency procedure is open against the intermediary. In countries where the first interpretation prevails, the investor shall dispose of a right to "rivindicate" (claim as one's own) which will allow him a speedy recover of the securities. In countries where the second interpretation prevails (the US and, to a certain extent the recourse to trust deposits in common law countries), the investor would only dispose of a right of claim, that will oblige him, except when the contrary is specified, to share with other creditors of the insolvent intermediary the product of the winding up of the intermediary in prorate of the value of the security.France Drummond: " Intermediated securities: reflections on a new concept in French financial markets law ", Law and Financial Markets Review, September 2007, p. 435.
This second interpretation does not comfort the investor, even when it is backed by experienced lawyers (see case of Banco Santander's securities deposited with Lehman Brothers). Although one is not aware of any case law precedent where a common law court pushed this interpretation until its ultimate consequence, Unidroit has chosen to remain neutral concerning any characterisation of the ownership regime. This neutral approach is defined by Unidroit as the "functional approach", since it focuses only on certain functions of the "ownership regime", in opposition to the "conceptual approach" which covers all proprietary aspects.
Matters covered by the Unidroit Convention The Unidroit Convention tackles the following matters:
the rights of the investor with respect to the intermediary (except for the right of ownership) the methods of registration of the book entry-securities the diligences of the intermediary concerning the control of the integrity of the securities the simplified methods of collateralisation between account holders and intermediaries.
Rights of the investor with respect to the intermediary The rights of the investor with respect to the intermediary retained are right of the investor to instruct the intermediary to dispose the securities, right to choose the method of detention of the securities, for example the right to require that the security be maintained on a separate account on behalf of the investor rather than on a collective account opened on behalf of the intermediary ("omnibus account"). right to be able to exercise the intrinsic rights, but without it being specified whether the intermediary is only committed not to impede the exercise of these rights (rights to vote) or has in addition the obligation to facilitate the exercise of these rights (for example while serving as a channel of distribution of the paid dividends by the issuer).
These rights of the investor constitute an enforceable minimum between the parties to the convention, which could be enriched by national provisions.
Methods of registration of the book entry securities Registration methods are subject to the principle of "visibility": "Debit/credit", without it being specified that a debit necessarily involves a credit. "Identification", or "ear-marking", technique consisting in annotating a security line by means of a code reporting that the security was the subject of a right for a third party, whether it is a taking of guarantee on these securities, or by means of a right to compensation with securities of a similar category. "Control agreement", American technique seldom used in Europe, consisting in connecting an "ear-marking" to a convention that has been additionally published.
Moreover, this limitation of the registration methods is supplemented by rules limiting the possibilities of reversal of these book entries even in the event of bankruptcy ("effectiveness"). The aim of this harmonisation of the registration methods is to create a bridge between European directive 98/26 on payment and securities settlement systems and the less integrated practices of non-European countries. Indeed, the directive 98/26 introduces since 1998, concepts very close to the concepts of book-entries("entry in the system"), of limitation of reversals ("irrevocability") and of effectiveness ("finality").
Diligences of the intermediary concerning the control of the integrity The convention envisages a number of obligations of the intermediary consisting in particular in the obligation for the intermediary to reflect with its own intermediary as many securities of the same issue, as it has credited in its own books either to the benefit of its customers or for itself. This obligation of exact "reporting" exact, also known under the name of "control of integrity" is intended to limit the risks of artificial creation of securities by simple erroneous entries.
Indeed, except rare exceptions, any chain of dematerialised securities contains at least four degrees: (1) the issuer, (2) the Central Securities Depository of the issuer ("CSD"), (3) the final intermediary and (4) the investor. In each subscription of a new security, each one of these actors forwards the security to the immediate lower level by a debit of its account and a credit of the account of its correspondent.