This presentation looks at Intermediated Securities in today's capital markets. It covers key terms, historical context, mechanics, benefit and challenges.

1. Intermediated Securities
LAW 512 - Corporate Finance
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2. 2
Key Terms
Introduction
Historical Context
Mechanics
Benefits
Challenges
Discussion
Table of Contents

3. 3
Global note/certificate: Where an issuer issues a single note or certificate encompassing
the entire offering, to be held by the top-tier intermediary.
- Contrast to the historic model of one share = one certificate.
Book Entry: A system to track ownership of securities.
- E.g., if I gave Kyle 10 shares in Freshii, my account would decrease by 10 shares,
and his would increase by the same amount.
- All transactions are done by electronic books.
- Contrast to me giving Kyle 10 certificates.
Intermediary: An entity that holds financial assets (e.g., shares) for its clients (often in its
own name).
End-investor: Investor who invests for their own benefit.
- E.g., Kyle if he decided to buy a share in Freshii after their IPO. Poor Kyle!
- Contrast to an intermediary who holds assets on behalf of other people, the end-
investor who purchases securities for themselves.
Key Terms
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

4. What are intermediated securities?
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Securities that are held by intermediaries on behalf of
clients.
… but what does that mean?
Key Terms
Historical context
Mechanics
Benefits
Challenges
Discussion
Introduction

5. 5
Let’s rewind a bit…
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

6. Historical Context
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Shares used to be represented
by physical certificates.
Legal title derived from SH
being on company’s SH
registry.
Key Terms
Introduction
Mechanics
Benefits
Challenges
Discussion
Historical context

7. 7
Trading shares became expensive,
cumbersome and slow.
Issuer had enormous burden of
maintaining shareholder register.
Key Terms
Introduction
Mechanics
Benefits
Challenges
Discussion
Historical context

8. 8
Solutions…
1. Get rid of paper (de-materialization).
2. Stop paper from moving (immobilization
of a global note).
Key Terms
Introduction
Mechanics
Benefits
Challenges
Discussion
Historical context

9. 9
Books are run by the central operator (i.e., CREST).
If we get rid of the paper…
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Second-tier
intermediary
Investor
First-tier
intermediary
ISSUER
Entry in Central
Operator’s Register
Member of the
Central Operator
First-tier
intermediary
Investor
Second-tier
intermediary
Investor
First-tier
intermediary
Member of the
Central Operator

10. 10
If we stop the paper from moving…
Top-tier book entries are made by the depository (i.e., intermediary).
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Second Tier Intermediary
Investor
CSD/ICSD Participant
Issuer
CSD/ICSD Participant CSD/ICSD Participant
InvestorSecond Tier Intermediary
Investor
ICSD or CSD

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Key Distinctions
1. Whether physical
shares actually exist; and
2. Whether the top-tier
intermediary is the listed
shareholder.
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

12. 12
BUT WAIT… the systems must still be updated every
time a trade is made.
Key Terms
Introduction
Mechanics
Benefits
Challenges
Discussion
Historical context
Solution: “netting”
• Since it’s costly if shares move every time there’s a trade
the system must find more efficient ways of “settling”
trades.
• Intermediaries will transfer the net balance owing
once daily.

13. Mechanics:
Trading shares within this system
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

14. Intermediaries pool all
identical client assets.
E.g., it will hold the Apple
common shares belonging to all of
its clients in the same account.
Mechanics:
Pooled/Omnibus accounts
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
30 common
shares in
A’s account
30 common
shares in B’s
account
40 common
shares in C’s
account
100 shares in
intermediary D’s account

15. Mechanics:
Shares entering the systems
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Immobilized De-materialized

16. Benefits:
For Investors
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Convenience
• Don’t need to hold onto share
certificates.
• Trades can be made with the
‘click of a mouse’.

17. Benefits:
For Investors
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Lower Costs
• With less to do, costs go down.
• Easier to become a shareholder.
At one point, 33 forms were needed
to make a single share trade.

18. Benefits:
For Investors
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Reduced Settlement Risks
• Securities no longer need to be
delivered.
• Without paper certificates, there
are fewer things that need to be
done, and less associated risk
that one won’t be done.

19. Benefits:
For Issuers
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Simplicity of maintaining
share register
• Only need to deal with
top-tier intermediary or
a central operator
system.

20. Challenges:
Replicating investors’ rights
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
End-investor is not the registered shareholder but
is the economic beneficiary (different approaches -
UK vs US & Canada)
“Need to put investors in same place as would be
if they were the registered shareholders”: Gullifer
E.g. Voting
• s.153 of CBCA does not allow the intermediary to vote
without seeking proxies from end-investors.

21. Challenges:
Replicating investors’ rights
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Proxies (down the chain, then back up)
Intermediary appoints the end-investor as
a proxy
Recognize beneficial investors’ ‘right to
vote’ in Articles
Voting gets replicated in one of the following ways:

22. Challenges:
Protecting Investors
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Insurance: Protecting intermediary insolvency.
• In US: Securities Investor Protection
Corporation (“SIPC”).
• In Canada: Canadian Investor Protection Fund
(“CIPF”).
Rules & Regulations: Restrict what
intermediaries can do with client assets.
• UCC § 8-503(a).
• SEC Rule 15c3-3.

23. Challenges:
Deciding approach to multi-jurisdictional issues
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
One transaction
almost always
involves multiple
jurisdictions.

24. Challenges:
Deciding approach to multi-jurisdictional issues
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
2 approaches:
1. Choice of law - deciding whose law will apply.
• Hague Securities Convention
2. Harmonization of substantive law - focus on consistent
outcomes between systems.
• Geneva Securities Convention

25. Let’s find out who’s been paying attention!
1. Go to https://kahoot.it (can be on your laptop or cell phone)
2. Type in the code
3. Enter your nickname
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https://play.kahoot.it/#/?quizId=314ee6cb-77ab-45f5-8e0e-f3b54568250d

26. Discussion:
Is there a fair balancing of interests?
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Consider end-investors, intermediaries and issuers.
Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

27. Discussion:
Is there a fair balancing of interests?
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Pros Cons
End Investors • Lower fees; and
• Markets more accessible to
retail investors.
• Increased counter-party risk.
Intermediaries • Get to play a central role in
modern capital markets.
• Very expensive and resource-
heavy to run these systems
properly.
Issuers • Deal with small number of
parties.
• Don’t necessarily know
identities of end-investors.

28. Discussion:
What types of investors are the ‘winners’
and ‘losers’ of the intermediated system?
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

29. Discussion:
What types of investors are the ‘winners’
and ‘losers’ of the intermediated system?
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion
Institutional investors — Winners
-Due to bargaining power, as well as the volume and size of transactions
Retail investors — Losers
-Within retail investors, there are frequent traders and more long-term traders (‘buy-and-hold’ traders)
-Frequent traders are moderately benefitted from transactional costs (despite the added counter-party risk)
-Buy-and-hold traders are subject to the most risk (without corresponding benefits)
-They enjoy convenience but don’t benefit as much from lower fees
-Additionally, they are still subject to counter-party risk

30. Discussion:
As an end investor, are you comfortable
with the risk/reward tradeoff?
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Key Terms
Introduction
Historical context
Mechanics
Benefits
Challenges
Discussion

31. the end.

32. Sources
Books
• See Louise Gullifer, “Ownership of Securities, the Problems Caused by Intermediation”, in Louise Gullifer & Jennifer Payne, Intermediated Securities (Portland, OR: Hart
Publishing, 2010).
• See Jennifer Payne, “Intermediated Securities and the Right to Vote in the UK”, in Louise Gullifer & Jennifer Payne, Intermediated Securities (Portland, OR: Hart Publishing,
2010).
Articles
• Charles W Mooney Jr, “Property, Credit, and Regulation Meet Information Technology: Clearance and Settlement in the Securities Markets” (1992) 55:3 L Contemporary
Problems 131
• Delphine Nougayrede, “Towards a Global Financial Register? Account Segregation in Central Securities Depositories and the Challenge of Transparent Securities
Ownership in Advanced Economies” (2018) 4:2 J Financial Regulation 276
• Anthony Hainsworth, “The Shareholder Rights Directive and the Challenge of Re-Enfranchising Beneficial Owner” (2007) 1:1 L Financial Markets Rev. (DOI:
https://doi.org/10.1080/17521440.2007.11427857)
Legislation
• Canada Evidence Act, RSC 1985, c C-44.
• Securities Transfer Act, 2006, SO 2006, c 8.
• CSA Consultation Paper 54-401: Review of the Proxy Voting Infrastructure.
Online Sources
• Gabriella Rosenberg, Maria Carmen del Urquiza & David Miller, “What s Netting? How Does Netting Work?” - Presentation of Federal Reserve Bank of New York. Source:
https://www.newyorkfed.org/medialibrary/microsites/fmlg/files/Millerspresentationonnetting.pdf
• Elizabeth Ledrut & Christian Upper, "The US Paper Crunch, 1967-1970" (2007) BIS Q Rev. See: https://www.bis.org/publ/qtrpdf/r_qt0712z.htm.
• Finra Staff, "When Paper Paralyzed Wall Street: Remembering the 1960s Paperwork Crisis" (August 19, 2015). See: www.finra.org/investors/when-paper-paralyzed-wall-
street-remembering-1960s-paperwork-crisis.
• Dietmar Roessler, "Do you really know where your assets are, and if they are safe?" See: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-
services/IM/lu-are-your-assets-safe-11052015.pdfDeloitte.
• Hansell et al, "The Quality of the Shareholder Vote in Canada" Davies Ward Phillips.& Vineberg LLP. See: shareholdercommunication.ca/wp-content/uploads/2018/03/The-
Quality-of-the-Shareholder-Vote-in-Canada.pdf.
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