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  • Eva Micheler


Computerisation facilitates instantaneous and direct links between all of us in our work and social lives. At the same time, and counter-intuitively so, securities are increasingly held indirectly through chains of custodians that operate between issuers and investors. This disconnects investors from issuers and can significantly reduce the value of assets. The regulatory framework does not prevent this effect. UK-regulated holders of client securities should be required to hold these directly in the name of the investor. At an international level, it is worth asking whether the technology underlying bitcoin and other cryptocurrencies can be used to create an un-intermediated securities ledger connecting investors and issuers directly.


Corresponding author

Address for Correspondence: Department of Law, London School of Economics, Houghton Street, London, WC2A 2AE, UK. Email:


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1 Custodians safeguard and administer securities on behalf of investors. The rules on alternative investment funds (AIFs) and undertakings for collective investment in transferable securities (UCITS) use the term “depositary”, which is also used in this article when the respective rules are discussed.

2 M. Yates and G. Montagu, The Law of Global Custody, 4th ed. (London 2013), at [1.1]–[1.12].

3 The Kay Review of UK Equity Markets and Long Term Decision Making, Final Report, July 2012, at [12.15]; see also J. Benjamin, Financial Law (Oxford 2007), at [19.4]. The phenomenon that computerisation leads to intermediation can also be observed in the context of trading, where it has been said that “[t]he initial promise of computer technology was to remove intermediaries from the financial market … . The reality turned out to be a windfall for financial intermediaries”, M. Lewis, Flashboys (Allen Lane 2014), 135.

4 L. Gullifer, “Transfer of Equity and Debt Securities” in M. Bridge, L. Gullifer, G. McMeel, and S. Worthington (eds.), The Law of Personal Property (Oxford 2013), ch. 32; E. Micheler, Property in Securities (Cambridge 2007); J. Benjamin, Interests in Securities (Oxford 2000).

5 See for example L. Gullifer, “Ownership of Securities” in L. Gullifer and J. Payne, Intermediated Securities (Oxford 2010), 15.

6 Benjamin, Interests in Securities (Oxford 2000).

7 L. Gullifer (ed.), Goode on Legal Problems of Credit and Security, 5th ed. (London 2013), at [6–07].

8 Ibid., at para. [6–07].

9 See section V below.

10 A. Pretto-Sakmann, Boundaries of Personal Property (Oxford 2005); B. McFarlane and R. Stevens, “Interests in Securities” in L. Gullifer and J. Payne (eds.), Intermediated Securities (Oxford 2010), 33; contrast with Benjamin, Financial Law, at [19.4], [16.2], who characterises interests in securities as proprietary; see also Jaffey, P., “Explaining the Trust” (2015) 131 L.Q.R. 377.

11 Benjamin, Interests in Securities, at [1.108].

12 See e.g. L. Gullifer, “Ownership of Securities”, pp. 3, 13; or Benjamin, Interests in Securities, at [1.106].

13 Videorecording, Money and Inflation, made by Harcourt Brace Janovich for WQLN (public broadcasting service in Eire, Pennsylvania).

14 Euroclear (Belgium), Terms and Conditions governing use of Euroclear: The clearance and settlement system for internationally traded securities (Euroclear Terms and Conditions), art. 4(b)(i), available at <>.

15 Ibid., art. 4(b)(ii); see also art. 11(a)(i): “We may, from time to time, appoint banks or legal entities (other than Euroclear Bank) as additional depositories … for securities held in the Euroclear System.”

16 Clearstream and Deutsche Borse Group (Luxembourg), General Terms and Conditions (CBL Terms and Conditions), art. 13, see also art. 47, available at <>.

17 Euroclear Terms and Conditions (note 15 above), art. 4(b)(i); CBL Terms and Conditions (note 17 above), art. 13.

18 Contracts (Rights of Third Parties) Act 1999 (1999 c. 31).

19 G. Fuller, The Law and Practice of International Capital Markets, 3rd ed. (London 2012), at [1.153]; see also Yates and Montagu, The Law of Global Custody, at [6.20].

20 Euroclear Terms and Conditions (note 15 above), art. 18, second para.

21 See the facts underlying the recent FCA Final Notice, Barclays Bank PLC (122702) 23 September 2014, at [4.5]–[4.6], [4.11].

22 FCA, Policy Statement, Review of the client asset regime for investment business, Feedback to CP13/5 and final rules (June 2014) (PS14/8), at [5.24]–[5.25]).

23 European Commission, SWD/2012/184 final, 13.

24 The FCA adopts these rules relying on Financial Services and Markets Act 2000, s. 138.

25 CASS 6.1.1 R FCA.

26 SUP 3.10 FCA; the rights and duties of CASS auditors are set out in SUP 3.8 and SUP 3.10. CASS auditors are assisted by client asset guidelines published by the Financial Reporting Council (October 2011) (FRC CASS Guidelines) available at <>.

27 CASS 6.1.1(1C and 1D) R FCA.

28 Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773) (AIFM Regulations 2013); these implement Directive (EU) No 61/2011 (OJ 2011 L 174 p. 1) (AIFM Directive); see also Commission Delegated Regulation (EU) No 231/2013 (OJ 2013 L 83 p. 1) (AIFM Regulation).

29 Directive (EC) No 65/2009 (OJ 2009 L 302 p. 32) last amended by Directive (EU) No 91/2014 (OJ 2014 L 257 p. 186) (UCITS Directive); implemented in the UK by the Undertakings for the Collective Investment in Transferable Securities Regulations 2011 (SI 2011/1613).

30 CASS 6.2.3(2)d R FCA.

31 COLL 6.6.16(1)G FCA together with SYSC 8.1.6 R FCA PRA.

32 FUND 3.11.28(2) R FCA.

33 AIFM Directive (note 29 above), art. 21(11)(a); UCITS Directive, art. 22a(2)a.

34 When assessing the reasons for delegation, competent authorities should consider the structure of the delegation and its impact on the structure of the AIFM (AIFM Regulation, whereas 83).

35 See sections IV and V below.

36 CASS 6.3.4B G FCA and the recently introduced requirement for written documentation CASS 6.3.4.A R FCA; see also AIFM Regulation, whereas 112.

37 CASS 6.3.1 R FCA and CASS 6.3.2 G FCA; see also FUND 3.11.28(3) R and AIFM Regulation, art. 98.

38 Euroclear Terms and Conditions, art. 12(e).

39 CBL Terms and Conditions, art. 15.

40 Euroclear Terms and Conditions, art. 4(b)(i); CBL Terms and Conditions, art. 13.

41 It is possible for custody terms to exclude physical delivery. See e.g. the general terms of one of the custodians who acted for the investors in Eckerle v Wickeder [2013] EWHC 68 (Ch); [2014] Ch. 196: Special Terms—Brokerage (Besondere Bedingungen—Brokerage) of Postbank, s. 18, available at <>.

42 Eckerle v Wickeder [2013] EWHC 68 (Ch); [2014] Ch. 196.

43 Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm) 25 Febrary 2015.

44 See note 42 above.

45 UK Takeover Code, s. 3(a)(i).

46 German Wertpapiererwerbs- und Übernahmegesetz, § 1(3).

47 CA 2006, s. 98(4)b.

48 Eckerle v Wickeder Westfalenstahl GmbH [2013] EWHC 68 (Ch); [2014] Ch. 196, at [14(l and m)], [30].

49 Ibid., at paras. [14(k)], [14(m)], respectively.

50 Ibid., at para. [14(g)].

51 Ibid., at paras. [20]–[23].

52 Ibid., at para. [24].

53 Ibid., at para. [24], last sentence.

54 Ibid., at para. [32].

55 Ibid., at para. [32].

56 Ibid., at para. [31].

57 Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm) 25 February 2015.

58 Ibid., at para. [3].

59 Ibid., at paras. [3], [8].

60 Ibid., at paras. [7]–[11].

61 Ibid., at paras. [4], [23]–[28].

62 Ibid., at paras. [52]–[57].

63 CBL Terms and Conditions, art. 43.

64 Ibid., at art. 44.

65 FCA Final Notice, Barclays Bank PLC (122702), 23 September 2014, at [4.11].

66 Accountancy and Actuarian Discipline Board in the Matter of an Investigation into the Conduct of PricewaterhouseCoopers LLP Re JP Morgan Securities Limited Client Monies, Agreed Statement of Facts (July 2011) (JP Morgan Agreed Facts), at [17], available at <>.

67 Ibid., at para. [19].

68 The Accountancy and Actuarial Discipline Board (Accountancy Scheme) v Pricewaterhousecoopers LLP Re JP Morgan Securities Limited, Tribunal Decision 6 December 2011, at [43], available at <>.

69 CASS 6.3.6(1) R FCA.

70 Re Lehman Brothers International (Europe) [2012] UKSC 6; [2012] 3 All E.R. 1.

71 J. Braithwaite, “Law after Lehmans”, LSE Working Paper Series 11/2014, 14, available at <>; Sabalot, D., “FSA's Client Money Rules: Are Clients the Authors of Their Own Misfortune?” [2012] Butterworths Journal of International Banking and Financial Law 331; Bridge, M. and Braithwaite, J., “Private Law and Financial Crises” [2013] Journal of Corporate Law Studies 361, at p. 382, note 96.

72 A. Hudson, The Law of Finance, 2nd ed. (London 2013), at [9–86]–[9–97].

73 Benjamin, Financial Law, ch. 13; P. Paech, Shadow Banking: Legal Issues of Collateral Assets and Insolvency Law (European Parliament IP/A/ECON/NT/2012, 30 June 2013), 33–35.

74 Professor Benjamin points out that investors such as short/long hedge focus on maximum speed dealings and benefit from income arising out of third-party arrangements such as lending. She observes that such investors are less interested in asset protection and concludes that separate regulatory and legal regimes are required for different types of investors (Benjamin, J., “The Law and Regulation of Custody Securities: Cutting the Gordian Knot” (2014) 9 C.M.L.J. 327). From the perspective of this article, the value of securities can be significantly reduced by an indirect holding structure and this would seem to be of concern also to those who are interested in speed and lending. It would also seem counter-intuitive to conclude that transactions channelled through various levels of custodians can be carried out with greater speed than transactions that are effected directly on one common ledger.

75 CASS 6.4.1(1) R FCA.

76 CASS 6.4.1(2) R FCA.

77 CASS 6.4.1(3) R FCA and CASS 6.4.1A G–6.4.2 G FCA.

78 CASS 6.3.6.R states that “A firm may conclude an agreement with a third party … only if”. CASS 6.4.1(1) R states that “A firm must not enter into arrangements…”; see also AIFM Directive, art. 21(11)(d)(iv); FUND 3.11.28(4)(d) R FCA and UCITS Directive, art. 20(7).

79 See section I above.

80 FCA Final Notice, The Bank of New York Mellon London Branch (122467) The Bank of New York Mellon International Limited (183100), 15 April 2015, at [4.8]–[4.10], [2.3].

81 Ibid., at paras. [4.19]–[4.20].

82 Ibid., at paras. [2.3], [4.17]–[4.18].

83 Ibid., at paras. [2.10(5)], [6.11(6)], [6.30(1)].

84 European Commission, SWD/2012/0185 final, 3.

85 CASS 6.3.4A(1) R FCA, CASS 6.2.5 R FCA, FUND 3.11.21R FCA; see also AIFM Directive, art. 21(8)a; AIFM Regulation, art. 99; ESMA Consultation Paper, Guidelines on Asset Segregation under the AIFMD 1 December 2015 ESMA/2014/1326 and UCITS Directive 2014/91/EU, whereas 17.

86 CASS 6.3.4A R and 6.3.4B G FCA; FUND 3.11.28R FCA.

87 Hainsworth, A., “The Shareholder Rights Directive and the Challenge of Re-Enfranchising Beneficial Shareholders” (2007) 1 L.F.M.R. 11; Manifest, Safe Custody and Shareholder Rights, The Impact of Pooled Accounts, A Manifest Discussion Paper (August 2007), 4.

88 CASS 6.6.13 R–6.6.14 R FCA; AIFM Regulation, art. 98(1)(c) and (e); FRC CASS Guidelines, p. 24, at [105].

89 FRC CASS Guidelines, at [9], [15], [16], [42], [78]–[80], [85(d)].

90 CASS 6.5.6.R CASS 6.6.33R–6.6.46R FCA.

91 SUP 3.10 FCA; CASS 6.6.58 G FCA.

92 FCA Final Notice, Barclays Bank PLC (122702), at [2.7].

93 FCA Final Notice, The Bank of New York Mellon London Branch (122467) The Bank of New York Mellon International Limited (183100), at [2.10(4)].

94 Euroclear Terms and Conditions, art. 12(d), second para., emphasis added.

95 CBL Terms and Conditions, art. 48, at [3], emphasis added.

96 Clerk and Lindsell on Torts, 21st ed. (London 2014), at [24–70]–[24–89]; H. Carty, An Analysis of the Economic Torts (Oxford 2010), at [78–100].

97 FCA Final Notice, Barclays Bank PLC (122702), at [2.9].

98 Ibid., at para. [4.8].

99 Ibid., at para. [4.11].

100 Ibid., at para. [4.11].

101 See note 80 above.

102 Euroclear Terms and Conditions, for example, state that Euroclear is liable for “negligence or wilful misconduct on … [its] part”. The liability “for indirect losses such as, but not limited to, loss of business or loss of profit or for unforeseeable losses” is limited to “gross negligence or wilful misconduct on … [its] part” (art. 12(a)). Under its terms, CBL is liable for its own negligence or wilful misconduct (CBL Terms and Conditions (note 17 above), art. 48). It is not liable for “indirect or unforeseeable loss, claim, liability, expense or other damages unless such action or omission constitutes gross negligence or wilful misconduct on the part of CBL” (CBL Terms and Conditions, art. 48, third sentence). CBL is not liable for events beyond its “reasonable control” (CBL Terms and Conditions, art. 48, fourth sentence).

103 See e.g. Unfair Contract Terms Act 1977, ss. 2(2), 3; Unfair Terms in Consumer Contracts Regulations 1999; COB 2.1.2R FCA; Yates and Montagu, The Law of Global Custody, at [6.5]–[6.16].

104 The new CASS rules on shortfalls specify that a firm does not need to make good a shortfall when it concludes that another person is responsible (CASS 6.6.54(3) R FCA). The firm must take all reasonable steps to resolve the situation without undue delay with the other person. It must also consider whether it would be appropriate to notify the affected clients (CASS 6.6.54(3) FCA).

105 Euroclear Terms and Conditions, art. 12(d); see also art. 17: for securities that are mutilated, lost, stolen, or destroyed, Euroclear has no obligation to but can “elect” to obtain reissuance. If instructed by a participant, they will obtain reissuance, but only “to the extent practicable”; see also CBL Terms and Conditions, art. 48.

106 CBL Terms and Conditions, art. 48, sentence 5.

107 CASS 6.3.4B(7) G FCA.

108 SI 1773/2013 (AIFM Directive, art. 21(12)), emphasis added.

109 AIFM Regulation, whereas 118; European Commission, SWD/2012/386 final, 12 and 36–41; European Commission, SWD/2012/387 final, 6.

110 AIFM Regulation, art. 100(4).

111 See also AIFM Regulation, whereas 114, which stresses that it is important that there is “no prospect” of recovering the financial asset. Situations where an instrument is only temporarily unavailable or frozen should not count as losses.

112 AIFM Regulation, art. 21(12), last para.; AIFM Regulations 2013, at [31].

113 See subsection A above.

114 UCITS Directive, art. 27(1).

115 Directive (EU) No 91/2014 (OJ L 257 p. 186), whereas 27.

116 See subsection 2 above.

117 See subsection 1 above.

118 For a short overview on how the technology underlying cryptocurrencies works, see “Blockchains”, The Economist, 9–15 May 2015, Special Report International Banking, 15–17; see also P. Vigna and M.J. Casey, Cryptocurrency (London 2015).

* I am grateful for comments on earlier versions of the paper to two anonymous referees, Joanna Benjamin, Jo Braithwaite, Michael Bridge, Jason Donaldson, Leonardo Felli, Philip Goed, Steven Elliott, Paul Hewitt, David Kershaw, Matteo Solinas, Sarah Wilson, and the participants of the conference on “Intermediated Securities and Investor Rights” held at LSE on 24 March 2014 and the participants of the Workshop on EU Securities Regulation and Company Law held in Vienna on 5 December 2014. All mistakes are mine.



  • Eva Micheler


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