The indirect holding system (also multi-tiered holding system) is a system of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

clearance, settlement and ownership system where ownership information is held electronically as a

book entry Book entry is a system of tracking ownership of securities where no certificate is given to investors. Several terms are often used interchangeably with "book entry" shares including "paperless shares", "electronic shares", "digital shares", "digi ...

. It consists of one or more tiers of intermediaries between issuer and investor. It is an evolution from the "

direct holding system The Direct Registration System (DRS) or direct holding system is a traditional system of securities clearance, settlement and ownership in which owners of securities have a direct relationship with the issuer. As implemented in the past, investors ...

" 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 immobilized or otherwise concentrated. The next tier consists of a limited number of

financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

s, depositories and other professional

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...

s who have direct

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

ual relationships with the CSDs and who hold their

interests in securities {{Unreferenced, date=November 2007 An interest in securities is the asset of a client for whom an intermediary holds securities on an unallocated basis, commingled with the interests in securities of other clients. The distinction between securiti ...

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 customer 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 is the act of taking another person's property or services without that person's permission or consent with the intent to deprive the rightful owner of it. The word ''theft'' is also used as a synonym or informal shorthand term for some ...

, and

counterfeiting To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...

associated with the direct holding system. The transfer of securities by mere

accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

entries allows for the 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 (also called private international law) is the set of rules or laws a jurisdiction applies to a case, transaction, or other occurrence that has connections to more than one jurisdiction. This body of law deals with three broad t ...

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 rights, 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.

References

External links

– history and current state of IHS by David C. Donald (Chinese University of Hong Kong, Faculty of Law) from September 26, 2007 {{DEFAULTSORT:Indirect Holding System Securities (finance)

See also

References

External links