finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

and

financial law Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking and financ ...

, dematerialization refers to the substitution of paper-form

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 ...

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 ...

securities. This is a form of

indirect holding system The indirect holding system (also multi-tiered holding system) is a system of securities clearance, settlement and ownership system where ownership information is held electronically as a book entry. It consists of one or more tiers of intermedi ...

where an intermediary, such as a

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 ...

central securities depository A central securities depository (CSD) is a specialized financial organization holding securities like shares, either in certificated or uncertificated ( dematerialized) form, allowing ownership to be easily transferred through a book entry rather t ...

, or the issuer itself (e.g., French system) holds a record of the ownership of shares usually in electronic format. The dematerialization of securities such as stocks has been a major trend since the late 1960s, with the result that by 2010 the majority of global securities were held in dematerialized form.

History

Although the phenomenon is ancient, since

systems for recording securities have been noted from civilisations as early as

Assyria Assyria (Neo-Assyrian cuneiform: , romanized: ''māt Aššur''; syc, ܐܬܘܪ, ʾāthor) was a major ancient Mesopotamian civilization which existed as a city-state at times controlling regional territories in the indigenous lands of the A ...

in 2000 BC, it gained new prominence with the advent of computer technology in the late 20th century. Even during the period when paper certificates were popular, book-entry systems continued since many small firms could not afford printing secured paper-form securities. These book-entry securities were often held under the control of an attorney who acts as a

notary A notary is a person authorised to perform acts in legal affairs, in particular witnessing signatures on documents. The form that the notarial profession takes varies with local legal systems. A notary, while a legal professional, is disti ...

to certify the existence of the securities, as well as their authenticity. Since the 1960s, dematerialization has affected more and more listed companies in the United States and more recently in the

European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...

, where dematerialized securities represent often more than 99% of the securities listed on

regulated markets A regulated market (RM) or coordinated market is an idealized system where the government or other organizations oversee the market, control the forces of supply and demand, and to some extent regulate the market actions. This can include tasks ...

. However, the phenomenon of dematerialization of

issued by large firms is mostly undertaken via

Central Securities Depository A central securities depository (CSD) is a specialized financial organization holding securities like shares, either in certificated or uncertificated ( dematerialized) form, allowing ownership to be easily transferred through a book entry rather t ...

, a national or regional institution holding the notary function, such as the

Depository Trust Company Depository Trust Company (DTC), founded in 1973, is a New York corporation that performs the functions of a central securities depository as part of the US National Market System. DTC annually settles transactions worth hundreds of trillions o ...

(DTC) in the United States or

Euroclear Euroclear is a Belgium-based financial services company that specializes in the settlement of securities transactions, as well as the safekeeping and asset servicing of these securities. It was founded in 1968 as part of J.P. Morgan & Co. to settl ...

Group in part of the EU, which itself entrusts banks and investment firms to act as intermediaries between issuers and investors for the custody of these securities. Therefore, dematerialized securities are often referred as intermediated securities, in particular by the Unidroit convention on substantive rules for intermediated securities.

References

{{reflist Corporate law Legal documents Securities (finance) Stock market Dematerialisation (securities)

History

See also

References