4. Paragraph 5: debits and credits on a net basis

11-22. As mentioned above in section 11-7, the Study Group proposed a strong policy choice in favour of the net settlement of intermediated securities transactions (see UNIDROIT 2003 – Study LXVVIII – Doc. 8, section 3.6) and against the requirement that credits must be traced back to the corresponding debits (see UNIDROIT 2004 – Study LXVVIII – Doc. 19, section 27).

11-23. The predecessor to Article 11(5) was a positive rule that debits and credits in respect of securities of the same description may be effected on a net basis. However, there was no consensus that the Convention should mandate the recognition of netting arrangements. As it now stands, paragraph 5 merely states that the Convention does not interfere with the non-Convention law provisions requiring, allowing or disallowing the netting of transfers in respect of securities of the same description.

Article 12

Acquisition and disposition by other methods

1. Subject to Article 16, an account holder grants an interest in intermediated securities, including a security interest or a limited interest other than a security interest, to another person if:

(a) the account holder enters into an agreement with or in favour of that person; and

(b) one of the conditions specified in paragraph 3 applies and the relevant Contracting State has made a declaration in respect of that condition under paragraph 5.

2. No further step is necessary, or may be required by the non-Convention law, to render the interest effective against third parties.

3. The conditions referred to in paragraph 1(b) are as follows:

(a) the person to whom the interest is granted is the relevant intermediary;

(b) a designating entry in favour of that person has been made;

(c) a control agreement in favour of that person applies.

4. An interest in intermediated securities may be granted under this Article so as to be effective against third parties:

(a) in respect of a securities account (and such an interest extends to all intermediated securities from time to time standing to the credit of the relevant securities account);

(b) in respect of a specified category, quantity, proportion or value of the intermediated securities from time to time standing to the credit of a securities account.

5. A Contracting State may declare that under its law:

(a) the condition specified in any one or more of the sub-paragraphs of paragraph 3 is sufficient to render an interest effective against third parties;

(b) this Article shall not apply in relation to interests in intermediated securities granted by or to parties falling within such categories as may be specified in the declaration;

(c) paragraph 4, or either sub-paragraph of paragraph 4, does not apply;

(d) paragraph 4(b) applies with such modifications as may be specified in the declaration.

6. A declaration in respect of paragraph 3(b) shall specify whether a designating entry has the effect described in Article 1(l)(i) or Article 1(l)(ii) or both.

UNIDROIT 2009 – CONF. 11/2 – Doc. 5 – Article 12 53.

7. A declaration in respect of paragraph 3(c) shall specify whether a control agreement must include the provision described in Article 1(k)(i) or Article 1(k)(ii) or both.

8. The applicable law determines in what circumstances a non-consensual security interest in intermediated securities may arise and become effective against third parties.

Commentary

I. Introduction

12-1. Besides acquisitions and dispositions of intermediated securities by credits and debits, a Contracting State may declare that one or more of the three methods specified below are sufficient to create an interest in intermediated securities under its law. “[I]ts law” referred to in the chapeau of paragraph 5 encompasses the non-Convention law and Convention law. The three methods are:

(a) an account holder may grant an interest in intermediated securities to the relevant intermediary by entering into an agreement with that intermediary, and no further step is necessary to make that interest effective against third parties;

(b) an account holder may grant an interest in intermediated securities to another person by entering into an agreement with that person and by having a designating entry apply to those intermediated securities in its securities account, and no further step is necessary to make that interest effective against third parties;

(c) an account holder may grant an interest in intermediated securities to another person by entering into an agreement with that person and by entering into a control agreement in respect of these intermediated securities, and no further step is necessary to make that interest effective against third parties.

12-2. Method (a) applies only to interests granted to the relevant intermediary; the other two apply for any person acquiring an interest from the account holder. Method (b), designating entries, relies on an entry made in the account (see Article 1(l)); the other two methods do not involve any book-entries.

12-3. Each of these three methods – referred to as “conditions” in paragraphs 1(b), 3 and 5(a) – is currently widely (though not universally) used in a number of jurisdictions and in a number of intermediated holding systems. Each method is capable of rendering an interest effective against third parties because it gives to the person to whom the interest is granted a certain degree of control over the intermediated securities subject to that interest. When that person is not the relevant intermediary itself, it exercises this control through or with the help of the relevant intermediary.

12-4. None of these methods is compulsory and Contracting States are entirely at liberty to provide for one, two, all or none of these methods in their non-Convention law. For the sake of international transparency and legal predictability, paragraph 5 requires a Contracting State to make a declaration in respect of each such method that it wishes to make available to account holders under its law.

12-5. The methods proposed in Article 12 apply to the voluntary, express grant of any interest in intermediated securities (“including a security interest or a limited interest other than a security interest”) to one or more persons. Non-consensual interests such as statutory liens, purchase-money liens, etc., are not regulated by the provisions of this Convention. The circumstances in which they arise and become effective against third parties and their priority against other interests must be determined according to the applicable law (see Articles 12(8) and 19(5)).

II. History

12-6. This article underwent constant change during the negotiations. It would not be helpful to trace all of the changes. The following notes focus on the most significant policy issues.

12-7. In the initial draft and throughout the first two sessions of the CGE, this article only dealt with the creation of security interests. During the third session of the CGE, it was extended to any interest in intermediated securities, “including a security interest or a limited interest other than security interest” (UNIDROIT 2006 – Study LXVVIII – Doc. 57, Article 8(1)). This extension was not subsequently questioned.

12-8. Article 3 of the initial draft submitted to the CGE only included methods (a) and (b) which all Contracting States would have needed to adopt (UNIDROIT 2004 – Study LXVVIII – Doc. 18). At its first session, the CGE added method (c) (control agreement) and allowed Contracting States to choose among these three methods by way of a declaration; it also provided a definition for

“designating entry” and “control agreement” in Article 1 (UNIDROIT 2005 – Study LXVVIII – Doc. 24). The principle of a free choice by Contracting States and the need for a declaration was not subsequently questioned.

12-9. The initial draft spoke of the “creation” of a security interest and did not require an agreement between the grantor and the grantee. At its first session, the CGE shifted the emphasis to the “grant” of interests “so as to be effective against third parties” and introduced the “no further step is necessary” which has since remained in this article.

12-10. The second session of the CGE specified that the non-Convention law would determine the evidential requirements in respect of what is now in Article 12(1) and (3) (UNIDROIT 2006 – Study LXVVIII – Doc. 42, Article 5(6)). The third session moved it to a separate article referring to current Articles 11 and 12 generally (UNIDROIT 2003 – Study LXVVIII – Doc. 57, Article 10). The first session of the diplomatic Conference considered that the rule was either obvious or confusing and deleted it entirely on the understanding, however, that formal requirements may be imposed by the non-Convention law.

12-11. The first session of the diplomatic Conference made paragraph 1 subject to Article 16.

12-12. Many other modifications were made, mostly for the purpose of better clarifying the contents of the provision and extending the scope of options which Contracting States may make by way of a declaration.

III. Analysis