Opinion of the European Central Bank of 24 January 2012 on dematerialised securities (CON/2012/3)
Date: 2012-01-24
Institutions: European Central Bank
Subjects: Luxembourg, financial stability, law on negotiable instruments, national law, payment system, securities

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 January 2012 

on dematerialised securities 

(CON/2012/3) 

Introduction and legal basis 

On  21  November  2011,  the  European  Central  Bank  (ECB)  received  a  request  from  the  Luxembourg 

Ministry  of  Finance  for  an  opinion  on  a  draft  law  on  dematerialised  securities  and  amending  (a) the 

Law  of  5  April  1993  on  the  financial  sector,  (b)  the  Law  of  23  December  1998  creating  a  financial 

sector supervisory commission, (c) the Law of 10 August 1915 on commercial companies, (d) the Law 

of  3  September  1996  on  the  involuntary  dispossession  of  bearer  securities,  (e)  the  Law  of 

1 August 2001  on  the  circulation  of  securities  and  other  fungible  instruments,  (f)  the  Law  of 

20 December  2002  on  collective  placement  bodies,  (g)  the  Law  of  17 December  2010  on  collective 

placement bodies, (h) the Law of 13 February 2007 on specialised investment funds and (i) the Law of 

22 March 2004 on securitisation, (hereinafter ‘the draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on 

the  Functioning  of  the  European  Union  and  the  fifth  and  sixth  indents  of  Article 2(1)  of  Council 

Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities  regarding  draft  legislative  provisions1,  as  the  draft  law  contains  provisions  on  settlement 

systems  as  well  as  rules  applicable  to  financial  institutions  insofar  as  they  materially  influence  the 

stability  of  financial  institutions  and  markets.  In  accordance  with  the  first  sentence  of  Article 17.5  of 

the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.  

1.  

Purpose of the draft law 

1.1  The  draft  law  governs  the  dematerialisation  of  securities,  to  which  Luxembourg  law  applies, 
whether capital or debt securities issued by companies incorporated under Luxembourg law2 or 

debt securities issued under Luxembourg law by companies incorporated under foreign law. The 

dematerialisation  of  securities  is  designed  as  an  additional  option,  in  addition  to  the  possible 

issuance  of  such  stock  and  debt  securities  in  bearer  or  registered  form  under  the  Law  of 

10 August 1915 on commercial companies. From the date of entry into force of the draft law, the 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
Capital  securities  are  defined  to  include  capital  securities  issued  by  joint-stock  companies  under  Luxembourg  law, 
including shares and stock, beneficiary shares, subscription rights and common placement fund shares. Debt securities are 
defined to include financial instruments in the form of bearer instruments and public debt instruments. However, for the 
application of the draft law, bills of exchange, securities redeemable by number-based lottery draws, as well as shares and 
stock issued by variable capital pension saving companies, are not considered as securities.  

 
 
 
 
                                                 
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dematerialisation  process  is  available  to  convert  existing  bearer  or  registered  securities  and  to 

issue new securities in dematerialised form, provided the entire issue is registered with a single 

liquidation body or central account keeper.  

1.2 

Issues listed on regulated markets may only be dematerialised by liquidation bodies3. Securities 

settlement systems operated in Luxembourg and subject to the Banque centrale du Luxembourg’s 

oversight, governed by the Law of 10 November 2009 on payment services (hereinafter the ‘Law 
on payment services’), are considered as such liquidation bodies4. Non-listed issues may also be 

dematerialised  within  central  account  keepers  specifically  approved  by  the  Financial  Sector 
Supervisory  Commission  (hereinafter  the  ‘CSSF’)5,  unless  they  are  already  recognised  as 
liquidation  bodies6.  Securities  that  have  been  dematerialised  within  a  liquidation  body  or  a 

central account keeper may circulate freely, including within the accounts maintained by account 

keepers;  account  keepers  are  defined  as  any  person  authorised  under  Luxembourg  law  to 

maintain  securities  accounts,  including  national  or  international  bodies  of  a  public  nature 

established  in  Luxembourg  and  operating  in  the  financial  sector.  To  ensure  the  integrity  of  all 

issues, the CSSF may establish the accounting rules for dematerialised securities maintained by 
liquidation bodies, central account keepers and account keepers7. 

1.3  The draft law also modernises the framework in the Law of 1 August 2001 on the circulation of 

securities and other fungible instruments (hereinafter the ‘Law on circulation of securities’) that 

governs the holding and circulation of securities, regardless of their form and place of issuance in 

accounts located in Luxembourg. The draft law aligns the Law on circulation of securities with 

the Unidroit Convention on substantive rules for intermediated securities of 9 October 2009, and 
with  the  expected  Union  harmonisation  of  securities  law8.  Moreover,  the  draft  law  introduces 

three  additional  provisions  to  strengthen  the  protection  of  the  security  holders’  rights.  First,  it 

provides that, on bringing liquidation proceedings against an account keeper, the affected holders 

of the securities accounts immediately acquire the rights to the securities that have been credited 

to the securities account of the account keeper, without having to wait for the crediting of such 
securities to their own securities accounts9. Second, without prejudice to the separately regulated 
irrevocability  and  finality  rules10,  failure  by  one  party  to  deliver  or  settle  vis-à-vis  its 

counterparty, confirmed on the date and under the terms and conditions applicable in the relevant 

market  or  fixed  by  an  agreement  between  the  parties  or  the  rules  of  a  securities  settlement 

system,  discharges  the  affected  counterparty  of  its  corresponding  delivery  or  payment 

3  
4  
5  
6  
7  
8  

9  
10  

See Article 4 of the draft law.  
See Article 20 of the draft law.  
See Article 21 of the draft law.  
See Article 25 of the draft law, inserting a new Article 28(11) (2) in the Law of 5 April 1993 on the financial sector.  
See Article 22 of the draft law.  
See  in  particular  the  European  Commission’s  consultation  document  ‘Legislation  on  Legal  Certainty  of  Securities 
Holding and Dispositions’ of 5 November 2010, available on the Commission’s website at www.ec.europa.eu. 
See Article 4(2) of the Law on the circulation of securities, as amended by Article 28 of the draft law.  
See Title V of the Law of 10 November 2009 on payment services. 

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obligations,  without  prejudice  to  the  liability  of  the  defaulting  party11.  Third,  if  the  relevant 

account  keeper  proceeds  to  deliver  the  securities  or  to  pay  the  price  in  place  of  the  defaulting 

account holder, such an account keeper acquires ownership by way of guarantee of the securities 
or funds received from the counterparty as consideration12.  

2. 

Dematerialisation of securities 

The ECB welcomes the possibility for dematerialising securities in Luxembourg, as this will contribute 

to the elimination of the operational complexities and risks related to handling physical securities, and 

the  reduction  of  settlement  and  custody  costs,  as  recommended 

the  ESCB-CESR 
to 
Recommendations for securities settlement systems13 and the prospective CPSS-IOSCO principles14. At 

in 

the  same  time,  the  ECB  recommends  that  the  Luxembourg  authorities  monitor  Union  legislative 

developments  as  regards  the  on-going  harmonisation  of  Union  securities  law,  including  the  possible 

introduction of mandatory book entry form for transferable securities.  

3.  Modernisation of the Law on circulation of securities  

3.1  The ECB welcomes the amendments to the Law on circulation of securities, which strengthen the 

protection  and  enforcement  of  rights  of  the  securities  holders  who  maintain  securities  in  a 

securities settlement system, a liquidation body, a central account keeper or an account keeper in 

Luxembourg.  

3.2  The  ECB  welcomes  in  particular  the  amendment  to  Article  16  of  the  Law  on  circulation  of 

securities, under which the relevant account keeper acquires ownership by way of guarantee of 

the securities or funds received from the counterparty as a consideration for the securities or the 

funds that it has itself delivered. This is one of the available solutions to mitigate the credit risk 

taken by the financial intermediary financing the acquisition of securities by its customers. It has 

particular  relevance  to  the  TARGET2-Securities  (T2S),  the  Eurosystem’s  future  settlement 

platform,  as  the  legal  protection  introduced  by  the  draft  law  will  cover,  inter  alia,  the  credit 

institutions  providing  liquidity  to  their  customers  in  their  capacity  as  settlement  banks  and 

refinancing  the  costs  of  this  activity  with  the  intraday  credit  received  from  their  Eurosystem 

central  bank.  If  the  customer  of  the  settlement  bank  is  not  able  to  reimburse  the  liquidity 

provision  at  the  end  of  the  day,  the  ownership  of  this  customer’s  collateral  will  pass  to  the 

11  
12  
13  

14  

See Article 15 of the Law on the circulation of securities, as amended by Article 28 of the draft law.  
See Article 16 of the Law on the circulation of securities, as amended by Article 28 of the draft law.  
ESCB-Committee  of  European  Securities  Regulators  (CESR)  Recommendations  for  Securities  Settlement  Systems 
and  Recommendations  for  Central  Counterparties  in  the  European  Union,  May  2009;  particularly  Recommendation 
No  6:  ‘Securities  should  be  immobilised  or  dematerialised  and  transferred  by  book-entry  in  CSDs  to  the  greatest 
extent  possible.  To  safeguard  the integrity of  securities issues and  the  interests  of investors, the CSD  should ensure 
that the issue, holding and transfer of securities are conducted in an adequate and proper manner’.  
Committee  on  Payment  and  Settlement  Systems  (CPSS)  and  the  Technical  Committee  of  the  International 
Organization of Securities Commissions (IOSCO), Principles for financial market infrastructures, consultative report, 
March 2011, paragraphs 3.1.2 and 3.27. 

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settlement bank, hence facilitating the unwinding of the settlement bank’s refinancing transaction 

with the central bank, without increasing the settlement banks’ credit exposures.  

3.3  The  amendment  to  Article  15  of  Law  on  circulation  of  securities  provides  that  if  securities  are 

delivered against cash payment, failure to deliver or settle confirmed on the date and under the 

terms  and  conditions  applicable  in  the  relevant  market,  or  fixed  by  an  agreement  between  the 

parties or the rules of a securities settlement system, discharges the parties from their delivery or 

payment  obligations  without  prejudice  to  the  liability  of  the  defaulting  party.  The  ECB 

understands  that  this  provision  is  proposed  to  address  specific  situations  encountered  in  the 

present  financial  crisis  where  transfer  orders  duly  entered  into  a  system,  in  respect  of  a 

counterparty  against  which  insolvency  proceedings  were  subsequently  brought,  remained 

unsettled and suspended in the said system, as the insolvent counterparty could not discharge its 

obligations  and  the  parties  could  not  immediately  agree  on  the  bilateral  cancellation  of  such 

transfer order. The proposed amendment reflects a policy proposal according to which the failure 

to deliver or settle the underlying securities transaction will automatically discharge the parties 

from  carrying  out  the  corresponding  transfer  order  within  the  system.  The  abovementioned 
provision is ‘without prejudice to the separately regulated irrevocability and finality rules’15, as 

derived from Article 3(1) and Article 5 of Directive 98/26/EC of the European Parliament and of 

the  Council  of  19  May  1998  on  settlement  finality  in  payment  and  securities  settlement 
systems16. In this respect, the ECB understands that the proposed provisions aim to mitigate the 

effects  of  the  strictly  applied  principle  of  irrevocability  in  a  manner  which  decreases  the  risks 

related  to  unsettled  transfer  orders.  The  ECB  recommends  clarifying  the  scope  and  the 

relationship  of  the  newly  introduced  provision  with  regard  to  the  settlement  irrevocability 

safeguarded  by  Directive  98/26/EC.  In  addition,  to  avoid  uncertainties  that  may  be  associated 

with  the  implementation  of  this  proposed  amendment,  proper  coordination  should  be  ensured 

between  the  parties  to  the  securities  transaction  that  may  agree  on  the  date  and  conditions  of 

settlement  in  their  bilateral  agreements  and  the  securities  settlement  system  that  may  provide 

similar  provisions  in  its  rules,  and  also  the  T2S  operator  that  may  provide  the  technical 

settlement platform on which the transfer order will be processed. If such coordination is not in 

place,  the  parties  may  agree  that  they  are  discharged  from  their  obligations  on  date  S,  but  the 

securities  settlement  system  and,  as  a  consequence,  also  the  T2S  operator  may  have  no 

knowledge  of  this  agreement.  In  such  situations,  the  securities  settlement  system,  and 

consequently  T2S,  may  continue  to  attempt  to  settle  the  transaction  after  date  S  which  may 

produce legal uncertainty as to the status of such transaction. The ECB recommends that the draft 

law elaborates how the proposed statutory discharge of obligations can be aligned with the rules 

of the operator of a securities settlement system. 

15  
16  

See Title V of the Law of 10 November 2009 on payment services. 
OJ L 166, 11.6.1998, p. 45. 

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This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 24 January 2012. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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