Dematerialised securities

The Law and Lore of Repackaging →Go uptown Repack Anatomy: Hedging exemption | Covenant to pay | Quoted Eurobond exemption | Pre-enforcement | The curious structure of an MTNIndex: Click ᐅ to expand: Repackaging Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

“Dematerialised” securities or financial instruments — AKA book-entry securities, because they only exist as entries in the books and records of a depositary organisation and don’t have other corporeal form as “res extensa” — are those which have swallowed the blue pill, jacked themselves into the Matrix, and gone digital, no longer having earthly existence as a security printed, paper “thing”.

That is, in this day and age, pretty much all of them.

Global securities

In these modern, dematerialised times, the securities in a clearing system — that is, pretty much all securities — exist only as entries in a ledger maintained by the clearing system. The individual securities might not be security-printed, physical things any more, but their origins as such lives on in the “global security”, which is a printed physical thing, on actual paper — usually run off on a word-processor, not security-printed though — which is signed and given to a depositary to hold on the clearing system’s behalf (or on behalf of several clearing systems, in which case it is a “common depositary”).

This global security, representing all notes issued under that ISIN, is technically the instrument the clearing system’s records reflect. On execution of a bond deal, until relatively recent times, a trainee would be sent along with the executed global note to deliver it to the common depositary, a fellow with a green visor, sleeve garters and a permanently malevolent view of humankind who was kept, apparently against his will, in the basement of a building on Queen Victoria Street.

The common depositary would “authenticate” (counter-sign) the global note — at which point it would become a “live” bearer instrument — and put it in an actual vault where it would gather dust awaiting the time at which holders of the securities it represented might need to convert it into actual physical notes again. That time would be the Apocalypse, so you can expect quite a lot of dust to collect in the meantime.

And it is a detail whose legal significance, in practice, will never affect any practising lawyer — or not until the common depositary’s vault has hit by a tactical nuclear missile or something — and in that case, even practising lawyers will have plenty else to be worrying about — like packing rifles, tins of spam and so on and heading into the hills — so, if they know what is good for them, they won’t be consulting your old internet chum even at that point to figure out what to do with that stupid global note.

See also

• Bearer instrument