VII ACSDA General Assembly 29 – 31 March 2006 San Salvador, El Salvador UNIDROIT

1. The Brazilian Clearing and Depository Corporation VII ACSDA General Assembly 29 – 31 March 2006 San Salvador, El Salvador UNIDROIT CONVENTION ON INTERMEDIATED SECURITIES Margarida Baptista

2. Background • Last two decades: • Financial Innovations • Growth of the estimated value of securities held in custody worldwide: US$ 50 tri (2004) • Expansion of cross-border securities transactions • Enlarging complexity of the intermediation chain Increasing awareness of the legal risks inherent to the securities transactions

3. 1980/90s 2000s Operational risk Credit risk Legal risk Liquidity risk Market risk In fact...

4. Cross border situation Country A CSD Intermediary Country B Country C Intermediary Collateral Secured creditor Investor Loan Problem: growing of legal uncertainty in cross-border securities transactions

5. Solutions in a cross-border context • International Private Law elements are used to define which is the applicable law (jurisdiction) in case of conflicts. Conflict-of-laws Substantive law • Harmonization of statutory or written law that governs rights and obligations of those who are subject to it.

6. Hague and UNIDROIT Conventions Conflict of Law Benefits: • Protection of market participants • Protection of financial system • Gains in economic efficiency • Lower transaction costs • Lower credit costs Hague Convention Substantive Law UNIDROIT Convention

7. Hague Convention - Overview • International multilateral treaty intended to remove, at a global scale, legal uncertainties for cross-border securities transactions • Basic purpose: update and unify conflict of laws principles to: • Reduce Legal Risks • Better reflect market reality in securities holdings • Final version: December 2002 • Principle: PRIMA – Place of the Relevant Intermediary Approach • Article 4 – Primary Rule:the law governing the main proprietary issues of indirect securities holding systems is the law agreed upon as governing the account agreement between the investor and his direct intermediary, provided several factual conditions are met. • Incorporated in the G-30 Recommendations (rec. 15)

8. Hague Convention – Limited solution? • Relevant questions: • Is the domestic law identified by the international rule clear and satisfatory? • Does the domestic law combine, i.e. work effectively with other juristictions, in a cross-border context? • Complementary solutions: Hague Convention cannot address issues of substantive law EU Directives UNIDROIT

9. Unidroit Convention - Overview • Objectives: • “Promote internal soundnes and cross-border system compatibility through the provision of a basic legal framework for the modern intermediated securities holding system” • Suggests a framework that comprehensively adressess issues of substantive law related to intermediated securities Reduction of Legal Risk

10. September 2002: First Meeting of the UNIDROIT Study Group on Harmonized Substantive Rules Regarding Intermediated Securities 2003/2004: Consultations in 20 countries 2004: Preliminary Draft Convention and Explanatory Notes (UNIDROIT 2004 - Study LXXVIII – Docs. 18 and 19) May 2005: First Session of the Committee of Governmental Experts Delegations of 33 countries and 10 international organizations Amended Draft Convention (Doc. 24) Unidroit Convention – History (I)

11. Inter-Sessional Regional Meetings (2005/2006): Europe: September 2005: Bern/Switzerland January/February 2006: Paris/France Latin America: October 2005: São Paulo/Brazil Organized by UNIDROIT, CBLC, Caja de Valores, BM&F, and Comisión Nacional de Valores Participation of ACSDA’s representatives (Brazil, Argentina and South Africa) Unidroit Convention – History (II)

12. March 2006: Second Session of the Committee of Governmental Experts Delegations of 39 countries and 11 international organizations Participation of 8 ACSDA member countries: Argentina Brazil Canada Chile Colombia Mexico South Africa USA Preliminary Draft Convention (UNIDROIT 2006 - Study LXXVIII Doc. 42) Unidroit Convention – History (III) ACSDA’s Members States of Unidroit: Argentina Bolivia Brazil Canadá Chile Colombia Mexico Nicaragua South Africa USA Uruguay

13. Unidroit Convention • Main Principles: Scope: cross-border and domestic transactions Neutrality, functionality, accomodation of distinct legal approaches Compatibility with other relevant instruments, like the Hague Convention Credit/debit of book-entry accounts: pre-condition for acquisition and disposition of securities and securities’ interest in intermediated systems

14. Unidroit Convention – Issues covered • Core-issues: Clear and simple rules for acquisition and disposition of securities Fruits, voting rights, etc Investor protection in case of insolvency of the intermediary Integrity of the account holder / intermediary relationship Finality and irrevocability Net settlement Relations with issuers of securities Creation and realisation of security interests Right to use clients’ assets for own purposes

15. Unidroit Convention – Structure*¹ Articles 1 to 3 Definitions, Scope of Application and Interpretation Articles 4 and 9 Rights Attached to the Securities Articles 5, 7 and 11 Acquisition and Disposition of Securities Articles 6, 7, 10 and 11 Security Interests in Intermediated Securities Articles 8 and 13 Exemptions for SSS/Clearinghouses Articles 12 and 14 Insolvency of Intermediary Articles 15 to 18 Duties of Intermediary and Loss Sharing of Securit. in Case of Insolvency Articles 19 and 20 Relations with Issuers of Securities Articles 21 to 25 *² Special Provisions on Collateral Transactions (Chapter 7) *¹ There are proposals for a new structure (France and USA) *² Fall Back Rules – Chapter 7

16. [Overriding effect of certain rules os securities settlement [or clearing] system] Any provision of the rules or agreements governing the operation of a securities settlement [or clearing] system [which is directed to the stability of the system or the finality of transactions effected through the system] shall, to the extend of any inconsistency, prevail over [any provision of Articles 7, X, Y,...] this Convention]. Unidroit Convention – Article 8

17. [Effectiveness of debits, credits etc. and instructions on insolvency of operator or participant in securities settlement [or clearing] system] 1. – Any provision of the rules or agreements governing the operation of a securities settlement [or clearing] system [which is directed to the stability of the system or the finality of transactions] shall have effect notwithstanding the commencement of an insolvency proceeding in respect of [the operator of] the system or any participant in the system in so far as that provision: (a) precludes the invalidation or reversal of a debit or credit of securities to, or a designating entry in, a securities account which forms part of the system after the time at which that debit, credit or designating entry is treated as final under the rules of the system; (b) Precludes the revocation of any instruction given by a participant in the system for making a disposition of securities, or for making a payment relating to an acquisition or disposition of securities, after the time at which that instruction is treated under the rules of the system having been entered irrevocably into the system. 2. – Paragraph 1 applies notwithstanding that any invalidation, reversal or revocation referred to in that paragraph would occur by mandatory operation of the insolvency law of a Contracting State. Unidroit Convention – Article 13

18. Discussions of the new version of the Draft Convention and proposed amendments (Unidroit 2006 - Study LXXVIII Doc. 42) Production/publication of comments by National Governments November 6-15, 2006: Third Session of the Committee of Governmental Experts Unidroit Convention – Next steps...

19. For more information... http://www.unidroit.org/english/workprogramme/study078/item1/main.htm

20. www.cblc.com.br