Indirect Holding of Securities

in the Russian Federation

by Tuktarov Yuri

This paper is descriptive and dedicated to Russian law on securities held through intermediary (nominee holder). Its purpose is to assess the existing Russian law in light of the standards provided for by the Draft convention on harmonised substantive rules on securities holding through intermediary [Doc. 13 prov. 2] (hereinafter – the Draft).

Most securities in Russia are registered directly in the name of real holders and not nominal holders. Holding securities with an intermediary (nominee holder) has a relatively low profile as a separate legal phenomenon in the legislation, and even less so in the literature and in practitioners’ works. In legal literature one could find analysis of some elements of the indirect holding of securities, but such analysis is not made in light of the system as a whole, but views certain individual legal aspects. For about 10 years there has been a broad discussion concerning two problems – (i) legal nature of uncertificated securities, which in Russian sounds quite awkward (“no-documentary value paper”), and (ii) whether it is possible for promissory notes to circulate in “electronic” form (by book entries).

Secondly, and as a consequence of the above, the indirect holding of securities in Russia is not properly governed (with respect to both quantity and quality of legislation). In quantitative terms, the deficit of rules, as compared with the Draft, amounts to 70 per sent of what needs to be adopted. Half of the existing rules are contained not in the legislation, but in subordinate acts, which are hardly perfect tools for regulation of the basic questions of the securities market (susceptible to easily change, formulation problem and etc).

1. Interpretation

1. “Securities” (“value papers”)

The term “securities” (or “value papers”) in Russia is understood in along the lines of the continental traditions and is defined as a “document certifying, with the observation of the established for and obligatory requisites, patrimonial rights, the exercise or transfer of which are possible only upon the presentation” (sec. 1 art. 142 CC). Besides other characteristics, documents shall be recognised as securities “only by statutes or under a procedure established by them” - principle of numerus clausus (art. 143 CC).

The principle of numerus clausus is also used as a “gate” for “securities or other documents” to be publicly offered and traded in capital market. Investor Protection Act 1998 provided that they should be admitted by legislature (sec. 1 art. 5). The following securities are currently admitted for public offering and trading: shares, corporate bonds, options of the issuer – “emissive” securities (Securities Market Act 1996); investment units (Investment Fund Act 2001); mortgage participation certificates (Mortgage Baked Securities 2003); and public bonds (State and Municipal Securities Act 1998).

Besides the “admitted” securities, there are so called “non-emissive” securities (promissory notes), which in reality are also publicly offered and traded in the markets. Circulation of promissory notes is the result, on the one hand, of heavy and costly regulation regarding “admitted” securities, which do not have favorable provisions for short-term fund rising, and, on the other hand, ambiguity in the competence of two capital market Regulators, which helped the Central Bank to support the circulation of promissory notes with barely sufficient regulation, while the Securities Commission legally and politically cannot prevent it.

Financial derivatives are traded in the far less friendly conditions. The laws regarding the capital market regulate circulation of securities, but not financial derivatives. For about 4 years the financial derivatives have been more or less under discussion, but up to date there is no common consensus regarding what the regulation should be. As a result of deficiency of legal intervention for financial derivatives, the markets tend to compensate such position by themselves, relying on the Instruction on offering and trading of financial derivatives (2001), which lost its legal effect in 2003.

2. Fungibility of securities

All securities, admitted for public offering and trading, are fungible in definitio. Securities Market Act 1996 provides that “emissive” securities (shares, bonds and options of the issuer) are those securities, which, in particular, within a single issuance “have equal rights and terms of performance independently of the moment of acquisition of such securities” (art. 2). According to Investment Fund Act 2001 “each investment unit evidences the same share in co-ownership in asset of unit investment fund and the same rights” (part 5 sec. 1 art. 14). Similarly, Mortgage Baked Securities Act 2003 reads: “each mortgage certificate of participation evidences the same volume of rights, in particular, the same share in co-ownership in mortgage underlying asset” (sec. 1 art. 20).

Regulation on “non-emissive” securities (promissory notes) is provided by Central Bank’s Regulation of 15.07.1998 № 292-У. The norm about the fungibility of “non-emissive” securities is formulated as an exclusion, because promissory notes are generally considered as value papers for individual relationships and therefore “non-fungible” (scholars consider as artificial the use of promissory notes for public markets). Regulation № 292-У says that “if several non-emissive securities entitle their holders with the same rights, such aggregate of securities is called partia”. Securities within “partia” are recognised as interchangeable and in case the unique character is acquired, they shall be excluded from “partia”. Credit organisations have rights to determine the possibility of applying the rules of “partia” by their own and while doing this “take responsibility for correctness of this decision” (sec. 6). Thereon, fungibility of non-emissive securities is subjective and changeable.