Research On Choice Of Law Of Intermediated Securities In Cross-border Transactions

There are two kinds of securities holding system, directly holding system and indirectly holding system. Directly holding system means holding securities directly by the investors, no matter by holding the certificates or only nominal holding the title. Indirectly holding system means holding securities by an intermediary and in an intermediary’s name rather than in the investors’ name. In the latter pattern, securities held by an intermediary between the investors and the Central Securities Depository. The indirectly holding system has more and more been adopted, especially in cross-border securities transactions. In practice, it was called intermediated system, and this kind of securities was called intermediated securities.In the history of international intermediated securities,different provisions of different countries led to legal conflict, and traditional rules on solving this problem were not effective. The lex conto sitae rule, i.e. the place of relevant account approach developed in practice in many countries, has been adopted in relevant legislative practice of choice of law of European Union,Germany, France, America, and the Hague Conference on Private International Law. With the formulate of the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, the place of relevant intermediary approach, i.e. the PRIMA rule came into being, based on the lex conto sitae rule. It was popular between both the scholars and the relevant Professionals at the time it came out. Been effected, Japan and Korea are tending to reform and legislate with PRIMA rule. The legislation of the Convention further contributed to the widely applicable of the rule.Chinese securities transactions meanly adopt directly holding system, supplemented by intermediated system. So far, there are five securities adopt intermediated system. The first two are respectively held by a Qualified Foreign Institutional Investor or a Qualified Domestic Institutional Investor, and in each other’s name. The third one is RMB special shares, i.e. the so called B shares. The last two are RMB Qualified Foreign Institutional Investor and Shanghai-Hong Kong Stock Connect program, which are both being piloted. However, neither substantive laws nor conflict laws are available. The sole conflict law of China is the Choice of Law for Foreign-related Civil Relationships, while it doesn’t provide special rules for the application of intermediated securities, even not a word. As a result, this paper suggests that we should reference the legislations of other jurisdictions, adopt PRIMA rule in the conflict law of China, and establish a reasonable legal framework for the application of intermediated securities.