Investors do not physically hold their investment securities any more. Securities are held and transferred through a complex, sophisticated, and international network of financial intermediaries, including central securities depositories, investment banks, and brokers-dealers. Investors buy and sell their holdings by having book-entries made to their securities accounts; they provide collateral to secured lenders by book-entries or by control agreements. Because transfers and collateral transactions are critical to the liquidity of the financial markets and to financial stability, market participants and regulators have become increasingly concerned with the legal soundness, the internal consistency, and the international compatibility of national laws regulating the holding and transfer of securities held with an intermediary. This article examines how the international harmonisation of key rules of commercial law can contribute to the reduction of legal risk and discusses a draft convention prepared by the International Institute for the Unification of Private Law (UNIDROIT). Rather than addressing the numerous features of that draft, the author focuses on its methodology—the “functional approach”—and finds that it is possible to create effective international treaty provisions, which contracting States may implement without disrupting their property law with respect to the structure and characterisation of investors' interests in securities. This article tests the robustness of the functional approach by examining two critical issues: the definition of intermediated securities as the building block of international substantive rules and the choice among four internationally recognised methods for the transfer of intermediated securities and for their use as collateral.
