Book Entry Securities Representation

What are transferable securities?

A transferable security is any right of an asset nature that can be transferred widely and impersonally in financial market. Their main characteristics are:

• Negotiable nature
• Issued by an entity

The financial instruments listed in the Annex to the Consolidated Text of the Securities Market Law (TRLMV), in two. Transferable securities and the rest. Transferable securities are mainly shares (and comparable securities), bonds and notes. The others listed in the Schedule are options, swaps, interest rate agreements, etc., i.e. derivatives.

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What kinds of transferable securities are there?

The Annex to TRLMV lists the instruments it considers to be transferable securities. The following are noteworthy:

• Shares and equivalents
• Bonds and notes
• Shares and holdings in collective investment institutions
• Securitisation bonds
• Preferred shares
• Warrants
• Mortgage bonds

How are transferable securities represented?

Transferable securities can be represented in two ways: by securities or by book entries.

Traditionally, the system for representing securities was by paper securities. Today, this is a residual system. It has become obsolete as it has been replaced by the more modern book-entry system. Thus, it has been relegated to the system of representation by securities for the representation of certain securities. Generally, not traded on the stock exchange.

Thus, the predominant system is the book-entry system. This is the most modern and most widely used system. It is also the system that securities traded on the stock exchange must have.

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Securities lending and repurchase transactions

Stock loans and repos are efficient portfolio management techniques. These techniques are commonly used by the management companies of collective investment institutions. The advantage of these techniques is that their benefits can be obtained indirectly in benefits for the participants.

What are book entries?

The book-entry system is a method of representing securities that consists of the computerised accounting record of securities.

The book-entry representation system is regulated in Articles 6 to 13 of the TRLMV. Articles 118, 119, 496 and 497 of the Companies Act also apply. In addition to these legal texts, its legal regime is extended by Royal Decree 878/2015. This RD, which repeals RD 116/1992, regulates the clearing, settlement and registration of negotiable securities represented by book entries.

The book-entry system removes the role of paper as a means of representing securities. Ownership of securities is now recorded in computerised form. In this way there is an equivalence between the two forms of representation. The consequences of this equivalence are:

• The transfer of ownership, which used to occur through delivery, now occurs with the accounting transfer. The transfer of ownership only takes place with the book entry, not before.
• The creation of rights in rem in respect of negotiable securities no longer requires the transfer of ownership. A book entry showing the lien on the value is now sufficient.

Registration principles applicable to book entries

Being a registry that accredits ownership of goods, book entries must be protected by registry principles. These principles are:

• Legitimacy: it is presumed iuris tantum as owner that whoever is registered as such in the registry. This ownership of securities is protected by the courts. As a consequence, the legitimate owner may demand that the services to which the represented security gives right be performed. To accredit this ownership there is what is known as a Certificate of Legitimacy. The contents of this certificate are: name of the holder, number of securities owned and expiration date.
• Priority: the previous registration has priority in time over the same securities. In other words, once the registration has been made, no other registration can be made for the same securities.
• Successive Tract: This principle tries to give coherence to the registration. Newly registered acts must be consistent and compatible with what has already been registered.

How is the bookkeeping system in Spain?

The book entry of securities in Spain is carried out through the so-called “Double Step System”. The system is as follows:

• First Tier or Central Registry: The Central Securities Depository (CSD) in Spain is Iberclear. The CSD is in charge of maintaining the Central Registry. In this Register Iberclear keeps the accounts of all the securities issued and traded in Spain. In the accounting books of the Central Registry, each participating entity authorized to manage securities has two accounts. Its own account, where the securities owned by the entity itself are registered. And the third party account, in which the sum of all its customers’ balances is recorded.
• Second Tier or Detailed Record: These are the records kept by each entity in its own systems. They record the customers’ securities accounts

Conclusions: What are the advantages of the bookkeeping regime?

The replacement of the previous regime of representation by one that dispenses with paper has other positive consequences. On the first place, any type of security can be represented by book entries, not only traditional securities. This simplifies the processing of transactions and thus the operations themselves. In addition, securities issued in the same issue are fungible. i.e. they can be replaced, thus increasing the speed of transactions.

Furthermore, the book entry system, by no longer using paper as a means of representation, also avoids the need for a notaries. This makes securities transactions and operations more dynamic and cheaper.

As can be seen, the book entry system has substantially improved stock market operations. It has speeded up the transfer and reduced costs.

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