institutions were able to delay reform. In particular, company registrars, to whom the maintaining of registers had traditionally been outsourced by issuers, were opposed to reform and lobbied to maintain a function in the new transfer process. The influence exercised by the registrars and other lobby groups caused the TAURUS project to become so complex and costly that it had to be abandoned in March 1993.12

3.3 CREST

3.3.1 Introduction

After the collapse of TAURUS, the Bank of England stepped in and created CREST, which is the current settlement system. CREST went live on 15 July 1996,13 and it allows for dematerialised transfers.14

There would have been alternatives in drafting a new legal regime, all of which would have preserved the current institutional framework, but no attempt was made to draft, or even consult with market participants on, a new, perhaps more modern, legal framework. The Bank of England carried out the reform by modelling the new legal regime closely on the regime that had been in place before. At first, CREST did not maintain issuer registers; CREST was simply a system through which buyers and sellers communicated transfer instructions electronically. After having received matching instructions from both parties, CREST instructed the respective registrars to amend the register.15 In the same way as the paper-based settlement systems that were in place prior to CREST were sorting systems for paper-based transfer instructions, CREST began its existence as a platform for the exchange of electronic transfer instructions between the transferor, the transferee and the issuer. The Bank of England simply transposed the paper-based procedure into an electronic environment; the doctrinal rules that had been in place before, the existence of which can be traced back to the rules that were in place when securities first appeared, also shaped the rules governing the paperless infrastructure when it was first implemented.

12Cheffins, Company Law 15, 407–409.

13CREST Domestic Legal Framework 1, http://www.crestco.co.uk and on the Company/ Timeline website last visited 20 July 2006.

14When it was first implemented, the operation of the system was governed by Uncertificated Securities Regulation (USR) 1995, SI 1995/3272. It is now subject to USR 2001, SI 2001/3755.

15Robert Pennington, Company Law, 8th ed. (London: Butterworths, 2001) 493–494.

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Market infrastructure institutions are able to delay reform. However, when institutional pressure is overcome and reform is carried out, the form in which the law evolves to respond to change is determined by incumbent legal doctrine independently of institutional pressure.16

The records kept by CREST, originally, did not serve a legal function. This cautious start for the CREST system could be explained by a concern about the reliability of the computer system and its communication network. The fact that registration on decentralised registers kept by registrars remained of sole legal significance for determining ownership in securities would also have had significant appeal to registrars, whose function as keepers of the issuer register was preserved. In the same way as Talisman was a sorting system for paper-based transfer instructions, CREST began its existence as a platform for the communication of electronic transfer instructions between the issuer, the transferor and the transferee. This point will now be further explored.

Transfers of uncertificated securities within CREST are effected by instructions sent by or on behalf of holders to the CREST computer via a computer network which is established by network providers appointed by CREST.

In order to transfer securities in CREST, the issuer, the transferor and the transferee must all be members of the system. The issuer may resolve by resolution of its directors to become a member of CREST.17 The transferor or the transferee may become members of CREST in two ways. They may either become users themselves, which means that they have to provide for the hardware and software necessary to establish a communications link to the system. If they do not wish to establish a link themselves, each of them may appoint a user (a sponsor) through which they issue instructions with respect to their securities. Whichever form of membership a securities holder chooses, she must appoint a bank to provide settlement bank facilities.

16As we saw in chapter 1, Lucian Bebchuk and Mark Roe use the term ‘structure-driven path dependence’ to describe the influence of the incumbent market infrastructure. When analysing the influence of pre-existing structures, however, the authors view incumbent institutions as being principally free to cause the adoption of any legal framework that suits their needs. They are able to shape the law, and are not viewed as being bound by legal constraints themselves. The view put forward in this chapter contests this. Structure-driven path dependence exists, but-only in so far as institutions delay reform. The type of legal framework that is implemented is not a function of the influence of institutions, but is largely determined by legal doctrine.

17USR 1995, reg. 19; USR 2001, reg. 16.

CREST maintains two types of accounts for each member, a member account and a cash memorandum account. The member account shows how many and what kind of securities each member owns. The cash memorandum account shows how much credit the member has with her settlement bank.

The CREST Manual 1996 provided for a detailed description of the administration of the electronic transfer process.18 Once a sales contract was concluded, the seller and the buyer sent computer instructions to CREST. The seller instructed CREST to transfer her shares to the buyer and the buyer instructed CREST to transfer the purchase price to the seller. As soon as CREST received both instructions, it verified whether the input of the buyer and seller corresponded to each other. If the inputs matched and sufficient credit was available on the buyer’s and the seller’s respective accounts on settlement day, CREST processed the securities transfer.

The first step was that CREST amended its internal records. It debited the seller’s account and credited the buyer’s account with the securities, and debited the buyer’s cash memorandum account and credited the seller’s cash memorandum account with the purchase price. Simultaneously with these internal amendments, CREST sent instructions to the issuer to amend its register and to the settlement bank to transfer the purchase price to the seller. This process was called ‘settlement’.19

For the first five years of CREST’s operation, CREST records existed for internal purposes only. Most importantly, they did not constitute evidence of the holder’s entitlement. CREST only received electronic instructions from both the buyer and the seller, matched those instructions and instructed the company or its registrar to amend the register. At that time, CREST operated only as a sophisticated electronic communication network; the difference between transfers effected through the CREST system and those effected through paper certificates was the method by which the transferee’s entitlement would be evidenced to the issuer.

When certificated shares are transferred, the share certificate serves as a document of identification; the company issues a certificate to every shareholder. When a shareholder transfers her shares, she passes

18CREST Manual Version 1.0, issued 15 July 1996.

19The CREST Manual uses the term ‘settlement’ in the narrow sense described in the text. For a broader meaning of the term, see p. 1.

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the certificate to the transferee and the transferee delivers the certificate to the company. The fact that she possesses the certificate provides the company with some evidence that she has obtained the transferor’s authority to have the securities transferred into her name.

When CREST was first implemented, transfers occurred in a manner which closely mirrored the transfer procedure that had operated for paper-based securities. The rules originally governing CREST changed only the process whereby the issuer identified the transferee. The identification would take place by means of instructions sent through a centralised network; the CREST computer performed the identification process automatically and without the requirement for paper. A number of security measures ensured that the information sent through the network was as reliable as possible.20

Paper documents were replaced with electronic instructions but the actual transfer still required the involvement of the issuer; CREST simply assisted the issuer in identifying the transferee. Transfers still had to be recorded on decentralised securities registers. CREST maintained records of shareholdings, but those records reflected only the entries on the register kept on behalf of issuers. The CREST records, originally, did not constitute the securities register.

3.3.2 Legal title

When CREST first started, a transferee became the legal owner of securities when her name was entered on the securities register kept by or on behalf of the issuer, irrespective of whether the entry had been effected upon delivery of paper transfer documents or upon receipt of a CREST instruction. The legal significance of the issuer register remained unchanged. According to USR 1995, reg. 20, an entry on the register was ‘evidence of such title to the units as would be evidenced if the entry on the register related to units of that security held in certificated form’. It is important to note that the register continued to be kept by the issuer, or on the issuer’s behalf by a registrar.

3.3.3 Equitable title

In keeping with the path originally adopted by English law, the dualistic model of property law that distinguished between legal and equitable title continued to exist for transfer of both uncertificated and certificated

20CREST project team, CREST Network and Security Requirements Specification (release 2.3 January 1995) 24–30.

Notwithstanding the fact that there appears to be scope for the application of the rules on equitable title to apply to uncertificated securities, one observation needs to be made. The introduction of an uncertificated transfer system in England has reduced the practical significance of equitable ownership: the time lag between the point in time at which securities are sold and the point in time at which transfers are completed has decreased. It used to be the case that there was a time lag of two, sometimes, three weeks between trade and settlement. If, for example, the seller became insolvent during that period, equity would make it possible for the buyer to assert a proprietary right to the securities notwithstanding that her name had not yet been entered on the issuer register. If securities are sold on the London Stock Exchange today, the transactions will normally settle within three working days after the sales contract has been entered into. It is possible for transactions to settle earlier than that: CRESTCo offers a service whereby transactions settle on the same day as the trade is made.24 In those circumstances, the buyer is exposed to the risk of the seller’s insolvency for a period of time that is shorter than it used to be when transfers were effected by means of paper documents, because the buyer will acquire legal title at an earlier point in time. Equitable title, if it arises at all in the circumstances, will only ever exist for a comparatively short time span.

The reforms that led to the creation of the current settlement system are the product of an effort of the British securities market to comply with what is perceived as best international practice. It is possible to view the fact that equitable title has lost some of its practical significance as a change that has caused the English transfer system to become like the German and Austrian systems. The argument supporting this conclusion would be that, in practical terms, England is reducing the significance of its dual-headed approach to property law by structuring securities transfers such that the buyer becomes the legal owner at an earlier point in time. This may be seen as an example of convergence; there exists no evidence, however, that convergence with other legal systems was one of the aims to be achieved by USR 1995.

The regulation implementing CREST did not only leave the law of equity intact, it also made explicit use of the concept of equitable ownership by adopting a rule concerning the acquisition of equitable title in

24http://www.crestco.co.uk/home/home.html#/products/dvp_intro.html (last visited 20 June 2006).