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L A W F I R M
Τ S I B A N O U L I S & P A R T N E R S
________________________________________________________________________________________
Commentary of the Law
N0. 10 158, Date 15.10.2009
ON CORPORATE AND LOCAL GOVERNMENT BONDS
INTRODUCTION
Structure of the Law The Law on Corporate and Local Government
Bonds (hereinafter “the Law”) aims to create a corporate and local
government bond market in the Albania. It provides the possibility
for Albanian companies and local governments to issue bonds and
raise money as an alternative to bank borrowing.
The Law comprises three parts:
- The first part (“Generally Applicable Rules”, Articles 1-46)
details general provisions which apply to any kind of bond,
independently of the issuer.
- The second part (“Special Provisions on Bond Loans Issued by
Joint-Stock Companies”, Articles 47-63) contains provisions
concerning bond issued by joint-stock companies.
- The third part (“Special Provisions on Bond Loans Issued by
Local Governments”, Articles 64-70) refers to the issuance of bond
by local governments.
The second and third parts are supplementary to the first part,
which constitute the core of the bond regulation.
General policy issues for developing a domestic bond market
The cornerstone of the Law on Corporate and Local Government
Bonds was the creation of an active and efficient bond market in
Albania. Bonds, as transferable securities, might be a more
attractive vehicle for creditors than bank lending, since bonds can
be traded in the capital market before maturity.
A functioning bond market allows issuers to reduce their
financing costs in two different ways. First, issuers can borrow
directly from investors, thus avoiding charges related to the
administrative costs that arise from arranging loans. Second, by
introducing in the market an additional source of capital, interest
rates could become more competitive: the creation of another method
for companies to borrow money would push banks to offer interest
rates more advantageous to the borrowers than through traditional
lending.
One further reason for developing a bond market is to make the
Albanian financial market more complete by generating market
interest rates that reflect the opportunity cost of funds at
This commentary has been prepared by the Law firm Tsibanoulis
& Partners within the EBRD project for development of the Law
on Corporate and Local Government
Bonds.
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each maturity. Since the expectations of all bond market
participants are incorporated into the bond price, firms are guided
by an accurate cost of capital in making investment decisions.
Thus, the efficient pricing of credit risk can contribute to an
efficient allocation of capital in the economy.
The development of an Albanian bond market, at this time, could
further benefit from the overall growth of the European bond
market, particularly in the sector of corporate debt. The European
market for corporate bonds has shown dramatic growth during the
last years, particularly at lower credit levels. The new legal
framework provides adequate transparency for companies and
investors, while ensuring a balance between market efficiency and
investor protection. The achievement of efficient market regulation
should be viewed with reference to three particular types of
efficiency.
The first type is the “operational efficiency” of the
regulation. In order to achieve high operational efficiency it is
necessary to avoid burdening the bond market with unnecessary
transaction costs.
The second type of efficiency is the allocation of capital for
bonds. On a regulatory level, the demand for “allocation
efficiency” requires maximum market transparency between market
participants.
Third, it is important to ensure that bondholders’ rights are
efficiently protected. The Law on Corporate and Local Government
Bonds provides specific redemption rights for bondholders and it
introduces the institution of the bondholders’ agent in order to
facilitate the exercise of the bondholders’ rights.
Finally, it should be stressed that the development of effective
bonds legislation requires a coherent harmonisation between the Law
and relevant commercial legislation, particularly capital market,
commercial companies and local government borrowing regulations. In
that respect, by drafting the Law, existing Albanian legislation
has been taken into consideration, particularly the recent Law No.
9879 of 21 February 2008 on Securities, the subject of which is
wider, but closely related to that of the Law.
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CHAPTER ONE: GENERAL PROVISIONS
Article 1 - Scope of application (1) The present law applies to
bond issued by:
a. joint-stock companies having their registered seat in the
Republic of Albania, and
b. Local Government (2) The present law does not apply in cases
of bond issued by either the
Government of the Republic of Albania or the Bank of
Albania.
Commentary Article 1, Paragraph 1, defines the scope of
application of the Law. The Working Group1 expressed concerns
regarding the international issuance of bonds and any potential
restrictions posed by the definition of the scope of application.
According to Article 1 Paragraph 1, the Law applies to bonds issued
by: a) joint-stock companies having their registered seat in the
Republic of Albania, and b) Local Governments. In other words, the
Law applies only in the case of issuance of bonds by joint-stock
companies with a registered seat in the Republic of Albania and
Local Governments (in the latter case the registration of seat
within the Republic of Albania being self-evident).
There are two major issues related to the international issuance
of bonds: first, whether a foreign issuer may place bonds in the
Albanian capital market. Second, whether a joint-stock company with
a registered seat in Albania or a Local Government can issue bonds
to be marketed internationally.
Regarding the first question, any bond issuance by a joint-stock
company with a registered seat outside the Republic of Albania,
falls outside the scope of application of the Law and would likely
be governed by the law of the jurisdiction in which the issuing
company has its registered seat. Instead, the Law does not regulate
the issuance of bonds by a foreign company.2
1Members of the Working Group were: a) on behalf of FSA Mr.
Keler GJIKA and Artan GJERGJI, b) on behalf of the Ministry of
Finance Mrs. Linda RUSMAILI, c) on behalf of the Ministry of
Economy, Trade and Energy, Mr. Denis KALENJA and Zamir STEFANI, d)
on behalf of Bank of Albania Mr. Toni KOGO, e) on behalf of
Raiffeisen Bank Mr. Christian CANACARIS, f) on behalf of the
American Chamber of Commerce in Albania Mr. Perparim KALO, g) on
behalf of the Albanian Association of Banks, Mr. Elvin MEKA, h) on
behalf of the EBRD, Mr Gian Piero CIGNA. 2 However, there are
certain areas where the Albanian law could apply in reference with
internationally issued bonds, which are to be placed in the
Albanian capital market (see also Articles 38 and 39 of the Law on
Securities). The aforementioned areas may refer to legal provisions
which are considered as part of the “ordre publique” of the
Albanian legal system. Such provisions include capital market law
regulations, monetary law provisions, as well as provisions
regarding the unfair contract terms. The relevant capital market
law provisions mainly concern the conditions required for the
public offering of internationally issued bonds (e.g., the
provisions on the prospectus), as well as the conditions required
for the listing of such bonds in the Albanian Stock Exchange. It is
therefore important to accurately define the meaning of the term
“issuance of a bond loan”, particularly in comparison with the term
“distribution of a bond loan”. The term “issuance” refers to the
organizational (corporate) conditions which regulate the process of
the decision making and its implementation regarding the
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With reference to the issuance of bonds in foreign currency or
bonds to be marketed internationally by joint-stock companies with
registered seat in Albania or Local Governments, the Law does not
prohibit such issuance.
Finally, with reference to the flexibility left to the parties
to choose the national law applicable in case of issuance of an
internationally distributed bond loan, this question has to be
answered according to the provisions of the Albanian private
international law.
In case of bond loans with aspects of extraterritoriality, it is
necessary to distinguish between multiple conflicts of law rules.
For instance, the contractual relationships between the issuer and
the bondholders are regulated according to the legal provisions set
by the lex contractus3 (i.e., the Civil law provisions governing
the relationships between the bondholders and the issuer). On the
other hand, the conditions regarding the issuance of the bond loan
are regulated by lex societatis4 (i.e., the law governing the
issuer). Finally, the law regarding the ownership of the bond
certificates is usually regulated by lex rei sitae5 (i.e., the law
governing the registrar where the securities are registered).
The Law does not interfere with Albanian private international
law. Therefore, it does not prohibit the applicability of the lex
contractus regarding the terms of bond loan (e.g., the organization
of the bondholders into a group, the activity of the bondholders’
agent, etc.), to the extent that lex contractus is the one
applicable according to Albanian private international law. The
issuer may provide for a foreign law to govern the terms of the
bond loan and the fulfilment of the obligations deriving from the
bond (e.g., the relationship between the bondholders and the issuer
and all rights emanating between them), without being restricted by
the Law. The same applies for the contractual relationships between
the issuer and the underwriters (particularly banks), or between
the issuer and the account provider. Regarding the acquisition of
ownership of internationally placed bonds, the relevant provisions
of the Albanian international property law remain applicable.
financing of a joint-stock company by means of a bond loan.
Instead, the term “distribution” refers to the act of offering an
already issued bond loan to the targeted market. The conditions
which govern the distribution of bonds are primarily regulated by
the law of the market in which the bonds will be distributed. As a
result, if a joint-stock company with a registered seat in Albania
wants to distribute in the Greek market a bond loan issued
according to Albanian law, it is the Greek law which will decide on
the validity and the requirements of the distribution. Instead, if
a joint-stock company with a registered seat outside the Republic
of Albania wishes to distribute its bond loan in the Albanian
market, the specific legislation regarding the distribution of
financial instruments/securities in the Albanian market (e.g.,
Articles 27ss of the Law on Securities) will apply. 3 In conflicts
of law, the “lex contractus” or “lexi loci contractus” is the Latin
term for the law of the place where the contract is made. 4 In
conflicts of law, the “lex societatis” is the Latin term for the
law where the company’s domicile is found to be. 5 In conflicts of
law, the “lex rei sitae” is the Latin term to identify where the
property is situated.
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Article 2 - Definitions For the purposes of this law, the
following definitions shall apply: a. “Bondholders’ agent”: a
person who represents the group of Bondholders vis-à-
vis the issuer and third parties. b. “Financial Supervisory
Authority” or “Authority” is the Financial Supervisory
Authority, established in accordance with the Law “On Financial
Supervisory Authority”.
c. “Simple Bond Certificate”: a Bond certificate that
incorporates only one Bond.
ç. “Multiple Bond Certificate”: a Bond certificate that
incorporates more than one Bond.
d. “Bond Loan Program” is the program that contains the terms
and conditions for borrowing funds through Bond issuance
dh. “Account Provider”: a custodian within the meaning of the
Law on Securities, who has opened an account with the
Dematerialised Securities Registry and administers the Securities
at the bondholder’s order.
e. “Bond”: A bond is considered to be a long-term debt security
binding the issuer to pay the holder, on a determined date, the
nominal value and the interest, in one or more installments.
ë.. “Convertible Bond”: a Βond that is convertible into shares
or that confers on its holder pre-emption rights to purchase
shares.
f. “Participating Bond”: a Bond which confers on its holder the
additional right to receive dividends.
g. “Exchangeable Bond”: a Bond which confers on its holders the
additional right, by a statement, to request the issuer, in
fulfilling partly or wholly its obligations as to the payment of
the principal of the bonds, to transfer to them securities named in
the terms of the Bond loan contained in the Bond loan program.
gj. “Dematerialised Bond”: an electronic record of an account in
the computer system of the Dematerialised Securities Registry.
h. “Long-term debt security: A debt security with a maturity of
longer than twelve months
i. “Dematerialised Securities Registry”: a registry licensed by
the Albanian Financial Supervisory Authority, whose scope includes
the securities data organisation and administration, within the
meaning of the Law on Securities.
j. “Bondholder”: the holder of the Bond. In case of
Dematerialised Bonds, the person in whose name a dematerialised
securities account is opened with the Dematerialised Securities
Registry, in which account the Dematerialised Bond is recorded.
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Commentary Article 2 defines the types of bonds, which are
allowed to be issued. The Law provides for a definition of “Bond”
in line with Article 16 of the Law on Securities.6 In this way, it
is ensured that the Law is applicable to all types of bonds which
are described by the Law on Securities7. Furthermore, the types of
bonds described in Article 2 correspond to that found in the Law on
Securities.
Further, in order to provide the necessary flexibility for
future market developments, the Law provides for a special
authorization of the Albanian Financial Supervisory Authority to
extend the types of bonds which fall under the scope of the Law
(see Article 3, Paragraph 2, below).
Article 3 - Types and series of Bonds (1) Bonds shall be issued
in dematerialised form where offered through a
public offer. Bonds may be issued in paper form where offered
through private placement.
(2) In addition to the types of Bonds defined in the Law on
Securities, the Albanian Financial Supervisory Authority can
determine by regulation further types of Bonds which may be issued
and traded in the Republic of Albania.
(3) Bonds may be issued in several series. The nominal value of
the Bond can be different in each series.
(4) It is possible to issue Simple or Multiple Bond
Certificates.
Commentary Paragraph 1 The Law distinguishes between
dematerialized bonds and bonds in paper form. From a practical
standpoint, paper form bonds are useful where bonds are kept by few
persons and distributed to the bondholders through private
placement. In such cases, the need for operational efficiency
requires minimising the relevant transaction costs. By contrast,
where bonds are distributed to the public and are widely tradable,
dematerialisation is mandatory. This provision is in line with
Article 115 of the Law on Securities, which states that
“dematerialized securities may be issued only by a public offer”.
The Law on Securities
6 Art. 16 of the Law on Securities states that “A bond is
long-term debt security binding the issuer to pay the bond owner,
on a determined date, the nominal value and the interest of the
bond, in one or in more installments”. 7 Art. 18 of the Law on
Securities states that “Bonds may be classified: 1. By the method
of securing the rights: a) secured; b) unsecured. 2. By the method
of exercising the right on interests: a) zero-coupon bonds, which
are bonds that pay interest immediately; b) bonds with coupons,
which are bonds that pay interest in instalments. 3. By interest:
a) discountable bonds; b) fixed-interest bonds; c) bonds with
floating interest rates. 4. By the method of exercising the right
to redeeming the nominal value: a) bonds redeemable in one
installment; b) bonds redeemable in several instalments. 5. By the
method of exercising the right to redeeming the nominal value: a)
bonds redeemable before maturity date; b) bonds irredeemable before
maturity date. 6. By special rights: a) participating bonds, which
are bonds conferring their holders the right to also receive
dividends; b) bonds that are convertible to shares; c) convertible
bonds conferring their holders preemption rights to purchasing
shares.”
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defines dematerialised securities as “electronic records of a
security account in the computer system of the registry with which
its issuer shall undertake to fulfil the obligations towards the
owner contained in the security”.
Consequently, the Law enables the issuance of both
dematerialised and paper form bonds: the issuance of dematerialised
bonds is required in the case of public offers, whereas bonds in
paper form can only be issued in private placements.
It is important to differentiate between bonds offered through a
public offer and bonds offered through private placement according
to Article 27, Paragraph 3 of the Law on Securities. According to
this provision “Private offer of securities shall be the issuance
in which the offer to subscribe securities has been extended only
to institutional investors, issuer’s shareholders or employees and
up to 100 external investors, who address the issuer directly”.
Thus, the crucial point is the number and type of persons that are
addressed by the invitation to acquire recently issued bonds.
This provision is strongly linked to Article 35 of the Law,
which imposes the duty to list in the stock market bonds that are
offered through a public offer. Despite the fact that the Albanian
Stock Exchange remains inactive at the present time, this should
not hinder the listing of bonds, as there are relevant listing
procedures. The lack of a functioning trading system at the
Albanian Stock Exchange means practically that the transactions
over listed bonds must take place over the counter and/or by means
of a systematic internaliser8...
The differentiation based on the number of the invitation
recipients should not be considered merely with regard to the
initial stage of issuance and disposal of the titles. To avoid any
infringement of the provisions regarding bonds that are offered
through a public offer and to ensure that the actual and real
number of persons to whom the issuer refers to will be discernable,
Article 34, Paragraph 1 of the Law on Securities states that “If
securities are offered by a private offering of securities, the
issuer shall, in the securities issuance act, list the names of the
potential investors to whom he will send the invitation to
subscribe the securities as well as the form and the amount of
their investments.”
The number of bondholders is also of importance during
circulation of the bonds. If after the initial stage of issuance
and disposal of the bonds, the number of bondholders increases
beyond the triggering point for the application of the rules
governing public offers, the Albanian Financial Supervisory
Authority needs to make sure that the bonds are kept in a
dematerialised form.
It is worth noting that the Law on Securities requires issuance
of a prospectus both where bonds are to be publicly offered or
privately placed. Article 28 of the Law on Securities states that
“When the issuer issues securities in the Republic of Albania, it
shall publish a prospectus on the public offer for sale of
securities, or it shall submit a prospectus to the potential
investors”. Further, Article 32, Paragraph 1 of the Law on
Securities provides that “in the case of a private offering, the
issuer shall publish the prospectus (…) in the form of an
8 A Systematic Internaliser is an investment firm which, on an
organised, frequent and systematic basis, deals on own account by
executing client orders outside a Regulated Market or a
Multilateral Trading Facility.
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attachment to the invitation to subscribe the securities, which
is to be sent to the potential investors”.
Paragraph 2 Article 18 of the Law on Securities details the
types of bonds9 which are allowed to be issued in Albania, by
naming the characteristics, on the basis of which bonds could be
classified. According to Article 2(e) of the Law, bonds are long
term debt securities. Paragraph 2 of Article 3 enables the
Financial Supervisory Authority to extend the scope of the Law to
other types of bonds to introduce a certain flexibility regarding
the types of bonds to be issued by corporate and local government.
The types of bonds governed by the Law can thus be extended upon
regulation of the Albanian Financial Supervisory Authority.
Paragraph 3 Paragraph 3 provides that bonds can be issued in
more than one series, meaning that a joint-stock company or a local
government may issue more than one bond with a different nominal
value. Thus, for example, the nominal value of series A bonds and
series B bonds can be 10 lek and 20 lek, respectively.
Paragraph 4 Bonds can be issued in paper form or dematerialized.
In the case of bonds in paper form, the relevant certificates are
issued by the issuer once a bond issuance has been resolved by the
competent corporate body (see Article 47 of the Law) and the terms
thereof have been determined. The bond certificates incorporate the
bonds, which are the object of the corporate body’s decision and
constitute the title of ownership of the bond(s). Where the bonds
are issued in paper form, the bondholder will have physical
possession of the bond certificates in their paper form, whereas
where bonds are issued in dematerialized form, the bond
certificates will be directly registered with the bondholder’s
account at the Dematerialized Securities Registry (see Article 5,
below). The number of bond certificates to be received by each
bondholder is determined on the basis of the number of bonds
acquired and incorporated in each bond certificate (see below).
Simple bond certificates follow the principle of “one bond-one
certificate”. For example, for a bond issuance of 100,000 leks
divided into 1,000 bonds with a nominal value of 100 lek each,
1,000 simple certificates will be issued.
Multiple bond certificates can certify the ownership of more
than one bond. For example, for a bond issuance of 100,000 leks
divided into 1,000 bonds with a nominal value of 100 lek each, the
issuance of only 10 certificates is possible, each one having a
value of 10,000 lek. The issuance of multiple bond certificates
allows for greater flexibility regarding the keeping and
negotiating of bonds. The differentiation between simple and
multiple bond certificates does not have an impact on the number of
votes of the bondholders, as the latter are measured by the number
of owned bonds and not by the number of certificates incorporating
them.
9 See footnote 7, above.
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Commentary Commentary Paragraph 1 Paragraph 1 This provision
refers to the required minimum content of the bond certificate in
paper form and determines what this must include. These elements
are, inter alia, the name and seat of the issuer, the total amount
of the issue, the nominal value of the bond, relevant data about
the guarantor, the manner of bonds issuance and subscription, and
the purpose for which the bond issuance proceeds are used. It is
understood that the bond certificate in paper form should entail
all elements regarding the terms of the bond issuance which provide
to the bondholder the necessary information for the rights
incorporated in the bond certificate and make clear the rights
emanating from such certificate.
This provision refers to the required minimum content of the
bond certificate in paper form and determines what this must
include. These elements are, inter alia, the name and seat of the
issuer, the total amount of the issue, the nominal value of the
bond, relevant data about the guarantor, the manner of bonds
issuance and subscription, and the purpose for which the bond
issuance proceeds are used. It is understood that the bond
certificate in paper form should entail all elements regarding the
terms of the bond issuance which provide to the bondholder the
necessary information for the rights incorporated in the bond
certificate and make clear the rights emanating from such
certificate.
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Article 4 - Bonds in paper form (1) The content of the
certificate of Bonds in paper form must contain the
following elements: a. the name of the issuer, headquarter
address, registration number
at Center for Registration of Shares (QKR); b. The type,
guarantees if applicable, the place and time of the
Bonds’ issuance and its registration with QKR; c. the nominal
value of each Bond; ç. the total nominal value of the Bond loan; d.
the name of the bondholder; dh. the place, time and manner of
redemption; e. the signature of the legal representatives of the
issuer; ë. the data which is required for the determination of the
rights of
the bondholders-creditors and in particular the securities of
the loan, the conversion right or the right to participate in the
gains of the issuer;
f. the series number of the Bond; g. any interest units, if the
Bond is interest-baring as well as its
repayment terms; gj. any rights of the issuer for early
termination (redemption) of the
Bond; (2) The provisions of the Civil Code as well as of the Law
on Securities shall
apply to the transfer of Bonds in paper form. (3) The Financial
Supervisory Authority approves a limit for the total amount
of Bonds to be issued by the joint-stock company.
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Paragraph 2 Where the investor has physical possession of the
paper certificate of a bond, either in its own physical possession
or held in safe custody under his name, it shall enjoy all legal
rights provided by law with respect to the securities (“ownership”
or “property”. See Articles 149 and following, of the Albanian
Civil Code).
Paragraph 3 As already indicated above under the commentary of
Article 3, Paragraph 1, the differentiation between bonds in paper
form and dematerialised bonds depends on the number of people to
which such bonds are offered.
Furthermore, the size of the bond of the issuing entity
(especially corporate bonds) in connection with its own capital is
a factor linked to the company’s credibility and, hence, involves a
consideration of creditors’ protection.
In this respect, the Financial Supervisory Authority is
authorized to approve a limit of the amount of bonds to be issued
by the joint-stock company. This provision targets two issues:
a) In the case of issuance of a small number of bond
certificates, so that the number of bondholders does not exceed 100
persons, there is considered to be no public offer and thus no need
of intervention on behalf of the Albanian Financial Supervisory
Authority. However it is possible to circumvent the rules regarding
public offers, by splitting at a later stage the number of bonds
into certificates of lower nominal value in order to distribute
them to a larger number of investors. The Financial Supervisory
Authority is empowered through this provision to ensure the
continuous compliance with the criterion on the number of persons a
bond is offered to in order for there not to be a case of public
offer, and no circumvention thereof by a later split of the bond
certificates.
b) As to creditors’ protection, the Financial Supervisory
Authority is entitled to control the size of all bond issuances of
an entity in relation e.g., to its capitalization, to avoid bond
issuances which would seriously put in risk the credibility and
solvency of the issuer. As to dematerialized bonds, such protection
is implied in the prospectus issuance procedures, described in
Article 28 and following of the Law on Securities.10
10 Article 28 and following of the Law on Securities deal with
prospectus obligations.
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Commentary Commentary Paragraph 1 Paragraph 1 The regulation of
dematerialised bonds is in line with the Law on Securities
(Articles 1, 37, 73, 115 and following). By reference to the Law on
Securities, dematerialised bonds will be registered without serial
numbers (Article 117 of the Law on Securities) in relevant
dematerialised security accounts held in the Dematerialized
Securities Registry regulated by the Law on Securities (Articles 6,
115 and following and 123 of Law on Securities). According to
Article 2, section i), “Dematerialised Securities Registry” is a
registry held by a bank (see below) licensed by the Financial
Supervisory Authority, whose scope includes securities data
organisation and administration.
The regulation of dematerialised bonds is in line with the Law
on Securities (Articles 1, 37, 73, 115 and following). By reference
to the Law on Securities, dematerialised bonds will be registered
without serial numbers (Article 117 of the Law on Securities) in
relevant dematerialised security accounts held in the
Dematerialized Securities Registry regulated by the Law on
Securities (Articles 6, 115 and following and 123 of Law on
Securities). According to Article 2, section i), “Dematerialised
Securities Registry” is a registry held by a bank (see below)
licensed by the Financial Supervisory Authority, whose scope
includes securities data organisation and administration.
Paragraph 2 Paragraph 2 A. Abstract A. Abstract According to
Article 2, point dh) of the Law on Securities, the account provider
is a custodian/registrar who has opened an account with the
Dematerialised Securities Registry and administers the securities
at the bondholder’s order. In other words, securities are held and
settled through account providers. It follows that the protection
of bondholders rights as well as the ability to ensure the
continuity of the relationships between the issuer and the
investors (because the bondholder does not have a direct contact
with the issuer, only through the account provider) depend heavily
on the careful and diligent exercise of a number of duties by the
account provider.
According to Article 2, point dh) of the Law on Securities, the
account provider is a custodian/registrar who has opened an account
with the Dematerialised Securities Registry and administers the
securities at the bondholder’s order. In other words, securities
are held and settled through account providers. It follows that the
protection of bondholders rights as well as the ability to ensure
the continuity of the relationships between the issuer and the
investors (because the bondholder does not have a direct contact
with the issuer, only through the account provider) depend heavily
on the careful and diligent exercise of a number of duties by the
account provider.
The functions of a registrar, as account provider directly
linked with the issuer, typically include maintenance of the
securities register and handling of actions on behalf of the
issuer. The registrar is thus essentially a record keeper on behalf
of the issuer. The function of a
The functions of a registrar, as account provider directly
linked with the issuer, typically include maintenance of the
securities register and handling of actions on behalf of the
issuer. The registrar is thus essentially a record keeper on behalf
of the issuer. The function of a
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Article 5 - Dematerialised Bonds (1) Dematerialised Bonds shall
be recorded, in accordance with the provisions
of the Law on Securities, in a Dematerialised Securities
Registry chosen by the issuer. Dematerialised Bonds accounts shall
be held in accordance with the Law on Securities.
(2) The Account Provider shall be responsible for conducting the
entries, registrations of granting, operations and payment of the
Bond loan on behalf of the issuer.
(3) The assets which are to be used for the fulfilment of the
obligations arising from the Bond loans shall be transferred by the
Account Provider to the bondholders, immediately after their
collection from the issuer.
(4) The Dematerialised Securities Registry shall issue to the
bondholders keeping an account therewith, certificates and
confirmation for any change on the account.
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registrar is usually combined with that of a transfer agent,
whose role is to handle transfers on behalf of the issuer, by
recording the name of the transferee on the register of the issuer
replacing the name of the transferor (See Articles 122, 123 - 140
of the Law on Securities).
The recording of a bond into a securities account confers to the
account holder (see Article 73 of the Law on Securities11):
(a) the right to receive and exercise the rights attached to the
bond, including in particular dividends, other distributions and
voting rights; and
(b) the right, to instruct the account provider to dispose of
the bonds or any rights related to the bonds (i.e., to sell or
grant an interest, such as the establishment of collateral).
B. Diligence and Core Duties of the account providers In order
to define the diligence and core duties of the account provider, it
is worth examining relevant EU legislation, which is considered
among the most efficient, thorough and clear relevant legal
standards at the international level.
MiFID12 provides for organisational requirements and business
conduct rules of all entities entitled to provide investment
services and ancillary services. Account providing is included
among the ancillary services enumerated by MiFID (i.e.,
custodianship, safekeeping and administration of securities13).
According to Article 13, Paragraph 4 of the MiFID, account
providers should use appropriate and proportionate systems,
resources and procedures. Account providers also should apply sound
administrative and accounting procedures, internal control
mechanisms and effective control and safeguard arrangements for
information processing systems (See also Article 5 of the MiFID
Implementing Directive 2006/73)14. These behavioural and
organisational requirements are enumerated in the Law on
Securities, especially in Articles 72 and 73 thereof15. It should
be noted that Article 11, Paragraph 2 of the Law (see below)
empowers the Financial Supervisory Authority to issue regulations
determining the specific obligations of the account providers as to
the information to be provided to the bondholders in relation to
bonds that are traded over the counter. The regulations to be
issued by the Financial Supervisory Authority should take into
consideration the above-mentioned provisions. 11 Article 73 of the
Law on Securities governs the opening of dematerialised securities
accounts by custodians and the registrar. It further provides that
securities in a custodian account are the customer’s property and
shall not be included either in custodian’s property or its assets
if in liquidation, nor can they be seized as part of claims against
the custodian. The custodian shall be liable for all damages
suffered by its customer due to inadequate implementation of the
contract, including loss of profit. 12 Directive 2004/39/EC of the
European Parliament and of the Council of 21 April 2004 on markets
in financial instruments amending Council Directives 85/611/EEC and
93/6/EEC and Directive 2000/12/EC of the European Parliament and of
the Council and repealing Council Directive 93/22/EEC. 13
“Safekeeping and administration of financial instruments for the
account of clients, including custodianship and related services
such as cash/collateral management”. 14 Commission Directive
2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of
the European Parliament and of the Council as regards
organisational requirements and operating conditions for investment
firms and defined terms for the purposes of that Directive, L
241/26/2.9.2006 15 Article 72 of Law on Securities enumerates the
operations related to the custody of securities and provides that
security custody operations shall be performed by banks authorized
by the Financial Supervisory Authority to provide such services.
The same article provides for organisational requirements of
custodians, who must set up a special department for the security
custody activity within its structure. The Financial Supervisory
Authority is empowered to regulate the conditions for conducting
transactions related to the custody of securities and the template
contract of bringing securities under securities.
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13
In line with Article 72 of the Law on Securities, only banks are
entitled to provide custodian services and thus to be authorized as
account providers.
The Law of Securities enumerates a number of core duties of the
account providers:
a) Segregation: Segregation means the safekeeping of a
customer's securities in a separate location when the securities
have been paid for in full. Segregation is a mechanism to
distinguish clients' assets from the account provider’s assets and
thus to assist allocation of the segregated book-entry securities
to account holders. In such framework, in the event of insolvency
of the account provider this mechanism makes sure that customers’
assets are not part of the insolvency estate of the account
provider.
The segregation principle is provided in Article 69 of the Law
on Securities16 as to the funds of brokerage companies belonging to
their clients, in Articles 7317 and 76 as to dematerialised
securities held with a custodian and in Article 11218 as to
investment advisors.
According to this principle, a brokerage company shall keep any
funds remitted by customers in a separate account.
Thus, the customer’s money is not property of the brokerage
company and cannot be included in its assets nor can it be
confiscated under claims by third parties against the brokerage
company. This principle intends to protect investors against
insolvency of brokerage companies. Furthermore, customers’
positions need to be clearly recorded. According to Article 75 of
the Law on Securities, each custodian shall keep “special records
for each customer and securities in its custody and a custodial
book with data on all orders to purchase and sell securities”.
b) Account providers must act diligently in following the
instructions of the account holder (bondholder) or any other person
entitled to give instructions under the account agreement as well
as in the process of enabling bondholders to exercise their rights
accruing from the bonds, e.g., coupon collection, principal
collection, exercise of voting rights (Article 72 and Article 73
Paragraph 2 of the Law on Securities);
c) Account providers must act diligently in reporting to their
clients on bonds' accounts changes and holdings in a fair, clear
and not misleading manner.
16 Article 69 of the Law on Securities states: “The brokerage
company shall keep the funds remitted by customers for payments of
securities or the money from sale of securities in a separate
account or separate accounts that are organized as customer
accounts. Customer money is not property of the brokerage company.
These funds cannot be included in the assets of the brokerage
company, and cannot be confiscated as a result of claims by third
parties against the brokerage company. The money in the customer
account for the purchase of securities shall be used only as per
the customer’s orders. The brokerage company shall transfer the
proceeds from the sale of securities to the customer account”. 17
Article 73 of the Law on Securities states: “(…) Securities in a
custodian account are the customer’s property and shall not be
included either in custodian’s property or its assets if in
liquidation, nor can they be used for seizures related to claims
against the custodian. The custodian shall handle the customer’s
monetary accounts as per Article 76 of this Law. The custodian
shall be liable for all damages suffered by its customer due to
inadequate implementation of the contract, including loss of
profit”. 18 Article 112 of the Law on Securities states:
“Investment advisors that are not assigned to deposit custody shall
segregate their customers’ money in custody and related to
investment advisory services and that is kept to be used on behalf
of the advisor and for customer’s account from its monetary assets
and from the accounts of other customers. Before accepting trust
money, investment advisors shall notify the bank of the deposition
of monetary assets on the account of a third party”.
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Account providers are also required to obtain all necessary
information with regard to the client’s knowledge and experience
and give advice accordingly. If the client elects not to provide
such information, the account provider must warn the client that
doing so could adversely affect the advice provided thereto.
Account providers shall further keep records of all documents
agreed between the account provider and the client as well as other
terms and conditions. Such rules should be introduced by the
regulations to be issued according to Article 12, Paragraph 2 of
the Law (see below)
d) Finally, to safeguard the integrity of the holding system,
the principle “no credit without debit” must be applied by account
providers (see Article 36, Paragraph 3 of the Law). Bookings should
not be effected before all requirements for the acquisition of the
asset (or interest therein) have been fulfilled. Conceptually,
there must never be more bonds validly credited in the account
provider’s accounts than issued, unless the fungible pool of bonds
at the Registrar level is reduced.
Limitation of liability The requirement to act according to
professional diligence cannot be circumvented through contractual
clauses which unduly limit liability (See Article 73, Paragraph 5
of the Law on Securities19).
Finally, it should be noted that account providing is a private
service with terms that are, in principle, freely negotiable.
Therefore, Article 73 of the Law on Securities sets the framework
under which the above duties can be specified by the account
agreement.
Paragraph 3 Paragraph 3 refers to account providers’ duties
regarding the transferring of assets from the issuer to the
bondholder. These duties require the immediate fulfilment by the
account provider (as custodian of the bondholders), towards the
bondholders of any action made by the issuer concerning the bonds
that are in the hands of the account provider (e.g., payment of
interest coupon).
Due to the fact that payments made by the issuer are provided to
the bondholders via the account provider (see Article 7, Paragraph
2 of the Law), this provision clarifies that the account provider
is responsible for any monetary amount that it receives from the
issuer on behalf of the bondholder and has the duty to deliver such
amount to the bondholder immediately, upholding again the principle
of segregation.
Paragraph 4 To ensure the integrity and due operation of the
DSR’s records of each transaction (debit and credit) in the
accounts kept by the DSR, the Law requires that, when making a
debit or credit in the name of a bondholder in an account held with
the DSR, the DSR shall issue a confirmation to the bondholder and
create a record on the details of such debits or credits.
19 Article 76, Paragraph 5 of the Law on Securities states that
“The custodian shall be liable for all damages suffered by its
customer due to inadequate implementation of the contract,
including loss of profit.”
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International practices (such as in Germany, U.K., Greece,
U.S.A.) suggest that such confirmation should entail at least the
following elements:
a) Instrument identification; b) Debit / credit indicator; c)
Quantity of bonds which have been credited or debited; d) Reasoning
for such debit or credit; e) Counterparty; f) Date and time of the
transaction (see Article 126, Paragraph 1 of the Law on
Securities20)
Article 6 – Trading of Dematerialised Bonds The trading of
Dematerialised Bonds is effected in accordance with the Law on
Securities.
Commentary This provision basically refers to Chapter III of the
Law on Securities, entitled “Trading in Securities”, which, in
turn, refers to Article 10 of the Stock Exchange Regulation on the
Licensing and Supervision of the Securities Exchange adopted by
Financial Supervisory Authority Board Decision No.120 of
02.10.2008.21
This provision must also be read in conjunction with Article 36,
Paragraph 2 of the Law22, which grants account providers the
possibility to further engage in bond transactions over the counter
(outside the stock market). Account providers may undertake the
activity described in Article 42, Paragraph 2 of the Law on
Securities23 and perform bond transactions outside
20 Article 126, Paragraph 1 of the Law on Securities states that
“Subject to the securities it has received a license for, the
Registry shall provide the service of registering securities, by
organizing the method of keeping the register in such a way that it
shall ensure at any time full data on the security ownership and
limitations to ownership rights over them.” 21 According to Art.
10, “a securities exchange shall adopt Trading Rules, which shall
determine the following: a. conditions and manner of trading
securities on the securities exchange; b. types of transactions to
be executed on the securities exchange; c. order of trading in
securities and other financial instruments on the securities
exchange; d. method for determination and publication of prices; e.
trading days and trading hours, f. procedures for cancellation of
transactions; g. the organization the information system; 8 h.
amount of the fixed annual fee for using the securities exchange's
facilities, amount of trading fees and the methods of their
calculation; i. provisions intended to prevent and reveal any
market manipulation; j. conditions under which the securities
exchange may temporarily suspend or permanently halt trading in a
security in order to avoid manipulative illegal operations or to
protect the interest of investors and market; k. other issues
relevant to the operation of the securities exchange”. 2. The
Trading Rules of a securities exchange must provide for comparison
and confirmation of trades and transfer of information to the
registry and the clearing entity or unit that will facilitate the
clearance and settlement of all trades conducted through the
exchange no later than three business days following the
transaction date. 22 Article 36, Paragraph 2 of the Law on
Corporate and Local Government Bonds states “Listed Bonds may be
transferred over the counter, through an Account Provider, in
accordance with the provisions of the Law on Securities” 23 Article
42, Paragraph 2 of the Law on Securities states that “The following
shall be activities related to transactions with securities: (…) 2.
Purchase and sale of securities on one’s own behalf and for one’s
own account”.
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the stock market as long as they act in conformity with the
rules established by relevant Albanian legislation.
Article 7 - Granting of interests in Dematerialised Bonds (1)
Subject to Article 8, changes or entries to a securities account
are invalid
if the relevant intermediary is not authorized by the account
holder or Court decision to make that change or entry.
(2) All payments from the issuer to the bondholders deriving
from the Dematerialised Bond shall be fulfilled by the Account
Provider through the Dematerialised Securities Registry.
Commentary A. Background Articles 7 and 8 govern the
“acquisition” and “disposition” of bonds through securities
accounts. The notion of acquisition and disposition is used to
describe the entire set of possible changes of the legal situation
of book-entry securities standing to the credit of an account.
”Acquisition” means receiving dematerialised bonds (including every
additional right on them (collateral etc)). It refers equally to
both the acquisition of a bond and/or a lien and to any other
limited interest thereon. “Disposition” comprises both the creation
of a security (e.g., collateral / pledge) in favour of another
person and the disposition (e.g., by way of sale) of book-entry
securities.
“Disposal of security interests” or other limited interests
means to dispose of them (e.g., by way of sale). In this respect,
“security interests” comprise any lien and any other legal tool to
provide security, in particular to secure a credit (e.g., a
pledge)24.
As to the manner of acquiring ownership over bonds, according to
Article 118 of the Law on Securities “The ownership of and the
rights deriving from a dematerialized security are acquired through
its transfer from the transferor’s dematerialized securities
account to the transferee’s dematerialized securities account on
the basis of an agreement the purpose of which is the acquisition
of ownership, a court order, by inheritance and on the basis of the
law. The ownership of and the rights deriving from a dematerialized
security shall be acquired at the moment of its entry in the
dematerialized securities account of the acquirer or the person
who, being the custodian, keeps dematerialized securities for the
buyer’s account. The provisions of this Article shall also apply to
the termination of ownership.” This applies respectively to liens
on dematerialised securities, according to Article 119 of the Law
on Securities.25
24 Please refer to the Unidroit Geneva Securities Convention on
Substantive Rules regarding Intermediated Securities of October
2009 as well as to the Second Advice of the Legal Certainty Group
Solutions to Legal Barriers related to Post-Trading within the EU
(August 2008). 25 Article 119 of the Law on Securities states that
“Lien on dematerialized securities shall be acquired by the
appropriate entry of that right in the dematerialized securities
account on the basis of a valid agreement, court order or by law.
Only one lien may be established on a dematerialized security.
Out-of-court discharge of a
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B. Right to dispose of the securities or create an interest
therein The role of the account provider is of particular
importance for the integrity of the system and for investors’
protection as to any transfer of bonds between accounts because of
its responsibility to register credits and debits on bond
accounts.
Credits and debits to securities accounts are universally
recognised methods for the acquisition and disposal of
intermediated securities. This principle is implied in Article 118
of the Law on Securities.
The crediting and debiting of accounts held with account
providers causes changes in the rights incorporated in bonds.
Because of this, there are specific legal requirements which need
to be fulfilled to render the acquisition of securities or the
creation of a lien (security interest) legally effective (See
Article 119 of the Law on Securities).
From this point of view, the account provider is entitled to
make a book entry on a bond account, for such actions as disposal
of bonds or creation of a lien over the bonds like a pledge, only
following the account holder’s instructions.
Paragraph 1 Article 7, Paragraph 1 states the basic rule that an
account provider may make a debit to a securities account only if
it is authorized to do so. The purpose of Paragraph 1 is to protect
the rights of an account holder who has acquired dematerialised
bonds or a security interest (e.g., pledge) by the credit of bonds
to its securities account against an unauthorized debit made by the
relevant intermediary. Paragraph 1 outlines who may authorize the
account provider for a debit or credit to an account.
The term “authorized” should be interpreted broadly and includes
any consent, instruction, direction, request or ratification given
regardless of the wording or the form. In most cases, the
authorization of the account holder for the account provider to
make a debit to the bonds account will be implied in the
instruction of the account holder to sell its securities or to
transfer them to a securities account of another person or to
another securities account which is maintained for the account
holder by the account provider.
C. Consequences of unauthorized debits, etc. Article 7,
Paragraph 1 provides that, subject to Article 8, the consequence of
unauthorized debits or unauthorized removals of such entries is the
invalidation (i.e., void) of such entries.
secured claim by pledge shall be allowed on a dematerialized
security. The lien on a dematerialized security shall be terminated
upon its release.”
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Paragraph 2 As indicated above, there is no direct relationship
between the issuer and the bondholders with regard to payment
issues accruing from bonds. Those payments are made through the
account providers and the DSR. In particular, the issuer transfers
the money to the DSR, which credits it to the accounts of the
account providers, depending on how many bonds each party holds. As
stated in paragraphs 2 and 3 of Article 5, the account provider is
responsible for the due payment and the immediate transfer to the
beneficiary bondholders. The matters on the performance of payments
through the DSR are regulated in the Manual of Operation, which is
a booklet encompassing the set of rules of its operation.
The role of account providers is vital for the performance of
the rights and obligations that exist between an issuer and its
investors. Account holders need to know:
(a) that the bonds can be disposed of under a sales agreement or
used as an object of a security interest. (e.g., pledge (see
Paragraph 1, above));
(b) that they can enjoy the rights flowing from the bonds
(dividends, voting rights) which will be serviced and exercised
through the account provider.
Article 8 - Acquisition of Dematerialised Bonds in good faith
(1) Where Dematerialised Bonds are credited to an account at a time
when a
third party has an interest in the particular securities and its
holder is neither aware of nor does he negligently disregard the
third party’s interest therein and the credit would violate the
rights of that third party, with respect to that interest: a. the
account holder is not subject to the interest of the third party;
b. the account holder is not liable to the third party; and c. the
credit is neither invalid nor must be reversed on the ground
that the interest or rights of the third party invalidate any
previous debit or credit made to another securities account.
(2) Paragraph 1 also applies to the pledge over Dematerialised
Bonds.
Commentary A. Abstract Article 8 provides protection to good
faith acquirers of dematerialised bonds. It reflects the general
principle that once a person has acquired a right or interest over
intermediated securities against consideration and unless that
person has actual knowledge or ought to have knowledge of the
relevant interest or fact, no adverse claim can be asserted against
that person26.
26 See Article 18 (“Acquisition by an innocent person”) of the
Unidroit Geneva Securities Convention.
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19
Paragraph 1 protects the acquirer of bonds unless the latter
actually knows or ought to know that (i) a third party has an
interest in the securities or intermediated securities and (ii) the
acquisition violates the rights of that party. If those conditions
are met, the acquirer is “immunised”, i.e., (i) the acquirer’s
right or interest is not subject to the interest of the third
party; (ii) the acquirer is not liable to that party; and (iii) the
acquisition is not invalid or subject to reversal “on the ground
that the right or interest of that other person invalidate any
previous debit or credit made to another securities account”. The
acquirer bears the burden of proof that he was in good faith at the
time of acquisition, in case that the account holder from whose
account the bonds were transferred claims that the relevant account
provider proceeded to such debit without the account holder’s
authorisation.
The protection of Paragraph 1 is only valid if the acquirer has
no knowledge or ought not to have known of an earlier defective
entry.
B. Prerequisites for protection - determining whether a person
ought to know of an interest or fact An account holder is not
protected if it knew or ought to have known that the dematerialised
bonds should not have been credited to its account.
The “ought to have known” element is to be applied in the light
of the unique circumstances applicable to dematerialized bonds.
Events such as a reversal of orders are usually associated to a
previous error at the level of the account provider.
The “ought to have known” standard imposes on a purchaser no
general duty of inquiry or investigation. In most trades, it would
be impossible for the purchaser to discover conflicting claims or
defective entries, because the purchaser relies entirely on the
account provider. It follows that requiring a purchaser to somehow
undertake due diligence by way of inquiry or investigation would
undermine the very efficiencies that account providers are intended
to provide.
However, the “ought to have known” standard does not protect a
person who fails to observe appropriate standards of honest
behaviour. Indeed, the “ought to have known” standard is expressly
designed to hold a dishonest person responsible for any interest or
fact of which an honest person would have actually known. For
instance, if a person knows of very suspicious circumstances (e.g.
that , and consciously decides not to make any inquiry, and that
decision is made in such a manner as to intentionally avoid
obtaining actual knowledge of a fact, then it is considered that
this person “ought to know” of that fact. However, due to the
nature of transactions in dematerialized bonds, this standard will
rarely apply outside of an acquirer’s actual collusion with a
wrongdoer, or in highly suspicious circumstances when the
acquirer’s knowledge falls just short of “actual knowledge”.
The question arises whether the knowledge of the account
provider could be attributed to an acquirer of dematerialised
bonds. However, this cannot be the case since the attribution of
knowledge of the account provider would result in a
non-controllable widening of the horizon of the acquirer. The
latter would never have certainty as regards the range of its
knowledge affecting the acquisition. This becomes even clearer by
the fact that one of the principal
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20
reasons for a book entry to be reversed consists of erroneous or
even fraudulent book entries made by the account provider.
Attributing the account provider’s knowledge to the acquirer would
cancel the meaning of the rule in these cases. However, there need
to be obvious exceptions to this rule, in particular in case of
collusion between the account provider and the acquirer.
Article 9 - Special issues (1) Bearer Bonds which are payable
upon delivery shall not be issued for an
indefinite term. (2) With the exception of the provisions on
Dematerialised Bonds of this
Chapter One, the issuer shall issue and deliver the Bond
certificates to the Bondholders. If Multiple Bond Certificates have
been issued, upon application of a Bondholder, the issuer shall
replace the existing certificates with new ones, incorporating a
smaller number of Bonds.
(3) Until the issuance of permanent Bond certificates, the
issuer may issue temporary Bond certificates.
Commentary Paragraph 1 The provision derives from the principle
that the issuer and debtor of a bearer title is obliged to fulfil
his payment obligations accruing from such title only if it has
been delivered thereto. This principle is established in Article
42, Paragraph 1 of the Law (see below).
A bond containing a promise of payment of a certain amount, if
it is of uncertain duration (i.e., perpetual bonds), entails
especially high risks for its payees, because repayment of the bond
is strongly linked to the solvency and creditworthiness of the
issuer for the fulfilment of its obligations accruing from the
title at stake within an undetermined period of time. Thus, and
given the possibility of transfer of such titles (see Article 36,
Paragraph 1 of the Law, in combination with Article 87 of the Law
on Securities concerning the listed ones) investors with no
particular knowledge of the market risk being misled by insolvent
enterprises.
Dematerialised bonds, to the extent that they are offered
through a public offer (Article 35, Paragraph 2 of the Law, in
combination with Article 28 and following of the Law on Securities)
are issued after an audit and approval of the prospectus by the
Financial Supervisory Authority (Article 30 of the Law on
Securities). It should be stressed that according to Article 28 of
the Law on Securities and in conformity with the Prospectus
Directive27, the issuer of securities offered to the public shall
publish a prospectus on the public offer for sale of securities, or
it shall submit a prospectus to the potential investors.
27 Directive 2003/71/EC of the European Parliament and of the
Council of 4 November 2003 on the prospectus to be published when
securities are offered to the public or admitted to trading and
amending Directive 2001/34/EC, L 345/64/31.12.2003
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21
The protection of investors is further enhanced because the
disposal of dematerialised titles, on the secondary market takes
place via licensed account providers (i.e., banks).28
The existence of a certain procedure for transfers of registered
bonds, through account providers, significantly diminishes the risk
of a wide and uncontrolled circulation of bond titles of
undetermined duration. Therefore, Paragraph 1 only applies to
bearer bonds.
Paragraph 2 Bonds are commercial paper. When issued in a paper
form, the exercise of the rights contained therein – depending on
their form: bearer or registered/nominal – is contingent upon
possession of the certificate. For instance, the transfer of a
bearer bond requires transfer of title. Hence, Paragraph 2 imposes
the obligation on the issuer of paper bonds to issue the
certificates of such bonds and to submit these certificates to the
bondholders. Furthermore, in order to facilitate circulation of
bonds, and taking into consideration the fact that it is possible
to issue multiple bond certificates, this provision requires
issuers to supply holders of multiple bond certificates with new
certificates incorporating a smaller number of bonds upon request.
This provision is to promote circulation and transferability of the
bonds by the bondholder. Bonds in paper form are not intended for a
broad and continuous circulation among a large number of investors.
To minimise costs for the investor and maximise security of the
bonds, the issuer may issue a limited number of multiple bond
certificates. However, the limited number of multiple bond
certificates must not diminish the principle of free circulation of
commercial paper and the possibility of the bondholder to transfer
his securities. The issuer is obliged to substitute multiple bond
certificates with new ones incorporating a smaller number of bonds,
upon request of the bondholder in order to facilitate him to
exercise any rights accruing from such bonds.
Paragraph 3 This provision makes it clear that where the issuer
delays issuance of permanent bond certificates for any reason, it
may issue and submit temporary certificates to the bondholders
until the issuance of the permanent bond certificates, which will
then replace the temporary certificates.
28 See Article 72 of the Law on Securities ensures protection of
the investor.
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CHAPTER TWO: ACCOUNT PROVIDERS CHAPTER TWO: ACCOUNT
PROVIDERS
Commentary Commentary A. Abstract A. Abstract Safe and efficient
finalisation of the transactions on corporate and local government
bonds is a necessary feature of the institutionalisation of the
bond market in Albania. Trading on bonds without satisfactory
clearing and settlement of the relevant transactions has no meaning
or substance. The bond market cannot function efficiently if
efficient post-trading services are not available.
Safe and efficient finalisation of the transactions on corporate
and local government bonds is a necessary feature of the
institutionalisation of the bond market in Albania. Trading on
bonds without satisfactory clearing and settlement of the relevant
transactions has no meaning or substance. The bond market cannot
function efficiently if efficient post-trading services are not
available.
In modern indirect securities holding and transfer systems,
account providers have a central position in the whole holding
pattern because book entry securities’ accounts are necessarily
held with them.
In modern indirect securities holding and transfer systems,
account providers have a central position in the whole holding
pattern because book entry securities’ accounts are necessarily
held with them.
The explanations under Article 5, Paragraph 2 introduce the
central role of account providers in holding securities: they
maintain the accounts and are a natural part of any transaction
with respect to those accounts. Furthermore, the assistance of
account providers is vital to the performance of changes in the
rights on the bonds (i.e., the settlement of transactions on
bonds).
The explanations under Article 5, Paragraph 2 introduce the
central role of account providers in holding securities: they
maintain the accounts and are a natural part of any transaction
with respect to those accounts. Furthermore, the assistance of
account providers is vital to the performance of changes in the
rights on the bonds (i.e., the settlement of transactions on
bonds).
Account providers must effectively safeguard clients' book-entry
securities (see Article 73 of the Law on Securities). This duty
comprises the proper handling of transactions, including correct
debiting and crediting of securities accounts.
Account providers must effectively safeguard clients' book-entry
securities (see Article 73 of the Law on Securities). This duty
comprises the proper handling of transactions, including correct
debiting and crediting of securities accounts.
For bonds in paper form, settlement is considered to be the
physical delivery of such securities to the possession of the
acquirer or its representative, e.g., a bank. For dematerialised
bonds, settlement is accomplished through debits and credits to the
appropriate securities accounts.
For bonds in paper form, settlement is considered to be the
physical delivery of such securities to the possession of the
acquirer or its representative, e.g., a bank. For dematerialised
bonds, settlement is accomplished through debits and credits to the
appropriate securities accounts.
Efficient transfer of securities amongst account providers or
between client accounts of the same account provider is a
prerequisite for the smooth functioning of the whole capital
market. Account providers perform in a wide range of different
services when it comes to the settlement of transactions. Hence,
the sound and efficient functioning of account providers in this
respect is of systemic importance for the financial system.
Efficient transfer of securities amongst account providers or
between client accounts of the same account provider is a
prerequisite for the smooth functioning of the whole capital
market. Account providers perform in a wide range of different
services when it comes to the settlement of transactions. Hence,
the sound and efficient functioning of account providers in this
respect is of systemic importance for the financial system.
22
Article 10 - Activities of the Account Provider Pursuant to the
Law on Securities, the Account Provider shall be responsible for
clearing and settlement of transactions of securities held in its
accounts.
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23
B. Meaning of clearing and settlement B. Meaning of clearing and
settlement According to Article 120 of the Law on Securities,
“Transfer of the ownership of a dematerialized security on the
basis of a transaction concluded on a stock exchange is performed
by clearing and settlement”.
According to Article 120 of the Law on Securities, “Transfer of
the ownership of a dematerialized security on the basis of a
transaction concluded on a stock exchange is performed by clearing
and settlement”.
A securities settlement system is any entity and structure that
offers settlement services. Because securities are held with
account providers, settlement of securities must go through them.
Security settlement systems – and thus account providers – can
operate in direct relation with the issuer or not. In Albania they
operate through the DSR.
A securities settlement system is any entity and structure that
offers settlement services. Because securities are held with
account providers, settlement of securities must go through them.
Security settlement systems – and thus account providers – can
operate in direct relation with the issuer or not. In Albania they
operate through the DSR.
‘Clearing’ is the process of transmitting, reconciling and
confirming instructions aiming at a disposition of securities.
Article 120 of the Law on Securities provides the following
definition: “Clearing is the comparing of information on a
completed legal transaction, on the dematerialized securities, on
the determination of the payment deadline and the calculation of
the charge to be paid”.
‘Clearing’ is the process of transmitting, reconciling and
confirming instructions aiming at a disposition of securities.
Article 120 of the Law on Securities provides the following
definition: “Clearing is the comparing of information on a
completed legal transaction, on the dematerialized securities, on
the determination of the payment deadline and the calculation of
the charge to be paid”.
‘Settlement’ is an act which discharges the obligations arising
from the agreement of the parties and possibly established and/or
confirmed during clearing. Settlement comprises those acts that
ultimately entail disposition of securities on one hand and
acquisition on the other. Article 120 of the Law on Securities
provides the following definition of Settlement: “Settlement is the
process of intermediation and supervision of payments and of the
security transfer, which is linked with the legal transaction”.
‘Settlement’ is an act which discharges the obligations arising
from the agreement of the parties and possibly established and/or
confirmed during clearing. Settlement comprises those acts that
ultimately entail disposition of securities on one hand and
acquisition on the other. Article 120 of the Law on Securities
provides the following definition of Settlement: “Settlement is the
process of intermediation and supervision of payments and of the
security transfer, which is linked with the legal transaction”.
According to Article 120 of the Law on Securities “Acquisition
and termination of ownership and other rights of a dematerialized
security on the basis of valid transactions concluded outside the
stock exchange, on the basis of a court order, by inheritance and
by law are performed by appropriate entries in electronic records
in the re-booking procedure”.
According to Article 120 of the Law on Securities “Acquisition
and termination of ownership and other rights of a dematerialized
security on the basis of valid transactions concluded outside the
stock exchange, on the basis of a court order, by inheritance and
by law are performed by appropriate entries in electronic records
in the re-booking procedure”.
Commentary Commentary Paragraph 1 Paragraph 1 Account providers
must operate on the basis of an authorization granted by the
Financial Supervisory Authority. Such decision aims to protect
account holders as well as the integrity of the financial system.
Clients (account holders) need effective protection against the
loss of their holdings.
Account providers must operate on the basis of an authorization
granted by the Financial Supervisory Authority. Such decision aims
to protect account holders as well as the integrity of the
financial system. Clients (account holders) need effective
protection against the loss of their holdings.
23
Article 11 - Granting of an operation authorization to the
Account Providers (1) The exercise of the activity of an Account
Provider must be authorized by
the Albanian Financial Supervisory Authority, in accordance with
any applicable law.
(2) The Albanian Financial Supervisory Authority can issue a
regulation specifying terms, conditions, and procedures for
licensing of custodians and, further, Account Providers.
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Article 43 of the Law on Securities provides that “Transactions
with securities as a business activity, with the exception of
security custody, may be performed exclusively by brokerage
companies or banks that have been licensed by the Authority to
conduct such transactions and have included such transactions in
their objects clause”.
The Law extends the authorization obligation to account
providers in conformity with Articles 123 and following of the Law
on Securities. The account provider keeps record of the
dematerialised securities according to Article 115 of the Law on
Securities.29
In that sense, an account provider holds bonds accounts with a
registrar, as defined in Articles 123 and following of the Law on
Securities.
The objective of Paragraph 1 is to increase the security and
soundness of holding bonds via account providers by putting the
account provider's activity under the scrutiny of the Financial
Supervisory Authority. This is equally reflected in the European
legislation and in particular in the rules introduced by the MiFID
with regard to licensing of investment services. As already
mentioned, account providing is an "Ancillary Service" under Annex
I, Section B of the MiFID.
The provision of ancillary services does not itself require
authorization unless such services are provided by an investment
firm, in which case the rules of the MiFID are applicable (cf.
Articles 5(I) and 6(1) of the MiFID). As such, account provider
falls within the scope of the MiFID and must obey its rules
regarding its organization and investors’ protection.
The idea that the activity of account providing should be made
subject to authorization and regulation by a competent authority
has been adopted by the Unidroit Geneva Securities Convention, in
the preamble of which “the importance of the role of intermediaries
in the application of this Convention and the need of Contracting
States to regulate, supervise or oversee their activities” is
stressed (the terms “intermediary” and “account provider” should be
understood as synonyms).
Paragraph 2 The Financial Supervisory Authority shall ensure
through the Regulation to be issued that only banks will be allowed
to act as account providers (Article 123 of the Law on Securities)
and that they comply with a set of specific requirements.
International practice (such as in U.K. and Germany) suggests
that the following issues should be considered:
a) The applicant shall maintain and operate effective
organisational and administrative arrangements with a view of
executing such activity. In this regard, the active involvement of
the account provider as a record keeper who handles accounts and as
a market maker is vital. In this respect, the applicant shall have
sound administrative and accounting procedures, internal control
mechanisms, effective procedures for risk assessment and effective
control and safeguard arrangements for information
29 Article 115 states that “Dematerialised securities shall be
the electronic records of a security account in the computer system
of the registrar with which its issuer shall undertake to fulfill
the obligations toward the owner contained in the security.”
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25
processing systems. It is necessary for the account provider to
make adequate arrangements so as to safeguard clients' ownership
rights, especially in the event of the brokerage company’s
insolvency and to prevent the use of a client's instruments on own
account.
processing systems. It is necessary for the account provider to
make adequate arrangements so as to safeguard clients' ownership
rights, especially in the event of the brokerage company’s
insolvency and to prevent the use of a client's instruments on own
account.
b) The applicant shall keep records of the relevant services and
transactions undertaken by it in order to enable the Financial
Supervisory Authority to monitor compliance with the requirements
under the applicable legislation.
b) The applicant shall keep records of the relevant services and
transactions undertaken by it in order to enable the Financial
Supervisory Authority to monitor compliance with the requirements
under the applicable legislation.
c) The applicant shall establish adequate policies and
procedures sufficient to ensure compliance of the firm including
its managers and employees with its obligations under the Law and
the Financial Supervisory Authority regulations.
c) The applicant shall establish adequate policies and
procedures sufficient to ensure compliance of the firm including
its managers and employees with its obligations under the Law and
the Financial Supervisory Authority regulations.
d) The applicant shall also dispose of persons having the
required knowledge and expertise in order to perform that work.
d) The applicant shall also dispose of persons having the
required knowledge and expertise in order to perform that work.
Commentary Commentary Paragraph 1 Paragraph 1 The provision of
Paragraph 1 is linked to Article 75 of the Law on Securities and
the custodian’s duty to inform investors. The principle of
Paragraph 1 also corresponds to the duties provided by Article 19
of the MiFID and Article 33 of the European Commission Directive
2006/73 implementing the MiFID. According to EU law, appropriate
information shall be provided in a comprehensible form to clients
or potential clients about the subject of the transaction, the
method under which such transaction will be effected, the
settlement time and the price at which they will acquire or dispose
of the bonds. Such information should include any costs and
associated charges, so that the clients are reasonably able to
understand the nature and risks of the transaction. In this
respect, a general description of the nature and risks of bonds is
required, taking into account the client's knowledge and
experience. The description must explain the nature of bonds as
financial instrument, as well as the risks particular to that
specific type of instrument in sufficient detail to enable the
client to take investment decisions on an informed basis.
The provision of Paragraph 1 is linked to Article 75 of the Law
on Securities and the custodian’s duty to inform investors. The
principle of Paragraph 1 also corresponds to the duties provided by
Article 19 of the MiFID and Article 33 of the European Commission
Directive 2006/73 implementing the MiFID. According to EU law,
appropriate information shall be provided in a comprehensible form
to clients or potential clients about the subject of the
transaction, the method under which such transaction will be
effected, the settlement time and the price at which they will
acquire or dispose of the bonds. Such information should include
any costs and associated charges, so that the clients are
reasonably able to understand the nature and risks of the
transaction. In this respect, a general description of the nature
and risks of bonds is required, taking into account the client's
knowledge and experience. The description must explain the nature
of bonds as financial instrument, as well as the risks particular
to that specific type of instrument in sufficient detail to enable
the client to take investment decisions on an informed basis.
25
Article 12 - Informing the account holders (1) The Account
Provider shall inform in writing and prior to the transaction
the Bondholders trading over the counter Dematerialised Bonds of
the Bonds’ sale and purchase prices. In particular, the notice
shall specify any commissions, fees, charges, the spread between
the sale and purchase prices on the particular transaction, as well
as to the fluctuation range of the price of the particular Bonds
the immediately preceding working day.
(2) The Albanian Financial Supervisory Authority may issue a
regulation determining the specific obligations of the Account
Providers as to the information to be provided to the Bondholders
in relation to Bonds that are traded over the counter.
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26
Furthermore, the client should be informed about the total price
to be paid by him in connection with the transaction, including all
related fees, commissions, charges and expenses, and all taxes
payable via the account provider or, if an exact price cannot be
indicated, the basis for the calculation of the total price so that
the client can verify it.
All this information should be given in a timely manner, before
the client or potential client is bound by any agreement for the
provision of services by the account provider (see Article 29 of
the European Commission Directive 2006/73/EC).
Paragraph 2 The Regulation which will be issued by the Financial
Supervisory Authority will focus on how account providers acting as
market makers will on an organised, frequent and systematic basis,
deal on own account by executing client orders through bilateral
transactions.
In line with international practices (list few), it is suggested
that account Providers should be obliged to publish public firm
quotes to which their clients should have access. Such an
obligation would be applicable for sizes up to a specific amount.
Account providers may decide the size or sizes at which they will
quote, respecting the general limits which will be set up by the
regulation. For a particular bond, each quote shall include a firm
bid and offer price or prices for a size or sizes. The price or
prices shall also reflect the prevailing market conditions for that
bond. Account providers shall make public their quotes on a regular
and continuous basis during normal trading hours. They shall be
entitled to update their quotes at any time. They shall also be
allowed, under exceptional market conditions, to withdraw their
quotes. The quote shall be made public in a manner which is easily
accessible to other market participants on a reasonable commercial
basis.
In the spirit of the MiFID provisions for systematic
internalisers, account providers should execute the orders they
receive from their clients in relation to the bonds for which they
are market makers at the quoted prices at the time of reception of
the order. However, they may execute those orders at a better price
in justified cases provided that this price falls within a public
range close to market conditions and provided that the orders are
of a size larger than the size customarily undertaken by a retail
investor. In that framework, it is suggested that the Financial
Supervisory Authority should check:
(a) that account providers regularly update published bid and/or
offer prices and maintain prices which reflect the prevailing
market conditions;
(b) that account providers comply with the conditions for price
improvement laid down in the regulation.
Account providers shall be allowed to establish, on the basis of
their commercial policy and in an objective non-discriminatory way,
clear standards for governing access to their quotes. They may
refuse to enter into or discontinue business relationships with
investors on the basis of commercial considerations such as the
investor credit status, the counterparty risk and the final
settlement of the transaction.
To limit the risk of being exposed to multiple transactions from
the same client, account providers will be allowed to limit in a
non-discriminatory way the number of transactions from the same
client which they undertake to enter at the published conditions.
They shall
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27
also be allowed, in a non-discriminatory way to limit the total
number of transactions from different clients at the same time
provided that this is allowable only where the number and/or volume
of orders sought by clients considerably exceeds the norm.
also be allowed, in a non-discriminatory way to limit the total
number of transactions from different clients at the same time
provided that this is allowable only where the number and/or volume
of orders sought by clients considerably exceeds the norm.
Finally, account providers should be obliged by the Regulation
to describe to their clients, prior to the transaction: Finally,
account providers should be obliged by the Regulation to describe
to their clients, prior to the transaction:
(a) the risks associated with bonds as financial instruments
including an explanation of leverage and its effects and the risk
of losing the entire investment;
(a) the risks associated with bonds as financial instruments
including an explanation of leverage and its effects and the risk
of losing the entire investment;
(b) the volatility of the price of bonds and any limitations on
the available market for bonds;
(b) the volatility of the price of bonds and any limitations on
the available market for bonds;
Commentary Commentary Paragraphs 1 and 2 Paragraphs 1 and 2
Given that account providers are banks, authorized by the Financial
Supervisory Authority to exercise their this activity, it is
natural and correct that the Financial Supervisory Authority
monitors whether the account providers perform their work and
activities according to the provisions of the Law. It is also
appropriate that the Financial Supervisory Authority is further
empowered to revoke the respective license to perform the relevant
activity if an account provider no longer meets the required
conditions for the granting of such license. This provision is
similar to Article 57, Paragraph 17 of the Law on S
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