This content is from: Local Insights


The Securities Settlement System Reform Law will come into effect in Japan in early January 2003. The object of the law is to provide a uniform, safe and efficient book-entry settlement system for certain corporate, government, municipal and foreign bonds, commercial paper and beneficial interests. Shares, warrants and convertible bonds are outside the scope of the new system. A unified settlement system for all securities remains a goal for the future.

The settlement structure will be multi-layered. Transfer institutions will consist of top-tier clearing houses, and lower-tier securities companies and financial institutions acting as account-keeping institutions.

The new system is voluntary. Issuers may choose whether to use the new system, usually at the time of each offering of securities.

Dematerialization (paperless securities)

In the new system, in general, issuers will no longer be required to issue certificates but to notify clearing houses, which will credit issued securities to investors' accounts and notify necessary lower account-keeping institutions, and such account-keeping institutions will respectively do so. Transferors will be required to notify transfer institutions, which will debit and credit the relevant investors' accounts with transferred securities. The person of record of such accounts will be presumed to be the valid owner. Transfers of securities will only be effective when recorded on the transferees' accounts at the transfer institutions. Investors will notify transfer institutions of any redemption and the institutions will debit redeemed securities from the investors' accounts. If a transfer institution wrongly credits an investor's account, the relevant transfer institutions would have no claim against a bona fide purchaser for value who acquires such securities from the transferring investor.

Investors protection trust

Under the law, clearing houses will be required to enter into trust agreements in order to compensate investors for loss or damage incurred, up to a certain amount, in the event a certain transfer institution becomes insolvent before satisfying its obligations with respect to incorrect account records. Account-keeping institutions will be required to make certain contributions to an investors' protection trust fund. Investors' protection trust legislation does not apply to institutional investors.

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