1. 1 UNIDROIT Draft Convention - Introduction, basic structure, and perspective from ACG, etc - 4 July 2009 Hideki Tomita Japan Securities Depository Center, Inc. Notice ： Some of the slides in this presentation are cited from Prof. Kanda’s ones of CSD10th Conference held in Budapest, May 2009, and JASDEC has received an approval from him for using the slides only for the ACG cross Training Seminar held in July 2009. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

2. 2 What is the UNIDROIT? The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization with its seat in Rome. Its purpose is to study needs and methods for modernizing, harmonizing and co-ordinating private and, in particular, commercial law as between States and groups of States. Set up in 1926 as an auxiliary organ of the League of Nations, the Institute was, following the demise of the League, re-established in 1940 on the basis of a multilateral agreement, the UNIDROIT Statute. Membership of UNIDROIT is restricted to States acceding to the UNIDROIT Statute. UNIDROIT's 61 member States are drawn from the five continents and represent a variety of different legal, economic and political systems as well as different cultural backgrounds. * UNIDROIT URL: http://www.unidroit.org/english/home.htmhttp://www.unidroit.org/english/home.htm Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

3. 3 Status of the Project on "Draft Convention on Substantive Rules regarding Intermediated Securities" In 2002-2004, the Study Group met five times. In November 2004, "Preliminary Draft Convention" was released. In May 2005, March 2006, November 2006, and May 2007, the "Committee of Governmental Experts" met four times. In September 2008, the first session of the "Diplomatic Conference" was held, and "Draft Convention" was prepared. In October 2009, the second session of the Diplomatic Conference is expected to be held. * In 2004. JASDEC took part in the study group. * In the boldface letters, JASDEC took part (or will take part) in the conference as one of the members of ACG. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

4. 4 Purpose and Scope Purpose is to enhance legal certainty and promote finance in international settings. Scope is (i) for the post-trade stage, namely, the clearing and settlement stage, (ii) the effort to harmonize property law rules (regarding transfers and pledges [collateral transactions]), NOT company law rules, and (iii) about intermediated securities [book-entry securities]. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

5. 5 Preface of the convention The states signatory to this convention, Conscious of the growth and development of global capital markets and recognizing the benefits of holding securities, interests in securities, through intermediaries in increasing the liquidity of modern securities markets. Recognizing the need to protect persons that acquire or otherwise hold such intermediated securities. Aware of the importance of reducing legal risk, systemic risk and associated costs in relation to domestic and cross-border transactions involving intermediated securities so as to facilitate the flow of capital and access to capital markets. Mindful of the need to enhance the international compatibility of legal systems as well as the soundness of domestic and international rules relating to intermediated securities. Desiring to establish a common legal framework for the holding and disposition of intermediated securities. Believing that a functional approach in the formulation of rules to accommodate the various legal traditions involved would best serve the purposes of this convention. Having due regard for non-Convention law in matters not determined by the convention. Recognizing that this Convention does not limit or otherwise affect the powers of Contracting States to regulate, supervise, or oversee the holding and disposition of intermediated securities or any other matters expressly covered by the Convention, except in so far as such regulations, supervision or oversight would contravene the provisions of this Convention. Having agreed upon the following provisions; - each provision - Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

6. 6 A Functional Approach H armonizing the results, not how (by what legal doctrines) to reach such results. Internal Soundness (workability): –Any system must operate properly as such, in response to intermediated holding situations. Compatibility (connectibility): –Even if one system as such is "workable," two [or more] different systems must operate properly where two [or more] systems are combined in international transactions. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

7. 7 The UNIDROIT Text of the Draft Convention CHAPTER I. DEFINITIONS, SCOPE OF APPLICATION AND INTERPRETATION Article 1: DefinitionsArticle 2: Sphere of application Article 3: Principles of interpretationArticle 4: Central bank and regulated intermediaries Article 5: Excluded functionsArticle 6: Performance of functions of intermediaries by other persons Article 7: Effects of insolvencyArticle 8: Relationship with issuers CHAPTER II. RIGHTS OF THE ACCOUNT HOLDER Article 9: Intermediated securitiesArticle 10: Measures to enable account holders to receive and exercise rights CHAPTER III. TRANSFER OF INTERMEDIATED SECURITIES Article 11: Acquisition and disposition by debit and creditArticle 12: Acquisition and disposition by other methods Article 13: Acquisition and disposition under non-Convention lawArticle 14: Effectiveness in insolvency Article 15: Unauthorised debits or designating entriesArticle 16: Invalidity, reversal and conditions Article 17: Terms used in Chapter IIIArticle 18: Acquisition by an innocent person Article 19: Priority among competing interestsArticle 20: Priority of interests granted by an intermediary CHAPTER IV. INTEGRITY OF THE INTERMEDIATED HOLDING SYSTEM Article 21: Effectiveness in the insolvency of the relevant intermediaryArticle 22: Prohibition of upper-tier attachment Article 23: Instructions to the intermediaryArticle 24: Holding or availability of sufficient securities Article 25: Allocation of securities to account holders’ rightsArticle 26: Loss sharing in case of insolvency of the intermediary Article 27: Insolvency of system operator or participantArticle 28: Obligations and liability of intermediaries Article 29: Position of issuers of securitiesArticle 30: Set-off CHAPTER V. SPECIAL PROVISIONS WITH RESPECT TO COLLATERAL TRANSACTIONS Article 31: Scope of application and definitions in Chapter VArticle 32: Recognition of title transfer collateral agreements Article 33: EnforcementArticle 34: Right to use collateral securities Article 35: Requirements of non-Convention law relating to enforcementArticle 36: Top-up or substitution of collateral Article 37: Certain insolvency provisions disappliedArticle 38: Declarations in respect of Chapter V CHAPTER VI. TRANSITIONAL PROVISION Article 39: Priority CHAPTER VII. FINAL PROVISIONS [omitted] Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

8. 8 CSD Intermediary X customer Acustomer Bcustomer C The Structure of the Text Issuer Chapter III Chapter IV Chapter II Chapter IV Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

9. 9 Examples of the Draft Provisions Basic structures regarding securities settlement and clearing systems are ruled. 1. The credit of securities to a securities account confers on the account holder: a right to receive and exercise any rights attached to the securities, including in particular dividends, other distributions and voting rights; 1. An intermediary must take appropriate measures to enable its account holders to receive and exercise the rights specified in Article 9(1) 1. Subject to Article 16, intermediated securities are acquired by an account holder by the credit of securities to that account holder’s securities account. 1. Unless an acquirer actually knows or ought to know, at the relevant time, that another person has an interest in securities or intermediated securities and that the credit to the securities account of the acquirer or the interest granted to the acquire violates the rights of that other person with respect to the interest of that other person; the acquirer is not subject to the interest of that other person. 1. An intermediary must, for each description of securities, hold or have available for the benefit of its account holders, other than itself, securities and intermediated securities of an aggregate number or amount equal to the aggregate number or amount of securities of that description credited to securities accounts which it maintains for such account holders. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

10. 10 The UNIDROIT Project: Common Law vs. Civil Law In general, the distinction between "common law" and "civil law" is sometimes helpful, but sometimes not helpful. As for substantive legal rules on transfers and pledges [collateral transactions] of "intermediated securities," such distinction is not helpful as a descriptive matter. As a prescriptive matter, such distinction should not matter – a functional approach is better. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

11. 11 Common Law: U.S. What does the investor have? issuer CSD intermediary investor security entitlement "financial assets" securities third parties security entitlement corporate lawproperty law Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

12. 12 Common Law: UK What does the investor have? issuer Euroclear UK intermediary investor equitable interest holding trust assets and own assets securities third parties Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

13. 13 Civil Law: France What does the investor have? issuer CSD (Euroclear France) intermediary (account keeper) "teneurs de compte conservateurs" investor securities contractual claim (?), though insolvency-proof third parties Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

14. 14 Civil Law: Germany What does the investor have? issuer CSD intermediary investor co-ownership interest in a fungible bulk of certificates (which may be represented by a global certificate or, if dematerialised, a register entry) securities third parties Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

15. 15 Civil Law: Japan What does the investor have? issuer CSD intermediary investor securities account keeping only contractual claim for book-entry holding securities third parties Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

16. 16 Transparent System: A Typical Type issuer CSD intermediary investor securities account keeping holding securities third parties Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

17. 17 Intermediary X’s Account 1,600 Customer A’s AccountCustomer B’s AccountCustomer C’s Account CSD's Book Intermediary X's Book intermediaries 300200100 Jurisdiction Type 1 - U.S. “omnibus account”: CSD does not know A, B or C or even X’s own Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

18. 18 Intermediary X’s Account owncustomer Customer A’s AccountCustomer B’s AccountCustomer C’s Account CSD's Book Intermediary X's Book intermediaries 1,000600 300200100 Jurisdiction Type 2 - JAPAN “customer omnibus account”: CSD does not know A, B or C Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

19. 19 Intermediary X’s Account owncust.Acust Bcust C Customer A’s AccountCustomer B’s AccountCustomer C’s Account CSD's Book Intermediary X's Book intermediaries 1,000 300200100 Jurisdiction Type 3 (Transparent System) - CHINA? 300200100 Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

20. 20 Description of current law: Tentative conclusion The "common law - civil law" distinction is not helpful. Rules are hopelessly different among major jurisdictions. –U.S. and UK are different. –France, Germany and Japan are different. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

21. 21 Prescription: A functional approach: a few items internal soundness (workability): –effect of the intermediary's insolvency –effect of book-entries –intermediary's right to use customers' securities compatibility (connectibility): –What if a financial instrument is a "security" in one jurisdiction, but not in another jurisdiction? Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

22. 22 Some Fundamental Points of Discussion "Direct" and "Indirect" Systems –Matching debits and credits –Upper-tier attachment and identification –Who is an intermediary? Priority Rules –How to apply three rules – (i) first-in-time priority, (ii) last-in-time priority ("innocent acquirer" or "good faith purchaser" rule) and (iii) sharing rule? Relationship with the Issuer Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

23. 23 Summary about UNIDROIT What is essential, and what is NOT essential? Paper or dematerialization is not essential – the first key factor is book-entry. For book-entry, we need intermediaries and thus the existence of intermediaries is unavoidable and essential. The second key factor is that transfers or pledges [collateral transactions] are effectuated by book-entries. With these two essential factors, "functional" harmonization (harmonizing the results) is possible without harmonizing legal doctrines (how to reach such results) or legal tradition (such as "direct" and "indirect" holding systems). Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

24. 24 Status of and purpose of ACG participation in UNIDROIT ACG takes part in the UNIDROIT conferences as an observer, NOT as a government. Some staff of the ACG members have participated in the conferences as the representatives of the government. UNIDROIT itself does not have a direct effect on the CSD rules, but on the government law if the government ratifies the convention. If the government modifies the law by ratifying it, it has of course a directly effect on the CSD rule. Therefore, ACG should pay close attention to the discussion in UNIDROIT conferences. UNIDROIT Convention Government Law CSD Rule effect Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

25. 25 Regarding Japan ・・・ Participation of ACG in UNIDROIT conferences has also the following purpose… It can also show that NOT ONLY U.S./EU, but also Asian countries accommodates the UNIDROIT convention as a functional approach. It can appeal to the world, and show ACG's presence to the other delegates. Status of and purpose of ACG participation in UNIDROIT Japan has completed the dematerialization process, and it is now the most advanced fields in the world. Ratification of UNIDROIT itself does not have an important and direct effect on the Japanese securities settlement and clearing system since almost all the structures are already taken in the Japanese book-entry transfer law. Copyright (C) 2009 Japan Securities Depositories Center, Inc. All rights reserved.

26. Applicable law –Law Concerning Book-Entry Transfer of Corporate Bonds, Stocks, and Other Securities Competent ministers –Prime Minister (Financial Services Agency) and Minister for Justice Eligibility of CSDs –Designation by the authorities as depository institution (designation by competent ministers) is required. –Designation criteria Status as a stock company, compliance of rules with the law, sound financial conditions, minimum capital requirement, capability of staffs, etc Business scope –Restrictions on scope of business (mainly for depository operations) –Restrictions on entrustment of its business Regulatory supervision –Report of accidents –On-site inspections –Business improvement order, revocation of designation, etc. Relationship with central bank –Participation of JDCC(CCP subsidiary) in BOJ-NET Funds Transfer System and JGB Book-Entry System –Gross-Gross DVP settlement for CP, SB, Investment Trust (Reference) Regulatory Framework for CSD in Japan