Foreign securities depositories: Overview, definition, and example
What are foreign securities depositories?
Foreign securities depositories are institutions or entities that provide safekeeping and settlement services for securities issued in countries outside the investor's home country. They are responsible for holding financial instruments, such as stocks, bonds, or other types of securities, in electronic form, ensuring that ownership is recorded and transactions are securely processed. These depositories play a critical role in international finance by enabling the efficient transfer, settlement, and clearing of foreign securities between buyers and sellers across borders.
Foreign securities depositories may offer services like custody, record-keeping, clearing and settlement, and sometimes even provide access to corporate actions such as dividends, interest payments, and proxy voting for foreign securities holders.
Why are foreign securities depositories important?
Foreign securities depositories are important because they help facilitate cross-border investments by simplifying the process of holding, transferring, and settling foreign securities. They mitigate the risk of fraud, ensure that the securities are handled in compliance with international regulations, and streamline processes that would otherwise be complex and costly.
For investors, these depositories provide a secure and reliable method to invest in foreign markets without the need to physically hold securities. For financial institutions, foreign securities depositories ensure efficient and smooth international transactions, reducing the operational burden of managing foreign securities.
Understanding foreign securities depositories through an example
Imagine an investor in the United States who wishes to purchase shares of a company listed on the Tokyo Stock Exchange in Japan. Instead of dealing directly with physical share certificates or navigating complex regulatory procedures, the investor can hold the shares in an account with a foreign securities depository, such as Japan’s central securities depository. The depository electronically records the investor’s ownership of the shares and facilitates the transfer of the securities during the purchase and sale, ensuring the transaction is smooth and compliant with both Japanese and U.S. regulations.
In another example, a European bank might hold a portfolio of bonds issued by companies in Brazil. The bank uses a foreign securities depository in Brazil to maintain electronic records of these bonds, settle transactions, and process interest payments and other corporate actions, such as bond calls or redemption.
An example of a foreign securities depository clause
Here’s how a foreign securities depository clause might appear in an investment agreement:
“The Investor agrees to utilize the Foreign Securities Depository of [Country] for the safekeeping and settlement of all foreign securities purchased under this Agreement. All securities will be held in electronic form, and the Investor will be subject to the rules and regulations governing the depository’s operations.”
Conclusion
Foreign securities depositories are crucial in the world of international finance, providing secure, efficient, and reliable services for holding and transferring securities across borders. They simplify the process of investing in foreign markets by offering electronic record-keeping, settlement services, and access to corporate actions. For investors and financial institutions alike, using foreign securities depositories minimizes risks, reduces operational costs, and enables smoother global transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.