eWpRV: Draft bill of the Electronic Securities Register Ordinance

The Electronic Securities Act (eWpG) led to a paradigm shift in June 2021: Instead of a physically drafted (paper) securities certificate, securities can now be issued electronically in a register. Here, the government did not include detailed rules on electronic securities registers but authorised the ministries to issue a supplementary ordinance. With the Ordinance on requirements on Electronic Securities Registers (eWpRV), the ministries now want to issue an ordinance that further specifies the requirements of the eWpG to increase legal certainty for all market participants and ensure the protection of the interests of participants in the electronic securities register. Participants in this particular case means the issuers as well as the holders and beneficiaries of the securities (investors).

1. Electronic securities registers: What is covered?

The ordinance is intended to cover electronic securities registers (section 4(1) eWpG) and register-keeping entities (sections 12(2), 16(2) eWpG). Electronic securities registers are central registers pursuant to section 12 eWpG and crypto securities registers pursuant to section 16 eWpG. In each case, the entities keeping the register are the persons keeping the register (i.e. making entries in the central register for central register securities (as securities clearing and deposit bank/central securities depository or custodian) or in crypto securities registers for crypto securities (as crypto securities registrar)). Therefore, the addressees of the Ordinance are central securities depositories, custodian banks and crypto securities registry administrators with a licence under the German Banking Act (KWG).

The eWpRV is roughly divided into two parts: the first part regulates all electronic securities registers (i.e. central registers and crypto securities registers); the second part concerns crypto securities registers only.

The ordinance contains details on the establishment and maintenance of the register. Additionally, it specifies the requirements for specification and documentation obligations, information in the registers and requirements for participation in and inspection of the registers. The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is responsible for reviewing the documentation and issuing orders to the entity keeping the register with regard to the specification and documentation.

2. Common rules for central registers and crypto securities registers

a. What must the electronic securities register define and document?

The registry administrators are expected to regulate details of the establishment and maintenance of the registry, the procedural requirements with regard to instructions and rules on transfers. These specifications shall be documented in a comprehensible manner and made available by requesting the information at BaFin. From there, BaFin may issue instructions to the entity keeping the register regarding the documentation or specifications.

b. How must the terms of issue be laid down?

The requirements for the deposit of terms of issue (according to section 5 eWpG) are kept low. The electronic securities register must store information in such a way that it can be retrieved unchanged at any time. In addition, the terms of issue must be freely accessible on the internet and findable via a common method for the issuer Neither the regulation nor its explanatory memorandum specifies further what "common methods" are. We therefore assume that it must be possibility to google the terms of issue.

Furthermore, amendments to the terms of issue shall be recorded and published in a timely and comprehensible manner. The different versions of the terms may be numbered consecutively.

c. Specifications with regard to the keeping of the register

An electronic securities register shall ensure the confidentiality, integrity, availability and authenticity of the data. The registry administrator is expected to test the necessary systems before first use and after significant changes. Speaking of which, the production and test environments shall be kept separate.

d. Contents of the register

The eWpG already prescribes a certain content of the register. The Ordinance specifies how the essential content of the right attached to the security (section 12(1) no. 1 and section 17(1) no. 1 eWpG) is to be presented. With regard to the registration of electronic bearer bonds, a reference to the laid down terms of issue is sufficient for this purpose. Alternatively, all potential information relevant for the investment decision from the point of view of a reasonable investor, must be included in the register. In principle, this includes: Maturity, amount and type of interest including the calculation method applied, maturity of all payments, ordinary and extraordinary termination rights as well as subordination agreements.

Personal details for holders and issuers shall also be recorded for entry in the register. In the case of a natural person, the first name and surname, date of birth, place of residence and, if apparent, academic degrees and previous surnames must be ascertained. In the case of legal entities, trading companies and partnership companies, the name (or company) and the registered office as well as the relevant register details (such as those of the commercial register) must be declared. If the holder or issuer is a partnership under civil law (GbR), the relevant information for the partners and, if applicable, the name and registered office of the GbR must be included.

The contents of the register may change, for example, when a security is transferred. The entity keeping the register must therefore define parameters under which an entry is valid (and cannot become invalid again). As a general rule, the participants must be informed of the specifications and any changes to them must be recorded.

The introduction of the Ordinance also defines what must be observed when changing from electronic securities to securities issued by means of certificates more detailed. For example, the consent of the beneficiary must be documented and changes must be added into the electronic securities register.

e. Notes on participants in the electronic securities register

Participants in an electronic securities register are entitled to inspect the register electronically pursuant to Section 10 (1) eWpG. The eWpRV puts this in concrete terms: The issuer, the holder and, in the case of individual registrations, all persons in favour of whom a right is registered have the right of inspection. Also, it specifies which information must be collected when identifying a person who requests information pursuant to Section 10 par. 3 eWpG. This information must be verified. The following applies: Two years after transmission, the data must be deleted.

The draft of the eWpRV also specifies in more detail the requirements to be met by the identification of the person authorised to give instructions and the authentication instrument pursuant to Sections 14 (1), 18 (1) eWpG for the amendment of register entries. A suitable authentication instrument exists if the procedure used basically complies with the common standards and the register-keeping authority can reliably assign the signature used or the comparable authentication instrument used to the natural person or legal entity or partnership issuing the instruction. However, this concretisation leaves a wide margin of appreciation.

3. Special requirements for crypto securities registers

The Regulation further defines special provisions for crypto securities registers.

a. Further definition obligations

The maintenance of a crypto securities register must comply with more extensive obligations than central registers. Among other things, details of the rectification of the register (in the absence of consent or instructions) or criteria for participation in the register must be defined and documented.

b. Access to the source code

The source code of the record-keeping system and the description of the record-keeping system required for it must be available to anyone with a particularly legitimate interest. It should be noted that it must be ensured, that changes to the content of the register can also be reversed in the system. This is necessary in order to be able to comply with the requirements of the eWpG regarding the reversal of changes to the register content without the instruction of the holder or beneficiary or without the consent of the issuer. The amendment process must be visible with an indication of the time of the reversal.

c. Participation criteria

The crypto securities registry administrator must establish fair and open participation criteria and requests for accessing the registry must be answered without delay, at the latest within one month. Access may only be denied in special exceptional cases. In such a case, the applicant can file a complaint with BaFin, to may get access.

In addition, interfaces for communication with the participants must be set up. By doing so, the common standards and regulations must be observed, and the current technical requirements must be met.

d. Change of the securities register

Of importance, is the possibility of transferring a crypto security to another registry. Such necessary procedures and precautions are to be continuously reviewed and, if necessary, updated and documented. In addition, extensive documentation obligations regarding the databases or storage systems are stipulated.

4. Conclusion

The ordinance on requirements for Electronic Securities Registers (eWpRV) creates a legal framework for securities register management for issuers and investors. This way, legal certainty is provided. It thus, supports the digitalisation of the German financial market. However, whether this makes the requirements for crypto securities registers too hard to be followed or not, remains uncertain yet. So far, the advantage of crypto securities compared to the security tokens issued and required from issuers and service providers seem questionable in some points.