In a "dematerialised" system, there is no document which physically embodies the claim. The system relies on a collection of securities accounts, instructions to financial institutions which maintain those accounts, and confirmations of account entries.

"Immobilisation" is common in markets which previously relied on physical share certificates, but the certificates are now immobilised in a depository, which is the holder of record in the register. Access by investors to the depository is typically through financial institutions which are members of the depository.

Through the establishment of CSDs, investors are able to substantially reduce risks of loss, theft and illiquidity costs by holding securities through one or more tiers of financial intermediaries such as banks or brokers. This has led to multi-tiered securities holding systems. There can be several types of holding systems. For example, some professional investors and financial intermediaries have direct contractual relationships with CSDs. They hold interests in securities through accounts on the records of the CSDs. Other investors, particularly retail investors, generally hold their interests through brokers or other financial intermediaries at a lower tier in the multi-tiered structure.

A direct holding system is one where the investor appears as the named owner in the issuer's records. The issuer therefore knows who its investors are, as the issuer's shareholder accounts are the same as the accounts which reflect the investor's ownership. An indirect holding system is one where the investor holds his securities through accounts maintained by one or more tiers of intermediaries. The person who appears as the registered owner of the securities in the accounts of the issuer in an indirect holding system is the top-tier intermediary through which the investor holds the shares.

In an indirect holding system, the functions of the holding system are performed by different institutions:

• custodian-with which investor deposits securities;
• central depository-where custodian deposits securities of customers; and
• issuer's registrar-which reflects the central depository as the owner of securities held through the depository and its custodian members.

To maximise the efficiencies of the multi-tiered structure, most CSDs and other financial intermediaries have adopted the practice of holding physical securities in fungible pools and of holding interests in dematerialised or registered physical securities through accounts in the name of the CSD or other financial intermediary (nominee name) with the issuer or its agent. The ultimate investor's ownership interest may not be shown on the books of the issuer, the CSD or other financial intermediary, except the particular intermediary with which it has a direct contractual relationship. The investor's direct intermediary will typically hold interests in the security in an omnibus account with the CSD or other intermediary at the next level up the multi-tiered structure.

There are some systems that have combined the advantageous features of both direct and indirect holding systems, resulting in a "hybrid" holding system. In those system, the "custodian" function in an indirect holding system is replaced with an "account administrator" or "sponsor" for direct investor accounts. The account administrator will deal with all communications to and from the registrars for securities which the investor owns. This helps to reduce the risks involved of having the investors' securities held in the name of custodians or brokers that may go bankrupt.

Most countries which have introduced immobilisation or dematerialisation have had to use some form of indirect holding systems. An indirect holding system has several advantages:

• The investor only has to deal with one institution, the custodian, for purposes of receiving securities, authorising transfer of securities, delivering securities, etc.

• Brokers would know, prior to entering sell orders that the investor owns the securities and that they are positioned for delivery. In a direct holding system, the broker would need to take extra precautions to ensure that the investor will be able to deliver the securities for settlement.

• Transfer of securities is by book entry and there are no physical movements of securities and no accounting entries made on the books of the issuer or its agent.

• Reduces the traditional loss, theft and illiquidity costs and risks associated with holding, transferring and pledging securities.

However, in order for indirect holding systems to work well, there are several legal issues which have to be addressed: