What is a warrant security: explanation in human language using a simple example
Greetings, dear readers! Let's dive into the diverse world of securities. It is not limited to stocks and bonds, as many of you might think. There are so many financial instruments in this market that you will have to write a whole series of articles to tell about them all. And today I propose to devote to such an interesting form as an order security.
- What is it and why are they needed
- Types of order papers
- OCB example
- The difference between bearer, registered and order securities
- What is the difference between endorsement and cession
- Are other types of order papers allowed by the laws of different countries, except for those regulated by law
- Features of the transfer of the OCB
- The main problems of the circulation of order securities in Russia
What is it and why are they needed
An order security (OTS) is a security whose holder is legally determined as the subject of the right certified by it, when he is the last in a continuous series of endorsements.
They are actively used in the economic activity of enterprises, organizations and companies of all sectors of the economy. They are convenient for quickly attracting credit funds without the services of banks, for settlements, for a simplified and quick transfer of ownership to tangible and other assets.
Types of order papers
Documents are considered to be orders if they have a special form and confirm the authority of the specified owner to purchase goods, services or money. Based on this, several types of order instruments are distinguished.
bill of exchange
In this case, the creditor may transfer in full the rights of claim under the bill of exchange to third parties without agreement with the debtor. This financial instrument is actively used for settlements, as collateral, as well as for lending by the seller to the buyer. The credit in this case has a commodity form, and the buyer receives a deferred payment.
The popularity of bills is explained by their advantages:
- Enterprises can lend to each other or receive deferred payments without the participation of commercial banks, that is, they save on paying commissions.
- Bills of exchange have good mobility — they can be quickly pledged in a bank or sold on the stock exchange.
In practice, there are 3 types of bills:
- Simple. It implies an obligation to pay the debt within the specified time to the creditor, to whom the security is issued. Such a bill is related to an IOU.
- Transferable. Otherwise called draft. Such a valuable instrument contains an order from the issuer issuing the bill to the payer to pay the specified amount within the agreed time to the holder of the bill.
- Availed. With such a transaction, a third party appears, for example, a bank acting as a guarantor (availist) for payments.
Checks are registered — issued to a specific recipient; bearer — bearer; order — issued to a specific person who can transfer them to a third party through endorsement.
The list of details required to be filled in the check is prescribed in the Civil Code of the Russian Federation, the form of the check is established by commercial banks.
In order for the check to be paid, it must be presented for collection — in the bank where the account of the person who issued this check is opened. The bank has an obligation to check the check for authenticity.
When the payer refuses to collect the check, the holder of the check is authorized to present a claim to any person who is liable for the check (drawer, endorsers, availist) or to all at once.
Bill of lading
The bill of lading performs a number of functions:
- Confirms the physical rights to the goods. The rightful owner of this valuable tool has exclusive rights to the goods. Since the bill of lading is an order security, it can be transferred to a third party by endorsement.
- It is a receipt indicating that the goods have been delivered to the carrier. Therefore, it contains a detailed description of the entire product. If during loading the goods were found to be damaged, they are recorded on the front side of the bill of lading. In this case, the bill of lading from «clean» becomes «not clean».
- Evidence of the conclusion of the contract of carriage.
In Russian legislation, the following order instruments are distinguished: promissory notes and bills of exchange, checks, double evidence of a warehouse and a bill of lading. In other countries, in addition to this, they include a letter of order, a circular transfer, a merchant's transfer, and a cargo certificate.
The difference between bearer, registered and order securities
Securities are classified according to many criteria. One of them is the principle by which the right of ownership is transferred. So, they distinguish:
- Bearer. Securities give all the powers contained in them to their holder. That is, on the form itself, there is no information about a specific owner. This explains their popularity in use. To change the owner of these securities, it is enough just to hand them over to the new owner. As an example, I can cite bearer checks and simple warehouse certificates (warrants).
- Nominal. Issued to a specific owner. Only he receives all the powers provided by this financial instrument. The most famous examples are stocks and bonds. The transfer of rights to another person on registered securities takes the most time and effort: it is necessary to draw up a special contract for the assignment of rights of claim — a cession. When transferring rights on registered valuable instruments, the owner is responsible only for their validity, and if the new owner is going to exercise his rights on them, he must make all presentations to the issuer of such securities.
- Order. In such securities, the owner is initially indicated, who has the right to transfer them to another person. To do this, a special endorsement is made — an endorsement. A distinctive moment of order valuable instruments: the ultimate owner can demand the execution of his rights not only from the issuer, but also from any person included in the continuous chain of endorsements. The most famous example is a bill.
What is the difference between endorsement and cession
I propose to find out what endorsement and cession are, what are their features and differences.
The main aspects of endorsement are unconditionality and completeness. It does not depend on whether some event occurs or whether some action is performed. Only part of the powers cannot be transferred by endorsement.
If an endorsement is made without indicating the data of the person who becomes the new owner, but only the signature of the previous owner is required, this is a blank endorsement. If the data of the new owner is indicated, then this is an endorsement by order.
In order for a security to be paid, the series of endorsements on it must be continuous, and the last owner must confirm his legitimacy.
Assignment is the assignment of the rights to claim debt obligations. The person who transfers the rights is the assignor, and the one who receives them is the assignee. The concluded cession agreement provides for the transfer by one creditor of the right to require the debtor to fulfill obligations to another creditor.
Now let's move on to the main differences between these two concepts.
For an endorsement to be considered valid, one signature of the person transferring his rights is sufficient. For the assignment agreement, the signatures of both parties are required — the one transferring the rights of claim and accepting them.
Endorsement is carried out exclusively on the reverse side of the Central Bank or on the allonge. For the cession, there are no clear requirements for registration by law. Thus, the assignment can be executed in any written form not prohibited by law.
Since the cession is a transaction, it must be registered, that is, made in favor of a clearly identified person. Endorsement can be both unilateral and nominal.
And most importantly, what is the difference between an endorsement and a cession: all signatory endorsers automatically become co-defendants for obligations and can demand recourse to all those who put their signatures.
Are other types of order papers allowed by the laws of different countries, except for those regulated by law
The legislation of different countries regulates in different ways the issues of the possibility of trading in other order securities, except for those permitted by law.
In France, promissory notes and bills of exchange, checks, bills of lading, warehouse and pledge certificates of warehouses, and warrants are recognized as warrants. Based on the existing practice of legal proceedings, it is allowed to transfer order instruments that are not regulated by legislative acts, subject to the procedure for endorsement.
In Italy, bills of exchange, checks, bills of lading, waybills, warehouse and pledge certificates are legally allowed to be traded as order securities. Order instruments that are not regulated by legislative acts are allowed to be transferred, as in France, subject to the endorsement procedure with an order clause. The judiciary is positive about this issue.
German legislation does not allow the possibility of trading other order instruments, except for those prescribed by law. The German doctrine considers the endorsement of papers not enshrined in legislative acts as a general civil assignment agreement.
Swiss law considers any security where the issuer gives an obligation at a specific place and time to pay a specified amount subject to an order, such as is transferred under an endorsement procedure. It is also added that such issues are considered on the basis of the norms of bill of exchange law.
Soviet law did not cover the question of whether other order securities were allowed for circulation, except for those that were fixed by law. However, freedom of contract follows from the principles of Soviet legislation. From this we conclude that the creation of central banks that are not enshrined in law is still allowed. Russian legal practice has inherited this state of affairs.
Features of the transfer of the OCB
Order securities are transferred through a special inscription — endorsement. The main thing is that the chain of endorsements should be continuous.
What happens if a bill of exchange is endorsed by an unauthorized person? Is the holder of a bill legal if one of the endorsements in the chain is invalidated?
I suggest looking into the law. The regulation on promissory notes and bills of exchange, along with the decision of the Plenums of the Supreme and Supreme Arbitration Courts of the Russian Federation, confirms: if one of the endorsements is recognized as illegitimate, the remaining signatures of persons in the chain do not lose their legal force. [/ bold]
The situation is more complicated when the bill is endorsed by an unauthorized person or with excess of authority. The legislation does not have clear explanations of who, in this case, is liable under the bill — an individual who has exceeded his authority, or still a legal entity on behalf of which this person acted.
The main problems of the circulation of order securities in Russia
The circulation of order securities in the Russian Federation is regulated by the Civil Code and other regulations. There are very few studies devoted to the theory of order papers in the domestic literature. Therefore, a number of issues related to order instruments still remain unresolved. For the same reason, the judiciary also experiences difficulties in using the relevant legislative acts.
The theory of acquiring ownership of order paper
The question of what fact, from a legal point of view, initiates the emergence of rights and obligations under OB is still being discussed in the theory of securities. There are many views and hypotheses on this subject, one of which is the theory of acquiring ownership of paper.
She argues that for the emergence of a right and an obligation under a paper, two prerequisites are needed: a correctly drawn up paper and a person other than the compiler, who has acquired the right to dispose of the CCB.
I hope that after reading this article, the topic of order securities has ceased to be a dark and mysterious forest for you! Subscribe to my updates and be sure to share links to fresh posts with your friends on social networks!