One of the most far-reaching changes for investors and for solicitor investment managers is the introduction of rolling settlement and Crest.

The Crest system is being developed by the Bank of England to replace the old Stock Exchange Talisman system.

Its blueprint is contained in a book entitled Crest - Principles and Requirements (revised), February 1994, which can be obtained from the Bank of England.The importance of Crest to the City of London and, hence, to the government, cannot be underestimated.

Most major equity markets around the world have rolling settlement as the norm or as an option.

The USA is currently operating a T+5 (ie the day of trading with settlement following five days later) cycle but, from 1 June 1995, transactions will be required to settle on a T+3 cycle.

Canada, also on T+5, is expected to follow the USA move, and Japan already operates a T+3 cycle.

In France, T+3 rolling settlement is possible, and in Germany the standard settlement cycle is T+2.Not surprisingly, the existence of the UK's two-week account settlement cycle was seen as a deterrent to overseas investors: because of its unfamiliarity, because it gave rise to extra risks, and because of timing mismatches when moving investments between rolling settlement and account settlement markets.

Anything that prevents markets drawing on the widest pool of investors is likely to result in trading activity and share values being lower than they otherwise would be.Rolling settlement should, therefore, be good for the market, good for companies and good for their shareholders.

The government also believes that the successful development of an electronic share settlement system, will be good for the City of London.

Put simply, London needs Crest if it is to develop further its position worldwide, and particularly within Europe, as a pre-eminent centre for equity trading and settlement.The essential function of Crest is as a transfer mechanism allowing for Stock Exchange transactions between those holding stock within the system to be settled against sterling payments on the basis of electronic messages, ie by book entry transfer.

At present, under s.185 of the Companies Act 1985, companies are obliged to issue a certificate to all shareholders and, moreover, under s.183 of the Act, a company is not permitted to register a transfer of its shares other than on receipt of a stock transfer form.

As they stand, these provisions prevent a paperless, electronic share transfer system from operating, although s.207 of the Companies Act 1989 allows such legislative changes to be introduced by 'regulations'.The government wishes the regulations to rely 'as far as practicable on the existing legal framework affecting shareholdings'.

Most importantly, the company register will remain prima facie evidence of legal title to shares.

The government also wishes to reinforce the principle that participation in Crest is voluntary - it being possible for shareholders to maintain their own names on the register, and to be entitled to a certificate.

This recognises that many of those investors with smaller holdings will trade infrequently, if at all.

For them it will probably be appropriate to remain with certificated holdings - in which case the legal position will remain as it is at present.The regulations will contain a number of essential elements.

Principally, they will remove from the company the obligation to issue a certificate where the shareholder indicates that he or she does not wish to receive one.

They will also provide that where shares are transferred by electronic means, the generation of the electronic message for the company registrar to register the transfer will create an equitable interest (by way of tenancy in common) in the seller's securities in favour of the transferee.

Transfer of legal title will follow when the register is updated shortly afterwards.

Consequently, the generation of the electronic message for the company registrar has broadly the same effect as does the delivery of a certificate and stock transfer form now.Crest will make a major contribution to the promotion of visibility by ensuring that the bulk of transactions are reflected on the company register promptly, normally within two hours, after the transfer in Crest.

This is a significant step forward as, at present, it is extremely unusual for a transfer of title to be registered in less than three days.

It should be mentioned that the separate legal system in Scotland may demand some differences in detail, but the approach adopt ed is expected to be broadly similar.Solicitors' firms can choose one of four ways to go forwards.

The first, staying in certificated holdings, is likely to be appropriate for some clients in even the most forward-looking practice.

The real issue, therefore, is which of the three Crest-related options is chosen for clients who move into the uncertificated world of Crest.-- Opt for certificated holdings.

The first - 'do nothing' - approach will be to continue to hold client securities in certificated form outside Crest.

This will be an acceptable way forward for semi-permanent holdings but will be unworkable if the holdings form part of a managed portfolio - for example, the steps necessary on sale of the holding.

At that stage, legal title to the holding will have to be transferred by the registrar to a Crest member, most likely the selling broker, before it can be used for settlement.

This requires the seller to deliver the certificate and signed transfer to the selling broker; the selling broker to complete the deposit set and then deliver it to a regional Crest collection point for onward delivery to the registrar; and the registrar to check it and then match it with data received from the broker.

The hope is that this process will be speedy enough to allow sale to take place within the T+5 timetable but it only has any chance of being so if the transfer is signed before dealing and no errors are made.It is laudable to see the new settlement structure accommodating those clients who want certificates, but the Crest paper makes it clear that they must bear the ensuing cost of this paper chain, without cross-subsidy.

At best the process will be cumbersome and certainly it must add significantly to the clients' cost on purchases and sales.-- Use a third party Crest member.

If certification is not the answer for active holdings, then the answer is to have clients' stock held within the Crest system.

The simplest method to achieve this is to contract everything to a third party wholesaler who is a Crest member.

This wholesaler will take responsibility for all membership fees, communications, security, specialist staffing and its capital will stand behind the bank credit lines required to make Crest's assured payments work.

Some firms, such as LawShare, are expected to provide just this sort of service, designed so that each solicitors' firm's logo appears on communications to its clients.The cost and banking implications may be attractive but there may be a snag.

The initial Crest design will only allow two levels of identification or classification to appear on the company register and the first must be the Crest member's.

Under this option, the second identification can be the solicitors' firm's (or its nominee company's) but individual clients' designations will not be able to appear.

Separate records of entitlements within the solicitors' nominee company will therefore be needed, and some Crest firms may not be happy that their clients' names or individual nominee designation accounts will not appear on the register itself.

If that is the case, only the third or fourth option will work.-- Become a sponsored member.

The Crest design incorporates two classes of membership: sponsored and participating.

Each will allow the solicitor's nominee to become a Crest member and therefore to designate individual clients on the company register, using the second level of identification.Both types of membership have identical rights and obligations but the sponsored member of Crest will not be required to communicate with Crest elec tronically or invest in the equipment and experienced securities staff to do this; this will be the function of the participating member who sponsors him or her.

The sponsored member will still be required at least to sign contracts for an assured payment arrangement with a payment bank and with the Crest operator and to pay the operator a small fee.Under the Crest design, a bank is required to provide an unconditional undertaking to make payments up to a specified level.

The Crest team is well aware of the potential knock-on effect large credit limits could have on individual firms' overall business.

Indeed, it is discussing with banks the possible use of purchased stock to secure the obligations.

Sponsored members will have the full benefits of electronic holding and transfer of stock without the need for investment in staff or systems to achieve it.

For the majority of firms the sponsored route looks the most attractive.Brokers such as LawShare are known to be lining up to provide a specialist sponsored membership option for solicitors.-- Become a participating member.

Some of the largest solicitors' firms may choose to go the whole distance and become full participating members themselves.

They will still need to deal and settle through brokers but will be able to carry out all stages of the securities custody function in-house.

They will have to resource additional investment in technology, secure communications and specialist staffing.

It is impossible to estimate the scale of this investment until more detailed plans for Crest are released.

In principle, the requirement for bank credit lines will be unchanged from those of a sponsored member.Solicitors' securities custody business will be best preserved throughout these important changes by holding clients' stock in a solicitors' firm's own nominee.

Not only will this allow the firm to cope with rolling settlement when it moves to T+5, it should permit solicitors the opportunity to offer clients a real long-term alternative to releasing their holdings to a bank's or broker's Crest account.One senses that there is a growing acceptance by investors of nominee accounts partly because of the present initiative, sponsored by ProShare, to identify ways of passing membership benefits to beneficial owners who hold their shares through nominees.

Certainly in a T+5 environment, use of Crest will be essential for clients who require timely execution of bargains, or who are already employing the services of an active portfolio manager and who choose to combine this with the use of a solicitor for custody purposes.

Many clients will wish to keep the peace of mind, highly valued today, of knowing that their scrip is still under the control and care of their solicitor.