On 3 May, the Bank of England Crest team published a final batch of papers to complete the design of the Crest system.

With a group of 74 firms committed in principle to provide finance by participating in the ownership structure, the Bank has now begun the building of the core system itself.

The outline timetable has been laid out, working towards implementation in the second half of 1996.

It is therefore important for all those with an interest in the equity industry to focus on the issues which Crest and rolling settlement raise.

This article sets out in particular the choices facing the solicitor on how to participate in Crest.-- Why Crest? Whatever the problems associated with the demise of Taurus, the need to find a replacement for Talisman remains a genuine one.

The move to rolling settlement on 18 July, dematerialisation in Crest in 1996 and the proposed link to real time gross settlement in 1997 should therefore be seen as one integrated process, reducing risk and impro ving market efficiency in the UK equity industry.A priority in the Crest design has been to achieve this in the context of the institutional market.

This is because it is in the high value wholesale transactions that the risk of financial instability essentially lies and which provides the basic liquidity to the market, for the benefit of all investors.

At the same time, the design of Crest has sought to achieve the important balance of also being usable by the retail investor.

The element of choice in Crest has therefore been crucial, enabling the institutional market to move ahead to speedier, cheaper, safer and more efficient settlement without impairing the ability of the retail investor to continue to hold share certificates and settle at a reasonable cost.-- What Crest does.

Crest members will have 'stock accounts' within the system in which their securities are held in dematerialised form.

To transfer securities from one Crest member to another, both the transferor and the transferee will need to input settlement instructions to the system via a terminal.

These instructions will be authenticated to appropriate security standards.

The system will ensure that the two sets of instructions match.

Continuously throughout the specified settlement day, the system will check whether the transferor has the necessary stock in his or her stock account and the transferee has the necessary credit with his or her bank within a 'cash memorandum account' maintained within the system.

Once these checks have been successfully performed, four systems processes will occur simultaneously: the stock will be debited from the transferor's stock account; the stock will be credited to the transferee's stock account; an instruction will be generated to the transferee's bank to make payment on the customer's behalf; and a request will be made to the registrar to update the register.The payment mechanism, known as 'assured payments', binds the transferee's bank unconditionally to make payments up to a credit limit specified by each bank for each of its customers.

Registrars will be required to effect registration within two hours in normal circumstances or to give a reason as to why registration cannot be achieved.-- Legal structure for Crest.

The 3 May package included a paper issued by the Treasury which describes the policy approach being taken by the government and the scope of legislative change which is being contemplated.The law currently requires companies to issue share certificates and to effect transfers on the register only by means of a 'valid instrument of transfer' (essentially a stock transfer form).

The regulations to be issued under s.207 of the Companies Act 1989 will amend this requirement so as to allow securities to be held in dematerialised form and transferred by means of electronic messages.The Treasury's paper proposes in particular that a transferee should acquire an equitable interest by way of tenancy in common in the transferor's securities at the moment of settlement.

This is intended to afford protection to the transferee during the two-hour period between settlement and registration.

Given that the transferee will have incurred a payment obligation as a result of settlement, granting him or her an equitable interest in the transferor's securities clarifies the nature of his or her property rights during that two- hour period and strengthens his or her position against the possibility of an insolvency on the part of the transferor.

The new legal structure will not change the fact that legal title to securities wi ll be conferred on the company register.The paper also describes the criteria which the system will need to satisfy in order to be approved under the regulations.

These will be in addition to the criteria to be applied to Crest as a recognised clearing house under the Financial Services Act 1986, and both sets of criteria will be the responsibility of the Securities and Investments Board.-- Crest is voluntary.

Unlike Taurus, Crest is a voluntary system.

Those active in equities trading will have much greater scope for making a fully informed choice about how to participate in Crest.

The four options available are: to remain in certificated form and continue to use transfer forms; to become a member of Crest; to become a sponsored member of Crest; or to become a client of a Crest nominee.-- Certificated investors.

The majority of small private investors will probably choose to remain in certificated form.

Those who trade infrequently and in low value will not benefit sufficiently to make it worth their while becoming direct participants in Crest.

For these investors, the introduction of Crest will make little difference in practice: they will continue to deliver their certificates to their broker and will have no direct involvement in the settlement process.

Although such investors will not benefit from the lower costs associated with full electronic settlement, there is no particular reason to believe that the costs they incur should be any greater than they are at present.In due course, the wholesale market will move to settlement on a five-day rolling basis and very probably to shorter periods still.

Given the additional time consumed by the processes of depositing certificated stock for settlement, it follows from the voluntary nature of the system that a two-dated market is likely to develop, with the retail market continuing to settle on a ten-day cycle.

The Bank has received assurances from most of the market makers that they will quote realistic prices to accommodate the longer dated settlement needs of paper-based investors.Some solicitors offer safe custody services for share certificates to their clients, particularly to trustees, and arrange for delivery of stock to go straight from the solicitor's office to the broker involved.

These clients may continue to hold their investments in this way; this service will therefore continue to be in demand.-- Crest members and sponsored members.

Direct members and sponsored members of Crest will have their names entered on the company register in respect of shares held via Crest.

Their relationship with the company is therefore the same as that of a certificated shareholder now.

The difference between the two lies in how they interface with the system.Full membership requires an investor to have his or her own terminal connected to the Crest centre via a network link, and to have a settlement bank prepared to service his or her payment needs resulting from his or her share settlements.

For the wholesale market this raises no difficulties.

However, few private investors - even the most active ones - are likely to want to maintain a capital infrastructure of this type themselves.

Sponsored membership therefore enables these investors to benefit from the increased efficiency and reduced cost of dematerialised settlement but to contract the technical operation of their membership to a sponsoring agent who might be, for instance, a bank or broker.Some solicitors may want to act as sponsoring agents for some of their clients, the client then becoming a sponsored member.

Th is would effectively replicate in electronic form the custody services already offered in the present paper-based environment.

Clearly, to do so would incur the costs of installing and servicing the technical infrastructure: this option is therefore likely only to be attractive to larger firms, given the often specialised nature of the client base and the difficulties of competing with larger broking and banking sponsoring agents.-- Nominees as Crest members.

Crest will facilitate either pooled nominee memberships (by having one 'member account' in which all clients' stock is held) or designated nominee memberships (by having several member accounts, one for each client with an alphanumeric designation appearing on the register after the name of the member).An issue common to all nominees is that many will have memoranda and articles of association which restrict their activities to providing nominee services.

The nominee will generally have little involvement in the activity relating to the stock it holds other than to sign any necessary documentation.

Payments for purchases or from sales will be made directly across the relevant client account and have no need to pass through the nominee.On the face of it, the obligations and liabilities which a Crest member would incur might compromise the nominee's own memorandum and articles of association.

This problem is readily overcome by structuring a Crest membership so that a third party undertakes the obligations and liabilities on the nominee's behalf.-- Trustees and Crest.

Whereas solicitors acting as nominees will approach the issue of participation in Crest from the perspective of the intermediary, those acting as, or for, trustees will approach the issue from the perspective of the investor.Two principles are relevant here.

First, some trustees are unable to hold trust assets in the name of a nominee.

Secondly, as a general rule, trustees should not part with trust property in connection with a sale or purchase before receiving the consideration.

Sepon, a pooled nominee company run by the Stock Exchange, is an integral part of the present settlement process; this would make it impossible for trustees to settle share transfers through Talisman were it not for the special provision made in the Stock Exchange (Completion of Bargains) Act 1976.The Crest regulations will make similar provisions to enable trustees to use Crest for the settlement of certificated sales of stock.

They will also empower trustees to hold securities in dematerialised form and, consequently, many trustees will be able to become members or sponsored members of Crest themselves.-- Admission of company shares to Crest.

Solicitors advising companies about their participation in Crest as issuers will need to be aware of one key difference between the approach being taken for the Crest regulations and that followed for Taurus.

The Taurus regulations required each company to obtain the approval of a shareholder meeting before it could admit its shares to Taurus.

For Crest, the Treasury proposes to enable the directors of a company to allow their company's shares to be transferred through Crest, notwithstanding any restricting provisions in the company's articles.

However, it will be possible for the directors' decision to be overturned at a shareholder meeting.-- Crest will be the fourth settlement system which the Bank has built, having delivered the Central Gilts Office, Central Moneymarkets Office and European Securities Office on time and to budget.

The building of Crest is already under way and is due for completion in the last quarter of 1995.

Trialling of the system with the networks will start in the first quarter of 1996 and with participants in the second quarter.

It is against this track record and timetable and the Bank of England's commitment to the success of Crest that participants in the industry need to turn their attention now to these issues and make their own strategic decisions for the future.