Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: Brazil

Status: December 6, 2001

Recommendation 1
Recommendation 2
Recommendation 3
Recommendation 4

Recommendation 5
Recommendation 6
Recommendation 7
Recommendation 8

Market selection

Recommendation 8

Local laws and regulations should ensure that there is segregation of client assets from the principal assets of their custodian; and no possible claim on client assets in the event of custodian bankruptcy or a similar event. Regulators and markets, to further improve investor protection, should work:

to ensure clarity on the applicable law on cross border transactions
to seek international agreement on a legally enforceable definition of finality in a securities transaction
to ensure that local law fully protects the rights of beneficial owners
to strengthen securities laws both to secure the rights of the pledgee and the protection accorded to client assets held in Securities Systems.

1. Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository? Yes. According to the Brazilian Securities Commission legislation, the depository account structure must segregate assets at the beneficial owner level. As a result, there should be not only a total segregation between the assets of the depository from the assets of custodians (depository agents) but also the assets of investors should be segregated from the assets of the custodians responsible for them and registered in individual accounts held in the investors' name.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? Please refer to answer above. As securities should be held in the name of the beneficial owner, in the case of a custodian or the depository default, there are no legal uncertainty about the ownership of the securities. Through beneficial owner account structures, investors are surely better protected against any defaulting situation. Many countries in north Europe and Asia-Pacific have a similar practice, the difference being how far they relate directly to the investors.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? As explained above. The legal owner of the securities held in CBLC Depository Service is always the beneficial owner. From the issuer's point of view, CBLC, in the issuers record, is only the fiduciary owner.

4. Does local law clearly define the point of time when a settlement, both for the security and the cash involved, achieves finality and thus cannot be unwound? Yes. Brazilian Central Bank regulations establish the moment of time that finality of payment is achieved. The law establishes also that the securities settlement systems should precise in their own rules and procedures the moment they become the central counterparty to trades as well as the moment finality of settlement - delivery versus payment - is achieved. SSS's rules and procedures should be approved by both Brazilian Central Bank and Securities Commission.

5. Does a pledgee have an absolute right to realise their security at all times? First, it is important to clarify that as central counterparty and guarantor of settlement, CBLC is the pledgee of all collateral posted within its systems. In such position, Brazilian Law, Central Bank's Regulations as well as its own rules found the legal basis for guaranteeing to CBLC its capacity to execute the collateral posted in case of a participants default. The order of execution as well as the rules for collateralization (defaulters pay) and mutualization (survivors pay) of losses are set forth in CBLC Rules and Procedures.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? CBLC has already submitted to the Brazilian Central Bank and Securities Commission its revised Rules & Procedures. Should it be approved without extensive change, the Rules contemplates definition of default, rules applicable in case of a default, layers of protection as well as Settlement Fund rules.
Regarding depository (or custody) risk, it is under analysis right now the possibility of creating a specific fund in order to protect investors.

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	Yes. According to the Brazilian Securities Commission legislation, the depository account structure must segregate assets at the beneficial owner level. As a result, there should be not only a total segregation between the assets of the depository from the assets of custodians (depository agents) but also the assets of investors should be segregated from the assets of the custodians responsible for them and registered in individual accounts held in the investors' name.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	Please refer to answer above. As securities should be held in the name of the beneficial owner, in the case of a custodian or the depository default, there are no legal uncertainty about the ownership of the securities. Through beneficial owner account structures, investors are surely better protected against any defaulting situation. Many countries in north Europe and Asia-Pacific have a similar practice, the difference being how far they relate directly to the investors.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	As explained above. The legal owner of the securities held in CBLC Depository Service is always the beneficial owner. From the issuer's point of view, CBLC, in the issuers record, is only the fiduciary owner.
4.	Does local law clearly define the point of time when a settlement, both for the security and the cash involved, achieves finality and thus cannot be unwound?	Yes. Brazilian Central Bank regulations establish the moment of time that finality of payment is achieved. The law establishes also that the securities settlement systems should precise in their own rules and procedures the moment they become the central counterparty to trades as well as the moment finality of settlement - delivery versus payment - is achieved. SSS's rules and procedures should be approved by both Brazilian Central Bank and Securities Commission.
5.	Does a pledgee have an absolute right to realise their security at all times?	First, it is important to clarify that as central counterparty and guarantor of settlement, CBLC is the pledgee of all collateral posted within its systems. In such position, Brazilian Law, Central Bank's Regulations as well as its own rules found the legal basis for guaranteeing to CBLC its capacity to execute the collateral posted in case of a participants default. The order of execution as well as the rules for collateralization (defaulters pay) and mutualization (survivors pay) of losses are set forth in CBLC Rules and Procedures.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	CBLC has already submitted to the Brazilian Central Bank and Securities Commission its revised Rules & Procedures. Should it be approved without extensive change, the Rules contemplates definition of default, rules applicable in case of a default, layers of protection as well as Settlement Fund rules. Regarding depository (or custody) risk, it is under analysis right now the possibility of creating a specific fund in order to protect investors.