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?	There is no regulatory requirement for segregation to be undertaken at depository level although the functionality exists. At depository level the custodian has the ability to segregate client assets at investor level.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	CSDCC Shanghai and Shenzhen branches register all assets in the legal name of the clients. In the event of default it is believed that China's law would protect the investor against claims on their agent because the client's asset account is clearly segregated from the asset account of the insolvent party.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	The nominee concept is acceptable. The concept of beneficial owner and legal owner of a security is recognized by local regulation.
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?	No local law clearly defines the point of time when settlement achieves finality in China. Normally, for B shares, in Shanghai, once the shares are transferred in the books of CSDCC Shanghai, the securities/cash cannot be unwound. In Shenzhen, once the trades are matched on T+2, the securities/funds will not be unwound.
5.	Does a pledgee have an absolute right to realise their security at all times?	According to the Mortgage Law, if not specified otherwise in the mortgage contract, the pledgee owns all benefits arising from the mortgage.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	The respective CSDCC branches have set up their own guarantee fund (Shanghai: USD 13.7 million; Shenzhen: HKD 100 million) to ensure the completion of settlement of B shares and cash and to guard against loss that might result from force majeure. Clearing participants are required to contribute to the fund.