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?	Pursuant to sec. 4 para. 1 German Deposit Act, incoming securities are generally deemed to belong to the clients of Clearstream Banking Frankfurt (CBF) participants. Thus, CBF participants have to indicate specifically when they deliver own securities. On the basis of this legal situation the German Federal Banking Supervisory Authority issued a declaration dated 21 December 1998 stating that incoming securities have to be allocated to a special account called "Depot B". If ownership of CBF participants is indicated, the relevant securities have to be deposited in "Depot A".
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	CBF does not acquire ownership of securities deposited in a CBF account (legal assumption of "external funds" pursuant to sec. 4 par. I German Depository Law ("Depotgesetz"). Client assets therefore never fall into the insolvency estate of CBF. The same principle applies to client assets held by custodian banks.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	German law does not know - in a strict sense - the distinction between beneficial and legal owner as follows from Anglo-Saxon principles of law. However, German law recognises trust agreements ("Treuhandvereinbarungen") assigning to one party certain rights similar to those of a beneficial owner with the effect that the "beneficial owner" is protected against insolvency of the "legal 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?	No, the point of time when a settlement achieves finality has to be deduced from several provisions of German private law. According to these a transfer of cash or securities is in general final upon credit to the account of the customer and can normally not be challenged. A new law dated 8 December 1999 (Official Federal Gazette ("BGBl.") 1999 I p. 2384) establishes specific beneficial rules to secure finality and to avoid a challenge in insolvency under certain circumstances and for transactions in a recognised settlement system. According to that it is the task of the system to define deadlines for entering instructions. After expiry of such deadline an instruction entered into the system is deemed to be irrevocable and unconditional.
5.	Does a pledgee have an absolute right to realise their security at all times?	A pledge can be realised upon its maturity ("Pfandreife"), i.e. upon due date of the secured claim. This has to be announced by the creditor one month before realisation (sec. 1234 German Civil Code, "Bürgerliches Gesetzbuch"). The enforcement procedures are relatively formalistic and restrictive. They are mandatory and may not be substantially changed by agreement between the parties. In principle, the pledged securities should be sold by the pledgee through an authorised broker dealer if the securities have a stock exchange or market price (sec. 1235 para. 2, 1221 German Civil Code).
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Yes, these provisions are outlined in No. 22 of the General Terms and Conditions of CBF which states (excerpt): "Losses in the collective holding of a particular class of securities are to be borne jointly and on a pro-rata basis by the coowners of the collective holding according to their collective custody credit balance in the ratio of the interests in the collective holding at the time when the loss occurred. If it is not possible to determine such time, the close of the books on the day immediately preceding the day on which the loss was discovered shall be conclusive. The allocation of the loss determined by the Board of Management in agreement with the Supervisory Board shall be binding upon the Customer. The duty to bear losses shall only apply if CBF did not cause the losses in the collective holding by negligence."