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?	Under the Securities Ordinance, a securities dealer must ensure that for securities which are not the property of the dealer, they are either registered in the name of the client or nominees, or deposited in safe custody in a designated account with an authorised institution under the Banking Ordinance or some other institutions approved by the SFC, and establishes and keeps at a licensed bank one or more trust account for paying in certain money received by him or it. Under the Code of Conduct for Persons Registered with the Securities and Futures Commission, a registered person including a securities dealer should in the handling of client transactions or assets, acts to ensure that client assets are accounted for properly and promptly and, where in possession or control of client positions or assets, ensure that client positions or assets are adequately safeguarded.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	Client assets are required to be segregated from that of the securities dealer and the law recognises such segregation. Creditors of the securities dealer generally cannot have access to client assets and the order of distribution of the assets of the insolvent custodian will follow the insolvency law. Participants' assets are segregated from HKSCC's assets. In the event of insolvency of HKSCC, its status is the same as other limited companies in which insolvency legislation related to liquidation will apply. Assets will be frozen pending arrangements to be worked out by the approved liquidators.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	Yes.
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. However, under the CCASS Rules, once a trade is settled, the settlement is irrevocable in terms of securities and cash payments.
5.	Does a pledgee have an absolute right to realise their security at all times?	A Stock Pledgee Participant may only withdraw eligible securities held in HKSCC in relation to the enforcement of its rights under stock pledging transactions in the case of default by a pledgor Participant.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Yes, in relation to Securities loss. HKSCC shall allocate such Securities Loss to those participants having the relevant shares in their stock accounts at the time by debits to their stock accounts either pro-rata to their holdings at the time HKSCC declares that such Securities Loss has occurred or in such other manner as HKSCC shall in its absolute discretion consider fair and appropriate in the circumstances.