Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: India

Status: October 25, 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? Depository Participants are required or permitted to segregate assets held for their own benefit from those they hold for their clients. Segregation is accomplished by separately designated participant accounts and sub-accounts within a single participant account. Records are maintained that identify the assets of each participant and segregate the institution's own assets and liabilities from the assets of participants.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? In the event a participant's account is blocked for any reason (e.g., insolvency, penalties, violations, etc.) securities held in the account on behalf of the participant's clients would be accessible to the owner, but not to the depository's creditors.

Custodians hold paper securities as trustees and as such the securities cannot be attached. In the case of dematerialized securities, the custodian's role is limited to the maintenance of accounts faithfully. As such the attachment of securities in case of insolvency of the custodian does not exist.

In the case of depositories, they are the owners of securities in the books of the company, as per the Companies Act 1956. However, they do not hold the beneficial interest in the securities held. Therefore, the securities cannot be attached in case of insolvency of the depository.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? Yes. The law recognises beneficial ownership which may be different from legal ownership.

Transactions involving dematerialized securities are automatically registered, without transfer documentation, with securities transferred to the account of the beneficial owner maintained at the depository. Legal ownership and beneficial ownership cannot be differentiated for securities held in physical form.

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. Transactions settling through the clearinghouse of their respective exchange achieve a point of final and irrevocable settlement following the pay-out of funds and securities to clearinghouse members.

5. Does a pledgee have an absolute right to realise their security at all times? This depends on the agreement between the pledger and the pledgee. Generally, the pledgee has the right to invoke the pledge in order to realise the security. The depository, on the receipt of a request for invocation, shall invoke the pledge and amend its record to register the pledgee as a beneficial owner. Generally, a notice is given to the pledger before disposing off the securities by the pledgee.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? No. However, each depository maintains comprehensive insurance for itself and depository participants. In addition, other forms of risk management exist based on assessing and monitoring participant volumes and participant financial strength. Procedural checks also exist including a controlled delivery versus payment settlement that minimizes the risk of default by a participant. Each of the major security exchanges also maintains a guarantee fund for transactions settling through their respective clearinghouse.

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	Depository Participants are required or permitted to segregate assets held for their own benefit from those they hold for their clients. Segregation is accomplished by separately designated participant accounts and sub-accounts within a single participant account. Records are maintained that identify the assets of each participant and segregate the institution's own assets and liabilities from the assets of participants.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	In the event a participant's account is blocked for any reason (e.g., insolvency, penalties, violations, etc.) securities held in the account on behalf of the participant's clients would be accessible to the owner, but not to the depository's creditors. Custodians hold paper securities as trustees and as such the securities cannot be attached. In the case of dematerialized securities, the custodian's role is limited to the maintenance of accounts faithfully. As such the attachment of securities in case of insolvency of the custodian does not exist. In the case of depositories, they are the owners of securities in the books of the company, as per the Companies Act 1956. However, they do not hold the beneficial interest in the securities held. Therefore, the securities cannot be attached in case of insolvency of the depository.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	Yes. The law recognises beneficial ownership which may be different from legal ownership. Transactions involving dematerialized securities are automatically registered, without transfer documentation, with securities transferred to the account of the beneficial owner maintained at the depository. Legal ownership and beneficial ownership cannot be differentiated for securities held in physical form.
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. Transactions settling through the clearinghouse of their respective exchange achieve a point of final and irrevocable settlement following the pay-out of funds and securities to clearinghouse members.
5.	Does a pledgee have an absolute right to realise their security at all times?	This depends on the agreement between the pledger and the pledgee. Generally, the pledgee has the right to invoke the pledge in order to realise the security. The depository, on the receipt of a request for invocation, shall invoke the pledge and amend its record to register the pledgee as a beneficial owner. Generally, a notice is given to the pledger before disposing off the securities by the pledgee.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	No. However, each depository maintains comprehensive insurance for itself and depository participants. In addition, other forms of risk management exist based on assessing and monitoring participant volumes and participant financial strength. Procedural checks also exist including a controlled delivery versus payment settlement that minimizes the risk of default by a participant. Each of the major security exchanges also maintains a guarantee fund for transactions settling through their respective clearinghouse.