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?	In accordance with Article 174 of the Securities & Exchange Act ("SEA"), KSD segregates depositors' assets from assets belonging to the depositors' clients. When depositing assets with KSD, depositors are required to specify whether such assets are proprietary, or client property (Article 174-2 SEA).
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	Client assets booked in the Participant Account Book managed by KSD do not fall under any lien or any interest in any event. In the event of insolvency of participants, client assets shall be blocked and KSD acts on instructions only from the clients.
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?	Yes
5.	Does a pledgee have an absolute right to realise their security at all times?	Yes
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	KSD has no loss-sharing provisions in case of settlement default. However, in accordance with Article 174-5 of SEA, KSD depositors are required to accept joint and several liability with the KSD when deposited securities fall short. Any person responsible for the shortage of securities deposited must replenish the shortage without delay. If the responsible party fails to replenish such shortage, the KSD depositors must jointly replenish such shortage. There is no specific loss sharing formula. It is believed that there is almost zero possibility that the deposited securities fall short as far as scripless securities are concerned. Most of the securities are scripless, being transferred by book-entry in the Korea market. A certain loss potential exists in the case of physical securities. However, no loss has ever materialized to date.