Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: Luxembourg

Status: November 5, 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? Clearstream Banking, Luxembourg (CBL) does not acquire ownership of securities deposited in a CBL account (pursuant to Articles 1915 and following of the Luxembourg Civil Code). Because of the requirements of the Luxembourg regulatory authority, the CSSF, concerning on-balance sheet and off-balance sheet reporting, securities deposited with CBL do not appear on CBL's balance sheet. Therefore, securities deposited by Customers are not in any legal sense commingled with CBL's own assets.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? As CBL and its sub-custodians do not acquire ownership of securities deposited in a CBL account, clients' assets do not fall into the bankruptcy estate of a custodian or depository in the event of insolvency.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? Clearstream Banking is part of an international market and, therefore, operates through the basic principle of no distinction between the legal owner and the beneficial owner of securities. This means that the holder of the securities has both the beneficial and the legal ownership of them, i.e. Clearstream Banking's customer, when its securities are held in the Clearstream Banking system.

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, in the Luxembourg law of 12 January 2001 implementing the EU directive 98/26/CE on Settlement Finality.

5. Does a pledgee have an absolute right to realise their security at all times? The Grand-Ducal Regulation of 17 February 1971 ("1971 Regulation") was enacted shortly after the founding of Cedelbank to provide a statutory basis for book entry custody, clearing and settlement of securities. The Luxembourg legal system regarding collateral was adapted to the modern market needs in 1994 by an amendment to the 1971 Regulation and by the law of 21 December 1994. Realisation or enforcement against collateral is possible after issuance of a simple letter of notification from the creditor to the debtor under the Laws of Luxembourg. To simplify enforcement, the Law of 21 December 1994 provided that realisation of the pledge can be effected by appropriation by the creditor of the pledged assets at the market price rather than through sale of the collateral. The 1996 Amendment to the 1971 Regulation introduces the possibility of a contractual elimination or reduction of the 8-day notice period, allowing immediate foreclosure and realisation of collateral among financial professionals.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? Yes, these provisions are outlined in Article 50 of the General Terms and Conditions of Clearstream Banking, Luxembourg which states: "……Losses in a collective holding of a particular class of securities are to be borne jointly and on a prorata basis by the co-owners of the collective holding on the basis of the credit balance existing at the time where the loss occurred. If it is not possible to determine such time, the close of books on the day immediately preceding the day on which the loss was discovered shall be conclusive."

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	Clearstream Banking, Luxembourg (CBL) does not acquire ownership of securities deposited in a CBL account (pursuant to Articles 1915 and following of the Luxembourg Civil Code). Because of the requirements of the Luxembourg regulatory authority, the CSSF, concerning on-balance sheet and off-balance sheet reporting, securities deposited with CBL do not appear on CBL's balance sheet. Therefore, securities deposited by Customers are not in any legal sense commingled with CBL's own assets.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	As CBL and its sub-custodians do not acquire ownership of securities deposited in a CBL account, clients' assets do not fall into the bankruptcy estate of a custodian or depository in the event of insolvency.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	Clearstream Banking is part of an international market and, therefore, operates through the basic principle of no distinction between the legal owner and the beneficial owner of securities. This means that the holder of the securities has both the beneficial and the legal ownership of them, i.e. Clearstream Banking's customer, when its securities are held in the Clearstream Banking system.
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, in the Luxembourg law of 12 January 2001 implementing the EU directive 98/26/CE on Settlement Finality.
5.	Does a pledgee have an absolute right to realise their security at all times?	The Grand-Ducal Regulation of 17 February 1971 ("1971 Regulation") was enacted shortly after the founding of Cedelbank to provide a statutory basis for book entry custody, clearing and settlement of securities. The Luxembourg legal system regarding collateral was adapted to the modern market needs in 1994 by an amendment to the 1971 Regulation and by the law of 21 December 1994. Realisation or enforcement against collateral is possible after issuance of a simple letter of notification from the creditor to the debtor under the Laws of Luxembourg. To simplify enforcement, the Law of 21 December 1994 provided that realisation of the pledge can be effected by appropriation by the creditor of the pledged assets at the market price rather than through sale of the collateral. The 1996 Amendment to the 1971 Regulation introduces the possibility of a contractual elimination or reduction of the 8-day notice period, allowing immediate foreclosure and realisation of collateral among financial professionals.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Yes, these provisions are outlined in Article 50 of the General Terms and Conditions of Clearstream Banking, Luxembourg which states: "……Losses in a collective holding of a particular class of securities are to be borne jointly and on a prorata basis by the co-owners of the collective holding on the basis of the credit balance existing at the time where the loss occurred. If it is not possible to determine such time, the close of books on the day immediately preceding the day on which the loss was discovered shall be conclusive."