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?	Because the rights of investors are adequately protected by the Securities giro transfer act (see answer 2 below), there is no physical segregation or segregation of accounts required by local rules or regulations between client assets and custodian assets in the central securities depository Necigef.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	As a consequence of giving securities into custody with an affiliated institution of Necigef (such as KAS BANK), the person who was the owner of the securities at the moment of acceptance thereof in custody by the affiliated institution, becomes co-owner of the collective deposit (verzameldepot) held by the affiliated institution together with those who are already co-owner at that time. Such co-ownership right is proportional to the amount of securities deposited by that co-owner with the relevant affiliated institution. An affiliated institution can give securities in custody with Necigef. Securities are thus by law segregated from the affiliated institution's or Necigef's own assets and would therefore not form part of the bankruptcy estate of the affiliated institution or Necigef.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	Dutch law does not recognise a formal distinction between legal and beneficial ownership of securities.
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?	As a result of the implementation of the Settlement Finality Directive in the Netherlands, the retroactive effect of a bankruptcy order has been repealed in respect of instructions of a participant of a designated system as meant in the Settlement Finality Directive, in such system. Following clause 212b of the Bankruptcy Act instructions of participants (transfer or netting orders and resulting payments, deliveries and netting) which entered into the system before the handing down of the bankruptcy order are enforceable, and instructions which entered into the system after the moment of handing down of the bankruptcy order are enforceable provided that they are executed on the same day and the settlement agent, central counterparty or clearing house did not know and should not have known of the bankruptcy of the participant. The moment of entry of an instruction into a system is defined by the rules of that system. Designated systems are for instance the central securities depository Necigef, the securities and derivatives clearing house Clearnet and the RTGS-system TOP of the Dutch central bank.
5.	Does a pledgee have an absolute right to realise their security at all times?	Although the right of pledge is a limited in rem right in movable property, granting the pledgee, as a preferential creditor (separatist), the right of parate executie, allowing him to foreclose on the pledged property without a judgment and notwithstanding the bankruptcy of the pledgor, the pledgee is only allowed to realise the security if the pledgor is in default with the fulfilment of its obligations.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Yes, clause 27 of the Securities giro transfer act stipulates that a collective deposit which is insufficient to return to each participant the quantity of securities in respect of which he participates, shall be allocated with the following rules. Securities shall be returned to participants on a proportional basis in a quantity which is compatible with the rights of the other participants. If the remaining quantity of securities is too small to permit allocation, they shall be sold on a stock exchange and the proceeds shall be distributed to the participants in proportion to their shares in the collective deposit. Other assets included in the collective deposit shall be liquidated in the most appropriate manner and the proceeds distributed to the participants in proportion to their shares in the collective deposit. For the purposes of application of clause 27, the affiliated institution which holds a collective deposit shall, if it is itself a participant, only be allocated the quantity remaining after settlement of the other participants' entitlements in respect of their shares in the collective deposit, unless it can prove that the deficit was caused by circumstances which cannot be attributed to it.