Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: New Zealand

Status: October 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? FASTER: NZSE regulations require participants to hold client assets (stock and cash) in ‘trust’ accounts. These are separate from operational accounts of participants and are not part of the participants assets.

NZCSD: At the Reserve Bank of New Zealand, which has clear statutory authority to provide security registry or "depository" functions, one of the underlying principles for registered banks is prudent management, a subset of which is separation of the business of banking per se, from other businesses. Accordingly the depository is NZCSD, a separate entity, in conformity with the above principle. Further on New Zealand trustee law principles state that it would also in most circumstances be a breach of trust to intermingle custodial assets with other assets.

NZCSD does not hold any proprietary assets through the Austraclear System.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? General New Zealand insolvency and trust law will be applicable to the protection of the depositor’s assets in the event of NZCSD’s insolvency. New Zealand insolvency law provides that any property held by an insolvent as trustee will not form part of the property available for distribution to creditors.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? Yes – under the FASTER Order. Also, New Zealand law recognises that a beneficial owner may differ from the legal owner of a security.

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 relation to the "Austraclear" payment and clearance system operated by NZCSD/RBNZ it is noted that the payments are "irrevocable" when they are settled by the system.

5. Does a pledgee have an absolute right to realise their security at all times? Formal lending and borrowing not recognised in New Zealand.

The assumption made here is that a "pledgee" is the equivalent of a "mortgagee" i.e. the person to whom an asset is pledged as a security or the holder of a security. In New Zealand the doctrine of equity of redemption gives a right to redeem to the pledger /mortgagor, any asset pledged as security on payment of the debt. There cannot be said to be an "absolute" right in a pledgee to realise security at all times in New Zealand. Depending on the nature of the security there are various statutory notices, some of which are mandatory, and procedures which must be observed.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? NZSE has such an arrangement (including a fidelity fund) under the current mutual structure – however this is secondary to the elimination of principal risk and management of individual participant’s own risk. With demutualisation loss sharing provisions will be disassembled.

The rules for the NZCSD system contains comparatively standard liability and indemnity provisions and notably exclusions of liability and limitations of liability and members indemnities.

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	FASTER: NZSE regulations require participants to hold client assets (stock and cash) in ‘trust’ accounts. These are separate from operational accounts of participants and are not part of the participants assets. NZCSD: At the Reserve Bank of New Zealand, which has clear statutory authority to provide security registry or "depository" functions, one of the underlying principles for registered banks is prudent management, a subset of which is separation of the business of banking per se, from other businesses. Accordingly the depository is NZCSD, a separate entity, in conformity with the above principle. Further on New Zealand trustee law principles state that it would also in most circumstances be a breach of trust to intermingle custodial assets with other assets. NZCSD does not hold any proprietary assets through the Austraclear System.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	General New Zealand insolvency and trust law will be applicable to the protection of the depositor’s assets in the event of NZCSD’s insolvency. New Zealand insolvency law provides that any property held by an insolvent as *trustee* will not form part of the property available for distribution to creditors.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	Yes – under the FASTER Order. Also, New Zealand law recognises that a beneficial owner may differ from the legal owner of a security.
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 relation to the "Austraclear" payment and clearance system operated by NZCSD/RBNZ it is noted that the payments are "irrevocable" when they are settled by the system.
5.	Does a pledgee have an absolute right to realise their security at all times?	Formal lending and borrowing not recognised in New Zealand. The assumption made here is that a "pledgee" is the equivalent of a "mortgagee" i.e. the person to whom an asset is pledged as a security or the holder of a security. In New Zealand the doctrine of equity of redemption gives a right to redeem to the pledger /mortgagor, any asset pledged as security on payment of the debt. There cannot be said to be an "absolute" right in a pledgee to realise security at all times in New Zealand. Depending on the nature of the security there are various statutory notices, some of which are mandatory, and procedures which must be observed.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	NZSE has such an arrangement (including a fidelity fund) under the current mutual structure – however this is secondary to the elimination of principal risk and management of individual participant’s own risk. With demutualisation loss sharing provisions will be disassembled. The rules for the NZCSD system contains comparatively standard liability and indemnity provisions and notably exclusions of liability and limitations of liability and members indemnities.