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?	PCD Rules and Regulations Rule 1.7 Securities Accounts 1.7.1 Securities Account A Participant shall open and maintain with PCD one or more Securities Accounts which shall reflect the balance of Securities held by Participants resulting from all Lodgments, Uplifts, Corporate Action Entitlements as well as Transactions. A Participant which acts both as dealer and broker shall be provided and shall maintain with the System at least three Securities Account to be known as the Principal-Local or Principal-Foreign Securities Account, the Client-Local Securities Account and the Client-Foreign Securities Account. In the event that a Broker-Participant has foreign clients, it shall properly segregate and maintain their holdings in the Client-Foreign Securities Account. The Securities Account/s shall be within the exclusive control of the Participant. 1.7.2 Sub-Accounts A Participant's Securities Account shall be subdivided into a Settlement Sub-Account and such other Sub-Accounts as the Participant may apply for and PCD may allow. Every Sub-Account, including the Settlement Sub-Account, shall, at the time of opening, be designated in a clearly distinctive manner by way of numbering, lettering, naming or any combination of these. In the event that a Participant has foreign clients, it shall open and maintain a separate Client-Foreign Securities Sub-Account for that purpose and properly segregate and maintain said holdings in the specific Sub-Account. 1.7.6 Separation of Securities A Sub-Account may be used by the Participant to set aside and segregate: (a) the Participant's available and unencumbered Securities. From those which have been encumbered; (b) Securities held by the Participants for its clients on credit, from those which have been fully paid by the clients; (c) Securities held by the Participants for its Filipino clients, from those held for its non-Filipino clients; (d) Securities pledged by a non-Participant to a Participant; (e) Securities pledged by a Participant to another Participant and held by PCD for and subject only to the joint instructions of the Participants; or (f) Any other Account required by Participant and available from PCD.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	When securities are lodged in PCD, legal title is transferred to PCD Nominee Corp., a wholly-owned subsidiary of PCD with the single purpose of holding legal title to (but not Beneficial Ownership) all Securities lodged in the PCD system. If PCD becomes insolvent, the clients' assets are protected under the PCD Nominee Corp. The Civil Code of the Philippines (Republic Act no 386) provides that as a rule but subject to certain exceptions, property deposited must be returned to the depositor upon demand together will all it's products, even though a specific period for the return may have been fixed, unless the property deposited is judicially attached or the depository has received notice of the opposition by a third person to the return or removal of the property deposited. If the Philippine subcustodian becomes insolvent, only property belonging to the insolvent subcustodian will pass to the assignee in bankruptcy. Property held in trust by the insolvent subcustodian as a trustee of an express or implied trust will be excluded from the insolvency proceedings. Thus, the assignee in bankruptcy will not acquire title to property which does not belong to the insolvent subcustodian even if such property is in the latter's possession. The owner can recover the trust property from the insolvent subcustodian including its creditors. In recovering the property, the owner is exercising its rights as "owner" and not as depositor or creditor of the insolvent subcustodian. 2. Recovery of Cash The law on loans governs fixed , savings and/or current deposits of money in banks and similar institutions. The relationship between the depositor and the bank is that of creditor and debtor. If the bank becomes insolvent, the depositor does not have a preferred lien on the money deposited. The depositor must file a claim as a general creditor in the insolvency proceedings. The depositor's ability to recover will be governed by the provisions of Sections 29 to 33 of the New Central Bank Act (Republic Act no. 7653) as supplemented by the Civil Code provisions on the concurrence and preference of credits. However, if the money or cash proceeds from the sale of assets are held by the bank not as deposits in fixed, savings or current accounts but are identified as monies held in trust for the custodian or its Investment Company customers or as specific monies (e.g. deposits identified by specific serial numbers and denominations or identified as monies in a specific safety deposit box held in trust for the depositor), the depositor may recover the money as owner in the same manner as recovery of securities under the Civil Code of the Philippines (described above) Generally, deposits of money or its equivalent which are received by Philippine banks in the usual course of business are insured with the Philippine Deposit Insurance Corporation (PDIC). The PDIC is a government-owned and controlled corporation created under Republic Act No. 3591. The maximum insurable amount of any insured deposit is PHP100,000.00 If an insured bank is closed due to insolvency, the PDIC is required to pay the insured depositor a maximum of PHP100,000.00. In determining the amount due to the depositor, all deposits in the bank maintained in the same capacity and the same right for the depositor's benefit either in the depositor's name or in the name of others are added together. Trust funds or funds held by an insured bank in a fiduciary capacity are not included in the insurance coverage. Funds which are payable at an office of the depository bank located outside the Philippines are also not included in the insurance coverage.
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?	No. The right of the pledgee depends on the agreement between the pledgor and the pledgee.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Yes. The maximum total amount payable by PCD to all Participants for a Loss of Securities, Defective Lodgement, System-Related Loss or Operation-Related Loss shall be limited to actual damages or losses suffered by the Participant, and shall not exceed the net amount recovered by PCD from the insurance policies or any other responsible Person in respect of the loss, except to the extent covered by insurance. If more than one Participant is affected by a loss, the amount recovered by PCD shall be pro-rated among the Participants.