Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: Russia

Status: October 23, 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? The Regulation On Depository Activities in the Russian Federation #36, which is the main legal act regulating depository activity and with which all custodians are obliged to, stipulates that for the purposes of providing the safety of clients' assets the depository must provide separate custody of the securities and/or the records of the client's rights for securities from the securities owned by the depositary itself. For these purposes the depositary must act as a nominal holder of clients' securities at the securities registrar or at another depository and provide the separation of its own account from its client's accounts.

According to this Regulation the depository must also provide separate custody of each client's
assets from the assets of the other clients of the depository in particular by means of opening a separate depo account for each client.

2. How are clients' assets protected in the event of insolvency of a custodian or depository? The Regulation On Depository Activities in the Russian Federation #36 provides that the client's assets are not subject to lien or claim against the custodian and can not be used for redemption of the custodian's own debts. Should the depository be recognised to be insolvent, clients' assets must be transferred to another depository in accordance with the client's instruction or re-registered into his beneficiary owner's account at the registrar.

3. Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security? In addition to beneficial owner concept the law recognises the existence of other two types of market participants, which can instruct the depository with respect to the client's assets - fiduciary of the account and trustee. But the law stresses that such entities do not receive the proprietary rights for the securities and beneficiary owners' rights are protected.

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? The Federal Law on the Securities Market clearly identifies the point of time when the rights to securities pass to the acquiring party.

For equities the market practice is that the seller is responsible for re-registration of securities and the buyer will normally pay for the shares when they have been re-registered into his (or his custodian's) account. The settlement cycle is not fixed and the settlement date can not be determined in advance. For Minfin bonds the normal settlement cycle is determined as T+5, but it is possible to settle a transaction in a shorter timeframe. Most transactions are settled free of payment, and since bonds are USD denominated, cash is settled off-shore. The settlement cycle for state bonds (GKO/OFZ) is T+0. Trading occurs in the on-line regime and settlement happens automatically immediately upon matching the trades in the stock exchange system. The cash and securities transfer is executed simultaneously.

5. Does a pledgee have an absolute right to realise their security at all times? The pledgee have a right to realise the pledged property in the event of the failure of the debtor to fulfil his obligations secured by the pledge for which he is liable.

6. Does the depository have loss sharing provisions in its rules, and how would these be applied? There is no loss-sharing concept on the Russian market.

1.	Under local rules and regulations, what are the segregation requirements for keeping client assets and custodian assets in the depository?	The Regulation On Depository Activities in the Russian Federation #36, which is the main legal act regulating depository activity and with which all custodians are obliged to, stipulates that for the purposes of providing the safety of clients' assets the depository must provide separate custody of the securities and/or the records of the client's rights for securities from the securities owned by the depositary itself. For these purposes the depositary must act as a nominal holder of clients' securities at the securities registrar or at another depository and provide the separation of its own account from its client's accounts. According to this Regulation the depository must also provide separate custody of each client's assets from the assets of the other clients of the depository in particular by means of opening a separate depo account for each client.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	The Regulation On Depository Activities in the Russian Federation #36 provides that the client's assets are not subject to lien or claim against the custodian and can not be used for redemption of the custodian's own debts. Should the depository be recognised to be insolvent, clients' assets must be transferred to another depository in accordance with the client's instruction or re-registered into his beneficiary owner's account at the registrar.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	In addition to beneficial owner concept the law recognises the existence of other two types of market participants, which can instruct the depository with respect to the client's assets - fiduciary of the account and trustee. But the law stresses that such entities do not receive the proprietary rights for the securities and beneficiary owners' rights are protected.
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?	The Federal Law on the Securities Market clearly identifies the point of time when the rights to securities pass to the acquiring party. For equities the market practice is that the seller is responsible for re-registration of securities and the buyer will normally pay for the shares when they have been re-registered into his (or his custodian's) account. The settlement cycle is not fixed and the settlement date can not be determined in advance. For Minfin bonds the normal settlement cycle is determined as T+5, but it is possible to settle a transaction in a shorter timeframe. Most transactions are settled free of payment, and since bonds are USD denominated, cash is settled off-shore. The settlement cycle for state bonds (GKO/OFZ) is T+0. Trading occurs in the on-line regime and settlement happens automatically immediately upon matching the trades in the stock exchange system. The cash and securities transfer is executed simultaneously.
5.	Does a pledgee have an absolute right to realise their security at all times?	The pledgee have a right to realise the pledged property in the event of the failure of the debtor to fulfil his obligations secured by the pledge for which he is liable.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	There is no loss-sharing concept on the Russian market.