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?	Market participants (brokers and banks) are, under the provisions of the Securities Market Act, obliged to establish separate individual accounts for their customers. Customers' accounts and assets are technically and legally completely segregated from KDD's members' accounts and assets. Segregation from final customer accounts is compulsory. In the central registry this is accomplished through a multiplicity of accounts, which are not sub-accounts but direct accounts called the final customer accounts. Basically, KDD holds two types of (final customer) accounts: house accounts that belong to its members and client accounts that belong to legal owners, no matter where they conduct their business. According to the provisions of the Dematerialized Securities Act, the account holder is also the legal owner of securities, booked into his account. There is no difference between the two types of accounts from KDD's point of view. This also applies for custodians and their clients, KDD holds securities registered in the name of their legal owner (=customer).
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	As explained above, the compulsory segregation of clients' assets ensures that they stay intact in case of a KDD participant's insolvency or the insolvency of KDD itself. A participant's insolvency can result in its expulsion (temporary or permanent). from KDD as well as LJSE. In such case, the participant's clients could relocate their accounts and transactions to a different participant.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	The Dematerialized Securities Act recognizes securities legal owner only; but does not preclude any bilateral agreements from establishing nominee ownership. Market practice has largely established the nominee ownership concept for non-resident investors.
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?	Under the LJSE Rules, matched trades become binding and thus final 30 minutes after the market closes, that is to say on T+O at 1330. Matched instructions, which become locked-in trades at 1330, are received online by the KIS system, which in turn executes them if requested instructions correspond to actual status and availability of securities in KIS. Matching is required for all stock exchange trades.
5.	Does a pledgee have an absolute right to realise their security at all times?	Yes (the liquidation of collateral procedure is governed by the provisions of the Obligations Code). Liquidation of collateral takes several forms: partial liquidation full liquidation execution of collateral Partial and full liquidation take place by book entry on the basis of received pledge liquidation order, where the pledgee`s signature, as representation of his (legal) will, is the basis of collateral liquidation. It is executed by book entry by the KDD. As for execution of collateral, under the provisions of the Dematerialized Securities Act as well as those of the Obligations Code, the pledgee must summon the pledgor when the time limit set for fulfillment of pledgor's underlying obligation towards pledgee expires, that within 8 days from receiving such notice, he will execute the lien on securities. If the pledgor fails to fulfill its obligation within 8 days from receipt of the pledgee`s notification, the pledgee may sell the pledged securities. He does so with instruction to the pledgor`s broker with evidence, confirming postal delivery of the above described notice.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	Please see above -Recommendation 4, Question 3.