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?	There is no regulatory requirement for segregation to be undertaken at depository level although the functionality exists. At depository level the custodian has the ability to segregate client assets at entity level, investor level or fund level. There is extra cost and administrative expense involved with more complex segregation.
2.	How are clients' assets protected in the event of insolvency of a custodian or depository?	There is also the possibility to run separate accounts (called sponsored membership accounts) in the CREST system in the legal name of the client; this results in assets being registered in the client's name. Sponsored membership accounts are accounts of the holder who delegates the management of the technical interface to CREST to a third party (the sponsor). Unless the sponsored member changes the arrangement, all CREST communication must be driven through their sponsor. In all other cases the account is a sub account of the CREST participant; again all movements relating to the account must be originated through that participant. In the event of default it is believed that UK law would protect the investor against claims from an administrator or their agent as long as the relevant accounts were clearly segregated from the principal activities of the insolvent party.
3.	Does local law recognise the existence of beneficial owners who may differ from the legal owner of a security?	The concept of beneficial owner and fiduciary responsibility is clearly enshrined under UK law.
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?	Currently payments in CREST are on an assured payment basis (see Recommendation 5, question 1). Payment between two counterparty CREST members is final simultaneously with the debit and credit of securities and the respective settlement banks assume an unconditional and irrevocable payment obligation as between themselves. "Real" cash settlement occurs between the banks on a multilateral basis at the end of the day. Cash finality and availability of payment as between a recipient CREST member and their settlement bank is subject to agreement between that member and their bank. The UK is planning to enact the European Settlement Finality Directive, and CREST has consulted on rules, which would allow it to be designated under the European Securities Finality Directive. This will give even greater certainty to the concept of finality in a market transaction. In addition there are plans to make the settlement of a dematerialised security in CREST the point of finality rather than for that point to be achieved at the time of transfer in the books of the relevant registrar. This legal change is expected in 2001.
5.	Does a pledgee have an absolute right to realise their security at all times?	Subject to the structure adopted to hold securities charged, there is the ability to realise securities under UK law without impediment. There may be constraints in respect of CREST depository receipts (CDI) where local law could affect the realisation process even if the underlying security is an UK one.
6.	Does the depository have loss sharing provisions in its rules, and how would these be applied?	There are no loss sharing arrangements for domestic (UK, Irish, Channel Islands) securities. The depository depends on its insurance and capital to cover any losses that are its liability. Settlement banks outside the CREST system carry settlement risk for payments in relation to customers of CREST. Stock deficits could in theory arise (although this risk is mitigated by the daily reconciliations and strong audit trails) and such risk, if substantial, would be left to the impacted holders to resolve outside the system as there are financial limits to CREST's liability. CREST does not assume any risk in overseas or domestic markets. Crest claims, in respect of overseas assets, that investors have the protection that would be accorded to them under the relevant local market rules (thus loss sharing would be applied to foreign securities held in CREST if it is applied to local market securities).