Legal Task Force Session In ACG15 November 4th, 2011 Seoul, Korea

Legal Task Force Session in the 15 th ACG  Presentation by SD&C  Presentation by Jasdec  Discussion among the members  Summary

Presentation by SD&C Legal Protection of CSD/CCP in Case of Participants’ Insolvency Comments on Principles for FMI Next Step

Legal Protection Of CSD/CCP In Case Of Participants’ Insolvency Contributions from SD&C Contributions from other members Facts and feedbacks Conclusions and Suggestions

Contributions from SD&C  Questionare investigation  Draft of the report  Send the draft to members and get feedbacks  Finalization of the report

Contributions from other members TSD,NSDL,VSD,KSD,SICDA,CSEHKSCC, JASDEC, JDCC, JSCC, TDCC, KACD, CDC, CDSL.

Facts and feedbacks (1)  Would CSD/CCP be affected by participants’ insolvency?  No affectted, 7 members  For CCP only, 1 member  For CSD only, 1 member  For both CCP and CSD, 2 members  Are there any cases of participant’s insolvency?  No cases, 4 members  Having cases, 7 cases

Facts and feedbacks (2)  Do the rules take precedence over law of insolvency?  Type one: Not clearly defined, 6 members  Type two: Explicitly stipulated in laws, 7 members  Are settlement instructions still enforceable after the participants go into bankruptcy?  Type one: Not clearly defined, 3 members  Type two: Explicitly stipulated in laws, 9 members

Facts and feedbacks(3)  Are the rules and contracts between CSD/CCP and its participants still be binding to the insolvent participants?  Type one: Not clearly defined, 1 member  Type two: Yes, 12 members

Facts and feedbacks (4)  Would the rights of investors be affected if the participant goes into insolvency?  No, 8 members  separately segregate securities account  held separately in investor’s own name  Not clear, 1 member  depends on the relationships between investors and participants  Yes, 2 members

Facts and feedbacks(5)  Is it possible for investors to move their securities and money from insolvent participants to other participants?  No, 4 members  Not clear, 1 member  Yes, 6 members

Facts and feedbacks (6)  Is loss sharing rule applicable?  No, 11 members  Do you assume obligation of guarantee settlement?  Yes, 9 members  No, 1 member  Not applicable, 1 member  Which DVP models apply to your market?  Model 1, 3 members  Model 2, 4 members  Model 3, 6 members

Facts and feedbacks (7)  Do you have self-disciplined rules?  Yes, 6 members  No, 4 members  Not applicable, 1 member  What is the relationship between participants and their clients?  Commission / brokerage relationship: 9 members  Trust relationship: 3 members  Agent relationship: 6 members  Others, Contractual (deposit) Relationship: 3 members  What is the relationship between CSD/CCP and its participants?  Principal and agent: 1 member  Members or Participants: 3 members  Direct contractual relationship: 6 members  According to the agreement: 2 member

 Does CSD/CCP has the right to refuse to deliver securities/ cash to its defaulting participants?  Yes, 9 members  No, 1 member  And what is the legal nature of the above right?  Lien: 1 member  Pledge: 2 members  Other: 5 members Facts and feedbacks (8)

 The legal framework for securities depository and clearing/settlement varies from jurisdiction to jurisdiction and reflects different legal traditions  Key aspects of CSD/CCP’s legal framework should include: enforceability of transactions, protection of customer assets (particularly against loss upon the insolvency of a participant), finality of settlement, arrangements for achieving delivery versus payment, default rules, and liquidation of assets pledged or transferred as collateral. Comments and Suggestions

Comments on CPSS/IOSCO principle  Generally speaking, ACG members support CPSS and IOSCO to establish the new set of principles for FMIs;  Besides, ACG members have also some suggestions to CPSS/IOSCO.

Suggestions (1)  Clarify which principles apply to CSDs with SSSs, and which apply to CSDS without SSSs  Due to the complexity and the difficulties for FMIs to identify and analyze all potential conflict-of-law issues, certain flexibility should be allowed in adopting principle 1

 The costs and effectiveness resulting from the building of risk management systems should be evaluated and balanced thoroughly. (principle 3)  To contain credit risks, CCPs should take into account the characteristic of the market, not merely the participant with largest exposures. (principle 4) Suggestions (2)

 If a CSD wants to engage in CCP business, a more sound and resourceful risk management system should be in place.  And if a CSD does have the advantages of efficiencies and cost effectiveness the CSD should engage in CCP business in derivative products and spot markets through its subsidiaries or other forms of separate legal entity.(principle 11)  How much equity capital does a FMI should hold to cover potential general business risks?  Decided by each FMI/9 months of expenses/12months of expenses. Suggestions (3)

Suggestions (4)  To contain operational risks some members suggest that the following words should be noted in principle 17: “ any single system should have the capacity of acting as back-up for systems that FMIs set up in other locations”  Also simultaneous disasters should be taken into account in working out the BCP (principle 17)

Next Step (1) I 、 Wrap up of the topic “Legal Protection of CSD/CCP in case of Participants’ Insolvency ”  Finalizing the version after the 13 th Cross Training Program  Sharing research outcomes among members II 、 Continue the topic “Legal Application in cross- border securities transactions”  This will be 2012 ‘s focus

Next Step(2) III 、 Any new topics for 2013?  Theme: The application of title transfer collateral agreement in securities markets---suggested by SD&C  Any others?  IF we will start the topic suggested by SD&C, what are the major points we should enhance our research?

Next Step (3) III 、 New Research Program Outlines (to be discussed)  Collateral Transactions  Collateral Agreement  Title Transfer Collateral Agreement  conclusions

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