For the 1999 work program, each COSRA member was asked to examine the legal, regulatory and operational structures of its CSS. Specifically, each COSRA member reviewed its:

• legal and regulatory framework for CSS;

• financial and operational capacity of CSS; and

• membership standards for CSS.

This report provides information about the types of mechanisms that regulators in the region use to supervise the activities of CSS and general trends in regulatory approaches. The report also provides information about the various operational approaches to the development of CSS in the region. COSRA recognizes that its members are at different stages of development. The report is part of COSRA members’ continuing effort to enhance investor protection, ensure fair, efficient and transparent markets and reduce systemic risk.

The International Organization of Securities Commissioners ("IOSCO") has developed objectives and principles of securities regulation, including principles for the regulation of CSS. These principles will be referenced throughout the report and may be particularly useful as a benchmark for members in various stages of CSS development. This report is not intended to endorse the various approaches that COSRA members are using to regulate CSS. It’s purpose is limited to providing COSRA members with information about the status of CSS regulation in the region and with a greater understanding of alternative oversight mechanisms for CSS.

COSRA members addressed the following issues:

• Is there a centralized securities depository or registry?

• Are there book-entry transfer facilities?

• Are securities certificated or de-materialized?

• If securities are certificated, is there an effort to immobilize or de-materialize securities?

The COSRA members are in various stages of development. Many have very extensive clearance and settlement infrastructures, while others are just beginning to develop such infrastructures. Approximately two-thirds of the jurisdictions regulated by COSRA members participating in this work program have a CSD. In the jurisdictions without a CSD, the market intermediaries and the government regulators are actively working toward developing a CSD.

The jurisdictions in the Americas have a long history of stock issuance by corporations in certificated form. In a majority of jurisdictions, the issuer or its agent maintains the shareholder registry. A few jurisdictions also have or are moving toward central shareholder registries.

The general trend among markets in the Americas is toward immobilization of securities certificates. The majority of the jurisdictions have established a multi-tiered immobilization system where customers leave their securities with their broker-dealer. Market intermediaries deposit their customer’s securities in a CSD. Settlement among securities market intermediaries is effected on a book-entry basis at the CSD.

COSRA members addressed how various legal issues might impact the clearance and settlement process. These legal issues are:

• timely reporting and binding securities sales contracts;

• transfer of ownership;

• novation;

• custody relationships;

• bankruptcy; and

• securities lending and short sales.

Timely reporting of the sale of securities is essential in a reduced settlement time period (e.g., a settlement period of T+3 or less). Requiring that all contracts must be in writing impedes timely reporting and provides a party to a securities trade greater opportunity to renege on its terms if the market price moves significantly between the time of the trade and the time of the writing of the contract.

A majority of jurisdictions and virtually all of the jurisdictions that have a CSD do not require that a contract for securities be in writing. A majority of jurisdictions, in their securities market trading systems and CSS, recognize oral contracts and electronic documents and signatures as binding on all parities.

Virtually all of the jurisdictions that require written securities sales contracts are in the process of developing centralized settlement systems and CSDs. Many of these countries are considering changes to their laws so that oral contracts and electronic documents and signatures would be legally binding on all parties.

A majority of the markets have systems for the book-entry delivery of securities and funds. Likewise, those jurisdictions have laws that transfer legal ownership of the securities once delivery and payment occurs. For non-immobilized, certificated securities, most jurisdictions transfer legal ownership in the securities at the time of the delivery of the certificate.

The Group of Thirty and later IOSCO recommended that each country study its markets and market participants and determine if a netting system, including novation, would reduce risk and promote efficiencies. Virtually all jurisdictions with high volumes, a highly developed CSD and well-capitalized market intermediaries allow novation and many have implemented netting of securities in their CSS.

Virtually all jurisdictions provide a legal foundation for securities custody. All COSRA members with an established CSD also recognize the concepts of nominee and beneficial ownership and fungibility of securities.

Some jurisdictions without a CSD, limit custody relationships to banks and do not recognize the concepts of nominee and beneficial ownership and fungibility of securities. However, those jurisdictions are in the process of establishing a CSD, which will require them to extend permitted custody relationships to broker-dealers and the CSD, and to recognize the concepts of nominee and beneficial ownership and fungibility of securities.

The IOSCO Principles state that default procedures regarding market intermediaries and clearance and settlement of securities transactions should be effective and transparent. The IOSCO Principles aslo state that regulators should ensure that insolvency laws do not disrupt the settlement process. Settlement arrangements at a CSD should be protected from the application of bankruptcy laws in the event that a CSD participant becomes bankrupt.

A Zero-Hour Rule could disrupt the settlement process by unwinding trades that settled on the same day that a party to these trades was declared bankrupt. A majority of the jurisdictions responding to the work program indicated that they do not have a Zero-Hour Rule. In addition, the majority of COSRA members have specific laws to protect the integrity of the settlement process in the event of a bankruptcy.

Securities lending is a tool to help market intermediaries reduce failed deliveries of securities. Less than half of the jurisdictions allow securities lending. However, there is a growing trend to allow securities lending. Several of the jurisdictions that do not allow securities lending indicated they are currently developing regulations to permit it.

Short selling is often used as a mechanism to aid liquidity. In jurisdictions that allow short selling, regulation is needed to guard against its use to manipulate the market. Currently less than half of the jurisdictions allow short selling. Those jurisdictions that allow short selling have implemented regulations to guard against manipulative practices.

COSRA members addressed the following regulatory issues:

· licensing standards for clearance and settlement facilities (e.g., CSDs and clearing corporations); and

· regulatory authority over clearance and settlement facilities.

The majority of COSRA members require clearance and settlement facilities to obtain a license from the relevant government regulator. In some cases, clearance and settlement facilities, especially a CSD, may be subject to regulation by more than one authority. For example, in some jurisdictions both the securities regulator and the central bank have jurisdiction over the CSD.

Almost all jurisdictions that have a CSD also have licensing standards. Generally, those standards reflect the IOSCO Principle that regulatory oversight of the clearance and settlement system should be fair, effective, efficient and should reduce systemic risk. Most of the jurisdictions that are in the process of developing or improving their CSS indicated that they plan to have licensing standards for a CSD.

In addition to licensing clearance and settlement facilities, the IOSCO Principles recommend that securities regulators adopt recordkeeping requirements and reporting requirements. The IOSCO Principles also recommend that securities regulators should have the right to review the rules of CSS, inspect the facilities and records, and enforce the rules with respect to CSS.

Over two-thirds of the COSRA members have the regulatory authority to review and approve the rules of clearance and settlement facilities, to require clearance and settlement facilitates to make periodic reports and keep certain records; and examine clearance and settlement facilities. In addition, virtually all jurisdictions that do not have such regulatory authority are considering new legislation granting the securities regulator broad regulatory authority over clearance and settlement facilities.

COSRA members discussed the following financial and operational issues:

· financial capacity;

· trade comparison processing;

· netting of securities and funds;

· settlement process;

· delivery versus payment;

· failed trade processing; and

· safeguarding of securities, funds and related records.

A CSD requires protection against various types of losses. A CSD uses a variety of procedures to cover potential losses, including: paid-in capital and retained earnings; participant funds; lines of credit; guarantees; and insurance.

All jurisdictions with a CSD had capital requirements and a participant fund. Most respondents stated that the CSDs in their jurisdictions have the right to assess participants to cover losses. In addition, over half of the CSDs have some form of insurance to cover various types of losses.

The comparison of trades should occur as soon as possible after the trade. If the trading system is an electronic system, then the trading system should capture the trade information at or near the time of the trade. In addition, CSS should have formal and automated procedures to confirm and affirm institutional customer trades.

All COSRA members that have a CSD in their jurisdiction have an electronic trade comparison system. All jurisdictions that have an electronic trade comparison system also compare those trades by T+1. However, most of the jurisdictions’ CSS have informal and manual procedures to confirm and affirm institutional customer trades.

Netting of Securities and Funds

The Group of Thirty stated that netting is an effective settlement mechanism. Both the Group of Thirty and IOSCO have recommended that securities regulators and market participants in each jurisdiction should study market volume and participation to determine it netting is an appropriate mechanism for their market place.

Over half of the jurisdictions net funds. Virtually all jurisdictions that do not net funds are in the process of developing a CSD and are evaluating netting of funds to determine if it is appropriate for their markets.

Most jurisdictions do not perform netting of securities transactions. However, most of the markets that have high trading volumes and well-financed financial institutions have securities netting systems.

The Group of Thirty recommends that all markets settle securities transactions in three days or less after T in same day funds. Securities and funds should settle in centralized book-entry system.

Most jurisdictions settle securities in three days or less in same day funds. In addition, virtually all jurisdictions that have a CSD settle securities transactions in a centralized book-entry system.

The majority of the jurisdictions use some form of DVP to settle securities transactions. There are three recognized models of DVP.

· Model I: Deliveries and payments are settled on an unconditional, trade- for-trade basis, with final and irrevocable payment and delivery occurring simultaneously.

Jurisdictions use variations of all three models. A majority of jurisdictions use Model I or Model II. However, several of the jurisdictions with high trade volumes and well financed financial institutions use Model III where securities and funds are netted each day in a continuous net settlement environment.

IOSCO Principles state that CSS should be designed to reduce the risks to market participants including market risk. The IOSCO Principles recognized that netting with novation is not appropriate for many markets. In addition to novation , there are other recognized tools to reduce market risk.

Those tools include margin, buy-ins, and participant funds. Almost two-thirds of the responding COSRA members, and all jurisdictions that have a CSD, use one or more of those tools to manage market risk.

Safeguarding of securities, funds and related records is critical in CSS efforts to reduce systemic risk. All jurisdictions that have a CSD have procedures to safeguard securities, funds and related records and procedures to assure the integrity of their automated systems. In addition, all jurisdictions with a CSD have varying degrees of recovery procedures in the event of the loss or destruction of securities, funds and related records.

COSRA participants addressed several issues with regard to fiancial and operational standards for participating in CSS. Those issues include whether financial standards should be based on a participant´s financial exposure to the CSS and whether participants should be required to maintain adequate systems and personnel to meet clearance and settlement obligations in a timely manner.

Financial and Operational Standards for Participation in a CSS

The IOSCO Priciples call for rules and operating procedures governing the participants in CSS. One way to implement these peinciples is to make clearance and settlement facilities self-regulatory organizations ("SRO") with the authority to have rules and procedures that set minimum membership standards. In addition, SROs should have the authority to reject applicants that do not meet their memebrship satndards.

Most CSS do not have standards based on the participant’s financial exposure to the CSS. However, a majority of the jurisdictions that require a CSD to obtain a license also require that the CSD be a self-regulatory organization. These COSRA members have established financial and operational standards and have the right to reject applicants that fail to meet those participation standards.

COSRA members addressed the following issues:

· review of system capacity and back-up;

· security numbering system meeting international securities identification number ("ISIN") standards; and

· year 2000 concerns.

IOSCO Principles encourage securities regulators and clearance and settlement facilities to develop rules and operational procedures that require adequate operating and back-up systems and periodic review of these systems to minimize systemic risk. All COSRA members that have a CSD maintain procedures for review of their systems capacity and back-up systems.

The International Organization for Standardization has developed a uniform security numberingsatndard called the ISIN standard. The ISIN standard allows securities market participants to identify all securitie issues by country, issuer and type of security. This allows market participants around the world to correctly identify all securities that they trade and settle. A majority of COSRA members also has established security numbering systems that meet the ISIN standards.

COSRA members are concerned about the potential effect of year 2000 problem on the clearance and settlement of securities transactions. Regulators and market participants are taking steps to identify potential year 2000 problems. Once identified, they are taking steps to fix those problems and test such fixes to assure year 2000 compliance. Virtually all jurisdictions also are preparing contingency plans to minimize any disruption caused by year 2000 problems to CSS.

Virtually all the COSRA members are reviewing their laws and regulations that could impact the clearance and settlement process. COSRA members that have CSDs are seeking ways to improve their existing laws and regulations governing CSS. Jurisdictions that do not yet have a CSD are working to develop new laws, regulations and clearance and settlement facilities, including CSDs.

There is a trend among COSRA members toward book-entry securities settlement and toward immobilization and de-materialization of securities in a CSD. As noted in the report, approximately two-thirds of COSRA members have a CSD. The other one-third have indicated that they are actively developing a CSD.

COSRA members also are responding to legal, financial and operational risks associated with the clearance and settlement of securities transactions. For example, virtually all members participating in the CSS work program either have effective DVP mechanisms or are developing effective DVP mechanisms. In addition, most of the jurisdictions settle securities on T+3 or less and use same day funds. Regardless of a member’s stage of development, every participant in the clearance and settlement work program sought to better understand alternative oversight mechanisms so that they may achieve fair, effective, efficient and safe CSS.