Decision No. 23 on Segregation of Accounts for Securities Business and Custody Services

Decision No. 23 Concerning the Segregation of Accounts Related to Securities Business (Segregation Account) and Custody Services (Custody Services)

To the President of the Securities Commission / Governor of the Bank of Lebanon, Based on Law No. 161 dated 2011/8/17 concerning Securities Markets, particularly Article 11 thereof, And based on Decision No. 16/8/3 of the Securities Commission Council, taken in its meeting held on 2016/5/30, And based on Decision No. 16/14/15 of the Securities Commission Council, taken in its meeting held on 2016/10/24, It is decided as follows:

Section One: Segregation of Accounts Related to Securities Business (Segregation Account) Article 1: The provisions of this Decision apply to all financial intermediaries operating in Lebanon, including financial intermediary institutions, financial institutions, and banks that conduct securities business in Lebanon.

Article 2: For the purposes of this Decision, the following terms are understood as: "Client Assets": All assets, including financial instruments received by the financial intermediary from the client or related to financial instruments on its behalf during lending operations through pledge, to fulfill an obligation arising from such pledge until execution on these assets settles the obligation. "Client Funds": Cash funds belonging to the client or funds that constitute collateral (collateral or Cash).

Article 3: The financial intermediary must maintain the following accounts on behalf of its clients: a. One or more client asset accounts recording all assets belonging to each client, excluding those where the relevant financial intermediary holds a right linked to a margin guarantee on lending operations. The financial intermediary is prohibited from:

• Combining assets deposited in accounts belonging to its clients unless prior written and explicit client consent is obtained;
• Opening joint asset accounts with its clients, whereby the financial intermediary must segregate client assets from its proprietary account (account proprietary), recording client asset accounts off-balance sheet (sheet balance off), with the account title clearly indicating that ownership belongs to clients. Regarding the use of any client asset for its own account or another client's account; b. One or more bank accounts recording client funds, whereby the financial intermediary is prohibited from:
• Combining bank accounts belonging to its clients;
• Combining margin accounts with other cash funds belonging to them;
• Opening joint bank accounts with its clients. (2) Records for each client and the maintained bank accounts under this Article must clearly reflect asset characteristics and details of funds belonging to each client.

Article 4: The financial intermediary must ensure that the local or foreign custodian complies with the following conditions when maintaining one or more accounts for the financial intermediary's clients:

• Not combining assets deposited in accounts belonging to its clients unless the client is notified in writing;
• Not opening joint asset accounts between the financial intermediary and its clients, as the local or foreign custodian must segregate the financial intermediary's proprietary asset account from client asset accounts, with the title clearly indicating ownership belongs to one or more clients of the financial intermediary, who in turn record these client asset accounts off-balance sheet (sheet balance off);
• Not combining assets deposited in accounts belonging to its clients with the local or foreign custodian into the financial intermediary's own asset account.

Section Two: Custody Services (Custody Services) Article 5: Registration of Client Assets: (1) Legally required assets must be kept by Clearstream in an account with them under the name of the relevant client. (2) The financial intermediary must hold title deeds for client assets in its possession, or may keep assets in a segregated client asset account with a local or foreign custodian that may or may not have a credit rating. (3) If the financial intermediary registers or records a title deed for a client's asset, it must ensure the deed is registered and recorded in the client's name. If the client is a financial intermediary acting for its own client, the assets must be registered in the name of that ultimate client. (4) If the client's assets are financial instruments acquired abroad, ownership may be registered or recorded in the name of a foreign custodian or the financial intermediary, provided that: (a) it has been determined that assets cannot be registered and recorded in the client's name, or (b) it has obtained the client's written consent to register and record its assets in the name of a foreign custodian or the relevant financial intermediary.

Article 6: Use of Foreign Custodians: Before using a foreign custodian, the financial intermediary must notify the client in writing that different legal and regulatory settlement requirements may apply under competent authorities, particularly regarding the segregation of client assets.

Article 7: Client Agreements: Before providing custody services for client assets, the financial intermediary must execute an agreement with the client covering: (a) How client assets are registered; (b) Client arrangements regarding how to issue instructions for custody services; (c) The financial intermediary's liability toward the client regarding custody services; (d) Any pledge or lien rights (legal right to retain or sell third-party property as security for a debt) or other benefits in financial instruments related to client assets taken by the financial intermediary or another party; (e) Conditions leading to the sale of deposited client assets as security by the financial intermediary to fulfill client obligations; (f) How the financial intermediary handles profits, commissions, and other income or receivables belonging to the client; (g) How the financial intermediary handles corporate actions, such as voting rights, capital restructuring, and mergers/acquisitions; (h) What information will be provided to the client regarding deposited assets and how it will be communicated; (i) Fees and commissions for custody services; (k) Whether client assets will be combined with other clients' assets after considering the requirement to notify the client in writing, clarifying the effects of such combination.

Article 8: Custody Agreement: Before depositing client assets with a local/foreign custodian, the financial intermediary must reach a written agreement with the custodian on appropriate terms, including: (a) The title of any client asset account must show that deposited assets do not belong to the financial intermediary; (b) The custodian must prevent withdrawal of any client assets from the account unless for the benefit of the financial intermediary or another person pursuant to instructions issued by the financial intermediary; (c) The custodian must keep or register assets belonging to a client of the financial intermediary separately from any other financial instruments or assets belonging to the custodian, and must treat assets in the account as client assets; (d) The custodian must deliver a certified statement to the financial intermediary at specified dates, containing the description and value of all financial instruments deposited in the account. The statement must be delivered to the financial intermediary within 15 days of its issuance; (e) The custodian must refrain from claiming any pledge, lien, attachment, or sale of financial instruments in any client account covered by the agreement, unless: (a) prior written consent is obtained from each client, or (b) the purpose is to cover expenses for a specific client covered by the custody agreement; (w) The custodian must notify the financial intermediary of the appointment of a sub-custodian (including the sub-custodian's name, address, contact information, and applicable legal system).

Article 9: Evaluation of Local/Foreign Custodians: The financial intermediary must perform due diligence when depositing client assets with a local/foreign custodian.

Article 10: Liability Regarding Selection of Local/Foreign Custodians: The financial intermediary bears the responsibility to inform the client of the location where client assets are deposited and the names of correspondents used for depositing client assets after performing due diligence when selecting these correspondents.

Section Three: General Provisions Article 11: Any person violating the provisions of this Decision is subject to administrative penalties stipulated in applicable laws and regulations, particularly those in Law No. 161 dated 2011/8/17 concerning Securities Markets.

Article 12: This Decision takes effect upon publication in the Official Gazette, and financial intermediaries operating in Lebanon are granted a six-month grace period from the publication date to comply with its provisions, particularly regarding segregation of accounts related to securities business opened before its issuance and settlement of custody service agreements concluded prior to that date.

Beirut, 2017/1/12 President of the Securities Commission / Governor of the Bank of Lebanon Riad Toufic Salameh