Instruction COSOB No. 03-02 of December 21, 2003: Specifications for Securities Account-Keeping and Safekeeping Agents

Instruction COSOB No. 03-02 of December 21, 2003, establishing the specifications for the securities account-keeping and safekeeping agent.

THE SPECIFICATIONS FOR THE SECURITIES ACCOUNT-KEEPING AND SAFEKEEPING AGENT

TABLE OF CONTENTS

TITLE I - THE MEANS AND PROCEDURES OF THE SECURITIES ACCOUNT-KEEPING AND SAFEKEEPING AGENT

Part 1 - Provisions applicable to authorized financial intermediaries Chapter 1 - Human resources Chapter 2 - IT means Chapter 3 - Accounting procedures Chapter 4 - Services provided and protection offered to security holders Chapter 5 - Relations of the securities account-keeping and safekeeping agent with other service providers in the context of implementing securities safekeeping and settlement processes Chapter 6 - Control mechanisms for the account-keeping and safekeeping activity

Part 2 - Provisions applicable to securities account-keeping and safekeeping agents that are issuers of securities

TITLE II - SECURITIES ACCOUNTING

Part 1 - The structure of the accounting organization Part 2 - The minimal accounting plan Chapter 1 - The chart of accounts Chapter 2 - Operation of accounts Chapter 3 - The securities balance sheet

Part 3 - Specificities of securities accounting at issuers

COSOB Regulation Instruction No. 03-02

Art. 1. — The purpose of this instruction is to define the specifications for the securities account-keeping and safekeeping agent in accordance with the provisions of Article 8 of COSOB Regulation No. 03-02 of March 18, 2003, relating to account-keeping and safekeeping.

The means and procedures applicable to securities safekeeping and administration activities constitute the "specifications for the securities account-keeping and safekeeping agent." These means and procedures cover, on the one hand (Title I), the organization, human resources, IT systems, accounting procedures, client protection mechanisms, and internal control mechanisms; on the other hand (Title II), the chart of accounts to be used and their rules of operation.

The specifications for the securities account-keeping and safekeeping agent apply to any financial intermediary authorized by COSOB to conduct securities safekeeping and administration activities, as well as to any entity issuing securities and thereby able to administer registered securities accounts.

TITLE I THE MEANS AND PROCEDURES OF THE SECURITIES ACCOUNT-KEEPING AND SAFEKEEPING AGENT

Part 1 PROVISIONS APPLICABLE TO AUTHORIZED FINANCIAL INTERMEDIARIES

Art. 2. — The general means obligations contained in the specifications for the securities account-keeping and safekeeping agent supplement the legislative and regulatory provisions that securities account-keeping and safekeeping agents are required to respect.

Due to their general nature, certain provisions of the specifications apply only insofar as they are adapted either to the size of the establishment or to the nature of its clientele or activities.

Chapter 1 Human Resources

Art. 3. — The hierarchical reporting of services responsible for the account-keeping and safekeeping function is shown on the general organizational chart of the authorized intermediary.

Art. 4. — A description of the different functions and positions required is produced; it specifies the competencies and qualifications necessary to fill them.

Art. 5. — An annual training plan for staff is established; it is adapted to their needs and the specific function of securities account-keeping and safekeeping.

In application of this plan, all necessary training resources for the smooth running of the securities account-keeping and safekeeping agent's activities are regularly implemented and evaluated.

Art. 6. — The securities account-keeping and safekeeping agent provides the means to respond, in terms of human resources, to changes related to the evolution of capital markets, the technological environment, as well as to a durable or cyclical increase in activity.

Chapter 2 IT Means

Art. 7. — The securities account-keeping and safekeeping agent has an information processing system adapted to its size, its specificities, and the volume of operations it processes.

It has the hardware and software guaranteeing the necessary level of automation for the functions of transfer, retrieval, and processing of information.

Art. 8. — The general architecture of the information processing system specific to account-keeping and safekeeping activities is documented.

Art. 9. — The securities account-keeping and safekeeping agent keeps up to date the list of access rights to its IT systems.

All access to its IT systems is traced, as are the resulting modifications to data or processing.

Art. 10. — The securities account-keeping and safekeeping agent regularly controls the quality of its IT processing. This evaluation is based on the criteria defined in the contracts or service agreements passed between users and IT production.

A monitoring of indicators measuring the frequency of IT incidents and the intervention rate on software is put in place.

Art. 11. — The securities account-keeping and safekeeping agent ensures both the physical and logical security of all its information processing and exchange systems.

It ensures in particular the physical protection of processing centers and conducts rigorous access controls to processing systems. It defines a contingency plan to ensure service continuity and appropriate procedures.

COSOB Regulation Instruction No. 03-02

Chapter 3 Accounting Procedures

Section 1 General Provisions

Art. 12. — A securities account must not be in debit.

However, the securities account-keeping and safekeeping agent establishes:

• procedures to identify those operations that could not be prevented upstream of accounting processing and which result in a debit balance of the securities account;
• regularization procedures for these operations to be implemented as soon as possible.

Art. 13. — Operations are recorded in accounting as soon as the securities account-keeping and safekeeping agent becomes aware of them.

Art. 14. — When operations remain to be confirmed between the securities account-keeping and safekeeping agent and its counterparties, the corresponding commitments are subject to either accounting commitment entries or off-balance sheet records.

Art. 15. — Accounting provides, in the shortest possible time, all information necessary for the management of the settlement of operations.

Art. 16. — Any entry can be justified either by a written document or by computerized and unalterable data.

Art. 17. — The accounting of registered holdings of account holders who have given a mandate for the administration of their securities to an authorized intermediary must be identical to that kept by the issuing legal entity. Consequently, the securities account-keeping and safekeeping agent must be able to justify this identity at any time.

A daily situation of registered references, not transmitted to the central depository within the allotted time and whose transmission remains to be made, is established.

Art. 18. — Processing procedures are organized to guarantee the complete entry, reliability, and retention of base data, notably those relating to account holders, securities held, counterparty service providers, and events affecting the securities.

Art. 19. — The processing system is able to produce the following documents, for each of the securities held:

• the history of movements in securities;
• the history of securities accounts opened in all classes of the accounting plan.

The histories are retained for the duration in accordance with current regulations.

Art. 20. — Data relating to security holders and the operations they perform are processed and retained in compliance with professional secrecy, in accordance with current regulations.

Section 2 Accounting Procedures and Controls

Art. 21. — The securities account-keeping and safekeeping agent establishes an audit trail between securities entries and corresponding cash entries for the same operation using either common references or management rules.

Art. 22. — The securities accounting system is designed to justify, on the one hand, the balances of each security based on the balances of each holder and the balances of operations in transit (audit trail of balances); on the other hand, the reconstruction of each balance from the detailed operations that originated it (audit trail of entries).

These justifications can be daily.

Art. 23. — The securities accounting system is organized to allow control of the accuracy of processing procedures.

In each security, the following are verified daily:

• the equality between the total of entries posted to the credit of accounts and the total of entries posted to their debit;
• the balance between accounts presenting credit balances and accounts presenting debit balances.

The securities accounting system is also organized to allow, through the implementation of appropriate procedures, control of the completeness of data processing.

Art. 24. — The securities accounting system implements permanent verification procedures for the sincerity of available asset accounts (item 21 of the chart of accounts), using the supporting documents for the corresponding assets provided by the central depository, issuers, or various correspondents where securities are held, as well as by the internal service responsible for the physical safekeeping of securities. Any difference is justified.

COSOB Regulation Instruction No. 03-02

Art. 25. — The expected normal dates of receipt or delivery of securities are recorded alongside entries posted to securities to be received or securities to be delivered accounts (sub-items 221 and 222 of the chart of accounts). This recording takes into account the specificities of operations.

The situation of suspensions in securities and cash, for all concerned securities, is provided daily to the service responsible for the operational handling of delivery and settlement operations with counterparties.

For the purposes of these specifications, suspensions are understood as:

• operations not agreed upon within the prescribed timeframes;
• deliveries and settlements pending, relating to operations agreed upon with counterparties, and whose expected settlement dates have been exceeded.

The situation of suspensions is classified by counterparty, and each line is populated with the originally expected delivery date.

Furthermore, the agreement of counterparties on identified suspensions, both in securities and cash, is regularly sought.

Chapter 4 Services Provided and Protection Offered to Security Holders

Art. 26. — The delivery of securities following an operation carried out for own account, whether or not in relation to operations carried out by the clientele, is subject to a systematic check of availability in own safekeeping, so that securities registered in the name of third parties are not used.

Art. 27. — Any movement of securities in safekeeping not carried out within the timeframes fixed by market rules is immediately detected by the information system and brought to the attention of the relevant service for regularization.

Art. 28. — Upon receipt of a stock order addressed by a security holder, the securities account-keeping and safekeeping agent verifies, before transmitting this order for execution on the market, that the necessary conditions for said execution are indeed met.

It ensures in particular the existence of:

• sufficient cash provision, or failing that, adequate coverage, for a purchase of securities;
• sufficient securities provision in the case of a sale.

Art. 29. — In the event of non-receipt of expected securities on the expected date, the securities account-keeping and safekeeping agent intervenes as soon as possible with its counterparty to claim the securities in question.

In parallel, the missing provision in safekeeping is replenished, if necessary, by a repurchase, according to the modalities provided by market rules or according to contractual provisions agreed with the holder.

Art. 30. — When information on the conditions of execution of a stock order is sent to a client, the details of fees or commissions received by the service providers involved and the account-keeping agent are specified.

For operations carried out in currencies, the execution rate of the order in currency, the amount of fees received in currency, and the exchange rate used for the accounting of the operation are communicated.

Art. 31. — The amount of interest, dividends without reinvestment option, and capital repayments is credited to the holder's cash account as soon as the securities account-keeping and safekeeping agent has it available.

The securities account-keeping and safekeeping agent informs the holder of the amount credited to their cash account, taking into account their tax situation regarding options chosen at the beginning of the year.

Art. 32. — The securities account-keeping and safekeeping agent transmits to issuing companies the requests for documents preparatory to their general meeting formulated by shareholders or keeps these documents available to them.

Chapter 5 Relations of the Securities Account-Keeping and Safekeeping Agent with Other Service Providers in the Context of Implementing Securities Safekeeping and Settlement Processes

Art. 33. — The relations of the securities account-keeping and safekeeping agent with service providers assuming the functions of negotiators or compensators for the account of the same investor are established within the framework of conventions or contracts fixing the obligations of each, so that it is possible to regularize any disputes resulting from the adjustment or settlement of stock transactions under the best conditions.

Art. 34. — The risks related to the implementation of securities settlement and delivery processes are assessed.

COSOB Regulation Instruction No. 03-02

Art. 35. — When the securities account-keeping and safekeeping agent is required to carry out, on the instruction of a holder, a transfer of securities portfolio to another securities account-keeping and safekeeping agent, it provides as soon as possible to the new securities account-keeping and safekeeping agent all the information necessary for it, notably those relating to the precise identification of the concerned holders as well as the numerical elements allowing the establishment of tax declarations.

Art. 36. — The security of securities held abroad for the account of the clientele through an agent is ensured by the signing of an agreement between the securities account-keeping and safekeeping agent and said agent. This agreement provides in particular:

• the conditions for keeping the account or accounts opened in the name of the securities account-keeping and safekeeping agent in the books of the agent;
• the obligation for the agent to communicate as soon as possible any information relating to movements recorded on the account or accounts of the securities account-keeping and safekeeping agent, as well as periodic situations of securities on deposit;
• the implementation of the principle of separation of assets according to the various categories of holders in the books of the agent;
• respect for local practices.

Chapter 6 Control Mechanisms for the Account-Keeping and Safekeeping Activity

Art. 37. — The securities account-keeping and safekeeping agent puts in place a control of the exercise of its function. It designates for this purpose a manager whose mission is to ensure compliance with the rules in force concerning the securities account-keeping and safekeeping agent.

It ensures the quality of procedures specific to the account-keeping and safekeeping activity and the reliability of control and steering tools.

It has documentation regularly updated describing the organization of services, operational procedures, and all risks incurred due to the account-keeping and safekeeping activity.

It can consult the main dashboards and is the recipient of anomaly sheets and complaints formulated by security holders or professional partners, relating notably to malfunctions and possible breaches of professional ethics.

Art. 38. — The internal control manager organizes the control of the account-keeping and safekeeping activity by distinguishing:

• on the one hand, the devices that ensure the daily control of operations;
• on the other hand, the devices that, through recurring or unannounced controls as well as detailed audits of operational procedures, ensure the coherence and effectiveness of the control of operations.

Art. 39. — The internal control manager is associated with the validation of any new accounting scheme and controls the updating of the chart of accounts.

Art. 40. — The internal control manager ensures the existence of permanent monitoring of risks regarding counterparties, whether credit risks or risks related to the settlement of operations.

It verifies that the security of relations with counterparties relies, if necessary, on the signing of the conventions or contracts mentioned in Article 33.

Art. 41. — The internal control manager defines the rules for monitoring positions deemed sensitive regarding the continuity and integrity of processing or the confidentiality of operations.

Art. 42. — The internal control manager ensures the existence and application of procedures guaranteeing the proper consideration of instructions from security holders and various operations on securities, both regarding execution timeframes and the modalities for updating securities and cash accounts.

Art. 43. — The internal control manager ensures the effectiveness of procedures for the prospective management of securities and cash flows intended to prevent suspensions and protect assets held for third parties.

In the event that suspensions do occur, the internal control manager verifies the conditions and timeframes for their clearance.

Part 2 PROVISIONS APPLICABLE TO SECURITIES ACCOUNT-KEEPING AND SAFEKEEPING AGENTS THAT ARE ISSUERS OF SECURITIES

Art. 44. — The provisions of Articles 2 to 16, 18 to 20, 22, 23, 27, 33 to 35, and 37 to 43 above apply to legal entities issuing securities. The latter adapt the human and technical means to be implemented for the administration of registered securities accounts to the nature and volume of their activity.

COSOB Regulation Instruction No. 03-02

TITLE II SECURITIES ACCOUNTING

Part 1 THE STRUCTURE OF THE ACCOUNTING ORGANIZATION

Art. 45. — The basis of the securities accounting of the securities account-keeping and safekeeping agent is the security, in its individual specificity.

The term security is understood as a set of securities of the same nature, listed or likely to be listed, issued by the same issuer and conferring, by themselves, identical rights to their holders; all rights detached from a security and negotiable constitute themselves a security.

Any securities account-keeping and safekeeping agent keeps or causes to be kept an individualized accounting for each security for which it is accountable to its clientele. This accounting must allow it to know at any time its situation on a given security and to know both what it holds for each of its clients and globally.

The securities accounting of a securities account-keeping and safekeeping agent is thus constituted by the juxtaposition of as many accountings, identically structured and homogeneous, as it holds securities for the account of its clientele.

Art. 46. — The securities account-keeping and safekeeping agent operates, within its accounting by security, a subdivision describing, on the one hand, the securities whose holders have entrusted it directly with administration (bearer securities), on the other hand, the securities registered with the issuing legal entity (registered securities) and whose holders have requested its administration.

Art. 47. — The general accounting organization is articulated on two closely linked levels: that of the keeping of holders' accounts by securities account-keeping and safekeeping agents and that of the keeping of securities account-keeping and safekeeping agents' accounts by the central securities depository.

Art. 48. — The accounting organization of the securities account-keeping and safekeeping agent is:

• of generalized application, and therefore based on a minimal accounting plan;
• based on double-entry bookkeeping;
• designed in respect of the principle of recorded rights and the concomitance of entries guaranteeing the integrity of assets.

Art. 49. — The relationship between a principal securities account-keeping and safekeeping agent and an agent securities account-keeping and safekeeping agent can take two forms. In the form of simple mandate, the securities account-keeping and safekeeping agent under mandate opens at its agent a safekeeping account where its assets are registered globally, security by security. It keeps the accounts of its clients itself and serves its own securities accounting according to the accounting imperatives described in the specifications.

In the form of extended mandate, the agent securities account-keeping and safekeeping agent not only conserves, security by security, the entirety of securities registered in account with the principal securities account-keeping and safekeeping agent, but also takes charge of the individual keeping of the accounts of the principal's clients, accounts which it identifies by a particular codification. It thus holds, in place of the principal, the entirety of its securities accounting and, consequently, substitutes itself for it for the application of accounting obligations. On the other hand, the principal remains fully responsible for the regularity of movements affecting its accounts with its correspondent, as well as for the identity and capacity of its order givers.

Art. 50. — Any movement of securities, insofar as it is destined to impact any account of a given security, is subject to an entry in a general journal: stock negotiation, detachment of rights, exercise of rights, delivery or receipt of securities, transfer of files to or from another securities account-keeping and safekeeping agent.

The journal, general by security and by form, allows the registration and authentication of operations, any necessary searches, and controls. It is served chronologically and closed daily.

Each entry passed in the journal includes the following minimum data: entry number, accounting date, effective date, explanatory label of the operation with reference to supporting documents, number of the affected account, number of the account playing in counterparty, and number of securities moved.

COSOB Regulation