Circular 90/2 Periodic Statements

Brussels, March 13, 1990.

C.G.W

CIRCULAR No 90/2

Dear Member,

We have the honor to communicate to you the attached model of periodic statements that brokerage firms constituted as companies are invited to establish and transmit to the Guarantee Fund, according to the modalities described below.

These statements must enable the Guarantee Fund to effectively exercise its mission of preventive control, namely:

• to verify their accounting;
• to exercise continuous monitoring of the financial situation of the firms as well as the risks they incur and impose.

As indispensable instruments of prudential control, their importance is highlighted in the draft law relating to financial operations and financial markets, since the obligation for stock exchange companies to provide information at least quarterly is the subject of a specific provision.

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Appendix No 1

Since the establishment of the Fund, stock exchange brokers have been invited to provide their annual accounts. This first step allowed us to become acquainted with the financial situation of the firms. In a second stage, the transmission of financial situations became semi-annual. However, as announced in Circulars 88/1 and 88/2, this was an intermediate stage towards the transmission of information on a quarterly basis.

This transition period was justified both by the need for the Fund to develop its own organization and by the efforts required by many firms to adapt and update their administrative and accounting organization.

Unless otherwise excepted, this adaptation and updating process must have reached its conclusion, and brokerage firms should now be able to provide the requested information without major difficulties.

However, considering that the activity of stock exchange broker can no longer be exercised except within the framework of a stock exchange company as of January 1, 1991, it did not seem appropriate to subject stock exchange brokers who still temporarily exercise their activity on a personal basis to this obligation of periodic information. These stock exchange brokers remain however required to communicate their semi-annual situation as of June 30, 1990 within the same time limits as those provided by this circular for the periodic statements.

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Appendix No 2

The periodic statements essentially comprise two parts: on the one hand, a balance sheet and an income statement, and on the other hand, annexes. They are accompanied by detailed explanatory notes designed to guide firms in establishing the various statements. It goes without saying that the Fund's services are available to members to provide any complementary information.

We draw your particular attention to the following elements:

• the model of the balance sheet (active and passive) as well as the income statement is essentially based on the accounting plan applicable to stock exchange brokers (Rochette plan) in force for many years;
• it differs, however, regarding the treatment of the firms' securities portfolios and their results. Indeed, all the firm's securities are now grouped under a single heading titled "Positions". In accordance with a widely established practice, these securities are no longer considered as cash placements but as merchant goods and are subject to periodic market evaluations.

In the same spirit, the results on positions are considered to be the operating results of the stock exchange brokerage firm and no longer as financial results;

• it also differs regarding the accounts "securities to be received" and "securities to be delivered". The use of these accounts as provided by the "Rochette plan" posed various problems, and many firms had chosen not to integrate them into their general accounting, preferring to track securities flows using extra-accounting systems or securities accounting.

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Appendix No 3

This issue relates to the organization of an accounting for off-balance sheet rights and commitments, which seemed preferable to address separately from these periodic statements. It will be the subject of a future circular;

• the annexed statements aim to inform the Fund of the risks associated with the activities of stock exchange brokers that are not reflected in standard financial statements.

These are essentially risks related to: . the holding of a portfolio of securities for own account; . speculative activity (carry operations); . operations on instruments with high risk (options); . as well as the importance and age of claims on debtors.

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Starting from the 1990 fiscal year, brokerage firms are invited to provide the Fund, quarterly and before the 20th of the month following the end of the quarter, the requested information based on the model attached as an appendix. Pre-printed copies of this model are available at the Fund's secretariat as well as at the registries of the Stock Exchange Commissions of the Kingdom.

Given the date of publication of this circular and the time necessary for firms to adapt to the new procedure, the deadline for communicating the statements concerning the first quarter is extended by one month and set at May 20, 1990.

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Appendix No 4

Firms that encounter major difficulties in establishing certain of the requested statements are invited to spontaneously contact the Fund's services in order to allow a case-by-case examination of these difficulties and to find appropriate solutions.

Please accept, dear Member, the expression of our distinguished sentiments.

A. NIESTEN, Managing Director

J. REYERS, President

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PERIODIC STATEMENTS firm name .................. situation as ...............

1. ASSETS
I. Establishment costs II. Intangible fixed assets III. Tangible fixed assets IV. Financial fixed assets A. Related companies and companies with which there is a participation link:
1. Participations
2. Claims
B. Other financial fixed assets C. Cash deposits as guarantees V. Claims A. Commercial claims
1. Private clients
2. Professional clients & counterparties
3. Partners
4. Other commercial claims
5. Doubtful claims
B. Other claims
1. Partners
2. Other claims
VI. Positions A. Securities I. Currencies and precious metals VII. Cash placements and available values A. Time deposits
1. Deposits of more than one month
2. Deposits of one month or less
B. Current accounts, cash C. Other available values VIII. Adjustment accounts Total

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14. 2. Evaluation of positions. Positions in securities, currencies, and precious metals are valued at the rate of the last day of the quarter. The results on securities (results of exchange and results of the conversion into BEF of the currency in which these securities are expressed) are included under the item “I.A.3. Net results on positions” of the income statement. The results on currencies and precious metals are included under the item “I.B.1. Net results on positions” of the income statement. To the extent that the firm has adopted an accounting method for its securities transactions allowing it to distinguish, transaction by transaction, realized results from unrealized results, the firm is authorized to record positive revaluation results of its positions in regularization accounts, rather than in the income statement. In this accounting method, the acquisition value of the securities will be fixed in accordance with the provisions of Article 33 of the Royal Decree of October 8, 1976 determining authorized valuation methods. A specific regularization account titled “Unrealized gains on positions” will be listed separately in the active and passive balance sheet of the periodic statements. Entries relating to the recording of unrealized gains will be reversed on the first day of the following period.

• cash placements and available securities (item VII. of the asset): the item comprises three subdivisions: A. “Term deposits”: this item comprises deposits for more than one month, on the one hand, and deposits for one month or less, on the other hand. a. “Demand accounts, cash”: this item comprises account balances with credit institutions, the Postal Checks Office, and other financial establishments, as well as available securities in cash. C. “Other available securities”: this item comprises securities due for collection, internal transfers, etc...

b 15.

• commercial debts (item IX. B. of the liability): the item for commercial debts comprises four subdivisions:

• 1. “Privileged clients”: the debts of the firm towards privileged clients and partners arising from transactions in securities, currencies, and precious metals are classified under this sub-item (see comments under items V.A.1. and V.A.3. of the asset).
• 2. “Professional clients and counterparties”: the debts of the firm towards institutional clients, Belgian or foreign banks, and Belgian or foreign stockbrokers, considered either as clients or as counterparties, are classified under this sub-item (see comments under item V.A.2 of the asset).
• 3. “Suppliers of goods and services”.
• 4. “Other commercial debts”.

• other debts (sub-item IX. D. of the liability): this sub-item comprises the following two items:

• 1. “Partners”: the credit balances of partners’ current accounts are listed under this item.
• 2. “Other debts”.

• regularization accounts (item XI. of the liability): this item notably includes unrealized gains on positions, in the case where the firm does not record these revaluation results in the income statement (see above).

‘. . 16. 3. INCOME STATEMENT 3.1. The figures to be transmitted for the income statement are the cumulative figures as of the quarter-end date (3X.T.19XX), on the one hand, and those relating to the corresponding quarter of the previous accounting year (3X.T.19XX-1), on the other hand. 3.2. Comments

• services: a distinction is made between three categories of operating income: A. Products relating to operations and services in securities (services on securities); B. Products relating to operations and services in currencies and precious metals (services on currencies and precious metals); C. Other operating products. These three categories of products are classified in the income statement of the periodic statements as follows: A. Services on securities (item I.A. of the income statement): this item comprises five sub-items:

1. “Brokerage”: brokerage received on securities transactions as well as brokerage retroceded to the firm are classified under this sub-item (2).
2. “Commissions”: subscription commissions, as well as any other commission received in the context of intermediary activities in the field of securities, are classified under this sub-item (3). (2) In the firm’s accounting plan, separate accounts will be created to record gross brokerage and retrocessions of brokerage by category of investors. (3) See note 2.

17. 3. “Net results on positions”: this sub-item comprises two subdivisions:

• item 3.1 includes all results, including exchange differences on securities denominated in currencies, both realized and unrealized, on positions in securities (4).
• item 3.2 includes the amount of financial income (coupons, interest, ...) of securities accounted for under the securities positions item.
  4. “Custody fees”: this sub-item includes custody fees received by the firm.
  5. “Other products”: this sub-item includes various products realized from services provided in securities in the broad sense (investment advice, coupon services, “financial engineering” services, safe deposit box rentals, ...).

B. Services on currencies and precious metals (item I.B. of the income statement): this item is subdivided into three sub-items:
1. “Net results on currencies and precious metals”: these are the net results - i.e., the difference between purchases and sales, taking into account the variation in stock - of the currency dealer (banknotes) and precious metals dealer, as well as results generated during the revaluation of stocks.
2. “Commissions”: this refers to the remuneration that the stockbroker receives for his activities as a broker in currencies and/or precious metals. In this type of transaction, the role of the stockbroker is to bring the parties together in exchange for a commission.
3. “Other results”.
C. Other operating products (item I.C. of the income statement): these are products that have no link with the stockbroker’s activity in securities, currencies, or precious metals (insurance recoveries, real estate rental income, ...). (4) We recall the option to record - under certain conditions - unrealized gains in a regularization account (see page 14).

18.

• financial products (item IV. of the income statement): these products are broken down into: A. B. C. “Products from financial fixed assets” “Products from cash placements”: this sub-item includes products on cash placements, notably products from term accounts with credit institutions, as well as products from financing of carry operations carried out by the stockbroker... “Other financial products”: other financial products are listed under this sub-item, notably debtor interests that the firm receives on commercial receivables (e.g., customer accounts).
• financial charges (item V. of the income statement): financial charges include the following charges: A. “Debt charges”: this sub-item includes financial charges paid to credit institutions (item V.A.1.), interest on commercial debts (item V.A.2.), and other charges (item V.A.3). Under this last item will appear financing charges for carry operations. B. “Other financial charges”: notably included under this item are value reductions on cash placements.

19. 4. ANNEXES 4.1. Annex no 1 relating to positions in securities Annex no 1 includes the detail of the firm’s long and short positions (items VI.A. of the asset or X. of the liability) by category of securities. For each category of securities, the total amount of securities with a long position and the total amount with a short position will be indicated. These amounts will be subdivided into Belgian securities [columns (1)] and foreign securities [columns (2)]. In the “Total” columns, it is necessary to make, by category, the total of Belgian and foreign securities on the long side [column (3)] and the total of Belgian and foreign securities on the short side [column (4)]. In column (5), it is necessary to include, by category, the net position (long positions minus short positions). It is therefore not requested a complete list of listed shares, unlisted shares, etc., but totals by category. Regarding the classification of securities to be included in the categories mentioned in the annex, listed securities are to be considered those admitted to the listing of an officially recognized securities exchange. The following categories of securities are:

1. “Shares”: under this category are included shares, units, warrants and rights, convertible bonds, ...
2. “Debt securities”: under this label are included in particular public funds, i.e., bonds issued by the State (Rentes), provinces, cities and municipalities, autonomous funds, intermunicipalities, public credit institutions, and other public utility institutions. Also considered debt securities are private sector bonds, eurobonds, treasury bills, ...

r . 3. 20. “Units of collective investment undertakings”: this item includes any form of unit or certificate issued by collective investment undertakings in securities and derivatives, currencies, precious metals, short-term placement instruments, real estate, or a combination of these instruments, regardless of the legal qualification of the undertaking or the manner in which the price of these units or certificates is formed. This includes in particular certificates representing units of mutual funds, investment companies with variable or fixed capital, market index funds, real estate certificates, ... The share capital of holding companies whose activity is based mainly on the holding of participations in one or more subsidiaries, conferring on them, in law or in fact, the power to direct the activity of the latter, and/or recognized as such by the supervisory authorities, are to be considered for this annex as shares. 4. “Divers”: this item includes positions in other instruments than those enumerated above, notably options. Bought options are considered as long positions, sold options as short positions. Positions in financial futures and new financial instruments are not included in Annex no 1. In row 5. “Total”, the distinction by column is made between (A) the total amount of securities denominated in BEF and (B) the total of those denominated in foreign currencies (converted into BEF). The securities included in this annex are valued at the rate of the last day of the quarter (see comments under item “VI. Positions” of the asset).

21. 4.2. Annex no 2 relating to forward transactions. Annex no 2 concerns the statement of forward transactions in securities at the rate on the last day of the relevant quarter. It concerns the total amount - on the last day of the quarter - of purchases and sales carried out by the stockbroker during the current fortnight, and reported according to the quality of the investors. It should be noted that transactions at the rate for the benefit of staff members also include positions that they have taken for the benefit of clients for whom they personally hold a mandate to carry out transactions (e.g., client accounts in the name of the spouse or family members of this staff member, etc.). “Other forward transactions in securities” includes forward transactions at the rate carried out on foreign exchanges, as well as over-the-counter transactions, the settlement (payment and delivery) of which will take place only after an agreed period between parties. Transactions in new financial instruments (financial futures, options, swaps, FRA, etc.) are not included in this table.

22. 4.3. Annex no 3 relating to carry operations. Annex no 3 concerns, for each end of the fortnight of the quarter (F1 to F6), the detail of carry operations on the long and short side, on the one hand, by category of carry (carry on exchange, carry at the bank, carry by own means), and on the other hand, by category of investor (private and professional clients, partners, staff, or for the account of the firm itself). The carry positions for the account of staff members also include positions that they have taken for the account of clients for whom they personally hold a mandate to carry out transactions (for example, client accounts in the name of the spouse, family members, etc.). Item C. of Annex no 3 concerns supplementary information relating to carry operations for the fortnight at the rate (F6). It is necessary to mention: a) for carry operations carried out on the exchange, the amount of guarantees deposited at the request of the Forward Cooperative; b) for carry operations at the bank:

• under item a), the amount financed by the bank in cases where this amount is lower than the amount of securities carried. In this hypothesis, the firm must provide part of the necessary capital to lift the securities;
• under item b), the amount of guarantees in case where the amount financed by the bank is equal to the amount of securities carried and where it demands additional guarantees.

23. 4.4. Annex no 4 relating to issued options. Annex no 4 concerns the detail of options negotiated (limited to issued options) by the firm, for the account of various categories of investors. The first part of the annex concerns the amount of positions and hedges, according to various categories of investors. A distinction is made between calls and puts. For the first category, issued call options, the amount of positions is calculated as follows: number of contracts x number of securities per contract x underlying value (evaluated at the market rate). For the second category, issued put options, the amount of positions is calculated as follows: number of contracts x number of securities per contract x exercise price of the option. The second part of the table concerns the status of hedges given, by the stockbroker himself, to intermediaries involved in the execution and/or settlement of options transactions (e.g., POCM, POM, POCL for options negotiated on the EBE).

24. 4.5. Annex no 5 relating to commercial receivables due for more than one month and doubtful receivables. Annex no 5 comprises two parts. The first part concerns receivables (5) from clients and counterparties who are debtors in cash for an amount equal to or greater than 5% of own funds (the sum of items I. to VI. of the liability), with a minimum of one million BEF, and which are in whole or in part due for more than one month. The second part concerns doubtful receivables included under item V.A.5. of the asset, the amount of which is equal to or greater than 5% of own funds (the sum of items I. to VI. of the liability), with a minimum of one million BEF. The receivables will be arranged in descending order; they will be identified by their internal number to the firm for private clients and by their company name for any other creditor (institutional clients, bankers, agents, correspondents, ...). The firm will add comments it deems useful for the assessment of risk (real and personal securities, debits authorized by the firm (remunerated or not), repayment plans, ...). (5) This refers to all cash accounts in the name of a client or counterparty. I

I ” 25. 4.6. Annex no 6 relating to litigation at the rate. Annex no 6 on litigation at the rate concerns an overview of the litigation with which the firm is confronted. This includes in particular litigation with staff members, clients, suppliers, insurers, or public administrations involving an amount exceeding 5% of the firm’s own funds (the sum of items I. to VI. of the liability), with a minimum of one million BEF. Litigation relating to opposition procedures will be considered as a single litigation: the amount to be communicated is the sum of the amounts of the individual litigations involved. Annex no 6 comprises three parts:

• 1st part: evolution of litigations already reported to the Guarantee Fund. It is necessary to mention the name of the case, the date of the first report, the amount involved, the status of the procedure, and the sums covered by an insurance policy. Regarding the amounts involved, it is necessary to mention the firm’s litigious receivables with a positive sign and litigious debts with a negative sign. Regarding the status of the procedure, comments can be limited to the following codes: code (1): no recovery measures have yet been taken; code (2): the parties are negotiating; code (3): there is an official notice to pay; code (4): judicial procedure in first instance; code (5): “appeal”; code (6): an agreement/judgment has been reached and is executed according to the agreed/adjudicated modalities; code (7): litigation settled during the period; code (8): other (to be specified).
• 2nd part: list of insurance policies taken out by the firm to cover risks of fire, theft, staff fault/fraud, professional liability, ... Insurance policies related to cars, medical expenses, group insurance, etc. need not be mentioned. This list will be communicated once a year, unless there are changes during the year to report.

26.

• 3rd part: the description of new litigations includes the name of the case and the parties involved (the plaintiff and the defendant), the origin and nature of the litigation, the amount involved, the status of the procedure, the insurance policies likely to cover the loss, as well as an estimate regarding the outcome and consequences of the litigation. The following quarter, the litigations included in this part will be mentioned under the first part.