Circular 91/7 Accounting and Securities Balances

Brussels, 18 December 1991.
CIRCULAR TO STOCKBROKING COMPANIES

Ladies, Gentlemen,

We ask you to find attached in Annex 1 a model of the securities balance sheet which we request you to transmit henceforth to the Intervention Fund at the same time as the periodic quarterly statements of your stockbroking company, this for the first time with the statements as of 31 December 1991.

The securities balance sheet represents the situation of assets and liabilities, rights and obligations in securities of your stockbroking company at a specific date. It results directly from the securities accounting or securities administration of your company. Stockbroking companies that do not yet have sufficiently developed securities accounting will prepare this securities balance sheet based on the inventory carried out at the end of the period.

You will find in Annex 2 a copy of a note entitled "Securities Accounting of a Stockbroking Company" which will give you the necessary indications to complete this securities balance sheet. It can be used - if necessary - as a reference in the development of proper securities accounting.

Reference no. 1 c.91/7

This note comprises a series of basic principles as well as a minimum chart of accounts which, according to the Intervention Fund, should be included in the securities accounting of a stockbroking company. The fundamental concepts set out in this note are in fact already applicable to establishments acting as intermediaries on the market for government bonds and treasury certificates (cf. Law of 2 January 1991 and Royal Decree of 23 January 1991).

The intention of the Fund is to subsequently incorporate the provisions relating to securities accounting into a specific regulatory framework intended to define the content and presentation, on the one hand, of a standardized minimum chart of accounts and, on the other hand, of the annual accounts of stockbroking companies.

It goes without saying that we remain at your disposal to answer any questions you may have on this subject.

Please accept, Ladies, Gentlemen, the expression of our distinguished sentiments.

BANKING AND FINANCIAL COMMISSION
Prudential supervision of investment firms

THE SECURITIES BALANCE SHEET (in 000 BEF)

1. SECURITIES TO RECEIVE: ......................................... 1. SECURITIES TO DELIVER: .......................................
100. Exchange operations ......................................... 101. Exchange operations ........................................
110. Off-exchange operations ......................................... 111. Off-exchange operations ........................................
120. Operations on the primary market ......................................... 121. Operations on the primary market ........................................
130. Sales/Repurchases ......................................... 131. Sales/Repurchases ........................................
140. Securities loans ......................................... 141. Securities loans ........................................
150. Adjustments ......................................... 151. Adjustments ........................................
190. ..... 191.... ........................................

2. SECURITIES IN DEPOSIT: ......................................... 2. SECURITIES IN DEPOSIT: .......................................
200. Waiting accounts
210. Securities given in deposit
a. central depositories and securities transfers b. intermediaries and correspondents
c. vaults of the stockbroking company
d. available securities e. debit balances on client securities accounts f. own positions
......................................... 201. Waiting accounts ........................................
......................................... 211. Securities received in deposit ........................................
a. clients of the stockbroking company ........................................
a.1. ordinary clients ........................................
a.2. wealth management clients ........................................
b. clients of wealth management companies ........................................
c. non-allocable securities ........................................
d. own positions
e. credit balances on securities accounts with depositaries ........................................

3. SECURITIES IN GUARANTEE: ......................................... 3. SECURITIES IN GUARANTEE: .......................................
300. Waiting accounts ......................................... 301. Waiting accounts ........................................
310. Securities given in guarantee (liabilities of the stockbroking company) ......................................... 311. Securities received in guarantee (claims of the stockbroking company) ........................................
320. Securities given in guarantee (operations in progress) ......................................... 321. Securities received in guarantee (operations in progress) ........................................

4. GENERAL TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. GENERAL TOTAL: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Louise Avenue 99, B-1050 Brussels Telephone +32(2)535.22.11 Telex +32(2)535.23.08

Annex 2: "Securities Accounting of a Stockbroking Company"

1. Securities accounting concerns the recording of rights and obligations in securities, as well as own positions in securities and instruments.

This accounting is subject to the double-entry movement of amounts or movements of securities, or of debts/claims in the general accounting. It is the subject of specific entries in securities accounting and in general accounting.

2. Securities accounting is entered in units or quantities of securities. Securities and bonds are recorded at their nominal value in the currency in which the security is denominated, i.e., which covers the options and trustees, or the name of the contract.

a) From the legal relationships resulting from the law, securities are recorded in securities accounting:
b) by debtors and creditors of the securities in question; cc) by: taking the identification of the security itself (universal code ISCO); csc: identity of the debtor or creditor of the securities.

3. Securities accounting distinguishes the following categories of debtors and creditors:

• The following entities and the stockbroking company itself:
  a. clients (private, institutional, professional) of the stockbroking company:
  a.1. ordinary clients a.2. wealth management clients (1). b. clients of wealth management companies for which the stockbroking company intervenes as a depositary (1).
  c. unidentified clients, i.e., clients "unknown" which represents securities which cannot be individually attributed to an owner.
  d. own portfolio of the stockbroking company (participations recorded in the financial assets of the entity: positions).

• Intermediaries and stockbroking institutions:
  a. stockbroking institutions and clearing houses; b. stockbroking companies;
  c. credit institutions;
  d. foreign stockbroking institutions and correspondents; e. others ...

• Specialized depositaries and securities locations:
  a. central depositories and securities transfers; b. vaults or safes of the stockbroking company;
  c. "unique locations" (missing securities).

4. The securities balance sheet and the presentation of securities accounting follow one or more of the criteria mentioned in point 5 below. In the event of periodic production of the securities balance sheet, the securities and currencies in which they are denominated will be evaluated at market price. Annual valuation is permitted for non-listed securities.

At Annex 7, you will find a securities balance sheet drawn up according to the criterion of legal nature. Other presentation criteria may be debtors/creditors or a specific security.

(1) These distinctions are mandatory under the application of the Royal Decree of 4 October 1991 relating to wealth management and its implementation plan. They must therefore be made in the general capital by stockbroking companies. Provided for by the aforementioned Royal Decree.

5. The following must be included in securities accounting: securities referred to in Article 1 § 1 of the Law of 4 December 1990, notably:

• securities with share ownership rights, bonds, and other association rights and securities representing such rights;
• bonds, debentures, and other securities representing claims or rights in associations, indivisions, or partnerships and securities representing such rights (debenture certificates, participation certificates, participation bonds);
• subscription rights and other securities giving the right to subscription or acquisition of ownership securities, bond securities, and other rights;
• certificates representing shares of foreign companies listed on one of the stock exchanges of the Kingdom;
• and finally, other securities and instruments determined by Royal Decree (treasury certificates, treasury bills, savings certificates, as well as other financial instruments determined in question in Article 1, § 2 of the aforementioned law).

As well as the options and warrants attached to the securities and the contracts related to the evolution of the prices of securities, raw materials, precious metals, etc., which are excluded from individual securities accounting.

Coupons of securities are recorded from the moment they have been detached.

6. Securities to receive and to deliver

10. Exchange operations
100. Securities to receive
101. Securities to deliver

11. Off-exchange operations
110. Securities to receive
111. Securities to deliver

12. Operations on the primary market
120. Securities to receive
121. Securities to deliver

13. Sales/Repurchases
130. Securities to receive
131. Securities to deliver

14. Securities loans
140. Securities to receive
141. Securities to deliver

15. Adjustments
150. Securities to receive
151. Securities to deliver

19. ...

2. Securities in deposit
20. Waiting accounts
200. Securities in transit (rights)
201. Securities in transit (obligations)

21. In deposit
210. Securities given in deposit
211. Securities received in deposit

3. Securities in guarantee
30. Waiting accounts
300. Securities in transit (rights)
301. Securities in transit (obligations)

31. Coverage of bonds and debts of the stockbroking company
310. Securities given in guarantee to cover debts of the stockbroking company
311. Securities received in guarantee to cover claims of the stockbroking company

32. Coverage of operations in securities and other financial instruments
320. Securities given in guarantee to cover operations in progress
321. Securities received in guarantee to cover operations in progress

7. Presentation of the balance sheet

Annex 2: The balance sheet

1. Securities to receive
100. Exchange operations
110. Off-exchange operations
120. Operations on the primary market
130. Sales/Repurchases
140. Securities loans
150. Adjustments
190. ...

2. Securities in deposit
200. Waiting accounts
210. Securities in deposit
a. central depositories and securities transfers b. intermediaries and correspondents
c. vaults of the stockbroking company
d. missing securities e. debit balances on client securities accounts f. own positions of the stockbroking company

3. Securities in guarantee
300. Waiting accounts
310. Securities given in guarantee to cover debts of the stockbroking company
320. Securities given in guarantee to cover operations in progress

4. Securities to deliver
101. Exchange operations
111. Off-exchange operations
121. Operations on the primary market
131. Sales/Repurchases
141. Securities loans
151. Adjustments
191. ...

2. Securities in deposit
201. Waiting accounts
211. Securities received in deposit
a. clients of the stockbroking company a.1. ordinary clients a.2. wealth management clients b. clients of wealth management companies
c. non-allocable securities
d. own positions of the stockbroking company e. credit balances on securities accounts with depositaries

3. Securities in guarantee
301. Waiting accounts
311. Securities received in guarantee to cover claims of the stockbroking company
321. Securities received in guarantee to cover operations in progress

8. General remarks on the accounts

The balance sheet is divided into three rubrics (1. securities to receive and to deliver; 2. securities in deposit; 3. securities in guarantee). Each has a separate individual or specific name. The list of debtor accounts and those of the credit accounts or the accounts relating to the entity are treated with rights and obligations in securities or other financial instruments resulting from operations.

At the time of this conclusion, each operation concluded by the stockbroking company. Each right in securities and each obligation in securities of the stockbroking company will be recorded in these rubrics until the moment of the settlement of the operation - due to the delivery by the counterparty of the securities to the stockbroking company or by the delivery (physical or via deposit) of the securities to the client by the stockbroking company.

This rubric includes the following accounts:

10. Exchange operations: These accounts concern the rights and obligations in securities and other financial instruments resulting from purchase or sale operations that the stockbroking company has concluded or is to conclude, either for the account of a client, either for its own account, on an organized and officially recognized stock market, for which the settlement has not yet intervened.

This account is used in the case where the stockbroking company is a direct party to the market (e.g., on the Bourse de Bruxelles, or on the EASDAQ, or on another market) or if there is no other intermediary to conclude the operation.

The account may be subdivided in the chart of accounts according to the nature of the transaction (spot, forward, etc.) or the identity of the intermediary through which the stockbroking company acts.

Following a purchase operation for the account of a client, the stockbroking company will subsequently record a claim in securities (account 100) against the counterparty (either the market, either an intermediary) and a debt in securities (account 101) towards the client. Upon receipt of the securities (e.g., on account 210, via the depositary CIK), the claim against the counterparty is cleared while the debt towards the client is cleared by the securities made available to the client (account 201) or by the daily movement of securities (account 211) of the client.

The accounting entries, specifying the identification system described in point 5 above of the note, and assuming a security XXX, a client YYY, a counterparty ZZZZ and the depositary CIK, are as follows:

XXX/100/ZZZZ 1
XXX/101/YYY 1

• Settlement counterparty: receipt of securities CIK
• 100/XXX 1
• XXX/100/ZZZZ 1

b. Client settlement: The security is settled on the client's securities account:

11. Off-exchange operations: This account concerns the rights and obligations in securities and other financial instruments resulting from purchase or sale operations that the stockbroking company has concluded off-exchange, either for the account of a client either for its own account, and for which the settlement has not yet intervened.

Operations on public markets are considered as off-exchange operations.

12. Operations on the primary market: This account concerns the rights and obligations in securities resulting from operations on the primary market that the stockbroking company has concluded either for the account of a client either for its own account, and for which the settlement in securities - in many cases, it is a scripless delivery of securities after the closure of the issuance period followed, when it is not about delisted securities, by the making available to the effective holder of the securities - has not yet intervened.

13. Sales/Repurchases: This account concerns the rights and obligations in securities resulting from sales/repurchases in progress (cf. Articles 23 to 25 of the Law of 2 January 1991). A sale/repurchase is an operation by which securities are transferred to a counterparty and irrevocably linked to a repurchase at a later date between the same parties, with the same characteristics.

The party that sells the securities against payment and repurchases them later (the seller) records simultaneously at the conclusion of the operation a debt in securities (131) towards the counterparty, which is cleared by the delivery of the aforementioned securities, and a claim in securities (130) towards the same counterparty, which at the expiration of the agreed term is cleared by the restitution of the securities.

The party that receives the securities immediately pays and resells them later (the buyer) records simultaneously at the conclusion of the operation a claim in securities (130) towards the counterparty, which is cleared by the receipt of the securities, and a debt in securities (131) towards the same counterparty, which at the expiration of the agreed term is cleared by the delivery of the securities.

We draw attention to the fact - and this is valid as well for securities accounting as for general accounting - that even though the operation is qualified as a sale/purchase by the law, the securities do not disappear from the own positions of the party that sells them (the seller) and are not recorded in the own positions of the party that buys them (the buyer). A sale/repurchase operation is in fact recorded by the inscription of a claim and a debt in securities (securities accounting) as well as in the general accounting.

It should also be noted that operations of report (carry) where the counterparty is found on the organized market for report, are not considered as sales/repurchases nor as off-exchange operations. Reports at banks are, on the contrary, considered as sales/repurchases and must therefore be accounted for in the present rubric.

II. Securities in deposit: This rubric concerns the rights and obligations in securities of the stockbroking company resulting from operations of deposit and loan of securities.

a. Securities loan is a convention by which one party remains the owner of the securities to another party, who undertakes to return an equivalent quantity of securities at the expiration of the agreed or to be defined term.

The party that lends the securities receives in principle the remuneration for its loan, such as a commission (by which a calculated percentage on the value of the securities is applied). It also receives another guarantee - either in cash or in securities or another financial instrument - equal to 115% of the value of the securities given in loan.

The party that borrows securities records simultaneously its debt in securities (141) towards the party lending the securities, which is cleared at the same time by the return of the securities to the lender, and a claim in securities (140) towards the same party, which will be cleared at the expiration of the loan term by the delivery - return of the securities. The loan of securities is at par with the constitution of guarantee. The party that lends - under the hypothesis where it is a guarantee in securities - records a claim in securities (100), which is cleared upon receipt of the securities, and a debt in securities (321), in the account relating to guarantees received for operations in securities (see rubric 3. Securities in guarantee).

The party that borrows the securities records simultaneously a claim in securities (140) towards the party lending the securities, which is cleared by the delivery of the securities by this latter, and a debt in securities (141) towards the same party, which will be cleared at the expiration of the loan term by the restitution of the borrowed securities.

When the loan of securities is accompanied by the constitution of a guarantee in securities, the party that borrows records a debt in securities (301), which is cleared by the delivery of the securities to the lender, and a claim in securities (310), in the account concerning the guarantees constituted for operations in securities (see rubric 3. Securities in guarantee).

15. Adjustments and similar operations: This rubric concerns the rights and obligations in securities of the stockbroking company resulting from adjustments, exchanges, etc. of securities.

The accounts recorded under this rubric relate to the rights and obligations in securities resulting from the conservation and deposit of securities.

The own portfolio of the stockbroking company is also recorded under this rubric.

From the moment the stockbroking company has the obligation in securities owed to the holder of securities by clients for the purpose of sale or adjustment or following conventions made in deposit with its clients or with clients of wealth management companies or others, when the securities purchased by the client are not physically deliverable (dematerialized securities such as government bonds and certain corporate bonds: options, futures, etc.).

9.
The securities held by the exchange for the reasons mentioned above, as well as the securities held by the exchange for its own accounts in its own vaults, held by specialized institutions (entrusted for deposit and transfer of securities), or held by intermediaries and custodians of securities, are registered in the securities-accounting, i.e., the securities accounts.

The accounts of transit, nos. 200 and 201, are accounts of transit of which the securities are accounted for by the exchange under the following conditions: those whose reception is not yet confirmed, or those whose reception is not yet accepted by the exchange to which a new allocation has been assigned. Securities subject to allocation or to the issuance of a new title, or to the cancellation or regularization, are transferred to the accounts of transit.

We draw your attention to certain particular aspects:

(a) It may happen that certain debtors, by virtue of their allocation, or certain creditors (for example, securities accounts of clients) present a "negative" balance. This is noted in the case where the securities account of the exchange with a securities deposit and transfer control, and in the securities-accounting, only the debit balance is not provisioned and a credit balance is taken. The securities-accounting is thus recorded under the heading "Credit Balances on Securities Accounts held for Deposits".

It may happen that a client's securities account, which should in principle present a credit balance, is in debit.

This situation arises, for example, when a client exercises options: the exercised option is imputed to the debit of the client's account and recorded in the securities balance under heading 210.5. This option is registered in the credit of the securities account of the intermediary, and the exercised option is registered (in the securities-balance under heading 211.5.1).

Note: Positions on the exchange taken by clients or by the exchange on forward transactions will not be registered here, nor, as long as liquidation has not taken place, in the securities balance for securities to be received as a result of exchange operations.

(b) It may happen, during the allocation of securities, that securities are treated as if they could be distributed to their owner, without them being able beforehand to be ranked in the exchange's own positions: these securities are grouped in a securities account classified in the securities-balance under heading "Other non-allocable".

It may also happen that an investor of securities, in stock, undergoes an imbalance between the securities of the exchange, certain securities determined and the rights in these securities: in other words, some securities are missing.

To account for this situation, the exchange debits a "missing securities" account with the nominal value of the securities which are not yet recovered, by the credit of the allocation account where the shortfall is accounted for.

When the missing securities are recovered, the exchange must, to avoid any loss, replace them with identical quality securities to its clients and reproduce them provisionally on a specific suspense account opened for this purpose. The allocation account is updated following the liquidation of the replacement transaction, while the specific suspense account is balanced by the credit of the missing securities account. The general accounting of the exchange's own positions is thus credited with the debit of the account resulting. These resulting imbalances in the securities-accounting are charged to the results of the exchange.

These remarks, therefore, distinguish the following situations:

(a) Securities operations (3101) in the securities account of the debts of the exchange, and securities (by example, establishments of credit, and securities operations, 311) in the securities account of the credits of the exchange on its debtors (for example, debtors are banks, which do not have any direct link with securities operations or current accounts).

(b) Securities guarantees constituted (3201) and required (321) as cover for current operations in securities value:

• securities operations (for example: forward securities, reports, short sales, securities loans/borrows, etc.)
• operations in other financial instruments (options, futures, etc.).