Circular 91/7: Securities Accounting and Securities Balance

Brussels, December 18, 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 December 31, 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 establish 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.

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, moreover, already applicable to establishments acting as intermediaries on the market for government bonds and treasury certificates (cf. Law of January 2, 1991 and Royal Decree of January 23, 1991).

The intention of the Fund is to subsequently incorporate the provisions relating to securities accounting into a specific regulatory framework intended to define, on the one hand, a standardized minimum chart of accounts, and, on the other hand, 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 11. Off-exchange operations ........................................
120. Operations on the primary market ......................................... 121. Operations on the primary market ........................................
130. Sales/Repurchases ......................................... 131. Sales/Repurchases ........................................
140. Securities lending ......................................... 141. Securities borrowing ........................................
150. Regularizations ......................................... 151. Regularizations ........................................
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. missing securities e. debtor balances on client securities accounts f. proprietary 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. proprietary positions
e. creditor balances on securities accounts with depositaries ........................................

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

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 of a stockbroking company covers the recording of all operations involving rights and obligations in securities or other financial instruments, as well as proprietary positions in securities and instruments.

2. Any transaction involving a movement of capital or movement of securities, or a debt, constitutes an entry in securities accounting and in general accounting.

3. 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, to which options and warrants, or the number of contracts, are added.

4. The legal relationships on the basis of which the securities are recorded in securities accounting:
   a) the debtor and creditor of the securities in question; b) the identification of the security itself (universal code ISIN); c) the identity of the debtor or creditor of the securities.

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

   • The securities and the stockbroking company itself
   • Clients (private, institutional, professional) of the stockbroking company:
     a. ordinary clients b. wealth management clients (1).
     c. clients of wealth management companies for whom the stockbroking company acts as depositary (1).
     (5) "Unknown clients" status, which represents securities that cannot be individually attributed to an owner. d. the proprietary portfolio of the stockbroking company (participations recorded in the financial assets: proprietary 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).

6. The securities balance sheet and the presentation of securities accounting follow one or more of the criteria mentioned in point 5 above. 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 evaluation is permitted for non-listed securities.

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

(1) These distinctions are mandatory in application of the Royal Decree of October 4, 1991 relating to wealth management and the establishment of plans. They must therefore be made in the general accounting by stockbroking companies. Refer to the aforementioned Royal Decree.

7. The following must be included in securities accounting: the securities listed in Article 151 of the Law of December 4, 1990 (notably ownership shares, bonds and other association rights and securities representing these rights), bonds, treasury bonds and other securities representing claims or rights in associations, indivisions or partnerships and securities representing these rights (debentures, income shares, profit shares), 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 exchanges of the Kingdom and finally other securities and instruments determined by the King (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 options and warrants and contracts related to the evolution of indices of the prices of securities, raw materials, precious metals ... are excluded from individual securities accounting. Coupons of securities are recorded from the moment they have been detached.

I. 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 lending
140. Securities to receive
141. Securities to deliver

15. Regularizations
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 pledge
30. Waiting accounts
300. Securities in transit (rights)
301. Securities in transit (obligations)

31. Covering of debts and claims of the stockbroking company
310. Securities given in pledge to cover debts of the stockbroking company
311. Securities received in pledge to cover claims of the stockbroking company

32. Covering of operations in securities and other financial instruments
320. Securities given in pledge to cover ongoing operations
321. Securities received in pledge to cover ongoing operations

4. ...

5.

Annex 2: "The Securities Balance Sheet"

1. Securities to receive
100. Exchange operations
110. Off-exchange operations
120. Operations on the primary market
130. Sales/Repurchases
140. Securities lending
150. Regularizations
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. debtor balances on client securities accounts f. proprietary positions of the stockbroking company

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

4. Securities to deliver
101. Exchange operations
111. Off-exchange operations
121. Operations on the primary market
131. Sales/Repurchases
141. Securities borrowing
151. Regularizations
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. proprietary positions of the stockbroking company e. creditor balances on securities accounts with depositaries

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

Remarks: Code on the accounts
The code is divided into three main categories (1. securities to receive and to deliver; 2. securities in deposit; 3. securities in pledge). Each has a sub-category for individual or specific names. It indicates the nature of the debtor accounts and that of the creditor accounts.

The accounts relating to the main category are treated for rights and obligations in securities or other financial instruments resulting from operations.

At the time of conclusion, each operation performed by the stockbroking company. The right in securities and the obligation in securities of the stockbroking company will be recorded in these categories until the moment of settlement of the operation - namely delivery by the counterparty of the securities to the stockbroking company or by delivery (physical or via deposit) of the securities to the client by the stockbroking company.

This category 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 concluding, either for the account of a client, either for its own account, on an organized and officially recognized stock exchange, for which settlement has not yet intervened.

These accounts are used in the case where the stockbroking company is a direct party to the market (broker), i.e., the buyer or the seller, without there being an intermediary to conclude the operation.

These accounts can be subdivided in the chart of accounts according to the nature of the market on which the operations are concluded (securities, options, futures, ...) or by the identity of the intermediary upon 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) towards 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, the claim towards the counterparty is extinguished while the debt towards the client is extinguished by the making available of the securities (account 201) or by daily entry in the securities account (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 CII, are as follows:

XXX/100/ZZZZ 1
XXX/201/YYY 1

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

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

11. Off-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 off-exchange, either for the account of a client either for its own account, and for which settlement has not yet intervened.

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

12. Operations on the primary market: These accounts concern 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 settlement in securities - in many cases, it is a scripless delivery of securities after the closing of the issuance period followed, when it is not about delisted securities, by the making available to the effective holders of securities - has not yet intervened.

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

The party selling the securities against cash and repurchasing them later (the seller) registers simultaneously upon conclusion of the operation a debt in securities (131) towards the counterparty, which is extinguished 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 extinguished by the restitution of the securities.

The party receiving the securities immediately and reselling them later (the purchaser) registers simultaneously upon conclusion of the operation a claim in securities (130) towards the counterparty, which is extinguished 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 extinguished by the delivery of the securities.

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

It should also be noted that operations of report where the counterparty is found on the organized report market are not considered as sales/repurchases nor as off-exchange operations. Bank reports are, on the contrary, considered as sales/repurchases and must therefore be accounted for in the present category.

II. Securities in deposit: This category concerns the rights and obligations in securities of the stockbroking company following operations of deposit and loan of securities.

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

The party lending the securities receives as principal the remuneration for its loan, such as a commission (by which a percentage calculated on the value of the securities lent), and receives another guarantee - cash or securities or another pledge guarantee - equivalent to 115% of the value of the securities given in loan.

The party borrowing the securities registers simultaneously its debt in securities (141) towards the party lending the securities, which is extinguished at the same time as the return of the securities to the lender, and a claim in securities (140) towards the same party, which will be extinguished at the expiration of the loan term upon the return of the borrowed securities.

When the loan of securities is accompanied by the constitution of a pledge in securities, the party lending - under the hypothesis where it is a pledge in securities - will record a claim in securities (100), which is extinguished upon receipt of the pledged securities, and a debt in securities (321), in the account relating to pledges received for operations in securities (see category 3. Securities in pledge).

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

When the loan of securities is accompanied by the constitution of a pledge in securities, the party borrowing will record a debt in securities (301), which is extinguished by the delivery of the securities to the lender, and a claim in securities (310), in the account concerning the pledges constituted for operations in securities (see category 3. Securities in pledge).

15. Regularizations and similar operations: This category concerns the rights and obligations in securities of the stockbroking company resulting from regularizations, exchanges, etc., of securities.

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

The proprietary portfolio of the stockbroking company is also recorded under this category.

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

9.

For the part of securities held in custody for clients for the reasons mentioned above or securities held in its own safe, issued by specialized institutions (such as clearing houses and securities transfer agents) or by clearing houses and clearing agents, the securities transactions are recorded in the securities accounting - i.e., the securities accounts.

The accounts of items 200 and 201 are transit accounts in which securities are accounted for which are expected to be taken up under such transactions where the receipt is not yet confirmed or which are receivable by the securities company to which a new allocation must be made for securities held in custody or for redemption, repurchase, or requisition transactions. These are recorded in the securities account.

We draw your attention to certain particular aspects:

(a) It may happen that some debtors (for example, client securities accounts) or some creditors (for example, securities accounts of a clearing house and securities transfer agent) present a "negative" balance.

This is notably the case when the securities account of the securities company at a clearing house and securities transfer agent, which in the securities balance sheet presents only a debit balance, is not provisioned and presents a credit balance. The net balance is then taken up under the item "Credit balances on securities accounts held in custody".

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

This situation arises, for example, when a client exercises options: the option premium is set off against the debit of the client account and taken up in the securities balance sheet under item 210. S. This option is then recorded on the credit side of the securities account of the clearing house which issued the option (in the securities balance sheet under item 211. S.1.

Note: Positions on the forward market taken by clients or by the securities company on the forward market will not be recorded here as long as liquidation has not taken place - in the section of securities to be received due to securities market operations.

(b) It may happen that, upon the inventory of securities, some securities are found "missing", without being able to attribute them to their owner and without them being able beforehand to be ranked in the proprietary positions of the securities company: these securities are grouped in a separate securities account classified in the securities balance sheet under the item "Non-allocable securities".

It may also happen that an inventory of securities in stock reveals an imbalance between the quantities of the securities company's securities of a certain type and the rights in these securities: in other words, some securities are missing.

To remedy this situation, the securities company debits a "securities lost" account with the number of securities which are not found, by crediting the clearing account where the deficit is recorded.

When the missing securities are found, the securities company must, to avoid loss, purchase identical quantities of these securities from its traders and provisionally record them on a proprietary portfolio account specifying this status. This clearing account is updated following the liquidation of the purchase for replacement, while the proprietary portfolio account mentioned is settled by the credit of the "securities lost" account. The general accounting, the balance of proprietary positions, is thus credited via the debit of the account resulting. In this way, the imbalances maintained in the securities accounting are charged to the results of the securities company.

In summary, distinguish the following situations:

(a) Cover for securities operations (310 in the "Cover for debts of the securities company" account, for example, credit institutions, and 311, the "Cover for credits of the securities company" account, for example, bank debtors, which have no direct link with securities operations or current accounts)

(b) Securities constituting cover (320 and 321) as cover for current operations in securities:

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