Circular D4/EB/1 on the Examination of the Securities Ledger of Stockbroking Companies as of 31 March 2000

BANKING AND FINANCIAL COMMISSION
Prudential supervision of investment firms
Louise Avenue 99, B-1050 Brussels telephone +32(2)535.22.11 - fax +32(2)535.23.08 Brussels, 17 March 2000.
CIRCULAR D4/EB/1 TO THE AUDITORS
OF STOCKBROKING COMPANIES

Madam, Sir,

As you are aware, the value of financial instruments for which stockbroking companies provide custody services for their clients generally represents an amount much higher than that of cash deposits or other balance sheet or off-balance sheet items. Nevertheless, the treatment of securities deposit activity occupies a minor place in the annual and consolidated accounts that stockbroking companies have prepared so far in accordance with the provisions of general law.

This is why the Banking and Financial Commission imposes on stockbroking companies a periodic report on the status of their rights and obligations in financial instruments, taking the form of a securities ledger. This securities ledger must be prepared in accordance with the basic rules of double-entry bookkeeping, as set out in Circular 91/7 of 18 December 1991.

Given the importance of the "securities" items in the activity of stockbroking companies and considering that the custody of these securities constitutes a significant source of risk, the Commission has deemed it necessary to conduct an in-depth examination of the securities ledger of all stockbroking companies.

To this end, it requests that you, pursuant to Article 101 of the Law of 6 April 1995 (mandates entrusted to approved auditors) or pursuant to Article 167 of the same Law and Article 55 of the Law of 4 December 1990 (mandates still subject to the transitional regime), prepare a special report with the following content and characteristics:

1) a description of the stockbroking company's policy regarding the activity of depositing financial instruments (custody versus delivery; rental or provision of safes; custody in own safes versus with third-party depositaries; involvement of delegated agents in securities transactions (transit, deposit); tariff structure, security (access to the safe, physical controls, transport and insurance);

2) a description and assessment of the organization put in place by the company for each of the aspects listed in point 1), to the extent that they are applicable. The description and assessment will cover in particular the accounting system used, the personnel assigned, contractual supervision, internal control, internal and external audit (including their planning and budgets). The auditor must, in his report, highlight significant unresolved problems encountered during his checks;

BANKING AND FINANCIAL COMMISSION
Circular D4/EB/1 to auditors
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3) a certification of the securities ledger as of 31 March 2000, for which the auditor will confirm its completeness and accuracy as well as the fact that it was prepared in accordance with the basic rules referred to in Circular 91/7 of 18 December 1991, in particular paragraphs 1 to 7 of the Annex. If applicable, the auditor will mention events subsequent to this date that are important for his confirmation;

4) a description of the methodology on which the auditor bases his assessment and certification, including how the control results were achieved. The Commission wishes in any case to know what circularizations were carried out and what their results were. If certain items in the securities ledger were not subject to circularization or were only partially circularized, the auditor will mention the date of the last complete examination of the item concerned and any alternative controls that were performed. The stockbroking company's storage locations (safes, branches, delegated agents, transit locations) must, however, be subject to a complete inventory.

The Commission would like to receive your report by 31 May 2000 at the latest.
A copy of this circular is sent to stockbroking companies.
My services remain, of course, at your disposal for any additional information you may wish to obtain.
Please accept, Madam, Sir, the expression of my distinguished sentiments.

The President,
J.-L. DUPLAT