SEC Division of Investment Management staff letter: Warsaw Stock Exchange

20 OCT 199
Our Ref. No. 94-313-CC
RESPONSE OF" THE OFFICE OF CHIEF COUNSEL Warsaw Stock Exchange DIVISION OF INVESTMNT MAAGEMENT File No. 132-3 Your letters of September 15, 1993 and May 13, 1994, as

supplemented by telephone conversations on June 14, 1994 and

September 2, 1994, request our assurance that we would not

recommend enforcement action to the Commission under Rule 1 7f￾5 (c) (2) (iii) under the Investment Company Act of 1940 ("1940 Act") if the National Securities Depository ("National

Depository"), currently an unincorporated division of the Warsaw

Stock Exchange ("WSE"), acts as an eligible foreign custodian for

U. S. registered investment companies. i/
You state that the WSE is the only stock exchange, and the

National Depository is the only central facility for clearing and

settlement of securities, in Poland. Both the WSE and the

National Depository were established pursuant to the Act on Public Trading in Securities and Trust Funds ("Securities Act") . The government of Poland owns over 98% of the WSE's equity;

member banks and non - bank brokerages own the remainder of the

WSE's equity. Although the National Depository currently is an

unincorporated division of the WSE, it will become an

independent, non-profit corporation by November 1994 pursuant to

recent amendments to the Securities Act. Banks, brokerages,

exchanges, and investment funds will be el igible shareholders of

the National Depository, but its significant shareholders

initially are expected to be the WSE and the Polish government.

The amendments to the Securities Act require that any issue

admitted to public trading by the Polish Securities Commission

i/ Section 17 (f) of the 1940 Act provides that every registered

management investment company shall maintain its securities

and similar investments in the custody of (1) a bank meeting

certain requirements, (2) a member of a national securities

exchange, (3) the company i tsel f, in accordance with Commission rules, or (4) a system for the central handling

of securities pursuant to which all securities of any

particular class or series of any issuer deposited within

the system are treated as fungible and may be transferred or

pledged by bookkeeping entry without physical delivery of

such securities, in accordance with Commission rules. Rule

17f-5 provides an exemption from Section 17(f) to allow a

registered management investment company to deposit foreign

securities in the custody of an "eligible foreign custodian." Rule 17f-5(c) (2) (iii) defines the term "eligible foreign custodian" to include "a securities

depository or clearing agency, incorporated or organized

under the laws of a country other than the United States,

which operates the central system for handling of securities

or equivalent book-entries in that country."

("PSC") must be deposited with the National Depository.

Virtually all non-governmental issuers must apply to the PSC for

admission to public trading. Governmental issuers are not

required to apply to the PSC for admission to public trading, and

thus are not required to deposit their securities with the National Depository. ~/ All securities traded on the WSE, principally equities and

Polish Treasury debt, á/ are cleared and settled through the

National Depository. ~/ Although the Polish government may

authorize additional securities exchanges, the Securities Act

requires that all securities traded on any exchange in Poland be

deposited with the National Depository. 2/ While there is no

~/ Telephone conversation on September 2, 1994 between Kevin Fogarty and Monica Parry. á/ Trades in Treasury debt over 10 billion zlotys

(approximately us $440,000) may be effected off the WSE.

Because Treasury debt securities are not required to be

admitted to public trading by the PSC, they are not required

to be deposited at the National Depository. These

securities, however, are in fact deposited with the National

Depository and thus they must clear through the Depository.

Treasury debt instruments with a maturity of less than one

year from issue to maturity do not trade on the WSE, do not

clear and settle through the Depository, and are not within

the scope of the Securities Act. There is no central

depository for short term Treasury debt; settlement is

effected through physical delivery or interbank transfers.

~/ While the National Depository remains an unincorporated

division of the WSE, creditors of the WSE can not reach securities deposited with it. 2/ You note that certain securities issued in connection with

the "Mass Privatization Program" may not be required to be

deposited with the National Depository for a limited period

of time. It is expected that in 1994, about 450 state-

owned enterprises will be privatized, resulting in the

issuance of up to 27,000,000 physical certificates to adult

citizens who are permanent residents of Poland. One

physical certificate can be redeemed at the National

Depository for a share in each of seventeen closed-end funds

listed on the WSE which will serve as the direct owners of

the privatized enterprises. Physical certificates deposited

with the National Depository for redemption for fund shares,

red trading, will be dematerialized. Holders also

can trade their physical certificates off - exchange, or can

or broke

trade them in dematerialized form on the WSE. If holders

over-the-counter market in Poland, if such a market is created,

securities traded over-the-counter that are admitted to public

trading by the PSC would be required to be deposited with the

National Depository.

The PSC supervises the WSE and will separately supervise the

National Depository when it becomes independent. The PSC may

inspect the WSE, seek withdrawal of the WSE's license in case of

legal violations, and must approve all rule changes. The PSC

chairman has the powers of a civil prosecutor in cases involving

securities trading violations. An independent accounting firm

audits the WSE annually. The Polish government will issue

operating principles to govern the National Depository when it

becomes an independent corporation. At that time, the National

Depository also will be able to adopt its own rules. The PSC

will continue to have inspection and enforcement authority over

the National Depository, and may challenge the acts of the

National Depository's supervisory board or its general

shareholders meetings. The PSC will have the right to have a

representative present at meetings of the National Depository and

its shareholders.

Issuers deposit a global certificate with the National

Depository; the certificate is the physical representation of all

shares of the issue admitted to trading. The shares so

represented are fungible and trade on the WSE in book-entry form

only. The National Depository maintains security deposit

accounts for participants, settles transactions between

participants, and issues depository receipts to beneficial owners. Q/ The National Depository also reconciles cash accounts and supervises the procedures of Bank Slaski, which acts as the

clearing bank for all transactions effected on the WSE.

Participants have a securities account in the National Depository

and a cash account with Bank Slaski. When a trade is effected,

the National Depository clears and settles the trade by amending

trade their certificates off - exchange, they would not

necessarily be required to deposit their certificates with

the National Depository. Physical certificates will have a

life span not to exceed ten years; at the end of that

period, holders who have not redeemed their certificates for

fund shares will be required to do so, and those remaining

certificates will be dematerialized.

Q/ You state that National Depository participants are WSE

members, financial institutions, and the issuers of

securities listed on the WSE.

Depository receipts are not negotiable and are not used in

the settlement of securities transactions.

its records to reflect the change in ownership, and Bank Slaski

transfers funds from the buyer's account to the seller's account.

The Amendments to the Securities Act permit the National

Depository to perform cash settlement functions. The National

Depository intends to bring this function in-house within the

next four to nine months.

You state that the National Depository is the only central

facility for clearing and settlement of securities in Poland, and

that it is unlikely that a second central depository will be

created. You also state that the Securities Act, as amended,

mandates that all securities admitted by the PSC to public

trading in Poland be deposited with the National Depository. You

believe that the National Depository meets the definition of "eligible foreign custodian" in Rule 17f-5(c) (2) (iii) because it is the only central securities depository in Poland for all

securities admitted by the PSC to public trading.

We would not recommend that the Commission take enforcement

action against the WSE if the National Depository acts as an

eligible foreign custodian for U. S. registered investment

companies. 2/ This position is based on the facts and

representations in your letters and telephone conversations; any

different facts or representations may require a different

conclusion. This letter expresses the Division's position on

enforcement action only and does not purport to express any legal

conclusions on the issues presented.

~~ S~::5~

Senior Counsel

2/ See The Stock Exchange of Thailand (pub. avail. Aug. 26,
1993) and Malaysian Central Depository Sdn. Bhd. (pub.
avail. May 19, 1993).

.

lv:Ia:y 13, 1994
WARSAW STOCK EXCHANGE

rACT 'l0l. IJi-9 ~ wIs. .Monica PfuTj
.. 1. vi ",")",.! ""'.LV V ., .~.~" ..J .LVI".J. v t. .Lt. l\ tt"m""~r "D1' ~''1' "~"n "f Tn~"""ti"'nt 1\ Æ"'J'ag"'f'lcnt SECTION. " . U,S, Securities and Exchange Commission RULE l-lf'-ç-( c )(-i )((;,) 450 Fifh Street, N,W, PUBLIC ~ Â t.. A I 0. L1 . Washington, D.C. 20549 AVAILABILITY~ United States of Pi.erica

BE: Up-date of
Request for No-Action Position under Rule 17f-5 for W 8isaw Stock ExchangelNational Securties Deposito:rv Dear MO), Parry:
This lettei is to supplement my letter of September 15, 1993, requesting t11it the D~~'1'''~on -it",f- tC~l,.", a no-"'''t~on pûei't'on il' the abo~Te-"ef:er"'nr-""r¡ IT'''t"ter r "rill ~n,~h;irl" on LV .JI.. ri- t)'l.(t....l Mr~.. '-.L c....... ". .L '.. V J..1. ..!...__~'-l .t..1(~. vJ.. .1_ ~ L'll .!.Ln...I.t..i ..l..,. (-t...)

up-date conce:rng recent cßmges in Polish law, as well as address speific are::is Ül which the staff sought additional detaiL. Statutory Amendments " Amendments to The Law on Public Trading iii Securities and Tmsi Funds (Üie "SEoCurties Act") cae into effect in Februar of ths yea. Among otherfr.igs, they tend to strengthen the powers of the Polish Securities Commission ("PSC") and to c.ousoJjckttc the position of the National Securities Depository (the "National Depository!! or i'Depository!l) as the cenl.al c1eat.ig and depository agency ror securities :in Poland. The following changes in paiiicular are relevant to the material covered in my last letter:
1) The National Depository, currently an unincorprated division oftle Warsaw
Stock Exchange (IIWSEII), is now under statutory mandate to become an independent, nonpro11t cOIporatIon by mid-November. ItviIll be est~lbIished as ¡ ~JJ. ) . V l\iJ.... ~ 1.) .L _ VI( ,.1... i- l..t \iV oJ... i J.Ëy .t... ;).U..(u .I.l_~H..o.':,/i.~ ",¡ l. si-ir.I, -b~r tho. lI¡f"11' ~t.-r ofPrJ'''at''7''ti'on an:! +l-e HrS"E Eli "Ti"b1.. ",1-"i-e1-t,1.lA.- n'i'11 indude exchanges, brokerages, investment f1mds, hanks (including the Natio.naJ

Bank of Poland), aiid the State Treasury (Polish govemment\ at the outsei,

ho.vever, there .vill he no sigrlifíC¡11t o-vners besides tIie government and the WSE~

2) 'l~h.e National Depository's basic opemtional prinçiph~í' ""ill agaÜi be protDulgatt:d
by the Council of.Minist.ers ofthe Polish governrnent. \Vi1mn these hlÜit.s, tbe

Depositoryts internal governing bodies will issue rnore detaik'(l regulations.

\Vhile the PSC ",rill have no advance veto power over the latter regulationsj

it will continue to wi.eld enforceinent powers with resp~.ct to securihes law

compliance, incìuding, in Art.7lb §3, the specific iight to challenge the acts

of the Depository's Supervisory Board and general meeting of shareholders;

it also \vill have an explicit right to ir.LSy..t the Depository under Art.

~

71 b § i of the a.îl1ended Securities Act; and it viJlhave an explicit

right, under i\rt, 71b §2, to l:1.ve its representative present at meetings

of the Depository's Supervisory Board, as well as at the general m.eeting

of shareholders;

3) Th'" am. ""ndorl ~""'nn't~ea A r-t "'dd.."'''o'''' il' m"re .-",la~l tl,,, ,.".t1",10p1nent. L.. J.'V ;. U'w...tÁ .LL.L .,.1 1."", U. .iow.".;1.... .L ,/.1 u....uJ. l-..L.... "'.."". Vt..1 .L ..1,

of an over-the-counter market in Poland; it states in Art. 50a §2 that once the PSC has admi1ted aD issue to publi4.~ trading (and virtually all non￾governent securities require PSC pemrission tor public trading), tJie securities must be deposited "'lith the National Depository. 'rhere is no distinction beh-veen exchange versus OTC trading or between.or among ex('.hanges; by vitue of a regulation from the Council of IvíÜÜsters, money market instniments remain outside the general regulatory scheme, provided the. PSC is advised oftheii issuance and maturity;
4) UDder the autlioritý of
the amended Securities Act, the National Depository expects to bring in-house the settlement ofthe cash side of Îxansactions, a

function currently performed through Bank Slash, the \VSE's clearing bank. The change would be likely to OCA;~ur within tht; next ft:mr to nine months, l\ieas of SpeifQ InQ.l! 'l1)e staff requested elaboration on the physic,':l ('.ertiJicates issued pursuant to Po13nd's I!Íass Privatization Program that may be traded over-the-eounter. JvIass Privatization win æsull iriiheissumiee üfup tÓ 27,000,000 physical ceiificaJ.es (ltccrti.ficateslt) in bearer 'in my previous letter, one certifícate will be redeemable at the National Depository for a share in each of th.e dosed-end funds (there will be up to seventeen of these "National Invesiment Funds") being established to serve as the direct ownen; Orihi;, form. As noted

entcïprises being priva1.zed underlhe Prograui. TIieæ should be approximately 450 such enterprises, \vith an aggregate equity book value estini.ted at $4 to 6 billion" several times the combined current ma.rket ç.apit.aliz.ation all WSE-listed c01lpanjes. The 1lmd share" wili be listed on the WSE and trades dt..ed and seWed through the National DeposiiOl)i. Once deposited \vith the National Depository, whetlicr fbr. conversion into fund stwres or tor brokered trading, the physical certificate "vill bt~ destroyed. T11ereaft:er, it or the fund shares redeeme.d wiih it, win exist only in electronic book-entry form on tl),~ cnstoHH:.:r's aceount. TIie verification find dematerialization proeess will actually take place at the National DeposItof'j, iii the new 'Tiscal Agentll deparlInent to l",e established and \vh.ich wil h ~ .' ' t c.J ,.th f'~ ~ ..., tl. 1" T '. I'" ". " carr out t ose ninctions ~ssocia e.u \1 traIl..~..er ::.gent. activity m ie ..,ÆIÜ;'.a St.",ie,., AU physical c.eïtificates will have a limited life span not exceding t.en years, the exact
fiutire t" iìC detr.'m~in",;i b~r th'" 1\Jf~~ii'"trv "fPn'u",t~za' ti'''n 'if~e'" ~n-.nl"'''''''nta..tJ'r\1'1 ()ttl,I' .l,¡ , ,v t ....- 'I ..'.1, j. ,U.,".l '. .. ..V.Wl ¡')l."J ".II. i "'"',.1 J ...v (..t..t.L .uiJ.l-J.VJ_.L'l:\i.t i, .'JU '. i- ..u.....

Program. At the end of this period, all holders who have not already done S0 will be

required to exchange their ccitfcaies for fud shares, Accordingly, while Poland jil limited life-spans and wit! introducing temporary physical certificates, tJiese win have

illt;ID"t",hr"h rl",n-."ten"iJ"J"""d
.I. u.~,VJ..y r.,., V.L.lUl. .L.1u... .L-"w , ., .;

~

The st.aff also sought clarification on whether the Natiop..al Depository v..ere tht) only place shares could he deposited. It is the only plac.e puhlicly tm.ikd securities of non￾govemrnent.al issuers can he d€.posited, A non-public company rnay. of course, issue securities to investors or employees, but the securities cannot be listed or publicly traded until they have been immobilied, Banks and brokerages have comr;.-eted for the busj,ness of domiciling shares in privately held companies, but these must be deposited \v:th the National De:ix)sit.orj once the PSC has approved the application to admit il)e shares to public trading. The next staff inquiry conceme.i the drafting, review and appròval of Depository ruh:s by tiie Psc. The Depository, presently a division of the Warsaw Stock Exchange, is govemed in a very basic sense by the Securities Act, and in furter detail by an exceuÜve regulation promulgated by the Polish Governent's Council ofl\1isters. 111e PSC, of

course, has acc-ess to both these but no legal powt?r to alter Of veto t.hem. 'Jic Depository is govemed in furtier deüiil by the internal "statui!! and !lregniaminl' oftlie Warsaw Stock Exchanee. Tne PSC reviews these, and they cannot be altered without the PSC's pem1ission. /.1. t t.he most detailed level, t.1:e Depository is admiistered according to the ResolutionB and lustmdions of the \VSE's Supervisory Board and its Management l1ie PSC may also review these directives, but has no advance veto over them. hi cases of inconsistency with tiie law or applicable regulation, the PSC could apply to the Chairman of the Council ofl\1insters (the Prime l\1iúster) for a suspension of the WSE's licênse. The PSC's O\V chainan can also brig legal action as a civil prosecuter in cases arising froD:! pubhc trading in securities, , Removig any possible doubt about the PSC's review authority, the Febmary amendments added speifc paragraphs (Securities Act, Art,61a(2) and (3)) stating that the PSC has the right to have represent'ltives present at gimeral meetings of the WSE shaeholders and at meetings of the WSE Supervism:y Board, and to appeal any resolutions of those bodies that c.ontravene the \VSE's own "statut" or the law. As noted above, when the Depository becomes independent oftlie WSE, it -vill continue to be govemed by aii executive regulation of the COUi-icil of Ministers (as well as by the Securities ..ti..ct), It -'.rill have its own intemal"statut" and "ref.,;ulamín II whieh .vil1 not require the fonn.al approval of the PSC for either their initial adopiion or suhsequent amendment, although the Jvlinister of Privatization, as a statutOlY co-founder (wiili the

WSE) of the independent Depository and as the offcer iesponsible for exercisiiig the State Treasury's share in the Depository, wil have a more direct inuence. Nonetheless, the PSC Chairman will continue to have civil prosecutori.al powers 13); and, as with the WSE, me PSC 'Wll be entitled to be present at meetings of the independent (Securities Act, Art,

Depository's Supervsory Board and at its shaeholder's meeting (Securities Act, Ar,71b(2)); and it \vin be specific."lllY authori to appeal the decisions oftliose bodies in ca.se 0 llCOD~~lS ,ency WI, . . aw or wIt 1 t ie epositmy s governmg statut .:iecuntles.. ct, f . - t "tb 1 'i 1 D '! """ ',"' "A

Ar, 71b(3)),

, , .-..,.. ...--.-- . ~ .h..____
~ ~

the WSE included a specific audÜ ofthe The staff further inquired whether the audit of

Depository such as might identif specific, problems at the Depository, Since the Depository is currently an integral par of the \VSE~ no sp"~ial audit breaking out the the WSE COVØTS

expme ofûie Depository is made, Rather, the annual fina.:nÓal audit of

the Depository, The DepositOiY is not CUîfently treated as all fiiancials, includirig û1.ose of

either a profit center or a c,ost center. The Depository does not take both sides in tbe procss of trade clearance and settlement., unlike the cleanl1g p:f(X~SS in the U,S" and so IDe fiscaì "heath" of the Depository does not directly affect t.he health ofthe maiket The trades. TIlt; size Depository does administer a Guaantee Fund to finance the completion of

the Fund is monitored and reported on a reguL.'U basis (daily\ ai-id its size adjusted monthly to reflect any sigDjfic"Qn1 changes in market activity, of IDe PSC's inspection powers, with ïeSpE-'Ct to the TIie staff also requested more detail on

Depository sp"..ifically, rThe PSC has ahvays had authority to inspect the \VSE, Üicluding the Depository ~ause the Depository was and, for the next tcw m.oDths, will continue to he a part of the WSE, When the PSC has sought information from the WSE in the past.. .i norrnally has gûue directly to the ofiice or division of interest. (The PSC has not conducted the \lSB, itself a govemment-wntrolled eorporation, since the a full-sc.'Üe examInation of

latter's opening in 199 J .)
The Febmmy fu-iiendments, however, have made the PSCs authority more explicit. In

parallel provisions relating to the WSE and to the independent National DeposÜory,;

(Securiti~~s Act, Arts.61a(1) and 71b(l), respe..tive1y), the Securities Act states that tIie PSC may enter, may review books, documents and other reeords, and may obtain copies and receive required in1~)rmation. lfviolahons are found,. tJ:ie PSC hail, as noted abov:., civil enforcement powers. Finally, the sta asked whether tiris Do-action request would apply only to Exchange￾traded securities or to all sec1l-Ities deposited at the Dt";pository. We believe that the no ~-l.i. 1:1 ,. L". ,l~;~. _' , . . v. '- f. ~i 1.1 'I.. t.. ,"1.1, .J-u..f.....v W..l.V --' Ù..J.~' . .'; iJ. ".. ''1... . ~,...j "cti'on po"i'ti-on should- ev+end to ailij- ØPOSi't--l "'cc'in'fi-e" ";n",, .ih""-iP or" no .-li'X'er"Dcíw Depository's status as an eligible foreign custcx1ian or to the mnong them relevant to

purposes of
Rule i7f-5, there is any furtJier infomiation I I hope T have been able to a.nswer your questions, If

can provide~ please fl;..l frt.. to GOut-ad me, S TI1CeTCljr , ~. j '~biet.a Pustola Vice-President Na1Ional Depository i1

WI

WARSAW STOCK EXCHANGE

September 15, 1993
Mr. Robert Caroll, Esq.
Division of
Investment Management
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D,C. 20549
United States of America
RE: Request on behalf of
Warsaw Stock Exchange for a

No-Action Position under Rule 17f-5

Dear Mr. Carroll;
This letter is to seek assurance that the staff of the Division ofInvestment Management would not recommend that the Commission take enforcement action under Section 17(f) of the Investment Company Act of 1940 ("the 1940 Act") or Rule 17f-5 thereunder if the National Securities Depository ("National Depository") of the Warsaw Stock Exchange ("WSE") acts as an eligible foreign custodian pursuant to subparagraph (c)(2)(iii) orRule 17f-5, management investment companies registered under the Act. Rule 17f-5 thereunder allows the investment company to deposit foreign securities in the custody of an "eligible foreign custodian." Among these is, under subparagraph (c )(2)(iii) of the Rule,
Section 17(f) of the 1940 Act regulates custody of the investments of

a securities depository or clearing agency, incorporated or organized under the laws of a country other than the United States, which operates the central system for handling of securities or equivalent book-entries in that country. .. ,The National Depository is an unincorporated division of the WSE, the only securities exchange in Poland. The WSE is owned by member banks and non-bank brokerages and by the Polish government. It was established pursuant to Aricle 68 of the Act p£22 March 1991, The Act on Public Trading in Securities and Trust Funds ("the Securities Act"). . The government presently owns over 98% of the WSE's equity, although it cannot use this interest to effect corporate action without the consent of at least one of the WSE's 23 members. The WSE is a non-profit, self-regulatory corporation supervised by the Polish Securities Commission, the agency the Securities Act, is responsible for supervision of public trading in securities. The WSE is audited annually by an independent accounting firm, and the audit report is provided to the WSE's board, its shareholders and governmental authorities, A second report is made available to the general public. of the Polish government which, subject to regulations of 00-920 Warszawa, ul. Nowy Swiat 6/12. tel: (u2) 6~a 3¿ 32; fax: (O~) €28 81 J1; 628 1754; satellite fax 391 ::0701

The Securities Commssion may conduct inspections of the WSE on its own initiative, may seek a suspension of the Exchange's license in case of legal violations and must approve all rule changes proposed by the WSE. The Chairman of the Commission possesses the powers of a civil prosecutor in cases arising from public trading in securities. the Securities Act, which sets forth the Depository's functions and provides that it will be administered by the WSE The National Depository was organized pursuant to Aricle 71 of

according to operational principles prescribed by the Chairman of the Council of Ministers. Like the rest of the WSE, the National Depository also is subject to inspection and oversight by the Securities Commission, and any rule changes affecting its operation are similarly subject to Commission approvaL. Although the National Depository is not separately incorporated from the WSE, securities deposited with it are not reachable by the WSE's creditors. The National Depository is the only central facility for clearing and settlement of securities in Poland, All trades on the WSE clear and settle through it, and the WSE currently provides the nation's sole market for secondary public trading in non-governmental securities. Moreover, although the WSE is currently the only securities exchange in Poland, the Securities Act provides that all securities admitted to exchange trading anywhere in Poland must be deposited with the National Depository, Although there presently is no public secondary market in corporate bonds, the Securities Act does not distinguish between stocks and bonds with respect to the National Depository requirement. Accordingly, should other securities exchanges be established here in the future, transactions in all securities traded on those exchanges would also settle through the National Depository. There also is no separate, central clearing or depository facility for over-the￾counter trading. There is at present, in fact, no over-the-counter market for secondary public trading in non-government securities at all. Under Aricle 54 of the Securities Act, any such market would be subject to regulations promulgated by the Council of Ministers. Although no such market exists and no such regulation has yet been promulgated, it is expected that such a publicly traded aTC securities, whether debt or equity, in the National Depository, 1 Certainly no creation of a second central depository is likely, regulation would call for deposit of

In addition to providing a market for the securities of non-go~ernmental issuers, the WSE has, since September 1, 1992, traded Polish Treasury debt. As with equities, Treasury debt traded on the WSE is deposited with the National Depository, and transactions are cleared and settled there. Although Treasury debt transactions exceeding 10,000,000,000 PZL in value can be i This may not be the case with the street trading in berer share certificates to be issued in connection with Mass Privatization - see Law of April 30th, i 993 on National Investment Funds and Their Privatization ("Mass

Privatization Law"). Under this program, eii:pected to go into operation in i 994, shares of state-owned

enterprises will be distributed among a number of closed-end investment companies ("funds"). In return, the

State wiI tae shares in the funds, It wil then issue physical bearer certificates to be made available at modest

cost (and in some cases free of charge) to all adult citizens who are permanent residents of Pol. and, The certficates will be berer securities exchangeable at the National Depository for a bundle of(dematerialized) WSE-listed shares in the various funds. There wil thus be two new tyes of securities:, the redeenible certificate and the actual fund shares. While the fund share wil have no special status under the Securities Act, the certificates are specifically exempted from the requirements that public trading be conducted through brokerage houses and that secondary public trading occur on an Exchange. Although the certificates wil be entitled by law to be traded on the WSE in dematerialized form through brokerages (and be deposited for such trading in the National Depository), the Mass Privatization Law also anticipates street trading of these bearer certificates among these physical bearer certificates with a central depository or any other entity for street trading to occur.. natural persons and would not require deposit of

September 15, 1993 W ARSA W STOCK EXCHANGE Page 2 of 4

conducted outside the WSE, these too must clear through the National Depository, unless they involve instruments with less than a year from issue to maturity. The latter do not clear or settle through the National Depository system and do not trade on the WSE: such trades are not guaranteed by any central entity and are settled through physical delivery of certificates and computerized interbank funds transfers. Debt obligations with maturities ofless than a year, essentially money market instruments, are not within the scope ofPolands Securities Act, nor is there any central clearing or depository system covering them. The only longer-term Treasury debt not settled through the National Depository or traded on the WSE is for one issue distributed prior to the passage of the Securities Act. There is no central clearing or depository facility for this issue.

The mechanics of clearing and settlement are as follows. Securities are deposited with the National Depository in the form of a global certificate. The certificate is the physical representation of all shares of the issue admitted to trading, The shares so represented are fungible. The certificate is held in the National Depository's vault on the premises of the WSE. (Although the owners of securities can be issued depository receipts for shares of deposited securities that they own, such receipts are not negotiable and are not used in the settlement of securities transactions,)2 Afer a trade, amounts owing and owed, as well as securities owing and owed, are determined by the National Depository based upon compared contract notes from the parties to the trade, Settlement is on a delivery versus payment basis and is completed within three business days following the trade date (T+3). Investors hold a security account and a cash account with their brokers, The broker, in turn, holds a securities account in the National Depository and a cash account with a clearing bank, currently Bank Slaski for all National Depository participants.3 Settlements are effected through the transfer of funds in clearing bank accounts and the amendment of the securities register of the National Depository to reflect passage of the securities from one Depository participant to another. Corresponding entries are made by brokers on their own records for the accounts of specific beneficial owners. The National Depository's functions may be summarized as follows: it holds global securities certificates; keeps security deposit accounts for participants; settles securities transactions between participants; prepares settlement of financial transactions between participants; reconciles cash accounts and supervises the procedures of the clearing bank; registers volumes of issued securities in WSE trading; collects interest, dividends and redemptions; issues depository receipts to owners of securities for whom it hold deposit accounts; and establishes the A shareholder also may arrange to have his shares taen out of bearer form, registered and delivered to him in the form of ~l traditional stock certificate, This is accomplished by transferrng bearer shares from the investor's account to the account of the issuer at the National Depository and then having the issuer deliver registered shares to the investor. These shares, however, may not be publicly traded without redeposit,aHhe National Depository and retransfer into bearer form, While this tye of bearer- to-register ed- to-berer procedure is' a legal possibilty, it is largely unknown in practice. Shares in issues that are not publicly traded, however, and for which, therefore, no global certificate exists at the National Depository, are frequently held in registered or traditional certficated form. Bank Slaski was selected as clearing bank by the WSE board, It is one of Poland's largest banks, being among nine regional bank
spun offby the National Bank of Poland when it decided to withdraw from general commercial banng and concentrate on central banking functions. Although selection of a substitute clearing bank or banks is within the discretion of the WSE board, it is not expected that the WSE would use more than one clearing bank at any given time. September 15, 1993 W ARSA W STOCK EXCF ANGl: Page 3 of 4

principles of deposit account-keeping for participants. The Depository's participants are financial institutions as well as all members of the WSE and the issuers of securities listed on the WSE. We believe that a no-action position for the WSE's National Depository is amply warranted by the terms of the Rule and in view of the no-action positions the staff has taken in similar cases. See,~, Korea Securities Depository Corp. (pub. May 14, 1993), As with the WSE's National Depository, the Korea Securities Depository Corp. ("KSD") operated a centralized clearing and depository system based on fungible securities represented by immobilzed certificates on deposit in the depository's vault. KSD-eligible securities included all securities listed with the Korea Stock Exchange, those equity securities registered with the Korea Securities Dealers Association (the "KSDA," Korea's OTC dealers), and certain other securities. But while the KSD's potential reach may thus have extended to nearly as much of the existing public secondary market (at least in non￾governent issues) as does the National Depository's, only a portion of the eligible securities the listed shares and a minority oflisted bonds and KSDA-registered shares. actually used the system: a little over half of

The crucial point, however, is that the KSD clearly met the standard of Rule 17f-5: it clearly operated "the central system for the handling of securities or equivalent book-entries in that country." It thus satisfied the only criterion that the Rule states for depositories and clearing

agencies organized under foreign law, KSD did not have the whole market, but it had no rivals. We think there can be little doubt on the facts stated above that the Polish National Depository satisfies that sole criterion, in that it does have the whole existing market (with the one government bond issue exception noted above) and it has no rivals. What is clear from the KSD letter and the words of the Rule should be unmistakable from a variety of no-action positions in cases where the relevant institutions status as "the central system" for handling securities was less clear-cut than in either this case or the case of the KSD. See, e.g., Malaysian Central Depository Sdn. Bhd. (pub, May 19, i 993) (the entity was the sole central "depository system" but would not handle all exchange-traded securities for three to five years and existed side-by-side with separate clearing system for handling securities), Bolsa de Valores de Sao Paulo (pub. Oct. 28, 1992) (two interfaced clearing and depository entities for exchange-traded equities, two others for fixed-income securities), Reserve Bank of Australia (pub. Sept. 2, 1992) (government bank handles government debt, second entity for non-government debt, third entity contemplated for equity), S,D. Indeval, S.A. (pub, Oct. 19, 1990) (Separate transactions in government securities maintained by central bank), KAS - Associate, N.V. (pub. May 15, 1989) (three integrated entities). system for clearance of

W~' hope the facts and authorities outlined above wil enable the staff to' act favorably on we can provide any further information or assistance in this matter. this reqÜest. Please contact us, however, if

Sincerely;
~~ ;:4' ~ c.

~zbieta Pustola

Vice-President
National Depository
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