PUBLIC

Date: 19-22 October 2013

Asia Pacific Central Securities Depository Group General MeetingMarket Booms and Busts

Custodian Banks and CSD Interaction

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Banks (Local Custodial)

Local Brokers

How are CSDs directly serving the end investor?

Funds (Fund Manager)

International Brokers

Banks (Global Custody)

Insurance Companies

Listed Company

Hold Sell

Lawyer

Registrar

Banking Infrastructure

Members

Brokers

Banks

Sp. Category

Depository

InvestorsBuy

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Primary responsibility to the investor

· Instantaneous transfer of securities ownership linked with cash settlement

· “Speed to market" of corporate action notification and entitlement payment – Golden record

· Provider of Proxy services

"Provide uncompromised safekeeping of assets"

· Legally ringfenced

· Operationally robust

· Financially stable

· Lien free

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· Safekeeping of assets through the depository. Local Custodian Bank mirrors depository holdings in internal books and report to clients

· Reconciliation of CSD and local custodian bank records· Receipt and delivery of securities, after matching client

instructions to counterparty allegement and market settlement

· Forex conversion for foreign institutional investors· Cash payments and receipts, linking them to securities· Transaction/portfolio/cash reporting in specialised SWIFT

formats· Corporate action reporting/administration · Dividend and income collection· Proxy services · Take-up of rights and bonus issues

· Safekeeping of assets through the depository. Local Custodian Bank mirrors depository holdings in internal books and report to clients

· Reconciliation of CSD and local custodian bank records· Receipt and delivery of securities, after matching client

instructions to counterparty allegement and market settlement

· Forex conversion for foreign institutional investors· Cash payments and receipts, linking them to securities· Transaction/portfolio/cash reporting in specialised

SWIFT formats· Corporate action reporting/administration · Dividend and income collection· Proxy services · Take-up of rights and bonus issues

The sub-custodian bank

· A Custodian bank, is a specialised financial institution responsible for safeguarding a firm's or individual's financial assets, and providing residual services related to this function

· Custody services are approved either as part of the banking license, or as an add-on certification to a banking license

· Regionally consistent interface across markets · Extended client services hours · Single point of contact· Documentation review for account opening· Stock transfer processing between Registry and

Trading accounts· Special daily reports for alleged trades, trade status, settled

trades etc· High quality market information via Market Guide,

Newsflashes, etc · Cash Management services· MIS reporting, eg settlement and income collection

performance, Securities Performance Reports· Relationship Profile, Query Tracking reports etc· Regulatory reporting (if any)

Acts as the “Intermediary” of an investor

Core service offerings Value-add service offerings

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Relevant regulations – USA

Employee Retirement Income Security Act of 1974

· The Employee Retirement Income Security Act of 1974 (ERISA) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:– Requiring the disclosure of financial and other information concerning the plan to beneficiaries

– Establishing standards of conduct for plan fiduciaries

– Providing for appropriate remedies and access to the federal courts

· ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself

17F-5/17F-7

· Rule 17f-5 was adopted in 1984, and revised in 1997. The 1997 Amendments expanded the types of foreign banks and securities depositories that may serve as custodians of fund assets, and required that the selection of a foreign custodian be based on whether the fund's assets will be subject to reasonable care if maintained with that custodian

· Rule 17f-7 permits a fund to maintain assets with a foreign securities depository if certain conditions are met . First, the depository must be an "eligible securities depository". Second, the fund's "primary custodian" must provide the fund or its adviser with an analysis of the custodial risks of using the depository, monitor the depository on a continuing basis and notify the fund of any material changes in risks associated with using the depository. The rule defines a primary custodian (often referred to as a "global custodian") as a US bank or qualified foreign bank (as defined by rule 17f-5) that contracts directly with the fund to provide custodial services for foreign assets

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· Thomas Murray Depository Review and Risk Evaluation

– Asset Commitment Risk

– Counterparty Risk

– Liquidity Risk

– Asset Safety Risk

– Asset Servicing Risk

– Financial Risk

– Operational Risk

– Governance and Transparency Risk

– CSD on CSD Credit Risk

Liquidity Risk

Governance and Transparency Risk

Risk management

Source: Thomas Murray Data Services Ltd

Operational Risk

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AA7%

AA-26%

A+41%

A19%

A-4%

BBB4%

2

7

11

5

1 1

Regional risk ratings

Source: Thomas Murray Data Services Ltd

AAA Extremely low risk

AA+ Very low risk

AA Very low risk

AA- Very low risk

A+ Low risk

A Low risk

A- Low risk

BBB Acceptable risk

BB Less than acceptable risk

B Quite high risk

CCC High risk

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CommunicationIndustry groups – Working together

Japan

Philippines

Taiwan

India

Hong Kong

Singapore

Thailand

Vietnam

Indonesia

Korea

Japan

· Business operations committee – 10 Sub-committees and SM PG

Philippines

· Four foreign custodian banks conduct ad hoc meetings based on industry issue

Taiwan

· Taiwan Securities Association (broker member level). TDCC host public forums for member to receive input on changes or enhancements

Hong Kong

· Custodian Bank Working Group (8 banks) Regular Monthly meetings

Korea

· Korea Federation of Banks has a new sub-group Association of Local Custodians

India

· Informal Custodian Bank group – foreign and local banks. NMPG

Singapore

· SMPG – SWIFT related and Ind ustry related issues. CSD reps participate

Thailand

· Custodian Club – Market Advocacy division interact with Stock Exchange, BOT, and MOF. CSD will invite market participants where they will present proposed changes and enhancements

Vietnam

· Ad hoc custodian bank meeting to discuss issues. (foreign banks)

Indonesia

· Indonesia Association of Custodian Banks

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Thank you

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Disclaimer

CERTAIN INFORMATION IN THIS PRESENTATION HAVE BEEN PREPARED AND PRESENTED BY THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED ("THE BANK") BASED ON INFORMATION OBTAINED FROM SOURCES IT BELIEVES TO BE RELIABLE BUT WHICH IT HAS NOT

INDEPENDENTLY VERIFIED. WHILST EVERY CARE HAS BEEN TAKEN IN PREPARING SUCH INFORMATION, THE BANK MAKES NO GUARANTEE, REPRESENTATION OR WARRANTY AND ACCEPTS NO RESPONSIBILITY OR LIABILITY AS TO ITS ACCURACY OR COMPLETENESS. EXCEPT AS

SPECIFICALLY INDICATED, THE EXPRESSIONS OF OPINION ARE THOSE OF THE BANK ONLY AND ARE SUBJECT TO CHANGE WITHOUT NOTICE

© COPYRIGHT. THE HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED 2013. ALL RIGHTS RESERVED

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