Article 38(6) CSDR Participant Disclosure

  1. Introduction

    The purpose of this document is to disclose the levels of protection associated with the different levels of segregation that UBS Securities Japan Co., Ltd. (we) provides in respect of securities that we hold directly for clients with a CSD in the EEA (CSD), including a description of the main legal implications of the respective levels of segregation offered and information on the insolvency law applicable. This disclosure is required under Article 38(6) of the Central Securities Depositories Regulation (CSDR) in relation to CSDs in the EEA.

    Under CSDR, the CSD of which we are a direct participant has its own disclosure obligations and we include links to those disclosures in this document.

    This document is not intended to constitute legal or other advice and should not be relied upon as such. Clients should seek their own legal advice if they require any guidance on the matters discussed in this document.

  2. Background

    In our own books and records, we record each client’s individual entitlement to securities that we hold for that client in a separate client account. We also open accounts with CSDs in our own (or in our nominee’s) name in which we hold clients’ securities. We currently make two types of accounts with CSDs available to clients: Individual Client Segregated Accounts (ISAs) and Omnibus Client Segregated Accounts (OSAs).

    An ISA is used to hold the securities of a single client and therefore the client’s securities are held separately from the securities of other clients and our own proprietary securities.

    An OSA is used to hold the securities of a number of clients on a collective basis. However, we do not hold our own proprietary securities in OSAs.

  3. Main legal implications of levels of segregation

    Insolvency

    Clients’ legal entitlement to the securities that we hold for them directly with the CSD would not be affected by our insolvency, whether those securities were held in ISAs or OSAs.

    The distribution of the securities in practice on an insolvency would depend on a number of factors, the most relevant of which are discussed below.

    Application of the Japanese Insolvency Acts

    Were we to become insolvent, our insolvency proceedings would take place in Japan and be governed by the Japanese Insolvency Acts (see glossary).

    Under the Japanese Insolvency Acts, securities that we held on behalf of clients would not form part of our estate on insolvency for distribution to creditors, subject to any security interest we may have and provided that they remained the property of the clients. Rather, they would be deliverable to clients in accordance with each client’s proprietary interests in the securities.

    As a result, it would not be necessary for clients to make a claim in our insolvency as a general unsecured creditor in respect of those securities.

    Accordingly, where we hold securities in custody for clients and those securities are considered the property of those clients rather than our own property, they should be protected on our insolvency or resolution. This applies whether the securities are held in an OSA or an ISA.

    Deposit Insurance Act

    In addition to the legal insolvency proceedings as set out above, we, as a Japanese securities broker-dealer, can be covered by resolution proceedings under the Deposit Insurance Act of Japan (Act No. 34 of 1971, as amended) (DIA) such as Special Resolution Regimes I or II which will be applicable to distressed or insolvent securities broker-dealers. Those Special Resolution Regimes will apply when the prime minister of Japan makes a special confirmation that such measures would be required to be taken, following discussion at the Financial Crisis Response Council of Japan.

    Under the Special Resolution Regime I, a financial institution which is distressed but in a solvent status maintains its operations and takes steps to improve its financial condition, supported by liquidity provided by the Deposit Insurance Corporation of Japan (DICJ) without entering into a legal insolvency proceeding.

    If a financial institution is in an insolvent status and a significant disruption of the Japanese financial market or other financial system is likely to occur, the Special Resolution Regime II may apply to such financial institution.

    Japan Investor Protection Fund

    Japan Investor Protection Fund (JIPF) will make a compensation to certain non-professional customers to failed Japanese securities broker-dealers up to JPY 10,000,000 per customer when the customer's assets deposited to such broker-dealers will not be returned to the customer.

    Nature of clients’ interests

    Although our clients’ securities are recorded in our name at the relevant CSD, we hold them on behalf of our clients, who are considered as a matter of law to have a proprietary interest in those securities. This is in addition to any contractual right a client may have against us to have the securities delivered to them.

    This applies both in the case of ISAs and OSAs. However, the nature of clients’ interests in ISAs and OSAs is different. In relation to an ISA, each client is entitled to all of the securities held in the ISA attributable to that client. In the case of an OSA, as the securities are held collectively in a single account, each client is normally considered to have an interest in all securities in the account proportionate to its holding of securities as recorded in our books and records.

    Our books and records constitute evidence of our clients’ interests in the securities. The ability to rely on such evidence would be particularly important on our insolvency and in the case of an OSA, since no records of individual clients’ entitlements would be held by the relevant CSD.
    We are subject to the client asset rules under the Cabinet Office Ordinance Concerning Financial Instruments Exchange Business, Etc. of Japan (Cabinet Office Ordinance No. 52 of 2007, as amended) and the rules of Japan Securities Dealers Association (Client Asset Rules), which contain strict and detailed requirements as to the maintenance of accurate books and records. We are also subject to regular audits in respect of our compliance with those rules. Subject to the maintenance of our books and records in accordance with the Client Asset Rules, clients should receive the same level of regulatory protection from both ISAs and OSAs.

    Shortfalls

    If there were a shortfall between the number of securities that we are obliged to deliver to clients and the number of securities that we hold on their behalf in either an ISA or an OSA, this could result in fewer securities than clients are entitled to being returned to them on our insolvency. The way in which a shortfall could arise would be different as between ISAs and OSAs (see further below).

    How a shortfall may arise

    A shortfall could arise for a number of reasons including as a result of administrative error, intraday movements or counterparty default following the exercise of rights of reuse.

    If agreed with the relevant clients, a shortfall may also arise in the case of an OSA as a result of securities belonging to one client being used or borrowed by another client for intra-day settlement purposes.

    Where we have been requested to settle a transaction for a client and that client has insufficient securities held with us to carry out that settlement, we generally have two options:
    (i) in the case of both an ISA and an OSA, to only carry out the settlement once the client has delivered to us the securities needed to meet the settlement obligation; or
    (ii) in the case of an OSA, to make use of other securities held in that account to carry out settlement subject to an obligation on the part of the relevant client to make good that shortfall and subject to any relevant client consents required.

    Where option (ii) is used, this increases the risks to clients holding securities in the OSA as it makes it more likely that a shortfall in the account could arise as a result of the relevant client failing to meet its obligation to reimburse the OSA for the securities used.

    In the case of an ISA, only option (i) above would be available, which would prevent the use of securities in that account for other clients and therefore any resulting shortfall. However, it also increases the risk of settlement failure which in turn may incur additional buy in costs or penalties and/or may delay settlement as we would be unable to settle where there are insufficient securities in the account.

    Where clients’ securities are held in an OSA, we will use option (ii) in accordance with agreed contractual terms.

    Nothing in this paragraph should be construed to override any obligation that the client owes us in respect of any irrevocable payment or delivery obligations which we incur in settling that client's trades.

    Treatment of a shortfall

    In the case of an ISA, the whole of any shortfall on the relevant account would be attributable to the client for whom the account is held and would not be shared with other clients for whom we hold securities. Similarly, the client would not be exposed to a shortfall on an account held for another client or clients.

    In the case of an OSA, the shortfall would be shared among the clients with an interest in the OSA. Therefore, a client may be exposed to a shortfall even where securities have been lost in circumstances which are completely unrelated to that client.

    Shortfall mitigation rules

    If a shortfall arose for which we are liable to the client, the client may have a claim against us for any loss suffered. If we were to become insolvent prior to covering a shortfall, clients would rank as general unsecured creditors for any amounts owing to them in connection with such a claim. Clients would therefore be exposed to the risks of our insolvency, including the risk that they may not be able to recover all or part of any amounts claimed.

    In these circumstances, clients could be exposed to the risk of loss on our insolvency. If securities were held in an ISA, the entire loss (equal to the shortfall) would be borne by the client for whom the relevant account was held. If securities were held in an OSA, each of the clients with an interest in that account would bear a loss equal to the amount of the shortfall allocated to it.

    In order to calculate clients’ shares of any shortfall in respect of an OSA, each client’s entitlement to securities held within that account would need to be established as a matter of law and fact based on our books and records. Any shortfall in a particular security held in an OSA would then be allocated among all clients with an interest in that security in the account. It is likely that this allocation would be made rateably between clients with an interest in that security in the OSA, although arguments could be made that in certain circumstances a shortfall in a particular security in an OSA should be attributed to a particular client or clients. It may therefore be a time consuming process to confirm each client’s entitlement. This could give rise to delays in returning securities and initial uncertainty for a client as to its actual entitlement on an insolvency. Ascertaining clients’ entitlements could also give rise to the expense of litigation, which could be paid out of clients’ securities in the event of our insolvency.

    Security interests

    Security interest granted to third party

    Security interests granted over clients’ securities (which for the avoidance of doubt must always be granted in accordance with the terms of the custodial services agreement and/or additional contractual agreements that we have in place with them) could have a different impact in the case of ISAs and OSAs.

    Where the client purports to grant a security interest over its interest in securities held by us which we hold in an OSA and the security interest was asserted against the CSD with which the account was held, there could be a delay in the return of securities from that account to all clients holding securities in the relevant account, including those clients who had not granted a security interest. However, in practice, to the extent recognized to be valid under the applicable laws, we would expect that the beneficiary of a security interest over a client’s securities would perfect its security by notifying us rather than the CSD and would seek to enforce the security against us rather than against the CSD, with which it had no relationship. We would also expect the CSD to refuse to recognise a claim asserted by anyone other than ourselves as account holder.

    Security interest granted to CSD

    Whether or not the CSD may benefit from a security interest will be regulated by the CSD's own rules. Such rules may also regulate the CSD's approach to enforcement of such security interest. Should the CSD benefit from a security interest over securities held for a client, there could be a delay in the return of securities to a client (and a possible shortfall) in the event that we failed to satisfy our obligations to the CSD and the security interest was enforced. This applies whether the securities are held in an ISA or an OSA. However, in practice, we would expect that a CSD would first seek recourse to any securities held in our own proprietary accounts to satisfy our obligations and only then make use of securities in client accounts. We would also expect a CSD to enforce its security rateably across client accounts held with it.

    Corporate actions

    Where securities are held in an ISA and the client is entitled to a fractional entitlement on a corporate action, it is possible that the client would not in practice benefit from that fractional entitlement. However, where securities are held in an OSA, fractional entitlements may be received on an aggregated basis and therefore it is more likely that the clients may be able to benefit from some or all of those fractional entitlements.

    Our insolvency may also have an impact on our ability to collect any entitlements, such as dividends, due on clients’ securities held in an ISA or OSA or exercise any voting rights in respect of those securities.

  4. CSD disclosures

    Set out below are links to the disclosures made by the CSD:

    Link will be included as soon as it is available

    These disclosures have been provided by the CSD. We have not investigated or performed due diligence on the disclosures and clients rely on the CSD disclosures at their own risk.

GLOSSARY

Central Securities Depository or CSD means an entity which records legal entitlements to dematerialised securities and operates a system for the settlement of transactions in those securities.

Central Securities Depositories Regulation or CSDR refers to EU Regulation 909/2014 which sets out rules applicable to CSDs and their participants.

direct participant means an entity that holds securities in an account with a CSD and is responsible for settling transactions in securities that take place within a CSD. A direct participant should be distinguished from an indirect participant, which is an entity, such as a global custodian, which appoints a direct participant to hold securities for it with a CSD.

EEA means the European Economic Area.

Japanese Insolvency Acts means Articles 510 to 574 of the Companies Act of Japan (kaisha hou) (Act No. 86 of 2005, as amended), the Bankruptcy Act of Japan (hasan hou) (Act No. 75 of 2004, as amended), the Corporate Reorganisation Act of Japan (kaisha kousei hou) (Act No. 154 of 2002, as amended), the Civil Rehabilitation Act of Japan (minji saisei hou) (Act No. 225 of 1999, as amended) and the Act on Special Treatment of Corporate Reorganisation Proceedings and Other Insolvency Proceedings of Financial Institutions (kin'yuu kikan tou no kousei tetsuzuki no tokurei tou ni kansuru houritsu) (Act No. 95 of 1996, as amended).