Electronic flagging under the consolidated Strate Rules
Electronic flagging under the consolidated Strate Rules
The Registrar of Securities Services (Registrar) recently published proposed amendments to the Strate Rules for public comment under s71 of the Financial Markets Act, 2012 (FMA). The main purpose of the proposed amendments is to consolidate the Strate Rules dealing with equity securities, bond securities and money market securities (Securities). In order to consolidate and align the Strate Rules, the current s6 (Accounts other than money market securities accounts) and s7 (Money market securities ownership register) of the Strate Rules will be consolidated and renamed “Accounts” and “Settlement” respectively.
A number of editorial changes were made to the Strate Rules to align definitions with the consolidation of the Strate Rules dealing with Securities. However, this alert focuses on the substantive amendments to the Strate Rules which impact on electronic flagging of pledged Securities by Central Securities Depository Participants (CSDPs).
One of the notable amendments to the Strate Rules is the insertion of a new Rule 7.6.2 dealing with a pledge or cession in securitatem debiti of the “Securities Account”. Currently, under the Strate Rules, a CSDP can only note a security interest in respect of specified Securities in favour of a pledgee or cessionary. However, s39(3) of the FMA states that an interest in respect of uncertificated Securities may be granted in the manner provided for in the Strate Rules, where such an interest extends to all uncertificated Securities standing to the credit of the “Securities Account” at the time the pledge is effected.
In line with s39(3) of the FMA, Strate has now proposed a so-called “wheelbarrow” pledge rule in respect of “Securities Accounts” held in Strate. The “Securities Account” itself may now be pledged or ceded in securitatem debiti to the pledgee or cessionary as security for any existing monetary obligations of the pledgor or cedent. The “Securities Account” (and all of the Securities standing to the credit of such an account at the time that the pledge is effected) may now be electronically flagged in favour of a pledgee or cessionary as an alternative to electronically flagging specific Securities held in a “Securities Account”.
In addition, CSDPs are required to send statements to the pledgee or cessionary evidencing the existence of the pledge or cession in securitatem debiti over specifically flagged Securities which have been pledged in their favour. However, it is interesting to note that the new Rule 7.6.2 does not place a similar obligation on a CSDP to send such statements to a pledgee or cessionary when the “Securities Account” itself is electronically flagged.
“Segregated Depository Accounts” (SDAs) are now expressly restricted to equity securities only and CSDPs may not hold bond securities or money market securities in SDAs on behalf of clients in SDAs. (An SDA is different from a typical “Securities Account” in that the equity securities held in an SDA on behalf of a client are clearly segregated and distinguishable from the CSDP’s equity securities.)
Although CSDPs still need to provide their clients with bi-annual statements in respect of equity and bond securities, Strate has proposed an amendment to Rule 5.8.5 to impose a duty on CSPDs to send monthly statements to clients in respect of money market securities.
For purposes of s50(3) of the Companies Act, 2008 (which requires that a record be maintained of all uncertificated securities to be administered by a CSDP on behalf of a company) Strate has proposed the insertion of a new paragraph into Rule 6 of the Strate Rules. The new proposed rule provides that a record of ownership in Strate in respect of:
- equity securities must be recorded either in a “Securities Account” held by a CSDP in a “subregister” or in an SDA held by Strate in an “SDA register”; and
- bond securities and money market securities must be recorded in a “Central Securities Account” held by Strate in an “uncertificated securities register”.
The proposed amendments to the Strate Rules, once in effect, will align and consolidate the Strate Rules with current market practice. Interested parties were requested to lodge their objections to the proposed amendments by 28 April 2017 and the Registrar’s office has indicated that no objections were received. The effective date is currently being decided by Strate and the Registrar’s office has indicated that the proposed amendments should come into force before the end of June.
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