General Regulation

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Financial services providers & Crowdfunding Custody account keepers

Securities custody account-keeping

Published on May 30, 2013

Securities custody account-keeping consists in recording securities in an account opened in the name of the owner. As part of its tasks, the AMF makes sure that custody account-keepers meet the professional obligations placed upon them.

Authorisation from the Autorité de Contrôle Prudentiel et de résolution (ACPR)

Securities are now paperless in most countries. Physical securities have been replaced by book entries in electronically managed securities accounts. Entering securities in a securities account is legal evidence that the investor who holds the account owns the securities.

Strictly speaking, custody account-keeping is not an investment service but an ancillary service. Before credit institutions and investment firms can provide this service, they must be authorised to do so by the ACPR as part of the authorisation that it grants to these institutions and firms to provide one or more investment services. Only institutions with capital of €3.8 million or more are authorised to supply this ancillary service.

Regulatory principles

To comply with the regulations, the custody account-keeper must exercise due care in the safekeeping and accurate recording of securities, following the procedures in effect. In particular, recording must be organised according to the rules of dual-entry accounting. Thus, when it holds securities for its customers, the custody account-keeper must keep the securities that it holds on own account strictly separate from those that it is keeping for its customers. To this end, it must have at least two accounts open for each security with the central securities depository: the first account records the intermediary’s own assets; the second those of customers. This is called the account segregation rule.

For example: Mr Smith owns 100 securities, which he deposits in his securities account with Bank A. Bank A “records” the assets corresponding to these 100 securities with the central depository. The depository opens an account for A that evidences this custody in the form of a mirror account.

The rules require that the operating principles of securities accounts should be set down in an agreement between the custody account-keeper and the account holder. This agreement describes the rights and obligations of the parties.

The financial intermediary may never use its customers’ securities without their express prior consent. This rule is intended to ensure that customers’ securities may be promptly transferred to a healthy financial intermediary in the event that the original intermediary fails. In other words, the failing intermediary should be able to return all the securities owned by its customers.

Guarantee mechanism

In the event of the failure of a custody account-keeper that fraudulently used its customers’ securities without their agreement, the law has established a guarantee mechanism to compensate investors if they cannot obtain their securities (Art.L.322-1 of the Monetary and Financial Code). Compensation is limited to €70,000 per investor.

Oversight by statutory auditors, AMF inspections

For audit purposes, the statutory auditors of intermediaries that carry on this business prepare an annual report on the appropriateness of measures taken to safeguard the rights of customers over their securities and to prevent securities from being used for own account with the express consent of customers.
The AMF conducts inspections to make sure that custody account-keepers comply with the professional obligations placed upon them (Art. L. 621-9 of the Monetary and Financial Code).

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