UNOFFICIAL TRANSLATION APPROVED BY Latvian Central Depository Council Meeting January 23, 2004 Amendments approved By LCD Management Board December, 17, 2009 Latvian Central Depository Regulation No.3 On Financial Instruments Accounting 1
Latvian Central Depository (hereinafter the LCD) Regulation On Financial Instruments Accounting (hereinafter the Regulation) shall stipulate the accounting procedure of financial instruments within the LCD. These Regulations are developed pursuant to Article 94, paragraph two, clause one, five, six, and eight of the Law on the Financial Instruments Market (hereinafter- the Law). 1. Terms used in the Regulation 1.1. Terms and concepts used in the present Regulation not interpreted hereinafter shall correspond to the terms and concepts used in the Law and LCD Regulation No. 1 On Participants and LCD Regulation No. 2 On Book-entry of Financial Instruments and Execution of Corporate Actions. 1.2. Deregistration the transfer of financial instruments accounting from the initial register (henceforth the IR) or the register maintained by the LCD to financial instruments accounts opened with LCD participants. 1.3. Delivery versus payment (DVP) type of settlement for financial instruments transactions when settlement of financial instruments is made only and exclusively when the related money settlement is made. 1.4. B ook-entry date the date of book-entry of an operation regarding financial instruments. 1.5. Direct account accounting of financial instruments owned by the person with the register maintained by the LCD which is carried out by the LCD according to information provided by the issuer or the owner of the financial instruments. Direct account shall also be an entry in the Initial Register regarding the number of financial instruments owned by each person included in the Initial Register. 2. General Provisions 2.1. These Regulations shall stipulate the procedure: 2.1.1. whereby the LCD and LCD participants account the financial instruments registered with the LCD; 2.1.2. whereby the LCD and LCD participants make book-entries of financial instruments registered with the LCD; 2.1.3. whereby the LCD maintains the Initial Register.; 2.1.4. whereby the LCD accounts financial instruments registered with the LCD and the accounting of which is not regulated by the Law. 2.2. A different accounting and settlement procedure may be applied to LCD participants with the special status, as well as to the financial instruments issued by the Latvia State and municipalities if it is stipulated by the relevant regulatory enactments of the Republic of Latvia or it is stipulated by mutual written agreement. 2.3. The copies of the documents to be submitted to the LCD shall be drawn up in compliance with the procedure stipulated by the regulatory enactments of the Republic of Latvia. 2
2.4. The exchange of information between the LCD and an LCD participant shall be carried out electronically and in compliance with the procedure stipulated in LCD Regulation No. 11 On Data Exchange. 2.5. To reveal the book-entries regarding financial instruments transfers the classifier of the types of LCD participants, financial instruments accounts and transfer orders shall be used in compliance with LCD regulation No. 11 On Data Exchange. 3. Two-level Accounting System of Dematerialised Financial Instruments 3.1. The LCD shall account only dematerialised financial instruments. Within the accounting system of the LCD, financial instruments are kept in custody as scriptural book-entries in financial instruments accounts. 3.2. If a financial instruments issuer or depositor wants to account materialised financial instruments within the LCD accounting system of financial instruments before the registration with the LCD, these financial instruments shall be immobilised. The procedure if immobilisation shall be stipulated by a mutual agreement between the LCD and financial instruments issuer and depositor. 3.3. Financial instruments accounting shall be administered by the LCD and LCD participants. The total financial instruments accounting system shall comprise two accounting levels: 3.3.1. accounting administrated by the LCD - issue accounts and correspondent accounts of LCD participants with the LCD, and direct accounts with the LCD; 3.3.2. accounting administrated by LCD participants correspondent financial instruments accounts with the LCD and financial instruments accounts of clients of the LCD participant. 3.4. Proof of the ownership rights for the financial instruments registered with the LCD is a bookentry in a financial instruments owner account or direct account on the grounds of justification documents. 3.5. If an LCD participant has opened a nominal account for a person, who holds financial instruments, the proof of ownership rights for financial instruments shall be a book-entry in a financial instruments owner account that is opened with a person that holds financial instruments on the grounds of justification documents. 4. Accounting of Financial Instruments and Organising of Settlement of Financial Instruments Managed by LCD participants 4.1. The aim of financial instruments settlement managed by LCD participants shall be: 4.1.1. provide the proof of the ownership rights for financial instruments owners; 4.1.2. provide the accounting of financial instruments held by individuals. 4.2. The basic principles of the financial instruments accounting administrated by LCD participant shall be: 3
4.2.1. necessity of a justification document each operation with financial instruments and book-entries in accounting documents shall be carried out only on the grounds of justification documents. Justification documents shall be kept by an LCD participant at least for 10 years; 4.2.2. double entry each operation with financial instruments shall be recorded in two financial instruments accounts. One entry shall be done in the debit side and the other in the credit side of the account. The entries shall be done at the same time and both entries shall be done about a similar amount of financial instruments; 4.2.3. book-entry in the financial instrument account on the basis of received justification documents any operation which creates or changes the ownership rights for financial instruments, shall be book-entered by the LCD participant in the financial instruments account of its client with the LCD participant with the same book-entry date on which the operation has been registered with the LCD. LCD participant shall be responsible for the registration in the relevant financial instruments account. Only the book-entries made on the grounds of justification documents in the financial instruments accounts shall provide the proof that the financial instruments registered in the financial instruments account of the client of the LCD participant are owned or held by the respective client; 4.2.4. simultaneous registration of financial instruments and cash settlement in the event of delivery versus payment (DVP) each book-entry regarding financial instruments in a financial instruments account shall be made simultaneously with the book-entries in a money account. 4.2.5. separate accounting of totalities of fungible financial instruments financial instruments shall be accounted separately by the totalities of fungible financial instruments. 4.2.6. grouping of financial instruments accounting financial instruments accounting of LCD participants and its correspondent accounts the LCD shall group separately: 4.2.6.1. for financial instruments held and owned by the clients of LCD participants; 4.2.6.2. for financial instruments owned by an LCD participant; 4.2.6.3. when accounting financial instruments for another LCD participant, the LCD participant shall administrate the accounting separately; 4.2.6.4. the LCD shall have the rights to determine additional demands regarding financial instruments grouping. 4.2.7. minimum account plan each LCD participant shall comply with the account plan stipulated by these Regulations. LCD participants, if necessary, can supplement the minimum account plan. The minimum account plan which shall be mandatory for all LCD participants comprise three account groups with sub-groups: 1. group individual accounts: 1.1 account sub-group individual financial instruments accounts; 1.2 account sub-group - individual encumbered financial instruments accounts; 2. group financial instruments accounts correspondent with the LCD: 2.1. account sub-group accounts correspondent with the LCD ; 2.2. account sub-group financial instruments operational within the LCD; 3. group other accounts: 3.1. account sub-group deferred operations accounts: 3.1.1. unallocated financial instruments; 3.1.2. non-operational financial instruments ; 3.1.3. financial instruments in deferred settlements; 3.1.4. financial instruments being tested; 4
3.2. account sub-group various error accounts. 4.2.8. Storage of accounting documents all financial instruments accounting documents of LCD participants shall be stored by the LCD participant for at least 10 years. 4.3. Basic documents of the financial instruments accounting managed by LCD participants are the following: 4.3.1. journal; 4.3.2. balance sheet; 4.3.3. ledger. 4.4. Each LCD participant shall manage the operation journal where he shall register all operations in financial instruments accounts. The LCD participants shall observe when managing the operation journal that: 4.4.1. journal is managed separately by totalities of fungible financial instruments; 4.4.2. journal may be divided according to operation types; 4.4.3. records in the journal are made on the moment of book-entry and on the grounds of justification documents; 4.4.4. every financial instruments operation is registered in the journal; 4.4.5. records in the journal are done chronologically; 4.4.6. records in the journal are done on the book-entry date; 4.4.7. in journal the following shall be indicated: a) name and code of the operation; b) ISIN code of the financial instruments involved; c) the amount of financial instruments involved; d) account from which financial instruments are transferred (debit account); e) account into which financial instruments are transferred (credit account); f) number of the operation; g) date of the operation. 4.5. Each LCD participant shall provide the balance sheet and reveal financial instruments in debit and credit accounts. When managing the balance sheet, LCD participants shall observe that: 4.5.1. the number of financial instruments in debit an credit accounts are declared in the balance sheet; 4.5.2. in the balance sheet the balance between debit and credit accounts is declared (the number of financial instruments in debit accounts shall correspond to the number in credit accounts); 4.5.3. balance sheet is prepared every day when operations with financial instruments are performed; 4.5.4. balance sheet is prepared separately for each totality of fungible financial instruments; 4.5.5. balance sheet is prepared separately for each category of financial instruments owners (financial instruments owned and held by LCD participant clients, financial instruments owned by the LCD participant etc.). 5
4.6. An LCD participant shall manage the ledger of financial instruments in which all the financial instruments accounts the accounting of which are managed by the LCD participant are registered. LCD participants managing the ledger shall observe that: 4.6.1. a separate accounting register is created for each financial instruments account and each totality of fungible financial instruments; 4.6.2. the amount of financial instruments in the account as of the beginning of each period is declared; 4.6.3. each operation or activity with financial instruments during a period is declared in the accounting register by indicating the following: a) name and code of the operation; b) ISIN code of the financial instruments involved in the operation; c) amount of the financial instruments involved in the operation; d) account from which the financial instruments are written-off (debit account); e) account in which the financial instruments are counted in (credit account); f) operation number; g) date of the operation. 4.6.4. all operations or activities with financial instruments in a period is accounted chronologically; 4.6.5. the number of financial instruments accounts is declared at the end of the period; 4.6.6. the amount of financial instruments in debit accounts is equal to the amount of financial instruments in credit accounts. 4.7. Demands for the general financial instruments accounting and settlement to LCD participants: 4.7.1. Each LCD participant shall describe the organization of financial instruments accounting and settlement. The LCD shall have the rights to demand an LCD participant to produce such description and inspect whether the LCD participant acts in compliance with this description; 4.7.2. LCD participant, even if there are claims against the clients, shall be responsible for the settlement of financial instruments delivery versus payment in the set term; 4.7.3. LCD participant may not use financial instruments entered in the financial instruments account without a consent from the owner of the relevant financial instruments account for settlements on behalf of the LCD participant or a third person; 4.7.4. upon the receipt of order from the financial instruments account owner, the LCD participant shall register the date of the receipt and control the correctness of the order; 4.7.5. upon a request from an owner of financial instruments account, the LCD participant shall issue a document that verifies that the financial instruments in the account are owned or held by the owner; 4.7.6. LCD participant shall provide centralised accounting of all clients financial instruments accounts and financial instruments operations. LCD participant shall have no rights to open correspondent financial instruments accounts for its territorial structural units. 4.8. Requirements to the employees of an LCD participant: 4.8.1. as minimum two LCD participant employees shall have valid LCD professional certificates; 4.8.2. LCD participant shall determine which structural unit and which its employees are responsible for financial instruments accounting and the settlements regarding financial instruments; 6
4.8.3. LCD participant shall have developed a description of the financial intermediary s structural unit that shall open, hold, and service financial instruments accounts. In this description, distribution of duties and responsibilities regarding financial instruments accounting and settlements related thereto between the employees of the LCD participant shall be provided schematically. The description shall also indicate the employees who are entitled to make book-entries in financial instruments accounting documents (journal and ledger); 4.8.4. LCD shall have the rights to demand an LCD participant to present the description referred to in Subparagraph 4.8.3 and inspect whether the LCD participant acts in compliance with this description. 4.9. Technical requirements to LCD participants: 4.9.1. LCD participants shall organise data processing systems that provide financial instruments accounting and settlements regarding financial instruments in compliance with these and other LCD Regulations; 4.9.2. minimum requirements to the automatic data processing systems, technical means, and types and formats of data exchange shall be determined by LCD Regulation No. 11 On data exchange ; 4.9.3. LCD participant shall develop a description of the software used for financial instruments accounting and settlement; 4.9.4. LCD participant shall ensure the security of data processing and shall prevent the possibility of unauthorised access to financial instruments accounting data. LCD participant shall develop a description of the protection of the data base of financial instruments accounting and settlement; 4.9.5. The LCD shall have the rights to demand an LCD participant to present the descriptions referred to in Subparagraphs 4.9.3 4.9.4, as well as inspect whether the LCD participant acts in compliance with these descriptions. 4.10. Requirements to the internal control (audit) for LCD participants: 4.10.1. LCD participant shall develop a description of the internal control (audit) of financial instruments accounting and settlement; 4.10.2. LCD participant, pursuant to the document referred to in Sub-paragraph 4.10.1, shall carry out the necessary internal control arrangements regarding the security of financial instruments owned and held by its clients; 4.10.3. LCD participant shall carry out regular and sudden audits, as well as detailed documental audits of financial instruments accounting and settlement. During the audits, the conformity of financial instruments accounting to the LCD regulations and LCD participant s description of financial instruments accounting and settlement shall be controlled. The management of the LCD participant shall be informed about each documental audit of financial instruments accounting; 4.10.4. The LCD shall have the rights to get acquainted with the results of the internal control (audit) of LCD participant s financial instruments accounting and settlement; 4.10.5. The LCD shall have the rights to demand an LCD participant to present the description referred to in Subparagraph 4.1.10, as well as inspect whether the LCD participant acts in compliance with the description. 4.11. Minimum requirements to LCD participant for opening financial instruments accounts for financial instruments owners and holders: 7
4.11.1. to open a financial instruments account, the owner or holder of financial instruments shall conclude a written agreement on opening and managing a financial instruments account with an LCD participant; 4.11.2. prior to the conclusion of the agreement on opening and managing a financial instruments account or an order to perform an operation with financial instruments, the LCD participant shall control: 4.11.2.1. identity of the opener of financial instruments account or submitter of the order; 4.11.2.2. rights to deal with the financial instruments account of the opener of financial instruments account or submitter of the order; 4.11.2.3. possibility and legality of the order; 4.11.2.4. LCD participant shall be fully responsible for the control of the said data; 4.12. LCD participant shall provide to the owner of financial instruments account at least the following information: 4.12.1. for each day when one or more financial instruments operations are performed, the LCD participant shall prepare a relevant account statement in which the executed operations are accurately displayed. Upon a request from the owner of financial instruments, the LCD participant shall provide an account statement; 4.12.2. upon a request of the owner of the financial instruments account, the LCD participant shall prepare and provide information about the financial instruments account for a specified period: account statement and balance of the financial instruments portfolio; 4.12.3. notification that financial instruments registration notice, as well as other documents issued on the grounds of financial instruments registration, shall not be deemed as financial instruments; 4.12.4 about all corporate actions as well as facts and circumstances applicable to the financial instruments owned or held by him; 4.12.5. upon a request of the financial instruments owner, the LCD participant shall issue a document of proof of the ownership rights for specified period when operations with the financial instruments are not performed. The said document may be used in order to execute separate corporate actions however it shall not be deemed a financial instrument. 4.13. LCD participant shall provide in an account statement at least the following g information: 4.13.1. details of LCD participant (name, registration number and the date of registration with the Register of Enterprises); 4.13.2. details of the account owner (name, surname, identity number for a natural person and name, registration number and the date of registration with the Register of Enterprises for legal entities); 4.13.3. address of the account owner; 4.13.4. account number; 4.13.5. period for which the statement is issued; 4.13.6. date of the statement issue; 4.13.7. authorisation (signature) of the person in charge of the LCD participant; 4.13.8. amount of each totality of fungible financial instruments in the account as of the beginning of the period; 8
4.13.9. price of the financial instruments (if available); 4.13.10. chronologic sequence of each period of the performed operation with financial instruments or activity, by indicating: a) name and code of the operation; b) ISIN code of the financial instruments involved in the operation; c) amount of the financial instruments involved in the operation; d) account from which the financial instruments are transferred (debit account); e) Account into which the financial instruments are transferred (credit account); f) operation number; g) date of the operation. 4.13.11. amount of each totality of fungible financial instruments in the financial instruments account as of the end of the period. 4.14. The LCD participant shall provide in the statement about the balance of the financial instruments portfolio at least the following information: 4.14.1. details of LCD participant (name, registration number and the date of registration with the Register of Enterprises); 4.14.2. details of the account owner (name, surname, identity number for a natural person and name, registration number and the date of registration with the Register of Enterprises for legal entities); 4.14.3. address of the account owner; 4.14.4. account number; 4.14.5. period for which the statement is issued; 4.14.6. date of the statement issue; 4.14.7. authorisation (signature) of the person in charge of the LCD participant; 4.14.8. amount of each totality of fungible financial instruments in the account as of the beginning of the period; 4.14.9. price of the financial instruments (if available). 4.15. Procedure of records in financial instruments accounts opened with an LCD participant: 4.15.1. any movement of financial instruments regarding records in the debit of the financial instruments account of the LCD participant may be carried out only pursuant to an order from financial instruments account owner or a person authorised by the owner, except the cases when the LCD participant rectifies an error or when different procedure is stipulated by regulatory enactments; 4.15.2. document authorising to buy or sell financial instruments on behalf of the LCD participants shall be regarded as a prior consent to make records in the financial instruments accounts of the relevant client, and no additional consent is needed to make the records. 5. Financial Instruments Accounting and Organising of Financial Instruments Settlement Managed by the LCD 5.1. The LCD shall open financial instruments accounts for all LCD participants with issuer status and LCD participants: 9
5.1.1. LCD participants with issuer status shall open an issue account with the LCD. The LCD shall open a separate account for each totality of fungible financial instruments; 5.1.2. LCD participants shall open correspondent accounts with the LCD. The LCD shall open a separate correspondent account for each totality of fungible financial instruments accounted by the LCD participant. 5.1.3. financial instruments account with the LCD shall be characterised by the following four parameters: 5.1.3.1. ISIN code; 5.1.3.2. LCD participant code; 5.1.3.3. activity type code; 5.1.3.4. account type code; 5.1.4. LCD Regulation No. 11 On data exchange shall stipulate detailed procedure of the creation and usage of financial instruments accounts and their parameters. 5.2. Movement of financial instruments registered with the LCD may occur only as book-entries between financial instruments accounts with the LCD. 5.3. The LCD shall make book-entries only after it has checked the possibility of the operation and the amount of financial instruments in the account which is debited. 5.4. The LCD shall execute the following financial instruments transfer orders (operations): 5.4.1. simple (free of payment) financial instruments transfer; 5.4.2. financial instruments delivery versus payment (DVP) if ordered by the market organizer; 5.4.3. financial instruments delivery versus payment (DVP) if ordered by an LCD participant; 5.4.4. financial instruments transfers regarding the execution of corporate actions; 5.4.5. error rectification; 5.4.6. deregistration of financial instruments. 5.5. The LCD shall control cash settlements, if in compliance with the order of the market organizer or an LCD participant financial instruments delivery versus payment (DVP) has to be provided. 5.6. Main principles of financial instruments accounting by the LCD: 5.6.1. LCD shall be responsible for the accounting of all financial instruments registered with the LCD; 5.6.2. LCD shall manage separate accounting for each totality of fungible financial instruments; 5.6.3. LCD shall make records in the issue account on the grounds of a written order from the issuer; 5.6.4. LCD shall make records in the financial instruments correspondent accounts of LCD participants: 5.6.4.1. on the grounds of an LCD participant order; 5.6.4.2. on the grounds of the order of the regulated market organizer; 5.6.4.3. on the grounds of the LCD order in the event of error rectification and corporate actions; 10
5.6.5. The LCD shall observe the principle of double-entry accounting: the total amount of financial instruments (the total number of fungible financial instruments) shall be accounted on the debit side of the issue account, and the fungible financial instruments in LCD participant correspondent accounts with the LCD shall be accounted on the credit side; 5.6.6. The LCD shall observe that the amount of registered financial instruments is not increased or decreased illegally; 5.6.7. At the end of the day on which operations with fungible financial instruments in the accounts where relevant financial instruments are registered, the following balances shall match: 5.6.7.1. within the LCD accounting between the amount of financial instruments in the respective financial instruments issue account (debit) and the amount of financial instruments in the correspondent accounts of participants with the LCD (credit); 5.6.7.2. between the LCD un LCD participants - between the number of financial instruments in the LCD participant correspondent account with the LCD and the number of financial instruments in the account correspondent to the LCD within the accounting of the LCD participants; 5.6.7.3. within the accounting of LCD participants between the number of financial instruments in the correspondent accounts of the LCD participant with the LCD and the number of financial instruments in the financial instruments owners accounts and nominal accounts opened with the LCD participant. 5.6.8. The LCD shall supervise the activities of the LCD participants in compliance with the LCD regulations; 5.6.9. The LCD shall provide to LCD participants the account statement for every day on which financial instruments operations have been performed and in the result of which records have been made in the LCD participant s correspondent account. 6. Opening and Holding of Direct Accounts 6.1. The LCD shall have the rights to open and hold direct accounts. In direct accounts, the LCD shall register the financial instruments the accounting of which is not stipulated by the Law. 6.2. To account the financial instruments in the direct accounts it has to be provided in the agreement on the registration of financial instruments issue with the LCD entered into between the LCD and a financial instruments issuer. 6.3. In the agreement entered into between the LCD and a financial instruments issuer on the registration of financial instruments issue with the LCD the terms of opening, holding and closing of direct accounts, as well as the procedure whereby the LCD shall perform operations with financial instruments in the direct accounts, shall be provided. 6.4. When opening, holding and closing direct accounts the LCD shall, insofar as possible, comply with the demands to LCD participant set out in these Regulations and other LCD regulations. 11
7. Accounting of Financial Instruments Registered with the LCD in Foreign Central Depositories or Institutions Managing Financial Instruments Settlement 7.1. To ensure accounting of financial instruments registered with the LCD in foreign central depositories or institutions managing settlement of financial instruments, the LCD shall have the rights to open a nominal account for a foreign central depository or an institution managing settlement of financial instruments by entering into a respective agreement. The LCD shall forthwith notify all LCD participants, the market organizer, and the Commission about such agreement. 7.2. A foreign central depository or an institution managing settlement of financial instruments within their accounting system shall open an account that corresponds with the nominal account opened for a foreign central depository or an institution managing settlement of financial instruments with the LCD and in which all the financial instruments received from the LCD are accounted. 7.3. An agreement entered into between the LCD and foreign central depository or an institution managing settlement of financial instruments shall stipulate the detailed procedure of financial instruments accounting and settlement, as well as the activities for the execution of corporate actions. 8.1. The Initial Register (IR) shall be created if: 8. Initial Register 8.1.1. issuers are allowed to acquire financial instruments in the initial or secondary financial instruments market without opening a financial instruments account (e.g. participating in public offering of privatisation of the shares of companies (undertakings) for privatisation certificates; 8.1.2. the financial instruments issue the financial instruments of which are not put into public circulation and the initial distribution of which has been completed is transformed into a financial instruments issue the financial instruments of which are put into public circulation and if on the moment of transformation financial instruments accounts are not opened for the investors who own the financial instruments. 8.2. Accounting of financial instruments in the IR shall be started at the moment of book-entering of financial instruments issue. Owners of financial instruments shall be registered with the IR according to information provided by the Issuer, by book-entering financial instruments with the LCD. Separate IR with the LCD shall be created for each totality of fungible financial instruments. 8.3. The Issuer who, according to the Law or the terms and conditions of the agreement concluded with the LCD, needs to deliver to the LCD a list of the financial instruments owners who shall be registered in the IR, shall provide the following information to the LCD regarding the owner of the financial instruments: 8.3.1. for natural person given name, surname, identity number or another identification number, place of residence and number of owned financial instruments; 8.3.2. for legal entity company name, number and place of registration, number of owned financial instruments; 12
8.3.3. for investment funds name of management company of the investment fund, name of the investment fund, registration number with which the competent authority has registered the investment fund, number of owned financial instruments; 8.3.4. for investment plans of state funded pension scheme name of management company of the investment plans, name of the investment plan, identifier assigned by the State Social Insurance Agency to the investment plan, number of owned financial instruments; 8.3.5. for private pension funds name of the pension fund, name of the pension plan, registration number with which relevant competent authority has registered the pension plan, number of owned financial instruments. 8.4. For persons registered in the IR, direct account number shall be identity number (for natural person) or registration number (for legal entity or investment fund), or code granted by the LCD (for investment plan of state funded pension scheme). 8.5. Transfer of financial instruments between accounts in the IR is not permitted. 8.6. In order a person registered in the IR could deal freely with his or her owned financial instruments, the person must open a financial instruments account with the LCD participant and must deregister financial instruments in compliance with the procedure provided for in LCD Regulation No.10 On Deregistration of Financial Instruments. 8.7. In case, if corporate action are executed during the registration of financial instruments in the IR and the execution of the same is related to increase or decrease in the number of the financial instruments of persons registered in the IR, the LCD shall make relevant changes in the IR simultaneously with making such changes in the accounting of the LCD participants. 13