Draft Securities Clearing House Regulation, 2013 Page 1

DRAFT SECURITIES CLEARING HOUSE REGULATIONS 2013 Draft Securities Clearing House Regulation, 2013 Page 1

PART I Preliminary 1. Short title, commencement and purposes These regulations are made by the Royal Monetary Authority under the Financial Services Act, 2011. i. The regulations may be cited as the Clearing House Regulations, 2013. i These regulations shall come into effect on a day to be appointed bythe Royal Monetary Authority by notice in the Official Newspaper. These regulations shall be applied in order to promote the following objectives: a) To promote safe, accurate and efficient settlement of securities transactions on their terms, including such interface as the Authority may deem necessary with other clearing or settlement institutions; b) Reasonable access to participation, placing no undue burden on competition and fair procedure for implementation of its rules and responsibilities. These regulations must be read in conjunction with the additional requirements under the Act and do not replace them except where the Act states otherwise. 2.Definitions In these regulations, words shall have the meanings defined in the Financial Services Act, 2011, or, if not there defined, their ordinary meanings. The words below shall have the meanings provided, unless the context clearly otherwise requires: i. Act means the Financial Services Act, 2011 Authority means the Royal Monetary Authority of Bhutan. i Bank means a company which has been licensed as a bank under the Act. Draft Securities Clearing House Regulation, 2013 Page 2

iv. Business day means any day during which the offices of clearing house are normally open, but not necessarily a day upon which securities trading is being conducted. v. Clearing house means a company that has been licensed by the Authority to operate as a clearing house or a securities exchange authorized by law to perform clearing house functions; vi. Companies Act means the Companies Act of the Kingdom of Bhutan, 2000,as it may be from time to time amended; v Director means a member of a board of directors or of a board with similar functions by whatever name called; vi Participant means any person that has been accepted as a clearing participant by the Clearing House; ix. Securities broker means a person that has been licensed by the Authority to operate as a securities broker x. "Securities exchange" means a company that has been licensed by the Authority to operate as a securities exchange. Unless the context clearly otherwise requires, whatever used in these regulation, the masculine pronoun includes the feminine, and the singular includes the plural. 8. Articles PART II Clearing House i. Only companies may be licensed as clearing houses, and their articles shall be consistent with the Act. The articles shall include as an objective of the company the establishment and operation of a clearing house, unless the company is already operating as a securities exchange at the time this regulation is adopted. The articles shall make provision for a fair representation of persons in the selection of directors who shall represent the interests of all clearing house participants. Draft Securities Clearing House Regulation, 2013 Page 3

i iv. The articles shall be consistent with the Act, this regulation and its purposes and any other applicable legal provision. No changes shall be made to the articles once approved without the prior approval from the Authority under the procedures herein provided for rule changes. The Authority may from time to time prescribe forms of application for the purpose of eliciting information relevant to the grant of a clearing house license under the standards set forth in the Act and this regulation. Absent of any such form, an applicant shall: a) follow as near as may be possible the application requirements in section 3 of the Securities Brokers Regulations 2011, substituting information about proposed clearing house participants for information about securities broker representatives; and b) provide copies of the proposed rules of the clearing house and other information adequate to show compliance with section342 (a) and (b) and 342 (a) and (b) of the Act and this regulation. 9. Management of a clearing house i. The affairs of a clearing house shall be managed by a board whose members shall comprise those elected or appointed in accordance with its articles. Subject to the provisions of these regulations, the board shall have full power in all things to administer the affairs of the clearing house, and the provisions of the Companies Act shall apply in all respects to the directors. 10. Rights and duties A clearing house shall establish and maintain systems, in accordance with these regulations and its rules, that: a) record trades accepted for clearing ; b) undertake risk management measures to ensure, as far as reasonably practical, that participants will meet their market commitments in a timely manner; c) take the required action to acquire securities or cash in the event that a participant fails to meet its commitments on a settlement day; Draft Securities Clearing House Regulation, 2013 Page 4

d) take action in the event of the insolvency of a participant to close outstanding liabilities in manner which protects the interests of investors and is fair to all parties. 11. Operational requirements A clearing house shall, at all times, maintain: a) sound systems and internal control procedures; particularly to monitor the net exposure of participants; b) sufficient trained and experienced staff; c) up-to-date written internal procedures that govern the operation of the clearing house; d) documented back-up systems and procedures, which shall include disaster-recovery procedures. 12. Clearing house rules i. A clearing house shall establish rules concerning the operation of the clearing house and in particular rules that specify: a) the standards for acceptance of trades for clearing and securities eligible for clearing; b) the method for calculating the trade settlement obligations of the clearing house and its participants, including any netting or assignment of settlement obligations and the time when delivery of securities and payment of funds is to take place; c) procedures that require settlement to take place on the basis of delivery versus payment; d) procedures in the event of settlement default, including arrangements for the purchase or buying in of undelivered securities and the liquidation or selling out of securities bought by defaulting purchasers e) the distribution of risks related to settlement default; f) the collection, administration, use and application of any settlement or other guarantee fund; Draft Securities Clearing House Regulation, 2013 Page 5

g) any other settlement security arrangements, such as deposit requirements, position or exposure limits or other measures; h) management of operational risks such as equipment failure, fraud or clerical or administrative error; i) procedures in the event that a participant becomes or appears in danger of becoming insolvent or is in violation of the financial standards for participation; and j) Settlement of a suspended or terminated participant s outstanding obligations. A clearing house shall also establish rules that: a) except as provided in section 15, require participants and any person guaranteeing a participant s settlement obligations to be persons licensed by the Authority; b) establish financial standards for participants that are adequate to provide reasonable assurance that securities trades can be settled in accordance with their terms and without undue delay; c) establish standards for discipline of a participant, or exclusion from or restriction upon clearing house participation or access, that shall be related to legitimate business considerations and place no unwarranted burden on competition; d) establish fair procedures for the matters referred to in point (c); e) establish the level of fees to be paid by participants and charges for clearing house services; and f) otherwise implement the requirements of this regulation. i iv. The rules of the clearing house shall be consistent with the Act, this regulation and its purposes and any other applicable legal provision. All proposed rules of a clearing house and proposed amendments to its rules, including significant policies and interpretations having the effect of rules, shall be submitted in writing to the Authority, together with explanations, in accordance with the Act. The Authority will give immediate effect to rules it finds to be merely clerical or administrative in nature and will approve temporarily proposals of an urgent nature and shall otherwise proceed as provided in the Act. A clearing house may withdraw a proposal prior to the Authority s decision upon it. The Authority Draft Securities Clearing House Regulation, 2013 Page 6

will not disapprove a proposed rule or amendment without providing notice to the clearing house and providing an opportunity for the clearing house upon 14 days notice to appear before the Authority to provide evidence and arguments on the record as to why the rule should not be disapproved. v. The Authority may effect on its own authority an amendment to the rules of the clearing house to make them better accord with the provisions of the Act or the rules thereunder, provided that the Authority shall allow to the clearing house an opportunity upon at least 14 days notice to appear before the Authority to provide evidence and arguments on the record as to why the amendment should not be adopted. vi. Failure of a clearing house to enforce compliance with its rules may be deemed by the Authority to be a violation of a condition of the license granted, this regulation and the Act. 13. Record keeping i. A clearing house shall keep or cause to be kept such records and accounts, in sufficient detail, so as to show particulars of: a) any monies received or paid by the clearing house to or from participants; b) all income received from commissions, fees, charges and other sources, and all expenses, commissions, and other payments made or paid by the clearing house; c) all assets and liabilities (including any contingent liabilities) of the clearing house; and d) such other matters as may be necessary for the preparation of financial statements required in the Act and this regulation. A clearing house shall maintain records of all: a) trades passed to it for clearing; b) outcomes of any netting process or other tabulation of settlement obligations; c) failures to pay or failures to deliver by any participant and the steps taken to remedy the default; Draft Securities Clearing House Regulation, 2013 Page 7

i A clearing house shall also maintain: a) other records required to reconstruct the clearing process, the operation of any guarantee fund or other security or risk management devices; b) applications made for admission as a participant, together with supporting information, as well as the clearing house s action thereon and the reasons for that action; c) records as to monitoring of participant compliance with clearing house rules and inquiries undertaken by the clearing house of possible violations, as well as disciplinary or other action resulting from such violations and the underlying facts and reasons; d) participant, securities issuer or other complaints submitted in writing; e) the proceedings of the company s shareholders meeting and board of directors and such other material as required by the Companies Act. iv. An entry in the records or accounts shall specify the date and time of making such entry and, in the case of an entry made by a person, the identity of such person. v. An entry in the records or accounts of a clearing house shall, unless the contrary is proved, be deemed to have been made by, or with the authority of, the clearing house. 14. Reports to the Authority i. The clearing house shall report to the Authority on a monthly basis showing: a) the total value of transactions processed on a daily basis; b) the number of participants and any changes since the last report; c) any written complaints received by the clearing house concerning its actions or the actions of a participant that is not resolved to the satisfaction of the complainant within one month of receipt. The clearing house shall report to the Authority within one business day of the occurrence of: a) any failures by a participant to deliver securities or provide funds and the actions taken by the clearing house; Draft Securities Clearing House Regulation, 2013 Page 8

b) any system failures suffered by or suspension of the service initiated by the clearing house. i A clearing house shall notify the Authority of any changes in senior staff and their contact details within two business days of any change. iv. Where a clearing house reprimands, fines, suspends, expels orotherwise takes disciplinary action against a participant of the clearing house, it shall, within seven calendar days, give to the Authority particulars in writing of the name of the participant, the reason for and nature of the action taken, the amount of the fine, if any, and the periodof suspension, if any. If the matter is appealed to the Authority, the Authority may request prompt delivery of the full record. v. A clearing house shall submit to the Authority the statements and other material required under section 22 of the Act within the periods required under the Companies Act for listed companies. The Authority may also prescribe an annual regulatory report. PART III Participants 15. Criteria for admission of participants i. A clearing house may admit as participants: a) securities brokers; provided they have either : (i) a guarantee from a bank licensed by the Authority and in compliance with the financial requirements applicable to it under banking regulation sufficient to cover their potential outstanding settlement liabilities and liabilities to the clearing house; or (ii) a guarantee from their parent, where the parent is a financial institution licensed by the Authority and in compliance with the financial requirements applicable to it under the applicable regulations, to cover all outstanding settlement liabilities and liabilities to the clearing house; (iii) a guarantee approved and from a company pursuant to paragraph (c) below; b) banks meeting the criteria of (a)(i) of this subsection acting in the Draft Securities Clearing House Regulation, 2013 Page 9

capacity as clearing agent for brokers; c) other companies, whether incorporated in Bhutan or overseas, if the clearing house believes that it is in the interests of the clearing house to do so and the Authority has specifically approved such participation upon a finding that the company or its guarantee provide protections equivalent to those otherwise acceptable under this section, in light of the capacity of the clearing house and Authority to monitor the financial condition of the company, any jurisdictional impediments to recovery against it or its assets, and the purposes of this regulation. i A clearing house shall only admit an applicant if they are satisfied that they have the staff, the systems and the knowledge to operate as a clearing house participant. No person shall act as a participant or hold itself out to be a participant unless it has been admitted to participation by a notice in writing by the clearing house. 16. Admission of participants i. Companies that wish to become clearing house participants shall apply in writing to the clearing house in accordance with the rules of the clearing house. A clearing house shall advise the applicant of the acceptance or rejection of its application within one month of receipt of the application and all required information. 17. Suspension and other adverse action i. A clearing house shall suspend the activities of a participant if: a) the participant s net settlement liabilities and liabilities to the clearing house exceed the amount of his parent or bank guarantee; b) the participant fails to deliver securities or make payment for trades executed on a securities exchange in accordance with the rules of that securities exchange and the failure remains unresolved for longer than a period provided in the rules of the clearing house; c) the participant becomes insolvent; d) the clearing house receives an instruction to do so from the Authority based upon failure or inability to comply with the Act or the regulations there under; Draft Securities Clearing House Regulation, 2013 Page 10

e) the occurrence of (a) or (c) appears imminent or the participant has been in serious, sustained and substantial non-compliance with clearing house rules or this regulation. A clearing house may suspend, restrict or condition the activities of aparticipant upon a finding one of the following: a) the participant has failed to pay any fee or charge within the period prescribed by the rules; b) the participant has failed to comply with the Act, regulations issued by the Authority under the Act or the clearing house rules; c) the participant has ceased to be eligible for participation or to satisfy the qualifications or standards; d) the clearing house board determines on reasonable grounds that the participant is in such financial or operating condition that its continuation as a participant will jeopardize the interests of the clearing house or other participants; e)the participant is expelled or suspended by any regulatory body or its license to carry on business is revoked, suspended or made subject to a material restriction by a regulatory body. i A clearing house may terminate a company s participation if it has been suspended for a minimum period of three months and has not, to the satisfaction of the clearing house, remedied the reason for suspension. iv. A clearing house shall immediately report suspensions and terminations to the Authority, any securities exchange on which the participant trades and all other clearing house participants. Other adverse action under subsection (ii) as well as further particulars of any suspension shall be reported in accordance with section 13(iv) and the rules of the clearing house. v. A clearing house shall provide in its rules for advance notice to any person subject to the preceding subsections of the allegations involved and a reasonable opportunity to present evidence and arguments before the clearing house, provided that where potential harms resulting from delay render the action urgent, such notice and opportunity may be delayed as necessary and as provided in the rules of the clearing house. Draft Securities Clearing House Regulation, 2013 Page 11

vi. v A person who is the subject of adverse action under this section or who is upon application denied participation or full participation in the clearing house may within 30 days (or at any time where no timely action is taken on an application) in writing appeal the action of the clearing house to the Authority, describing the action and stating the grounds upon which appeal is made. The action shall be in effect pending review unless the clearing house or the Authority determines this unfair or unnecessary. The Authority may, as it judges the gravity of the matter to The Authority may, as it judges the gravity of the matter to require, dismiss the appeal, solicit a written response from the clearing house or conduct a hearing on the matter where both appellant and the clearing house may appear. The Authority s review may accord such deference to the determination of the clearing house as the Authority deems appropriate, and it may affirm, modify or reverse the decision, or remand the matter to the clearing house for further consideration. All decisions by the Authority on an appeal shall be in writing and state the legal and factual basis for the decision. A final decision by the Authority may be appealed by the person who is the subject of the action or by the clearing house as provided in the Act for adverse action by the Authority. The Authority may at any time by written notice to the clearing house pre-empt or terminate any portion of an action described under subsections (i)-(iii) where the matter involves violations of law or regulation within the Authority s jurisdiction and determine the matter or any portion thereof itself under its own procedures. 18. Rights and duties Participants, in accordance with the rules, shall ensure the settlement of securities exchange transactions on the due day. 19. Record keeping i. A participant shall keep or cause to be kept such records and accounts, in sufficient detail, so as to show particulars of : a) all monies received from or paid to the clearing house or on settlement obligations; all securities delivered or received on such settlements; and all obligations to settle whether completed or not; b) all income received from commissions, fees, charges and other sources, and all expenses, commissions, and other payments made or paid; An entry in the records or accounts shall specify the date and time of making such entry and, in the case of an entry made by a person, the identity of such person. Draft Securities Clearing House Regulation, 2013 Page 12

i An entry in the records or accounts of a participant shall, unless the contrary is proved, be deemed to have been made by, or with the authority of, the participant. PART IV Supervision of Clearing House and Certain Other Matters 20. Supervision and sanctions A clearing house shall be subject to inspection, requests for information and such disciplinary, penalty, corrective and liability measures as provided in the Act. The Authority shall enter no disciplinary, penalty or corrective order against a clearing house without notice of the allegations involved to any person who is subject to or the subject of such an order and providing a reasonable opportunity to present evidence and arguments on the record before the Authority, provided that where potential harms resulting from delay render the action urgent, such notice and opportunity may be delayed as necessary. Except in such a case or where otherwise expressly provided by law or where there is consent to a shorter period, the clearing house or person who is the subject of the order shall be given not less than 14 days after notification of the charges against it to prepare a response. 21. Securities exchanges licensed as clearing houses i. A securities exchange that is licensed also as a clearing house shall be subject to the provisions of this regulation. Suspensions, restrictions, terminations or other sanctions imposed against persons who are participants in the securities exchange and in its clearing functions may be brought under the procedures of this regulation or of the securities exchange regulation and shall apply against such persons in both their capacities unless the order of the securities exchange provides otherwise. The Authority may, in light of the purposes of this and the securities exchange regulation, make specific exemptions from this regulation for a securities exchange licensed as a clearing house where compliance would be unduly burdensome. Any such exemption shall be in writing, stating the legal and factual grounds upon which it is based, and not be granted without notice to and opportunity for challenge by any other licensed clearing house. Draft Securities Clearing House Regulation, 2013 Page 13

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