CHAPTER 4

Depository clearing and securities

 LEARNING OBJECTIVES
• Understand the basics of definition, role, function of the securities
depository system.
• Understand issues related to securities registration, depository and
clearing
 CONTENT
1. Basics of securities depository, registration and clearing

2. Securities registration

3. Securities depository

4. Securities clearing
 1. Basics of securities depository, registration and
clearing
1.1. Definition, operations and role of the system

1.2. Roles and functions of securities depository, registration,

settlement and clearing systems
 1.1. Definition, operations and role of the system

System operations
 Registration: register information about securities and ownership of holders.
 Clearing: process information about securities transactions in order to generate
a final net figure that the parties involved must pay after the transaction.
 Settlement: complete securities transactions, in which the parties will fulfill
their obligations.
 Depository: store and preserve customers' securities and help clients exercise
their rights to depositary securities.
 1.1. Definition, operations and role of the system
The role of the system
 Reduce risks for operations on the stock market
 Reduce costs for stock market participants
 Promote fast capital mobility
 Contribute to effective management of the stock market
 Ensure securities transactions are completed.
 2. Securities registration
 Registration of securities information: name, code, number, type ò
securities...
 Registration of securities holders’ information : Full name,
ownership registration number, address, phone number of the
owner, number of securities owned ...
 2. Securities registration
Objectives
 Issuers provide detailed information about shareholders, types and quantities of
securities owned so that depository centers and depository members have
grounds to receive shareholders' securities into the depository
 To determine who is entitled to the rights of depositary securities
 Help customers exercise their rights to depositary securities: receive dividends,
voting power, receive bonds and principal, buying right, conversion right,...
 Provide transfer agent services as authorized by issuers.
 2. Securities registration
Registration cases
 Issued securities
 Newly issued securities, additional issued securities
 Renamed/split/merger securities.
 2. Securities registration
 Rights exercising

Issuer
Holders of undeposited 4
securities
1
Designated bank
for settlement Depository center
(4)
Holders of depositary
2
securities
Depository 3
member
 3. Securities depository
 Store and preserve customers' securities
 Performing services related to opening depository accounts,
depositing, withdrawing, transferring, performing security
transactions such as pledge, pledge release...
 Manage the safe import, export and preservation of securities
certificates at securities certificate warehouses.
 3. Securities depository
Depository methods
 Synthetic depository: Same type of securities of the same issuer
are managed together, not separately by each customer.
 Advantages:
 Simplify procedures
 Facilitate customers to conduct securities transactions
 Facilitating customers to withdraw securities
 Depository center can provide utility services for depositary
securities
 3. Securities depository
Depository methods

 Segregated depository: The registered securities are deposited and managed in

the name of depository customer.

 Keep separate from other customers' securities;

 Withdraw the correct type of deposited securities;

 Buying/selling operations must clearly state the series, stock code and other
characteristics (if any);

 High depository costs.

 3. Securities depository
Securities depository account
 Trading securities account: used to reflect customer's existing securities
 Pledged securities account: used to reflect the number of pledged securities
 Securities waiting for listing (waiting for trading) account: used to account for the
number of securities waiting for listing but still allowed to be deposited at Depository
center
 Securities waiting for withdrawal account : used to account for the number of securities
customers want to withdraw but are waiting for withdrawal
 Clearing account for traded securities (pending settlement): used to account for the
securities bought/sold according to securities payment documents
 Suspended trading account: Securities are regulated, no longer regulated but suspended
trading to redetermine the reference price
 Impound account: received from using payment support funds
 3. Securities depository
Sơ đồ hệ thống tài khoản
DEPOSITORY MARKET
Depository Member 1
Central Foreign brokers Domestic brokers Self-trader
level
100 150 50

Foreign brokers Domestic brokers Self-trader

Depository
Member 1 A B C D

Members 50 50 100 50 50
level

Investor A Investor B Investor C Investor D

deposits 50 deposits 50 deposits 50 deposits 50 Depository
securities securities securities securities Member
Deposit 50
securities
Foreign investors Domestic investors
 3. Securities depository
Principles of securities depository accounts management
2 levels of management:
 Members level: Customer signs a contract to open a depository account at the
depository member.
Depository Members:
 Implement detailed management for each customer
 Manage customers’ depository securities separately from the assets of the
Depository member assets
 Using customers’ depository securities for the benefit of 3rd parties or of the
Depository members is not allowed.
 Fulfill obligations to customer in case customer switches to another Depository
member
 Central level: Depository member opens a depository account in the name of the
depository member at the depository.
Depository center:
 Manage separately from the assets of the Depository center assets
 Using customers’ depository securities for the benefit of 3rd parties or of the
Depository center is not allowed
 3. Securities depository
Services related to opening securities depository accounts
 Securities depository
 Securities withdrawal
 Securities transfer
 Pledge and pledge release
 4. Securities clearing
 Clearing is the processing of information about securities
transactions, the recalculation of which is aimed at
determining the final amount and net securities that the
transaction counterparties are obliged to pay after the
transaction is made.

 Bilateral clearing
 Multilateral clearing
 Settlement is the final activity to complete securities
transactions in which the parties will fulfill their obligations
 4. Securities clearing
Clearing method
 Bilateral clearing: is a method of clearing securities transactions
matched on the same day by each trading partner pair and by
each type of securities to determine the net settlement obligations
for money and securities of each party.
 Multilateral clearing: is a method of clearing securities
transactions matched on the same day between all transactions
parties under each type of security to determine the net
settlement obligations for money and securities of each party.
 4. Securities clearing
Principles of clearing
 Condition: Centralization of securities in the system
 Objectives: Guarantee payment and transfer of securities
 Principles:
 Multilateral and bilateral clearing and transaction-based
settlement
 Clearing by each securities and separate by margin
account type for domestic, foreign and self-trading
customers of depository members
 4. Securities clearing
Clearing methods
 Multilateral clearing
 Bilateral clearing
 Direct clearing
 4. Securities clearing
Multilateral clearing
 Settlement based on multilateral clearing results
 Do not identify the specific counterparty of the buyer or
seller
 The member's partner is represented by a central partner
(Depository center)
 Settlement time: T+x
 4. Securities clearing
Bilateral clearing
 Settlement based on bilateral clearing results
 Bilateral clearing: applied to a certain type of security, by
each pair of trading members
 Settlement time:
 4. Securities clearing
Direct clearing
 Settlements are per transaction and are not based on
clearing results
 Payment time: up to transaction parties
 4. Securities clearing
Clearing process diagram
Depository member Stock Exchange Center Depository member
Buyer (M) Trading Systems Seller (B)

(1)
(2)

(2)
(3)
(3) Depository center
(4) Clearing Department (4)
(4) (4)

Depository center
(6) , (8) , (10) Designated Bank
Depository Department

(9)
(11) (9) (7) (5) (11) (7) (5)

Trading Clearign Clearing Trading Trading Clearign Clearign Trading

Depository account Depository
account account account account account account account
center (B) cneter

25
(M) (M) (B) (B) (B) (M) (M)
 Diagram annotations
(1) Stock Exchange Center send transaction results to the
Depository center
(2) Depository center sends "Notification of transaction results"
to Depository members.
(3) Depository members send "Notification of confirmation of
transaction results”.
(4) Clearing department send payment documents to
Depository members, Depository department, Designated
bank
(5) Depository department transfers securities from Trading
account (B) to Clearing account (B)
Designate bank transfers money from Deposit money for
securities train account (M) to Clearing (M)
 Diagram annotations
(6) Depository center and designated bank check and collate balances.
(7) Depository department transfers securities from Clearing account (B) to
Clearing account of Depository center.
Designated bank transfers money from Clearing account (M) to Clearing
account of Depository center.
(8) Depository center and Designated bank check and collate balances.
(9) Depository department transfers securities from Clearing account of
Stock Exchange Center to Clearing account (M).
Designated bank transfers money from Clearing account of Stock
Exchange Center to Clearing account (B).
(10) Depository center and Designated bank check and collate balances.
(11) Depository department allocates securities from Clearing account (M)
to Trading account (M).
Designated bank allocates securities from Clearing account (B) to
Deposit money for securities train account (B)
 SUMMARY
• Role of the securities depository system
• Definitions of securities registration, depository, clearing and
settlement
• Basics of securities registration, depository, clearing and
settlement