This annex briefly describes the approaches used in some countries to protect client property in the custody or control of securities firms.

To protect customer securities, some countries require securities firms to have possession or control of all fully paid and excess margin securities⁽¹³⁾ of customers. The customer securities are required to be free of all claims or liens. The securities firms are required to make a regular determination to ensure that they have possession or control of customer securities.

The approach taken with respect to cash is important. Firms should not be allowed to use customer funds to finance their own activities. A number of approaches can be used. One country requires customer cash balances to be deposited immediately in a special bank account that must be maintained for the exclusive benefit of customers. Another country permits the use of customer cash balances to finance customer credit transactions. This approach is designed to separate a firm's brokerage activities from its other activities and also to prevent customer cash balances from being used to finance firm trading and underwriting activities and to pay for furniture, fixtures, equipment and ordinary expenses. This approach would require the securities firm to make a periodic computation (in accordance with a formula) to determine how much money it is holding which is either customer money or money obtained from use of customer securities (credits). From that amount, the securities firm subtracts the amount of money which it is owed by customers or by other securities firms relating to customers or by other securities firms relating to customer transactions ("debits"). If the credits exceed the debits, the securities firm is required to deposit the excess in a special bank account. If the debits exceed the credits, no deposit is necessary.

Footnote:

13.Excess margin securities are a portion of securities bought by customers on credit which are in excess of the amount of securities which the securities firm may pledge with a bank to finance the customer`s credit purchase.