Participant Disclosure Document Pursuant to Central Securities Depositories Regulation (CSDR) Articles 38(5) and (6)

Introduction

This document discloses the levels of protection associated with the different levels of segregation of (and the costs associated with) securities that each of State Street Bank and Trust Company (SSBTC). State Street Bank International GmbH (SSBI GmbH) or State Street Global Markets, LLC (SSGM) (SSGM, SSBI GmbH and SSBTC, individually or together, State Street) provides in respect of securities that it holds for its clients as a direct participant in a number of Central Securities Depositories within the European Union (EU) and European Economic Area (EEA) (CSDs), including a description of the main legal implications of the different levels of segregation offered and information on the applicable insolvency law.  As State Street is a direct participant in a number of CSDs, it is required to make this disclosure under Articles 38(5) and (6) of the CSDR with respect to CSDs in the EU and EEA.  CSDs have their own disclosure obligations under CSDR and may make their own disclosures from time to time.

CSDs in which State Street participates

SSBTC currently participates directly in three CSDs, namely:

  • Euroclear Bank S.A./N.V. (Belgium),
  • Clearstream Banking S.A. (Luxembourg), and
  • Euroclear UK & Ireland Limited (UK and Ireland) (through the London Branch of SSBTC).

SSGM currently participates directly in one CSD, namely, Euroclear Bank S.A./N.V. (Belgium).

SSBI GmbH currently participates directly in one CSD, namely Clearstream Banking AG (Germany).

This document is not intended to constitute legal or other advice and should not be relied upon as such.  Clients should seek their own legal advice if they require further guidance on the matters discussed in this document. Please note that this document may be updated from time to time.  Clients should ensure that they consider the most recent version of the disclosure, which will supersede and override any previous version.

Background

State Street records each client’s individual securities entitlements that State Street holds for them in one or more client securities accounts that State Street opens and maintains for that client.  These accounts are typically established pursuant to the contractual arrangements with the client.

State Street will hold the clients’ securities in accounts that State Street opens as a direct participant at the CSDs. There are currently two types of client accounts available at CSDs - Individual Client Segregated Accounts (ISAs) and Omnibus Client Segregated Accounts (OSAs).  State Street records, on its books and records, each client’s individual securities entitlement that State Street holds for that client, whether they are held in an ISA or OSA at CSDs. .

Accounts at CSDs

An ISA is used to hold the securities of an individual client in an account at the CSD that we establish for the benefit of that client and therefore that client’s securities are held separately from the securities of other clients of State Street, and from State Street’s proprietary securities.  An OSA is one used to hold, at a CSD, the securities of a number of clients on a collective basis.  However, State Street does not hold its proprietary securities in ISAs or OSAs at CSDs.    

Where State Street has an option to choose which type of account to use to maintain client securities, State Street would ordinarily select an OSA, and the use of OSAs is common practice in the custody and brokerage industries.  State Street does this for a number of reasons, including reduced operational risk and cost and increased efficiencies relating to transaction settlement, proxy voting, tax servicing, corporate action processing, and income collection.  Clients may request that State Street utilize an ISA for their securities.

Where a client’s securities are maintained in an ISA, this may facilitate the identification of an individual client’s securities in the case of State Street’s or a CSD’s insolvency or failure.  However, maintaining ISAs may increase the operational risk because utilizing an ISA entails individual allocation of corporate action entitlements outside State Street’s standard operating procedures.  Moreover, in the case of either an ISA or an OSA, a full reconciliation of the books and records in respect of all securities accounts may be required prior to the release of any securities from those accounts.

State Street does not presently charge additional fees for maintaining ISAs at CSDs.  We do not anticipate that will change in the foreseeable future, but that could change, particularly if a CSD changes its fee practices.    

Insolvency

SSBI GmbH

SSBI GmbH is a German entity regulated by the European Central Bank, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and the Deutsche Bundesbank.  Securities and other financial assets held by SSBI GmbH in a client securities account (ISA or OSA) are the property of SSBI GmbH’s clients.  If SSBI GmbH were to become insolvent, insolvency proceedings would take place in Germany and be governed by German insolvency law. Clients’ legal entitlement to their securities, whether held in an ISA or an OSA with the CSDs, would not be affected by SSBI GmbH’s insolvency.  Under German insolvency law, client securities as client property are generally not available to SSBI GmbH’s creditors in a bankruptcy or insolvency event. Rather, they would be deliverable to clients in accordance with each client’s ownership or fractional co-ownership interest in the securities. As a result, it would not be necessary for a client to claim in SSBI GmbH’s insolvency as a general unsecured creditor in respect of that client’s securities. Instead, the holder of the securities account would be entitled to a claim for segregation of these securities. In addition, securities that SSBI GmbH holds for its clients would not be subject to any bail-in process in resolution proceedings for SSBI GmbH.

Upon the commencement of SSBI GmbH`s insolvency proceedings, even if the clients have not received full legal entitlement on the securities due to the fact that the settlement of the transaction has not been fulfilled or SSBI GmbH has unlawfully disposed of the client`s entitlement regarding the respective securities,  the German Safe Custody Act (DepotG) establishes a priority right for clients in the following situations:

  • the client has fully satisfied its obligations owed to SSBI GmbH under the relevant agreement; or
  • SSBI GmbH has unlawfully disposed of the client`s entitlement regarding the respective securities and the client has fully satisfied its obligations owed to SSBI GmbH; or
  • the client has not fully discharged its contractual obligations owed to SSBI GmbH in case of (i) or (ii), but the non-performed part of its obligations does not exceed 10 per cent of the value of its securities delivery claim and the client fully satisfies its obligations within one week following request by SSBI GmbH’s insolvency administrator.

The client’s priority claim will be settled separately prior to any claims of SSBI GmbH’s general unsecured creditors. The claim will be settled with securities of the same type that form part of SSBI GmbH’s estate or securities that SSBI GmbH is entitled to receive into SSBI GmbH’s estate. The client would be required to claim in SSBI GmbH’s insolvency as a priority creditor in respect of the relevant client owned securities.

SSBTC

SSBTC is a Massachusetts trust company that is a member of the Federal Reserve System (Federal Reserve). It is subject to examination and supervision by the Commissioner of Banks of The Commonwealth of Massachusetts (Commissioner of Banks) and the Board of Governors of the Federal Reserve.  If SSBTC were to become subject to US insolvency proceedings, the interests and rights of SSBTC and its clients to assets of SSBTC or those of its clients would be governed by the substantive law of Massachusetts, principally the Massachusetts Uniform Commercial Code (UCC).

Under the UCC, securities and other financial assets held by a custodian for the benefit of a client are not property of the custodian and are generally not subject to the claims of the custodian’s creditors.  While the UCC provides that a client’s property interest with respect to a particular security or financial asset held through a custodian is a pro rata property interest in all interests in that security or financial asset held by the custodian, the custodian has an obligation under the UCC to maintain securities and other financial assets in a quantity corresponding to the aggregate of all securities entitlements that it has established for all its clients in such securities or financial assets.  Accordingly, in the event of SSBTC’s insolvency, the securities held for the benefit of SSBTC’s clients would not be assets of SSBTC or available to satisfy its creditors’ claims, and such securities would be returned to each such client in the normal course of such insolvency proceedings, free and clear of any claims of SSBTC’s creditors  This would be the same whether the securities are maintained in an OSA or an ISA.  The right of each client to receive back such securities would, however, be subject to any obligations due from such client to SSBTC, such as unpaid advances by SSBTC to settle securities trades on behalf of that client.

SSBTC London Branch may be subject to insolvency proceedings in England and  Wales.  Under English  insolvency law, upon insolvency securities held for clients would not form part of State Street’s estate and would not be subject to the claims of the State Street’s creditors, except to the extent such securities were subject to any security interest or setoff rights in favor of State Street.  

SSGM

SSGM is a limited liability company organized in the State of Delaware, United States of America. SSGM is a registered United States broker-dealer whose primary regulators are the United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).  SSGM is also a member of the Securities Investor Protection Corporation (SIPC).  SSGM offers brokerage services to its customers on a delivery vs. payment / receipt vs. payment basis (DVP/RVP) only.  As a result, SSGM does not generally hold assets of its customers.  If SSGM were to become subject to insolvency proceedings, the securities held for the benefit of SSGM’s client would not be assets of SSGM or available to satisfy its creditors’ claims, and such securities would be returned to each such client in the normal course of any insolvency proceedings, in the same manner as for SSBTC, whether the securities are maintained in an OSA or an ISA.

Shortfalls

Generally, if there were a shortfall between the amount of a particular security that State Street is obligated to deliver to clients and the amount of the security that State Street holds, this could result in clients recovering fewer securities than they had deposited with State Street.  In that case, the shortfall would be shared pro rata among the clients who were entitled to that security; provided that in the UK and Germany, (i) in the case of an ISA, the whole of any shortfall on that ISA would be attributable to the client for whom the account is held and would not be shared with other clients for whom we hold securities and the client would not be exposed to a shortfall on an account held for another client or clients and (ii) in the case of an OSA, any shortfall in a particular security would be allocated among all clients with an interest in that security in the account.

To the extent that a shortfall exists for which we are liable to clients, clients would be entitled to a claim against the applicable State Street entity pursuant to their contractual arrangements with that entity or, in certain cases, under applicable law. This claim, however, would be expected to rank equally with general unsecured creditors of the State Street entity.

Where State Street holds securities in an OSA,  for securities held for clients by State Street Bank and Trust Company London Branch, we would deposit our own funds, in an amount corresponding to the amount of the shortfall for which we are liable, into a client money account opened for the purpose of covering such a loss in the event of a State Street insolvency.  For securities held by non-London Branch clients in an OSA, we would  similarly deposit funds into an account opened for the purpose of covering such shortfall for the purpose of covering such a loss in the event of a State Street insolvency.

Security Interests

Security Interests Granted by Clients to Third Parties

Security interests granted over client securities accounts could have a different impact in the case of ISAs.

Where a client purported to grant a security interest over its interest in securities in an OSA and the security interest were asserted against the CSD with which the securities account was held, there could be a delay in returning securities to all clients holding securities in such account, including those clients who had not granted a security interest, as well as a potential shortfall in such account.  The assertion of a security interest in an ISA would have no impact on other clients.  However, in practice we expect that the beneficiary of a security interest in a client’s securities would perfect its security interest through State Street rather than the relevant CSD and seek to enforce its rights against State Street.  We also expect that the CSD would refuse to recognize a claim asserted by anyone other than State Street as its account holder.

Security Interests Created by Rules of CSDs

Where the CSD benefits from a security interest over securities held for the benefit of a client, such as for failure to pay for securities settlement or other CSD assessments, there could be a delay in the return of securities, as well as a potential shortfall in the event State Street failed to satisfy their respective settlement obligations to the CSD and the security interest was enforced.  This applies whether the securities are held in an ISA or OSA.  However, in practice we expect that an CSD would first seek recourse from State Street and to any proprietary assets held by State Street to satisfy those obligations.

If you have any further questions, please contact your State Street representative.