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Regulation on Risks Management in the Book-Entry System of Securities, approved by the DCA of the NBM, no.161 of August 8, 2013

Published in the Official Monitor of the Republic of Moldova, no.177-181 of 16.08.2013, Art.1268

by the Decision of the
Council of Administration
of the National Bank of Moldova
no.161 of August 8, 2013 

on Risks Management in the Book-Entry System of Securities 

Chapter 1. General Provisions

1. This Regulation establishes the general regulatory framework on policies, procedures and mechanisms for risk management within the book-entry system of securities (hereinafter BES).

2. The terms and expressions used in this Regulation have the meanings stipulated in the Regulation on the book entry system of securities approved by the Decision of the Council of Administration of the National Bank of Moldova no. 250 from October 25, 2012 (Official Monitor of Republic of Moldova, 2012, no.252-253, Article 1547).

3. For the purposes of this Regulation, the terms and expressions below have the following meaning:
a) risks related to the book-entry system of securities – risks to which BES participants are or could be exposed and which can disturb their activity in the BES if not adequately handled;
b) risk management – the process of identifying, assessing and supervising risks, as well as setting measures and actions to decrease the possibility of such risks or the consequences that might result from such risks.

4. The provisions of this Regulation are applicable to BES participants of the first level of BES established by the National Bank, and to the second level established by BES participants.

5. As the administrator of BES, National Bank develops and approves regulations, specifying the tools for monitoring the risks related to BES, and is entitled to assess the efficiency of policies, procedures and mechanisms used for risk management by BES participants.

6. In order to ensure compliance with this Regulation and a good management of risks related to the operations processed in BES for their clients, BES participants shall have in place clear governance framework, with well defined responsibilities, shall approve policies and procedures for identifying, managing, monitoring and reporting of risks to which they are or could be exposed, as well as internal control mechanisms in compliance with the provisions of the current normative acts applicable to these areas.

7. Policies, procedures and mechanisms for internal control of risks used by BES participants shall be developed in a transparent and coherent manner, and revised and updated periodically.

Chapter 2. Types of risks related to BES

8. BES participants to transactions with securities can be exposed to the following types of risks:
1) liquidity risk – the risk for a BES participant to not be able to honor its commitments incurred as part of transactions at the time of settlement, although they might be able to honor them later;
2) credit risk – the risk generated as a result of the inability of a BES participant to honor all of its commitments, neither at maturity nor later;
3) custody risk – the risk of losing assets held on the account of clients opened by the participant when the participant is insolvent, or the records of which contain frauds;
4) operational risk – the risk that the deficiencies of information systems or internal procedures, human errors, inadequate administrative decisions or disruptions caused by external events may jeopardize the process of settlement and recordkeeping of transactions with securities.

Chapter 3. Managing risks related to BES

9.The National Bank shall manage risks related to BES as follows:
1) the transfer of securities and related cash to the accounts of BES participants or their clients is final and irrevocable. The form for the transfer of securities transferred into the system cannot be revoked by a BES participant or a third party from the moment of entry defined in the Regulation on book-entry system of securities (the moment when securities are confined to the BES account of the seller), ensuring the finality of the settlement, even in case of withdrawing the license of a participant. The notification on making payments is the final proof of debiting and crediting the account as well as settlement of securities;
2) overdraft from the securities accounts of BES participants is not allowed. If a participant initiates a transfer of securities, but has no securities on its account, BES shall reject this transfer;
3) securities maintained in BES at the National Bank are registered separately in the accounts of participants and cumulative accounts of clients, held by participants, and are the object of regular examination, supervision and internal control;
4) data on securities registered at the first level of BES at the National Bank are reconciled on a weekly basis and upon maturity per issuer and per each ISIN separately with the data registered at the second level of BES;
5) inspecting the accuracy of operations with securities of BES participants, applying procedures for the adequate protection of client assets, under taking actions to transfer the portfolio of clients to other solvent participants in case of financial troubles;
6) developing, implementing, administering, monitoring, testing, revising and continuously improving the Plan for information security and continuity of operation of the BES, as part of the information security and business continuity system, to ensure an adequate level of information security and continuity of activities of BES.
The Plan for information security and continuity of operation of the BES identifies, analyzes and assesses all categories of risks related to the transactions with securities registered in the BES and sets the internal control procedures for preventing and managing risks;
7) if an incident occurs with the BES at the National Bank, remedy measures shall be taken to quickly remove irregularities according to the Plan for information security and continuity of operation of the BES and the Plan for the continuity of operation of the information system of the National Bank and the participants shall be informed within one hour, by authenticated phone/fax or by a securitized message about the timeframe necessary for remedying the issue and actions taken.

10.For the purpose of risk management, BES participants shall take the following actions, but not limited to:
1) have in place internal procedures, containing provisions on executing the orders of clients to buy state securities, including the manner in which funds are reserved based on contractual relations and depending on the level of tolerance of the risk to which they are exposed;
2) implement a mechanism at the second level of BES that would not accept transactions, if there are no sufficient securities on the individual accounts of clients of BES participants;
3) use a software to daily register in their own records the holdings of each particular client;
4) separate accounts with securities so as to segregate securities held by participants from securities held on behalf of clients, protect the assets of investors from receivables of creditors in case of a liquidation process;
5) ensure the integrity and safety of funds and securities of their clients, take actions necessary for minimizing the risk of loss or decrease in the value of assets of clients or rights related to these assets as a result of abuse, fraud, inadequate administration, inadequate record keeping in BES;
6) ensure that the software generates automatically a certificate of compliance for the balance of securities, confirming the client’s ownership right over the securities for the purpose of excluding manual manipulation of information by an employee who does not hold the necessary competence and authorization;
7) set procedures for reducing the risk caused by deficiencies occurred in the internal information system, human errors or disruptions caused by external events to ensure recovery and resumption of main functions and restoring important processes within the timeframes set for each process, ensuring the completion of all transactions on the date of settlement;
8) set, apply and maintain an adequate policy for business continuity in case of BES operation disruption, data conservation as well as continuity of services (when it is not possible), timely resumption of services and completing the settlement process;
9) periodically monitor and assess the efficiency of procedures applied for remedying any deficiencies of the respective policies, procedures, processes and mechanisms, including the failure by the responsible persons to comply with the aforementioned processes and mechanisms or with policies and procedures.

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