UNITED STATES
 

SECURITIES AND EXCHANGE COMMISSION
 

WASHINGTON. D.C. 20549
 

DIVISION OF
 

i. /MENT MANAGEMENT
 

ArJ _ \ CA T
 

~1llClIuI.J _.___~.______.. 

June 3, 1997 ,¡U..___ _...... .......T.. ...._,.._......
 'Pt-T.P l-:f-i:


PULIC VI FACSIM AN AI MA . V AIrLI'l'Y Co .,3 .qiMs. Adnana Tanasoiu 

Genera Deputy Manager 

Bucharst Stock Exchange
 

8 Doamei Strt
 

Buchart 70412
 

ROMA . 

Dea Ms. Tanasoiu: 

Your letter dated Apri 17, 1997 reuests inormation concerng the status of the 

C1eag and Registr Service of the Bucharst Stock Exchange (the "BSE") with respt to 

Section 17(f) of the Investment Company Act of 1940 (the "1940 Act") and Rule 17f-5 

thereunder. 

In your letter, you state tht the BSE commence trdig in November 1995 and is 

regulated by the Comisia National a Valorior Mobil ("CNV"). 1 You furter state that 

the BSE operates an integrted system with trdig, c1eag, settement and registr functions,
 

and that al companes trded on the BSE must hold their registers in the BSE. You state also 

that the CNV has licensed five custods in Roman, but you do not indicate whether the 

CNV has licensed the BSE as a custo. .
 

Section 17(f) of the 1940 Act sets fort the custo reuiments for U.S.-regitere 

management investment companes ("funds"). Rule 17f-5.permts funds to maita cert
 

assets with "eligible foreign custos. II On May 12, 1997, the Commsion .adopte 

amendments to Rule 17f- 5 to provide funds with grter flexibilty in mang their foreign
 

custody argements consistent with the saekeeing of fund asses. The amendments wil be 

effective on June 16, 1997. Among other thgs, the amendments expand the clas of foreign 

ban and depsitones tht may serve as fund custos.
 

Baed on your charcterition of the BSE, subpargrph (a)(l)(ü) of Rule 17f-5, as 

amended, seems most relevant to your inquir. Rule 17f- 5 deiines the terms "eligible foreign 

lWe assume tlat the CNV is the sae entity as the National Securities Commssion 

referr to on page one of your letter.
 
Ms. Adra Tanasoiu
 

June 3, 1997
 

Page 2
 

'.~:f..~~~'.:'~~..~ . .....-':....:=_. ,'~:'~' 

custod" to include "a securities depsitory or cleag agency tht acts as a system for the 

centr handlg of securities or equivalent bok-entres in the countr that is regulate by a 

foreign f"inancial regulatory authority. "2 Rule 17f-5 is self operative and, therefore, doe not 

reuir any foreign :tstitution tht satifies the def"intion of "eligible foreign custo" to obta 

the prior approval of the Commssion before serving as an eligible foreign custo for U. S.­

registere funds. Thus, if the BSE acts as a centr depsitory for hadlg seurities or
 

equivalent bok-entres in Roman, and is regulated with respt to those activities by a foreign 

. 

2Section 3(a)(23)(A) of the Securities Exchange Act of 1934 ("1934 Act") def"ines "cleag 

agency" generay as an intermed that makes payments or deliveries in connection with 

trasactions in securities. The term includes any entity, such as a securities _ depsitory, tht (1) 

acts as a custod of securities in connection with a system for centr handlg of securities 

whereby al securities of a parcular class or series of an issuer depsited with the system ar 

treted as fungible and may be trsferr, loaned, or pledged by bokkeeing without physica 

delivery of securities certcates, or (2) otherwise permts or faciltates the settement of 

securities without physica delivery of securities certcates. 

Section 3 
 (a) (52) of the 1934 Act def"ines a "foreign f"inancia regulatory authority" as any

(1) foreign securities authority, (2) other governenta boy or foreign equivalent of a selfregulatory organtion empowere by a foreign 
 governent to admster or enforc its laws relatig 'to the regulation of fiduciaes, trsts, comm~rcia lendig, insurace, trdig in 

contrcts of sae of a commodty for future delivery, or other instrments trded on or subject 

to the rules of a contrct market, board of trde, or foreign equivalent, ~r other ficia
 

activities, or (3) membership organtion a function of which is to regulate parcipation of its 

members in activities listed above. 

Rule 17f-4 under the 1940 Act def"ines a "seurities depsitory" as a "s'ystem for the 

~ntr hadlg of seurities where al seurities of any parcula class or series of any issuer 

depsited with the system ar trted as fungible and may be trsferr or pledged by
 

bokkeeing entr without physica delivery of seurities." 

Rule 17f-5(c)(2)(il) under the 1940 Act refers to both seurities depsitories and cleag 

agencies beuse a foreign securities depsitory may be known as a "cleag agency" in cert
 

countres. See Investment Company Act Release No. 13724 at n. 31 (Jan. 17, 1984) 

(reroposing Rule 17f-5). 
Ms. Adr Tanasoiu
 

June 3, 1997 

Page 3
 

f'inancia regulatory authority, it fals with the defition of eligible foreign custod and doe 

not nee the approval of the Commssion to provide custo service to U.S. funds.
 

If the BSE provides custo service but doe not satisfy the "eligible foreign custo" 

reuirments under 
 Rule 17f-5, we suggest tht the BSE consult an attrney familiar with the

U.S. federa seurities laws. 

I am sendig with the aiai copy of 
 this letter a copy of 
 Rule 17f-5, as amended, and 

the releae adoptig the amendments. If you have any furter questions, plea telephone me 

at (202) 942-0660 or (Fax) (202) 942-9659. 

. Very trly your,
 nhh Oí)~ 

Jlhn V. O'Haon 

Assistat Chief Counsel
 

Enclosures' 

. 
rm
 L 

i ~ BUCHAREST STOCK EXCHANGE

8 DOAMNEI Street. BUCHAREST r 70421 . Phone: 01/3230900" Fàx; 01 /323 57 32 

/10 

Date: 17 April 
 1997

To:	 Ms Kerri McMilan
 

Securities and Exchange Commission
 

Fax: 202 942 9659 

From: Adriana Tanasoiu 

General Deputy Manager ~ Bucharest Stock\Exchange 

Fax: 00401 323 5732 

. 

Re:Section 17 (f) 5 Investment Company Act 1940
 

'.s 

Dear Ms McMillan, 

I have been in correspondence with Sheldon E Warrick of Brown Brothers 

Harriman and Co, Boston, who has suggested that J write to you to find out 

whether or not the Bucharest Stock Exchange neèd$ to apply for a "No Action 

Letter" in regard of its Clearing and Registry Service so that US institutional 

iiivestors can invest iii our listed companies. 

Most ~ompanies in Romania 
 are partially privBtised, with thø state having 

majority shareholdings. However, the government, newly elected in 

November 1996, is determined to sell off Its holdings. It is this opportunity that 

is proving very attractive to foreign investors. 

There has been considerable interest from foreign investors, especially 

Americans. about adding Romanian companies to their portfolios of 

investments. It would be very helpful to us, if you could 
 clarify what our status Îs with regard to Section 17 (f) 5, and what we need to do to give confidence 

to American iiistitutions that they can invest in our listed companies. 

I trust that the 
 following description of our operation wil help you to analyse ­

lls. 

. Background 

The Bucharest Stock Exchange commenCE:d trading in November 1995. It is 

a public enti"cgulated by tile National Securities Commissiorlut 

managed by its members through an elected Board of Governors. It currently 

Bucharest Stock Exchange Page 1 of 4 
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trades 32 securities and is processing listing applications which wil bring this 

number up to over 1 00. 

into Exchange operates an integrated system with trading, clearing, 

. settlement, and registry functionality. All companies traded on the Exchange 

· must hold their registers in our system. t:There is also an OTe market in Romania, RASDAQI which has its own 

clearing and registry arrangements. All the companies that participated in the 

mass privatisation programme were automatically listed on the OTe market. 

Now issuing companies have to select which market their shares will be 

traded on, as they cannot be traded on both. 

Brokers, however, can trade on both Exchanges, and Bank Custodians can 

also participate in both.
 

The concept of securities custodians is very new in Romania. Our securities 

commission, the Comisia Nationala a Valorilor Moblliare (CNVM), which 

regulates the securities industry, began licensing custodians in January. At 

present, five have been licensed, three being Romanian subsidiaries of 

foreign banks (ABN Amro, INq Bank and Societe Generale). one Romanian 

bank (Transílvanía) and a broker (Creditanstalt Securities). 

Listing at the SSE 

We ha've a Listing Committee that vets-.aRPlìcations, concentrating on the
 

business history of the applicants, particularly their profitability,
 

Tllere are two tiers to our list. 

lhe top tier has special requirements concerning the capital of the company. 

the percentage of the company in public ownership. the minimum number of 

shareholders. Such companies miist have exIsted for three or more years of 

which the last two must have shown a profit. Today, there are four companies 

in this tier. 

The second tier has less onerous reqUirements; one year's history and a
 

certificate of non indebtedness to fiscal authorities.
 

We require all 
 listed companies to publish full annual reports to their shareholders and quarterly income statements. Company news releases 

must be checked by the Exchange before issue. They must be published in at 

least one national newspaper and one financial newspaper. They are 

required for any event that might 
 impact the market price eg: management change, significant new contract, corporate structure change etc. Trading can 

be suspended waiting for announcements. 

The registry
 

The Registry is divided into three sections. 

Unaligned holdings - these are holdiiigs of individuals who are not 

contracted to a participant in the clearing system. Stock cannot be traded 

from such holdings. It must be transferred to a clearing participant's control 

first.
 

Clearing Participant's Clients' stock - these holdings are stil recorded in
 

the name of the client, but they are controlled by the clearing participant. 

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A clearing participant can be either a broker or a custodian. rAt present 

custodians are not able to participate directly in the service, they have 

controls over accounts in brokers. This fax describes a service we are in the 

process of implementing having agreed the outline with the participants.) 

Clearing Participant's Principal holdings - the participants own stock. 

Companies can request copies of their registers at anytime. One has on line 

links to the system. 

Clearing parlicipants have access to the computer system, and can enquire 

on data involving the 
 accounts in their control such as stock holdings and
 

transaction history.
 

Cash benefits are distributed to the names on the register directly by the 

issiiing company. Stock benefits are 
 added to the account holdings. 

Romanian law requires registered shareholders to disclose who the beneficial 

shareholders behind them are on quarterly basis and on demand from the 

registry. This wil be required for voting at a company meeting. 

Trading on the eSE, . Only seclIrities firms that are members of the' BSE can trade on the BSE. 

They are licensed and regulated by the CNVM and licensed by the SSE. 

Trading is via an order matching mech,ênisrn where orders are input through 

terminals on a continuous basis during lhe trading period (9.15 - 13.30). 

Matched orders are for T+3 settement. '
 

Large value trades can be dealt outside the system but must be reported to 

the Exchange at the end of the trading period. The Exchange validates the 

price against the market and then inputs the trade for publication and 

settlement.
 

Short sellng is not permitted at the moment, so the system validates that a
 

seller has the holding he is attempting to sell before passing the order for 

matching. Buyers have their credit caps checked. 

Stock can be frozen in the broker's account, using a pledging mechanism, 

which means it is not available to sell. Custodians have been given the ability 

to freeze and release stock in specific broker accounts as their means of 

controllng holdings in the interim before our proper custodian solution is 

implemcmted. 

In the proper solution, the broker wil quote a custodian's account on his order 

input and the system wil check the custodian's holding. The broker wil check 

that thecuslodian has client instructions to settle the trade before entering the 

order. 

The custodian wil see the order soon after it is matched, and has until midday 

on T + 1 to repudiate it. 

Clearing and Sottlement 

As each trade matches during the trading period the Exchange recalculates 

the net cash settlemt3nt position for the clearing participants involved. After 

the close of the trading session, the final net cash settlement position is 

Bucharest Stock Exchange Page 3 of 4 
" 

reported to them together with lists of the transactions that make up the 

settlement position. 

In our proper custodian solution the custodian wil replace the broker as the 

settlement participant for trades using his accounts. 

On T +1 the settlement participants must inform the Exchange if they contest 

information appearing on the settlement reports. The reports can be adjusted 

by Exchange input. This wil Occur if a custodian rejects a trade. After T +1, 

trades are locked in for settlement. 

By the morning of T +3 n~t paying settlement participants must have 

contributed their payment amounts to our clearing bank. Settlement Is 

guaranteed. If someone falls to pay there are a number of measures in place 

to ensure funds are found: 

· the broker must have lodged a guarantee letter from its bank with our' 

clearing bank for a capped amount, which can be demanded; 

· if this is not enough, the Exchange can enforce its lien over the broker's 

principal holdings to use them as collateral for a loan; 

· then there is a guarantee fund to make the payment from, if that is not 

enough; 

· finally all brokers can be requested t~ make contributions to makeup any difference. .~..,.;. 

Buyers cash is transferred to the Exchange's account and then on to the 

sellers in accordance with a novation agreement between the BSE and the 

settlement parties. The Exchange does not effect the stock transfers until the 

clearing bank has confirmed it can make the cash transfers. .
 

Conclusion 

We believe that as the Bucharest Stock Exchange has sole responsibilty for 

managing the registers of the securities that are traded on it, we are qualified 

to be considered as a 17f-5 qualified custodian for US domiciled mutual 

funds'. 

I look forward to hearing your views about us, and, in particular, what we will 

have to do to apply for a "No Action Letter", 

Yours sincerely, 

1J. 

Adriana Tanasoiu 

Bucharest Stock Exchange Page 4 of 4