Based on our compliance with the foregoing, clients’ legal entitlement to the securities that we hold for them directly with CSDs would not be affected by our insolvency, whether those securities were held in ISAs or OSAs.
The distribution of the securities in practice on an insolvency would depend on a number of factors, the most relevant of which are discussed below.
Application of US insolvency law
We are a national banking association chartered under the laws of the United States whose deposits are insured by the Federal Deposit Insurance Corporation (the FDIC). Accordingly, our insolvency would be administered by the FDIC as conservator or receiver in proceedings under the Federal Deposit Insurance Act (FDIA).
Under the FDIA and applicable commercial law, securities that we hold on behalf of clients as described above under "Background" would not form part of our insolvency estate for distribution to creditors, provided that such securities remain the property of the clients2. Rather, they would be deliverable to clients in accordance with each client’s proprietary interests in the securities.
As a result, it would not be necessary for clients to make a claim in our insolvency as a general unsecured creditor in respect of those securities. Securities that we held on behalf of clients would also not be subject to any bail-in process (see glossary), even if a bail-in process were to apply to our parent company if we were to become insolvent.
Accordingly, where we hold securities in custody for clients in Europe and those securities are considered the property of those clients rather than our own property, they should be protected following our insolvency or any subsequent resolution. This applies whether the securities are held in an OSA or an ISA.
Application of English insolvency law
Were we to become insolvent, insolvency proceedings relating to our London branch may also take place in England and be governed by English insolvency law.
Under English insolvency law, securities that we held on behalf of clients would not form part of our estate on insolvency for distribution to creditors, provided that they remained the property of the clients3. Rather, they would be deliverable to clients in accordance with each client’s proprietary interests in the securities.
As a result, it would not be necessary for clients to make a claim in our insolvency as a general unsecured creditor in respect of those securities. Securities that we held on behalf of clients would also not be subject to any bail-in process (see glossary), which may be applied to us if we were to become subject to resolution proceedings (see glossary).
Accordingly, where we hold securities in custody for clients and those securities are considered the property of those clients rather than our own property, they should be protected on our insolvency or resolution. This applies whether the securities are held in an OSA or an ISA.
Nature of clients’ interests
Although our clients’ securities are registered in our name or the name of a nominee at the relevant CSD, we hold them on behalf of our clients, who are considered as a matter of law to have a property interest in those securities. This is in addition to any contractual right a client may have against us to have the securities delivered to them.
This applies both in the case of ISAs and OSAs. However, the nature of clients’ interests in ISAs and OSAs is different. In relation to an ISA, each client is beneficially entitled to all of the securities held in the ISA. In the case of an OSA, as the securities are held collectively in a single account, each client is normally considered to have a beneficial interest in all of the securities in the OSA proportionate to its holding of securities.
Our books and records constitute evidence of our clients’ beneficial interests in the securities. The ability to rely on such evidence would be particularly important on insolvency. In the case of either an ISA or an OSA, an insolvency practitioner may require a full reconciliation of the books and records in respect of all securities accounts prior to the release of any securities from those accounts.
We are subject to the client assets rules of the UK Financial Conduct Authority (CASS Rules), which contain strict and detailed requirements as to the maintenance of accurate books and records and the reconciliation of our records against those of the CSDs with which accounts are held. We are also subject to regular audits in respect of our compliance with those rules. As long as books and records are maintained in accordance with the CASS Rules, clients should receive the same level of protection in relation to both ISAs and OSAs. We are also required by legal rules in the United States, to the extent applicable to client accounts maintained by us, to maintain a quantity of securities credited to client accounts that are sufficient to cover the aggregate of all entitlements that we establish in favour of our clients.