## Detailed Assessment of Observance of Thailand Securities Depositories (TSD)

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### Recommendation 1 — Legal basis, enforceability, netting, and finality
- Key legal documents and framework:
  - Civil and Commercial Code; Securities and Exchange Act B.E. 2535 (SEA) (Sections 50–55,199, 224–228); Public Limited Company Act B.E. 2535; SET and TSD notifications, rules and regulations; agreements between members and TSD; BAHTNET Rules and Regulations B.E. 2549; Bankruptcy Act B.E. 2483.
  - Laws, regulations, rules and procedures governing operations of TSD are public and accessible; participant documentation available on request and on TSD website; Ministry of Commerce (MOC), SEC and BOT regulations accessible on their websites.
- Enforceability and customer asset protection:
  - Contractual arrangements between TSD and participants are fully enforceable under the Civil and Commercial Code.
  - Participants sign contracts binding them to TSD Regulations; TSD Regulations can be enforced through legal action.
  - Law requires segregation of customers’ assets from intermediaries’ assets; intermediaries must maintain internal accounting systems to identify customer holdings at any time.
  - TSD required to separate its own holdings from those of participants.
- Immobilization / dematerialization:
  - Immobilization by book entry in accordance with Sections 225–228 of the SEA; transfer by book entry deemed delivery under Section 199 and Section 51 of the SEA.
  - Securities in TSD name presumed held by TSD on behalf of members/customers.
  - No explicit legislation for dematerialization.
- Netting, securities lending, finality:
  - TSD acts as central counterparty (CCP) for multilateral netting prior to settlement.
  - Netting enforceable under Sections 341–348 of the Civil and Commercial Code and Section 102 of the Bankruptcy Act B.E. 2483.
  - Section 102 allows netting only if indebtedness incurred before the date of the receivership order; TSD may not net obligations of an insolvent participant which arise on that date.
  - Securities lending and collateralization require outright transfer of legal title per SEC rule.
  - TSD rules state timing and method of finality; transfer of funds enforced by BOT regulation.
  - No explicit legal protection for settlement finality; court can reverse transfers under Section 115 of the Bankruptcy Act for transfers during the three months prior to an application to adjudicate bankrupt where intent to give undue preference is found.
- Delivery versus Payment (DVP) and cross-border:
  - TSD rule requires all securities transactions to be settled on a DVP basis.
  - No cross-border participation in TSD; conflict of law issues not applicable.
- Assessment:
  - Broadly observed
- Recommendation:
  - Implement adequate legal measures to ensure netting arrangements are legally protected even in the event of participant insolvency.

### Recommendation 2 — Trade confirmation timing
- Direct participants:
  - For regulated markets, trade confirmation and matching required prior to settlement; trade confirmation between direct participants takes place on trade date (T+0).
  - For OTC transactions, 90 percent of trade is confirmed on T+0.
- Indirect participants:
  - Trade confirmations between direct and indirect participants are not mandatory.
  - For equities and bonds, confirmation between direct and indirect participants takes place between T+0 and T+3; general practice is direct participants issue confirmation within T+1.
  - If neither party confirms, TSD will settle via direct market participants.
- Assessment:
  - Observed

### Recommendation 3 — Rolling settlement, settlement cycle, failed trades, and discipline
- Settlement cycles:
  - Equities: T+3.
  - Government and corporate bonds: T+2.
  - OTC trades: negotiable, majority settled on T+2.
- Failed settlements and statistics (2006):
  - 1,120 failed transactions on T+3, or 0.0037 percent of trading transactions or 0.0456 percent of netting transactions.
  - Settlement failure value amounted to B 3,991 million, or 0.1 percent of trading value or 0.5750 percent of net settlement value.
- Early 2007 (after GPF as lender of last resort):
  - Reported reductions in failed trade proportions; standalone figures referenced: 0.02 percent of trading value or 0.14 percent of netting value.
- Settlement discipline, buy‑ins and incentives:
  - TSD rules require clearing members who fail to settle on contractual date to contribute to the clearing fund in a greater amount.
  - Open positions: required to be closed through securities borrowing and lending facility on T+3.
  - Buy‑in procedure:
    - If not closed by T+3, buy‑in on T+4 where buy‑in prices = closing prices of the previous day plus five spreads or current best bid, whichever is higher.
    - If not available, buy‑in bids may linger up to four days with addition of two spreads on previous buy‑in price or closing price of previous day or current best bid, whichever is higher (until T+7).
    - After T+7, defaulting member must settle in cash with penalty fees.
- Monitoring and mitigation of fails:
  - Two-step mitigation:
    1. Settlement cap monitoring: settlement cap = maximum pending settlement value for 3 days; must be no more than 8 times net capital level as required by the SEC; if exposure exceeds, TSD will call collateral in cash for exceeding limit.
    2. Early warning systems: loss probability calculated by value–at‑risk method; if loss probability more than 5 percent of confidence interval, member required to place collateral with TSD; financial surveillance uses statistical tools to predict members’ future financial status.
- Shorter settlement cycle analysis:
  - "STP Business Case Study" concluded straight‑through processing would reduce manual interventions and bring about shorter settlement cycle, decreasing operational risk by approximately 15 percent.
  - Study did not evaluate cost and benefit of the shorter cycle.
- CCP assessment and netting:
  - TSD acts as CCP for equities matched at the SET; no CCP for bonds transactions.
  - No cost‑benefit analysis carried out to assess whether CCP should be introduced for bonds.
  - Netting carried out on novation basis; enforceable under Sections 341–348 of the Civil and Commercial Code and Section 102 of the Bankruptcy Act B.E. 2483; Section 102 limitation noted above.
- Assessment:
  - (Assessment text for Recommendation 3 not included in supplied content)
- Recommendation:
  - TSD should abolish debit balances in securities (see Overdrafts / debit balances).

### Securities lending and borrowing (SBL)
- Institutional and regulatory framework:
  - Anyone except TSD intending to conduct lending business must apply for a license.
  - Royal Decree on tax issues for SBL transactions announced.
  - ICAAT accounting guideline since August 2003 based on IAS No. 39 and FASB No.140.
  - Securities lending transactions and collateral are exempted from tax exemption; clear tax treatment guidelines exist.
- Automated securities lending facility:
  - Centralized automated facility established; TSD assumes role of principal when providing securities.
  - Borrowers: general members (brokers); lenders: depository members, institutional investors, mutual funds, private funds and GPF.
  - GPF agreed to be lender of last resort from February 1, 2007.
- Supervision and restrictions:
  - SEC regulates and supervises SBL; license required; onsite examinations performed; capital, reserve and internal control requirements apply.
  - Nonresident investors are not allowed to borrow securities through commercial banks acting as intermediaries/custodians.
  - Nonresident investors must place only foreign currency as collateral when acting as securities lender.
  - Offshore securities lending between nonresidents in Thailand securities is reported to be very active and substantial.
- Assessment:
  - TSD has introduced SBL facilities but activity relatively negligible; no active repurchase agreement market.

### Dematerialization, immobilization, and registrar interaction
- Legal and operational status:
  - Legal framework allows physical issuance; no legal framework for dematerialization.
  - Around 74 percent of listed securities and 70 percent of government bonds are immobilized.
  - TSD operates indirect account holding system; TSD acts as nominee and transfers occur when recorded in TSD books and intermediaries are notified.
  - For government bonds, BOT acts as registrar; TSD acts as CSD; transfers in CSD have no effect on BOT registration until TSD notifies registrar on closing date.
- Comment and recommendation:
  - Relatively high share of securities still transferred physically; SEC and BOT should explore regulatory framework for dematerialized securities.

### DVP, RTGS, net settlement, and settlement bank risk
- Technical and timing arrangements:
  - DVP settlement in TSD regulations; TSD may suspend transfers/payments for defaulting members.
  - Two DVP modalities: Real Time Gross Settlement (RTGS) and Net Settlement.
  - Cash settlement in central bank money via BAHTNET operated by BOT.
  - One net settlement batch executed at 2:15 p.m.; RTGS available 8:00am and 5:00 p.m.
  - RTGS procedures for bonds:
    a) check seller’s securities account and place accounting block if available until cash settlement completed;
    b) if seller’s securities account insufficient, TSD will not send payment instruction to BOT;
    c) if insufficient availability in BOT account, transaction routed to queuing system; if cancelled from BAHTNET, RTGS deletes transaction and removes block.
- Finality:
  - RTGS allows real time finality after execution of DVP.
  - For net batch, finality achieved at 2:00 p.m.
  - Transactions received after 2:00 p.m. requiring same‑day delivery are settled by RTGS.
  - TSD does not allow unilateral revocation of unsettled transfer instructions late in the settlement day.
- Settlement bank structure and same‑day funds:
  - Multi‑tiered structure: banks with BOT accounts settle in central bank money; participants without BOT accounts rely on banks.
  - Three settlement banks and market shares of cash settlement: Siam Commercial Bank 65 percent, Krung Thailand Bank 25 percent, Bangkok Bank 10 percent.
  - No specific rules by TSD, BOT or SEC for settlement agents’ financial soundness; settlement agents are banks supervised by BOT.
  - MOU between BOT and SEC: BOT will inform SEC of settlement agent financial difficulties; SEC can pass information to TSD.
  - Proceeds of securities settlements can be used immediately when credited; participants can transfer to clients via Automatic Transfer System for Securities Settlement (ATS) on the same day.

### Risk controls, collateral, limits, and stress testing
- Limits and default resources:
  - TSD limits credit extension of each member to not more than eight times of each member’s net capital value; can call for collateral fully when exposure exceeds settlement cap.
  - As CCP, TSD uses credit line from settlement bank, borrowing and buy‑in processes, clearing fund and reserve fund from SET.
  - Outstanding balances marked to market daily.
- Stress testing:
  - Assumptions: 99 percent confidence level; maximum loss caused by failure of 14 members; volatility of SET index is at 2.65.
  - Result: possible maximum loss equals to B 1,860 million at the daily trading volume of B 74,000 million and the clearing fund can cover multiple failures during the most volatile period.

### Overdrafts / debit balances (equities)
- Historical levels:
  - 2006: debit balances were 0.1 percent of trading value or 0.57 percent of netting value or 0.05 percent of netting transactions.
  - Since February 2007: debit balances declined to 0.02 percent of trading value or 0.14 percent of netting value as of February 28, 2007.
- Recommendation:
  - TSD should abolish debit balances in securities.

### Operational risk, contingency, capacity, and audits
- Operational resilience:
  - Risk management department of SET identifies and manages operational risks for TSD; operational manuals and periodic policy reviews exist.
  - Contingency and Disaster Recovery Plans exist with multiple contingency levels; procedures, databases and messages duplicated across two sites; secondary site activated for whole‑system failures.
  - TSD can resume operations within a maximum period of less than one hour.
  - Contingency plan tested once a year; intermediaries involved.
  - Security measures for integrity, authentication, confidentiality and nonrepudiation in place; firewalls protect systems.
  - Key systems had no failure during 2004–2006.
  - Total current capacity utilized around 60 percent.
  - New Post Trade Integration system expected to be launched in Q3 of 2007.
- Audits and recommendation:
  - Business continuity plans reviewed by SET internal audit and external auditors (PricewaterhouseCoopers).
  - Recommendation: SEC should receive copies of internal and external audits of TSD policy and procedures to handle operational risk.

### Custody, segregation, protection of customer assets, and supervision
- Legal and operational safeguards:
  - TSD regulation obliges participants to segregate assets from customers.
  - Intermediaries must reconcile securities daily for book entry and monthly for immobilized securities.
  - Internal audits by intermediaries to ensure sufficiency of securities to satisfy customer claims.
- Supervision:
  - SEC performs onsite examinations periodically; custodian banks are supervised by BOT.
- Recommendation:
  - SEC and BOT should cooperate to ensure custodian banks implement measures to protect customer assets.

### Governance, access, pricing, communication standards, transparency, and oversight
- Governance:
  - TSD is a subsidiary of SET; Board composed of 11 members including SET representatives and five external experts.
  - Majority of board members are nominated by SET; SEC supervisory power over TSD is limited and indirect via SET board.
  - Recommendation: strengthen governance by appointing more independent board members and reduce SET regulation power over TSD.
- Access:
  - Access criteria are objective and disclosed; TSD accepts only direct participants located in Thailand.
  - Exit criteria publicly available; members must complete obligations before exit.
  - Comment: TSD may consider opening to foreign participants with appropriate risk management.
- Pricing and cost‑effectiveness:
  - TSD settlement fees integrated into SET aggregated fees; large share of TSD costs covered by registrar and custody revenues.
  - Risk of cross‑subsidizing: customers using only custody services may subsidize settlement function.
  - TSD does not regularly benchmark prices against other CSDs; recommendation to separate pricing from SET and review pricing against costs.
- International communication standards:
  - TSD uses proprietary communication network for SET‑listed securities; network does not offer high level of data transfer protection and conversion to international standards is difficult.
  - For government bonds, SWIFT messages are used; TSD subscribed to SWIFTNET and linked to BOT.
  - Post‑trade integrated platform in process that will use international procedures and standards; recommendation to enhance proprietary network to meet international standards.
- Disclosure:
  - Laws, regulations, system rules and fees are part of contractual agreements and available on TSD website.
  - TSD completed CPSS/IOSCO disclosure framework questionnaire but has not disclosed answers publicly; SEC intends to publish key question answers on SEC website.
- Regulatory and oversight framework and resources:
  - Under the SEA, SEC powers include granting clearinghouse license (Section 219), determining clearinghouse rules (Section 223), approving operating rules (Section 224), and restricting TSD clearinghouse activities via SET board (Section 186).
  - SEC does not have legal power to directly regulate and supervise TSD; must rely on SET.
  - TSD is not subject to BOT oversight; BOT lacks clear policies and objectives for securities clearing and settlement systems.
  - SEC staffing: 421 staff; 23 percent with degrees in finance, 17 percent in accountancy, remainder in laws and economy.
  - SEC has sufficient funding and a permanent endowment for budget shortfalls.
  - MOU between SEC and BOT exists but cooperation has not been implemented.
- Recommended actions:
  - SEC should have legal power to directly regulate and supervise TSD without involvement of SET Board.
  - BOT should assume oversight responsibility of TSD and set up a dedicated team.
  - SEC and BOT should develop a cooperation framework specifying responsibilities, areas of common interest and information exchange (e.g., BOT responsible for systemic risk containment; SEC responsible for conduct, investor protection, governance, access and transparency).
  - SEC and BOT should enhance staff capacity by setting up dedicated teams and providing specific courses, seminars and on‑job training.
  - TSD should separate pricing from SET and regularly benchmark prices against costs.
  - Governance should be strengthened by appointing more independent board members and removing SET regulation power over TSD.
  - TSD should enhance proprietary network to meet international procedures and standards and publish CPSS/IOSCO disclosure framework responses.

### Cross‑border links
- TSD does not have cross‑border links to foreign CSDs.
- Assessment: Not applicable.

*Source: _cr09150 - 0.02 percent of trading value or 0.14 percent of netting value.*

### 1.   Detailed Assessment of Observance of Thailand Securities Depositories (TSD)

### 1.   Detailed Assessment of Observance of Thailand Securities Depositories (TSD) of the Committee of Payment and Settlement Systems (CPSS)-International Organization of Securities Commission (IOSCO) Recommendations for Securities Settlement System (RSSS)

### Recommendation 1. Securities settlement systems should have a well-founded, clear and transparent legal basis in the relevant jurisdiction.
- Description
  - Accessibility of the regulatory framework
    - The laws, regulations, rules and procedures governing the operations and activities of TSD are public and accessible to participants.
    - Participants receive comprehensive documentation covering the rules, requirements, procedures and instructions of TSD. This documentation is available on request and is accessible on the TSD website.
    - The public authorities’ regulations are also available to the general public on the websites of the Ministry of Commerce (MOC), the Securities and Exchange Commission (SEC) and the Bank of Thailand (BOT).
  - Legal basis
    - The securities clearing and settlement activities in Thailand are governed and regulated by specifically issued laws and regulations and by provisions in other legislations and regulations. The main laws and regulations are:
      - The Civil and Commercial Code: (e.g., provisions governing juristic acts, obligations, contracts);
      - The Securities and Exchange Act B.E. 2535 (SEA) (Sections 50–55,199, 224–228);
      - The Public Limited Company Act B.E. 2535;
      - The notifications, rules, and regulations issued by the Stock Exchange of Thailand (SET), and the TSD;
      - The agreement between members and the TSD as a central securities depository (CSD) and a clearinghouse;
      - BAHTNET Rules and Regulations B.E. 2549; and
      - The Bankruptcy Act B.E. 2483.
  - (a) Enforceability of transactions
    - The contractual arrangements between TSD and its participants are fully enforceable under the Civil and Commercial Code.
    - Each participant signs a contract with the TSD, which binds the participant to the TSD Regulations. TSD Regulations can be enforced through a legal action.
  - (b) Customer assets protection
    - The law and regulation requires a clear segregation and application of the customers assets from those of the intermediaries.
    - At the level of the CSD, an intermediary is obliged to separate between its securities holdings and customers’ holdings.
    - TSD is also required to separate between its own securities holdings and the assets of its participants.
    - Entities acting as custodians such as banks, investment firms and other financial intermediaries are legally obliged to have an internal accounting system that allows the identification of the holdings of their customers at anytime.
  - (c) Immobilization and dematerialization of securities
    - In accordance with Sections 225–228 of the SEA, immobilization in the TSD system has been arranged through the transfer of securities by book entry.
    - The transfer of securities by book entry shall be deemed to be the delivery of securities which constitutes the legal basis for the validity of securities transfer under Section 199 and Section 51 of the SEA.
    - Securities transferred into the name of the TSD shall be presumed to be securities held by the TSD on behalf of its members or for any customers of its members.
    - However, there is no explicit legislation for the dematerialization of securities.
  - (d) Netting arrangements
    - TSD assumes the role of central counterparty (CCP) for multilateral netting procedure that takes place before the settlement is executed.
    - This netting arrangement is enforceable under Sections 341–348 of the Civil and Commercial Code and Section 102 of the Bankruptcy Act B.E. 2483.
    - Since Section 102 of the Bankruptcy Act allows netting of obligations only if the cause of indebtedness incurred before the date of the receivership order, the TSD may not net its obligations against the obligations of the insolvent participant which arise on that date.
  - (e) Securities lending arrangements
    - Securities lending and collateralization arrangements are based on the outright transfer of securities.
    - The SEC rule requires the transfer of the legal title in securities borrowed from the lender to the borrower, and the legal title in collateral is transferred from the borrower to the lender.
  - (f) Finality of settlement
    - TSD rule clearly states the timing of finality and the way finality is achieved.
    - The transfer of funds is enforced by the BOT regulation.
    - There is no explicit legal protection for settlement finality. It can be challenged by a court decision.
    - In accordance with Section 115 of the Bankruptcy Act, the court is empowered to reverse the debtor’s transfer of assets during the three months prior to an application to adjudicate him as bankrupt and thereafter if the court finds that the debtor transfers such assets with the intention to give undue preference to a creditor.
    - Thus, if the court orders receivership of a clearing house member or a settlement bank, the court may cancel the transfer of funds and securities made during that period if the official receiver is able to prove that the transfer has been made by the debtor with the intention to cause other creditors a disadvantage.
  - (g) Delivery versus payment (DVP)
    - TSD rule clearly states that all securities transactions must be settled on a DVP basis.
  - Challenges by a court
    - No court case has yet occurred.
  - Enforceability of rules and regulations in the event of a bankruptcy
    - There is no explicit legal protection of the netting procedures as well as the settlement finality when insolvency is involved.
    - Consequently, it cannot be ruled out that transactions settled in TSD will be protected against a court decision in the event a participant becomes insolvent.
  - Cross-border participation
    - There is no cross-border participation in TSD.
  - Conflict of law issues
    - Not applicable
- Assessment
  - Broadly observed
- Comments
  - For the observance of this recommendation, it is recommended to implement adequate legal measures that ensure the netting arrangement is legally protected even in the event of the insolvency of a participant.

### Recommendation 2. Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.
- Description
  - Direct participants
    - Regulated markets (e.g., equities, government and private bonds)
      - For transactions traded on regulated markets, trade confirmation and matching is required prior to the settlement.
      - Trade confirmation between direct participants take place on trade date.
    - Over-the-counter (OTC) markets
      - For OTC transaction, 90 percent of trade is confirmed on T+0.
  - Indirect participants
    - Trade confirmations between direct and indirect market participants are not mandatory.
    - For settlement of equities and bonds, trade confirmation between direct and indirect participants takes place between T+0 and T+3.
    - As a general practice, direct participants will issue confirmation document within T+1.
    - If either of them does not confirm the settlement instructions, the TSD will settle such transactions through direct market participants directly.
    - For settlement of bonds traded via the trading system confirmation between direct and indirect participants takes place between T+0 and T+3.
- Assessment
  - Observed
- Comments
  - (no additional comments provided in source)

### Recommendation 3. Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed.
- Description
  - Settlement cycles
    - Trade transactions are settled on a rolling basis in the regulated market. The settlement cycles are as follows:
      - Equities: T+3.
      - Government and corporate bonds: T+2.
    - OTC trades: negotiable between the involved counterparties, but the majority of these transactions are settled on T+2.
  - Failed trades and facilities to smooth the settlement process
    - For the year 2006, the number of failed settlements was very small.
    - There were 1,120 failed transactions on T+3, or 0.0037 percent of trading transactions or 0.0456 percent of netting transactions.
    - In terms of value of trades, settlement failure amounted to B 3,991 million, or 0.1 percent of trading value or 0.5750 percent of net settlement value.
    - For the first three months of 2007, after the Government Pension Fund (GPF) became the lender of last resort for the system, the proportion of failed trades has lowered to
- Assessment
  - (assessment text for Recommendation 3 not included in supplied content)

*Detailed Assessment of Observance of Thailand Securities Depositories (TSD) of the CPSS-IOSCO Recommendations for Securities Settlement Systems (excerpts).*

### 0.02 percent of trading value or 0.14 percent of netting value.

### _cr09150 - 0.02 percent of trading value or 0.14 percent of netting value.

### Settlement discipline, buy‑ins and incentives to settle on time
- TSD rules require clearing members who fail to settle on the contractual date to contribute to the clearing fund in a greater amount than those who can settle on the contractual date.
- Open positions:
  - Required to be closed out through securities borrowing and lending facility on T+3.
  - If not closed by T+3, a buy‑in method on T+4 is used, where buy‑in prices = closing prices of the previous day plus five spreads or current best bid, whichever is higher.
  - If security not available for buy‑in, buy‑in bids may linger up to four days with an addition of two spreads on the previous buy‑in price or closing price of the previous day or current best bid, whichever is higher (until T+7).
  - After T+7, if no offer, the defaulting member must settle in cash together with penalty fees.

### Monitoring and mitigation of fails
- Two-step mitigation:
  1. Settlement cap monitoring:
     - Settlement cap = maximum pending settlement value for 3 days.
     - Must be no more than 8 times of net capital level as required by the SEC.
     - If exposure exceeds limit, TSD will call collateral in cash for the exceeding limit.
  2. Early warning systems:
     - Loss probability calculated by value–at‑risk method.
     - If a member has the loss probability more than 5 percent of confidence interval, that member is required to place collateral with the TSD.
     - Financial surveillance system uses statistical tools to predict members’ future financial status.

### Shorter settlement cycle analysis
- "STP Business Case Study" concluded straight‑through processing would reduce manual interventions and bring about shorter settlement cycle, which can result in a decrease in operational risk by approximately 15 percent.
- Study did not evaluate cost and benefit of the shorter cycle.

### Central counterparty (CCP) assessment and netting
- TSD acts as CCP for equities matched at the SET; no CCP for bonds transactions.
- No cost‑benefit analysis has been carried out to assess whether CCP should be introduced for bonds transactions.
- Netting arrangements:
  - Carried out on a novation basis; TSD interposes itself between clearing members.
  - Enforceable under Sections 341–348 of the Civil and Commercial Code and Section 102 of the Bankruptcy Act B.E. 2483.
  - Section 102 allows netting only if cause of indebtedness incurred before the date of the receivership order; TSD may not net obligations of an insolvent participant which arise on that date.

### Securities lending and borrowing (SBL)
- Institutional framework:
  - Anyone except TSD intending to conduct lending business must apply for a license.
  - Royal Decree on tax issues for SBL transactions announced.
  - ICAAT issued accounting guideline since August 2003 based on IAS No. 39 and FASB No.140.
  - Securities lending transactions and collateral are exempted from tax exemption; clear tax treatment guidelines exist.
- Automated securities lending facility:
  - TSD established centralized automated securities lending facility activated in case of securities shortage.
  - TSD assumes role of principal when providing securities; borrowers are general members (brokers); lenders include depository members, institutional investors, mutual funds, private funds and GPF.
  - GPF agreed to be lender of last resort from February 1, 2007.
- Supervision:
  - SEC regulates and supervises SBL; license required; onsite examinations performed; capital, reserve and internal control requirements apply.
- Observed restriction:
  - Nonresident investors are not allowed to borrow securities through commercial banks acting as intermediaries/custodians.
  - Nonresident investors must place only foreign currency as collateral when acting as securities lender.
  - Offshore securities lending between nonresidents in Thailand securities is reported to be very active and substantial.

### Dematerialization and immobilization
- Legal framework allows physical issuance; no legal framework for dematerialization.
- Around 74 percent of listed securities and 70 percent of government bonds are immobilized.
- TSD operates an indirect account holding system; TSD acts as nominee and transfers occur when recorded in TSD books and intermediaries are notified.
- For government bonds, BOT acts as registrar while TSD acts as CSD; transfers in CSD have no effect on BOT registration until TSD notifies registrar on closing date.
- Comment: A relatively high share of securities still transferred physically; recommendation that SEC and BOT explore regulatory framework for dematerialized securities.

### Delivery versus Payment (DVP), RTGS and net settlement
- Legal and technical framework:
  - DVP settlement set out in TSD regulations; TSD may suspend transfers/payments for defaulting members.
  - Two DVP modalities: Real Time Gross Settlement (RTGS) and Net Settlement (both cash and securities netted).
  - Settlement of securities by book entry at TSD; cash settlement in central bank money via BAHTNET operated by BOT.
- System timings:
  - One net settlement batch executed at 2:15 p.m.
  - RTGS available 8:00am and 5:00 p.m.
  - RTGS procedures for bonds:
    a) checks seller’s securities account and places accounting block if available until cash settlement completed;
    b) if seller’s securities account insufficient, TSD will not send payment instruction to BOT;
    c) if insufficient availability in BOT account, transaction routed to queuing system; if cancelled from BATHNET, RTGS deletes transaction and removes block.
- Intraday and finality:
  - RTGS allows real time finality after execution of DVP.
  - For net batch, finality achieved at 2:00 p.m.
  - Transactions received after 2:00 p.m. requiring same‑day delivery are settled by RTGS.
  - TSD does not allow unilateral revocation of unsettled transfer instructions late in the settlement day.

### Risk controls, collateral, limits and stress testing
- Settlement limits and liquidity:
  - TSD limits credit extension of each member to not more than eight times of each member’s net capital value.
  - TSD can call for collateral fully when member’s exposure exceeds the settlement cap.
- Resources for default management:
  - As CCP, TSD uses credit line from settlement bank, borrowing and buy‑in processes, clearing fund and reserve fund from SET.
  - Outstanding balances are marked to market daily.
- Stress testing:
  - Stress test assumptions: 99 percent confidence level; maximum loss caused by failure of 14 members; volatility of SET index is at 2.65.
  - Result: possible maximum loss equals to B 1,860 million at the daily trading volume of B 74,000 million and the clearing fund can cover multiple failures during the most volatile period.

### Overdrafts / debit balances (equities)
- Historical levels:
  - Debit balances were 0.1 percent of trading value or 0.57 percent of netting value or 0.05 percent of netting transactions in 2006.
  - Since February 2007, debit balances declined to 0.02 percent of trading value or 0.14 percent of netting value as of February 28, 2007.
- Assessment:
  - Recommendation: For observance of the relevant recommendation, TSD should abolish debit balances in securities.

### Settlement bank structure and same‑day funds
- Multi‑tiered structure:
  - Banks with BOT accounts settle in central bank money; participants without BOT accounts rely on banks.
  - Three settlement banks: Siam Commercial Bank, Krung Thailand Bank and Bangkok Bank with shares of cash settlement 65, 25, and 10 percent, respectively.
- Safeguards:
  - No specific rules by TSD, BOT or SEC for settlement agents’ financial soundness, but settlement agents are banks supervised by BOT.
  - MOU between BOT and SEC: BOT will inform SEC of any financial difficulties faced by a settlement agent; SEC can pass information to TSD.
- Same day use:
  - Proceeds of securities settlements can be used immediately when credited; participants can transfer to clients via Automatic Transfer System for Securities Settlement (ATS) on the same day.

### Operational risk, contingency and capacity
- Operational risk governance:
  - Risk management department of SET identifies and manages operational risks for TSD; operational manuals and periodic policy reviews exist.
- Contingency and backup:
  - Contingency plans and Disaster Recovery Plan exist; different contingency levels defined.
  - Procedures, databases and messages duplicated across two sites; secondary site activated for whole‑system failures.
  - TSD can resume operations within a maximum period of less than one hour.
  - Contingency plan tested once a year; intermediaries involved in testing.
- Security and scalability:
  - Measures for integrity, authentication, confidentiality and nonrepudiation in place; firewalls protect systems.
  - Key systems had no failure during 2004–2006.
  - Total current capacity utilized around 60 percent.
  - New Post Trade Integration system expected to be launched in Q3 of 2007.
- Audits:
  - Business continuity plans reviewed by SET internal audit and external auditors (PricewaterhouseCoopers).
- Recommendation:
  - SEC should receive a copy of the internal and external audit of TSD policy and procedures to handle operational risk.

### Custody, segregation and protection of customer assets
- Legal and operational safeguards:
  - TSD regulation obliges participants to segregate assets from customers.
  - Intermediaries must reconcile securities daily for book entry and monthly for immobilized securities.
  - Internal audits by intermediaries to ensure sufficiency of securities to satisfy customer claims.
- Supervision:
  - SEC performs onsite examinations periodically; custodian banks are supervised by BOT.
- Recommendation:
  - SEC and BOT should cooperate to ensure custodian banks implement measures to protect customer assets.

### Governance, access, pricing and international standards
- Governance:
  - TSD is a subsidiary of SET; Board composed of 11 members including SET representatives and five external experts.
  - Majority of board members are nominated by SET; SEC supervisory power over TSD is limited and indirect via SET board.
  - Recommendation: strengthen governance by appointing more independent board members and reduce SET regulation power over TSD.
- Access:
  - Access criteria are objective and disclosed; TSD accepts only direct participants located in Thailand.
  - Exit criteria publicly available; members must complete obligations before exit.
  - Comment: TSD may consider opening to foreign participants with appropriate risk management.
- Pricing and cost‑effectiveness:
  - TSD settlement fees integrated into SET aggregated fees; large share of TSD costs covered by registrar and custody revenues.
  - Risk of cross‑subsidizing: customers using only custody services may subsidize settlement function.
  - TSD does not regularly benchmark prices against other CSDs; recommendation to separate pricing from SET and review pricing against costs.
- International communication standards:
  - TSD uses proprietary communication network for SET‑listed securities; network does not offer high level of data transfer protection and conversion to international standards is difficult.
  - For government bonds, SWIFT messages are used; TSD subscribed to SWIFTNET and linked to BOT.
  - Post‑trade integrated platform in process that will use international procedures and standards; recommendation to enhance proprietary network to meet international standards.

### Disclosure, regulation and oversight
- Disclosure:
  - Laws, regulations, system rules and fees are part of contractual agreements and available on TSD website.
  - TSD completed CPSS/IOSCO disclosure framework questionnaire but has not disclosed answers to the public; SEC intends to publish key question answers on SEC website.
- Regulatory and oversight framework:
  - Under the SEA, SEC powers include granting clearinghouse license (Section 219), determining clearinghouse rules (Section 223), approving operating rules (Section 224), and restricting TSD clearinghouse activities via SET board (Section 186).
  - SEC does not have legal power to directly regulate and supervise TSD; must rely on SET.
  - TSD is not subject to BOT oversight; BOT lacks clear policies and objectives for securities clearing and settlement systems.
- Resources and cooperation:
  - SEC has 421 staff: 23 percent with degrees in finance, 17 percent in accountancy, remainder in laws and economy.
  - SEC has sufficient funding and a permanent endowment for budget shortfalls.
  - MOU between SEC and BOT exists but cooperation has not been implemented.
- Recommendations to achieve observance:
  - SEC should have legal power to directly regulate and supervise TSD without involvement of SET Board.
  - BOT should assume oversight responsibility of TSD and set up a dedicated team.
  - SEC and BOT should develop cooperation framework specifying responsibilities, areas of common interest and information exchange (e.g., BOT responsible for systemic risk containment; SEC responsible for conduct, investor protection, governance, access and transparency).
  - SEC and BOT should enhance staff capacity by setting up dedicated teams and providing specific courses, seminars and on‑job training.

### Cross‑border links
- TSD does not have cross‑border links to foreign CSDs. Assessment: Not applicable.

*Source: _cr09150 - 0.02 percent of trading value or 0.14 percent of netting value.*

### 1. Securities settlement systems should

### 1. Securities settlement systems should

### Legal basis and netting
- Requirement: Securities settlement systems should have a well-founded, clear and transparent legal basis in the relevant jurisdiction.
- Assessment:
  - BO The contractual arrangements between TSD and its participants are fully enforceable under the Civil and Commercial Code. Netting arrangements can be challenged in the event of bankruptcy.
- Recommended action:
  - Adequate legal measures should be implemented as soon as possible to ensure that the netting arrangement is legally protected even in the event of the insolvency of a participant.

### Pre-settlement risk: trade confirmation and settlement cycle
- Requirements:
  - Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than the trade date (T+0). Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.
  - Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed.
  - The benefits and costs of a central counterparty should be assessed. Where such a mechanism is introduced, the central counterparty should rigorously control the risks it assumes.
- Assessments and observations:
  - O Trade confirmation for regulated markets occurs the say day between direct participants, while it is not mandatory for indirect participants. For OTC transactions, market convention is to confirm the trade the same date. However, market participants may agree to confirm at a later stage.
  - O Trade transactions are settled on a rolling basis in the regulated market and the settlement cycle for equities is T+3 and for debt instrument T+2. The settlement date for OTC transactions is negotiable, but the current convention is to settle on T+2.
  - BO TSD acts as a CCP for equities. No costs benefit analysis has been done for introducing CCP for debt instruments.
  - The risk management procedures of TSD as a CCP have not yet been assessed against the CPSS/IOSCO recommendations for CCP.
  - The CCP activities are currently not subject to the regulation and supervision of the SEC.
- Recommended actions:
  - A cost-benefit analysis should be carried out aimed at assessing whether CCP should be introduced for debt instruments transactions.
  - As an immediate measure, the CCP activities should be subject to the regulation and supervision of the SEC.
  - SEC is encouraged to assess the CCP function of TSD against the CPSS/IOSCO Recommendations for CCP.

### Securities lending and borrowing
- Requirement: Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged to expedite settlement; barriers should be removed.
- Assessment:
  - O TSD has introduced securities lending and borrowing facilities, although the activity is relatively negligible. Furthermore, there is no active securities lending market, such as a repurchase agreement in Thailand.

### Settlement risk: immobilization, DVP, finality, intraday credit, settlement bank risk
- Requirements:
  - Securities should be immobilized or dematerialized and transferred by book entry in CSD to the greatest extent possible.
  - Securities settlement systems should eliminate principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment.
  - Final settlement on a DVP basis should occur no later than the end of the settlement day. Intra-day or real-time finality should be provided where necessary to reduce risks.
  - CSDs that extend intraday credit to participants should institute risk controls (collateral and limits) to ensure timely settlement if the largest debtor fails.
  - Assets used to settle the cash leg should carry little or no credit risk; if Central Bank money is not used, steps must be taken to protect CSD members from losses and liquidity pressures arising from the failure of a settlement bank.
- Assessments and observations:
  - O A relatively high share of securities is still transferred in physical form. This increases the level of risk and settlement costs as well as reduces efficiency. Immobilization and, in particular, dematerialization of securities and their transfer by book entry would significantly reduce costs and increase the efficiency of settlement and custody.
  - O TSD provides DVP facility for the execution of settlement.
  - O TSD provides both intraday and end-of-day settlement finality.
  - NO TSD permits debit balances in securities. This means securities which have not yet been delivered to the system are booked on the accounts of the participants.
  - In addition, the CSD functions—registration, settlement and custody—are integrated with the CCP function of TSD. This means that CSD is exposed to the principle risk inherited in CCP activities. As best practice, the CCP function is separated from the CSD functions, and the former one is provided by a distinct legal entity.
  - O The cash leg of the transactions is settled in central bank money. However, the settlement risk is concentrated in the three major banks.
- Recommended actions:
  - SEC together with the BOT should explore the possibility to develop a regulatory framework for dematerialized securities.
  - TSD should abolish debit balances in securities.
  - In order to protect the CSD from any contagious risk inherited in CCP activities, it should consider separating the CCP function from the CSD function, by setting up a distinct legal entity that provides CCP services.

### Operational risk
- Requirement: Systems should be reliable and secure, with adequate, scalable capacity; contingency plans and back-up facilities should allow timely recovery and completion of settlement.
- Assessment:
  - O TSD has adequate measures in place in order to identify and monitor operational risk. It also has developed a contingency plan that ensures the system can resume on short notice and the information can be retrieved. The procedures are tested on a regular basis and market participants are involved in the testing.
- Recommended action:
  - SEC should receive a copy of the internal and external audit of TSD policy and procedures to handle operational risk.

### Custody risk
- Requirement: Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers' securities; customers' securities must be protected against the claims of a custodian's creditors.
- Assessment:
  - O Adequate measures and arrangements are in place to ensure the protection of the customers’ securities. In particular, the regulation of TSD obliges the participants to segregate their assets from those of the customers and reconciliation is done on a regular basis.
- Recommended action:
  - SEC and BOT should cooperate in order to ensure that custodian banks are implementing the necessary measures to protect the customer’s assets.

### Governance, access, pricing, standards, transparency, oversight, and links
- Requirements:
  - Governance arrangements for CSDs and CCPs should fulfill public interest requirements and promote objectives of owners and users.
  - CSDs and CCPs should have objectives and publicly disclosed criteria for participation that permit fair and open access.
  - RSSS should be cost-effective while maintaining safety and security.
  - Systems should use or accommodate relevant international communication procedures and standards for cross-border transactions.
  - CSDs and CCPs should provide sufficient information for participants to identify risks and costs.
  - Securities settlement systems should be subject to regulation and oversight; responsibilities and objectives of securities regulator and central bank should be clearly defined and publicly disclosed.
  - CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlement.
- Assessments and observations:
  - BO SET appoints the majority of the TSD board and defines its policy and objectives. SET has also the power to specify the issues, conditions and procedures of TSD. This create a conflict of interest, as the interest of SET may not be compatible with that of TSD, which also provides settlement and custody services to non trading members.
  - O The access and exit criteria are clearly defined and publicly disclosed. TSD accepts only direct participants located in Thailand. This is justified by the need to limit the system’s exposure to the risks associated with cross-border activities.
  - NO TSD’s settlement and custody fees are integrated in the aggregated fees collected by the parent company, SET. These fees cover trading, clearing, settlement and custody services. Consequently, TSD is not able to benchmark its prices against other CSDs in the region. TSD service levels are reviewed annually by surveying users.
  - PO TSD uses proprietary communication network for securities listed on the SET. This network does not offer a high level of data transfer protection and the data can be converted into international standards with considerable difficulty. For government bonds, SWIFT message is used.
  - O Laws, regulations, systems’ rules, and fees are part of the contractual agreements that are to be signed by participants. In particular, participants’ rights, obligations and costs are defined in these agreements, which are also available on the TSD website. TSD has not publicly disclosed the questionnaire set out in the CPSS/IOSCO disclosure framework.
  - PO The SEC lacks the legal power to regulate and supervise TSD. However, through its regulation of the stock exchange, the SEC has the possibility to influence the design and operation of TSD. TSD is not subject to the oversight responsibility of the BOT. The cooperation between the SEC and BOT is not fully effective.
  - NA TSD has not established links to foreign CSDs.
- Recommended actions:
  - The TSD may consider opening its system to foreign participants.
  - In order to eliminate the risk of cross-subsidizing and increase transparency, the pricing structure of TSD should be separated from that of the stock exchange and TSD should have in place procedures to regularly review its pricing levels against costs of operation.
  - The Governance structure of TSD should be strengthened by appointing more independent board members and by not being subject to the “regulation power” of the Board of SET.
  - TSD should enhance its proprietary network to meet international procedures and standards.
  - SEC should have the legal power to directly regulate and supervise TSD without the involvement of the Board of SET.
  - The BOT should assume its oversight responsibility of TSD and should set put a dedicated team to oversee the activities of TSD.
  - The SEC and BOT should develop a cooperation framework that identifies the responsibility of each authority, aimed at avoiding overlapping and loopholes. This framework should specify clearly the tasks of each authority, areas where both authorities have common interests, exchange of information, etc. For instance and in line with international experience, the BOT would be responsible for the containment of systemic risk and the soundness of clearing and settlement systems, while SEC would be responsible for the proper conduct, protection of investors, governance, access and transparency.
  - In order to increase the effectiveness of their cooperation and strengthening their overall supervision and oversight roles, the SEC and the BOT need to increase their mutual understandings of respective regulatory objectives and needs.
  - SEC and BOT should enhance the capacity of their staff by setting up dedicating team in respective authority to deal with securities clearing and settlement systems. The members of these teams should be offered specific courses, seminars and on-job training.

* _cr09150 - 1. Securities settlement systems should_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09150.pdf_