Outline of the Participant Protection Trust
The Participant Protection Trust (PPT) was established based on the Act on Book-Entry Transfer of Company Bonds, Shares, etc. and has accumulated reserves of approximately ¥10.9 billion as of the end of March 2012. Its purpose is to establish an investor protection system to indemnify the losses of participants up to ¥10 million should a Book-entry Transfer Institution (Bank of Japan and Japan Securities Depository Center, Inc. (JASDEC)) or Account Management Institution (securities firms, banks, and other financial institutions) make a booking or registration error and go bankrupt without compensating participants for damages. Compensation is made using trust assets contributed by Book-entry Transfer institutions or Account Management institutions.
Different roles of JIPF and the Participant Protection Trust
The PPT indemnifies investors against damages related to mistaken entries, etc. regarding eligible assets made by a Book-entry Transfer Institution or an Account Management Institution, while the JIPF indemnifies investors against damages from loss of deposited cash and securities caused by a Financial Instruments Business Operator ‘s violation of its segregated custody obligation.
For example, if a Financial Instruments Business Operator that is an Account Management Institution (manages a book entry transfer account within the overall book entry transfer system) mistakenly records more than the actual amount of Book-entry Corporate Bonds, etc. on a book entry transfer application from a customer, and a third party in good faith acquires them by transfer, the Account Management Institution is obliged to acquire the same amount of Book-entry Corporate Bonds, etc. on its own to recover its loss. However, if the Account Management Institution goes bankrupt without performing its obligation, and a participant of the said Account Management Institution suffers damages, the PPT compensates the participant.
On the other hand, if a Financial Instruments Business Operator accepts a deposit of cash from a customer and does not manage it on a segregated basis in violation of its obligation and goes bankrupt without fully returning the deposit to the customer, the JIPF compensates the customer.
Provided, however, that if a Financial Instruments Business Operator acting as an Account Management Institution transfers Book-entry Corporate Bonds, etc. recorded on a participant’s account to its own account without permission from the participant, and transfer it again to another account, and then a third party acquires them in good faith, the damages are caused by not only the Account Management Institution’s entry error in the transfer book, but also by the Financial Instruments Business Operator’s violation of its segregated custody obligation. Therefore, in this case, the damages are indemnified by both the JIPF and the Participant Protection Trust.
In such cases, according to the law, the PPT is primarily responsible for compensation with the JIPF covering any portion of the damages that the PPT cannot pay due to lack of resources. The purpose of this provision is to eliminate double compensation payments for the same securities.
The limit on compensation in these cases is ¥10 million in total from JIPF and PPT. The timing of payment by JIPF comes after the PPT determines the amount it can pay.
Based on the Supplementary Provisions of the Act for Partial Amendments of the Act Concerning Book-Entry Transfer of Company Bonds and Other Securities for the Purpose of Streamlining the Settlement of Trades of Stocks and Other Securities, etc., the JIPF is allowed to contribute some of its reserve funds to the trust assets of PPT in so far as the amount does not interfere with the performance of its responsibilities, on condition that the JIPF receives the approval of the Prime Minister and the Minister of Finance.