CL65 FLT CREW OBSERVES MD88 IN CLOSE PROX IN HOLDING PATTERN; POSSIBLY DUE TO ALTIMETER SETTING ERROR.

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WE WERE CLRED TO HOLD AS PUBLISHED AT RBV ON KORRY 2 INTO RGA; AND RPTED ESTABLISHED AS PUBLISHED 68 DEGS/248 DEGS. ACFT Y WAS ACCUMULATING ICE; AND REQUESTED LOWER. ATC ASSIGNED 11000 FT MSL -- 1000 FT ABOVE OUR ASSIGNED ALT. VERY LOW PRESS ALTIMETER CONFIRMED WITH ATC TWICE APPROX 29.02. OBVIOUSLY; ACFT Y'S ALTIMETER REMAINED AT 29.92 INCHES AS OUR STANDBY ALTIMETER WAS SET TO REF THEIR POSSIBLE DEV. ATC QUERIED THEIR ALT 2 OR 3 TIMES. THEY RESPONDED '11000;' UNAWARE OF THE ALTIMETER SETTING. ATC INQUIRED NO FURTHER. ALSO; THEIR ACFT WAS NOT HOLDING AS PUBLISHED 68 DEGS/248 DEGS. INSTEAD; THEY WERE HOLDING ON INBOUND COURSE 238 DEGS. WE VISUALLY ACQUIRED ACFT Y TOO CLOSE; AS THEY DSNDED TO; AND ENTERED; HOLD WITHIN 200 FT OF OUR ALT JUST BEHIND US. OBVIOUSLY; WE WERE OBSCURED BELOW THEIR NOSE. WE ACCELERATED OUR ACFT BRIEFLY TO ACHIEVE SOME SPACING IN PATTERN. ATC THEN TOLD US TO 'BE SURE AND HOLD AS PUBLISHED.' ACFT Y BECAME AWARE OF THE ALTIMETER ERROR; AND CLBED TO 1000 FT ABOVE OUR ALT. CTLR ADVISED 'THIS IS A VERY LOW ALT SETTING AND PROPER SETTING IS IMPORTANT.' NO TCASII ALERT!