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Having worked at a company that designed products exactly like that, here are my thoughts:
- There is no "standard" on how faucets ought to work, but they are usually designed to avoid crossflow for health reasons (one should not drink hot water). That is, each valve (h & c) allow/disallow flow into a common mixing chamber leading to the spout for use, and other than pressure-related issues, no crossflow should be allowed such that hot supply goes into cold supply.
- It seems as though your cold valve is cutting off supply water, but it assumes the top portion of that valve shuts flow from the mixing chamber. That part is not sealing, it is allowing water up the handle cavity. That function is apparently done by the yellow parts with O-rings. Either O-rings are bad, or the part is not seating well enough. Typically all elements of sealing are independent of the handle and are part of the "valve," there being a hot halve and a cold valve.
- Weirdly, your faucet design would appear to need the handle assembly to "complete the valve." (Or maybe you inadvertently took the top chunk of the valve along with the handle).
Super busy at work, so maybe I was not clear. Sorry.
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