Securities Lending Expert Track Carlos Galeano Direct Custody and Clearing Regional Product Manager Latam

Securities Lending: Colombia, Chile & Peru 1.Introduction Standard agency lending model vs Latam model. 2. Colombia Securities Lending market model. Presentation from Mr. Javier Diaz Commercial VP, Bolsa de Valores de Colombia. 3. Peru Securities Lending market model. 4. Chile Securities Lending market model. 5.Citi’s standardized model for execution of securities lending transactions in the markets + Shadow Posting Operational structure defined for client’s instructions. 6. Q&A

Introduction Agency Lending Negotiation OTC Negotiation. Intermediary Executed through a lending desk. Lending Structure Omnibus model. Collateral Transferred to lender. Latam Securities Lending Negotiation Colombia & Peru: On Exchange. Chile: OTC, registered On Exchange Intermediary Negotiation directly between the investor and the broker as in spot market Lending Structure Colombia & Peru: Segregated. Chile: Omnibus model Collateral Blocked at the exchange / CSD.

Introduction Agency Lending Negotiation OTC Negotiation. Intermediary Executed through a lending desk. Lending Structure Omnibus model. Collateral Transferred to lender. Latam Securities Lending Negotiation Colombia & Peru: On Exchange. Chile: OTC, registered On Exchange Intermediary Negotiation directly between the investor and the broker as in spot market Lending Structure Colombia & Peru: Segregated. Chile: Omnibus model Collateral Blocked at the exchange / CSD. Securities Lending market presentation Expert Track Javier Diaz Commercial VP, Colombian Stock Exchange.

COLOMBIAN SECURITIES LENDING March, 2016

In a securities lending transaction, securities are temporarily transferred by one party (the lender) to another (the borrower). The borrowers provide collateral in return for the loan and a fee for the use of the borrowed securities. The lender retains the economic benefits associated with ownership of the loaned securities such as the dividends. The borrower is contractually obligated to return the securities in the final transaction term. The securities lending process includes two operations: the initial and final transaction. Both are cleared and settled by the Colombia Securities Exchange. Definition Securities lending starts in Colombia in 2011 as an standardized operation Definition

Colombian Model BVC has developed a functional model based on the OTC international markets Borrower LenderBorrower Lender

Securities Lending in Colombia is an standarized operation, manage through the BVC´s transactional system. By law, colombian brokers are the only entities authorized to perform this transaction. The lender does not have the securities ownership during the term of Securities Lending, and therefore does not have the political rights. BVC implemented the recall as characteristic of the initial transaction. In the Securities Lending transaction, securities property are temporary transfered to the borrower. The lender retains the economic benefits associated (dividends) with the ownership of the loaned securities. The borrower must recognize an equivalent amount of the dividend received during the transaction. The Securities Lending is backed by a collateral provided by the borrower which is transferred to the lender and locked by BVC. Characteristics

Annual traded amount The securities lending market has increased 61,23% (CAGR) in the last 5 years Percentage of securities lending Vs. Total negociated amount 0,1% 0,2%1,0%1,2% Evolution of Securities Lending Source: BVC CAGR:61,23%

Structural Changes In 2014, BVC made a series of adjustments to align the characteristics of securities lending to global standards Rates in Colombian pesos

Stocks and Brokerage Firms Share For Colombian brokers securities lending transactions are the key of a more liquid market Negociated Stocks Share 2015 Brokerage Firms Share 2015 Source: BVC Colombian legislation allows securities lending over all listed stocks. During the last year most colcap stocks were used in securities lending operations. Securities Lending is avaliable in the top 11 Brokers in Colombia, Brokers which represent more tan 70% of total volume of stock traded in the country. OTHERS

Lenders share by investors type Borrowers share by investors type Lenders and borrowers share Securities lending operation can be a valuable part of efficient portfolio management Source: BVC Retail and investment funds are the most important lenders in Colombia. Pension funds started active participation on this market on the last 2015 quarter increasing its participation from 4% in 2014 to 14% in The new regulation of short sales was aproved in december of 2015, which will give a further boost to Securities Lending volume.

Average Rate and Return Terms Source: BVC Securities lending average rate has been consistently higher than other liquidity options available for institutional investors. Colombian market has started using Securities lending as part of investments strategies. During 2015 the 53% of all transactions where between 4 and 20 days, which represents an important tool for portfolio managers. Average annual rateAverage annual weighted rate Central Bank intervention rate 4,75% 4,25% 3,25% 4,50% 5,75%

Collaterals Lenders can define the collateral type for each operation according to its risk policies Cash High liquidity stocks according to quarterly BVC liquidity function Colombian government bonds: TES, TES UVR and TCO Guarantee Transfer and Property:BVC accepts the following collaterals: Cash is hold in BVC´s Central bank account (CUD) and blocked in name of the lenders Stocks are visible in Deceval lenders account TES, TES UVR and TCO are visible in Deceval lenders account

Risk Management BVC developed in 2014 the necessary risk management tools to attract foreign investors BVC has developed a back office counterparty risk function Securities Lending risk management: BVC has developed a back office securities risk function Recall can be define as a characteristic of the initial transaction Daily margin calls Online information and reports on guarantees BVC blocks and manages all guarantees Guarantee can be defined as a characteristic of the initial transaction

2016 BVC commitment with securities lending development has encouraged new changes and benefits Securities Lending Upcoming Changes Fee payment in final operation (actually is in the first operation) Roll over operations Dividend Payment through Deceval Rate: 50% Discount rate for both borrower and lender Initial operation: T+0 / T+1 / T+2 / T+3 Final operation: T+1 / T+365 Lender Borrower SECURITIES COLLATERAL SECURITIES COLLATERAL FEE

Introduction Agency Lending Negotiation OTC Negotiation. Intermediary Executed through a lending desk. Lending Structure Omnibus model. Collateral Transferred to lender. Latam Securities Lending Negotiation Colombia & Peru: On Exchange. Chile: OTC, registered On Exchange Intermediary Negotiation directly between the investor and the broker as in spot market Lending Structure Colombia & Peru: Segregated. Chile: Omnibus model Collateral Blocked at the exchange / CSD. Securities Lending market presentation Expert Track

Peru: Securities Lending market model Main considerations It is only used to cover short sales and to avoid fail trades. The ownership of the securities is transferred from the lender to the borrower. The economic rights remain with the lender and the political rights are transferred to the borrower. The Peruvian clearing house (CAVALI) is in charge of the daily mark to market and requests replacement of guarantees to the borrower if necessary. Loan Purpose: To cover transactions with pending settlements, securities lent are not freely available. Stock market transaction regulated by rules of the BVL (not mutual). The lender chooses the counterparties (maximum of 5). Source: Bolsa de Valores de Lima.

Peru: Securities Lending market model Source: Bolsa de Valores de Lima. Broker Agent Lender Lent securities Guarantees t or t+1 ≤ t+360 1st Leg Spot transaction 2nd Leg Future transaction Broker Agent Borrower Guarantees Lent securities Lent securities : Spot amount = Spot price x Amount negotiated Guarantees: Main guarantee + Additional guarantee >= Hedge amount

Peru: Securities Lending market model Borrower settles short sale Borrower trades a short sale 04/08/2015 FL1 Settlement of leg 1 of stock loan in t+1 03/08/2015 Beginning of stock loan 05/08/ /11/2015 FL2 Stock LoanTerm: 90 days 02/08/2015 Example 2 FL1 = 04/08/2015 FL2 = 02/11/2015 Example 1 FL1 = 04/08/2015 FL2 = 02/11/ /08/2015 FL1 1.Borrower trades a short sale. 2.Borrower and lender trade a stock loan 1. 3.Leg 1 of stock loan is settled on T Borrower settles the short sale (FL1 = t + 0). 02/11/2015 FL2 Stock LoanTerm: 90 days Source: Bolsa de Valores de Lima. 1 Before making a short sale, the broker agent should have traded or have orders for a stock loan at a market value rate and with a settlement date until the settlement of the short sale, or have orders to make a purchase of securities in the spot market at a market price. This operation must be intended to cover the short sale.

Peru: Securities Lending market model Source: Bolsa de Valores de Lima. Loan Main guarantee (100%) Equity: Lists of reference provided by the BVL Cash: PEN + USD Fixed Income Values: List of Reference Values Additional guarantee (20%) Equity: Lists of reference provided by the BVL Cash: PEN + USD Letters of guarantee Fixed Income Values: List of Reference Values Lendable assets Assets subject to be granted as collateral Financial leasing Corporate Mortgage Subordinate Securitization Public sector CDs Treasury bills Commercial papers

Peru: Securities Lending market model Source: Bolsa de Valores de Lima. Guarantees Equities Cash Letters of guarantee Main Transferred and blocked in the lender’s account in CAVALI Blocked in a bank account in the name of CAVALI, in the lender’s favor. The interests generated in the bank account belong to the borrower. Fixed Income Additional Blocked in the borrower’s account in CAVALI, in favor of the lender. Blocked in a bank account in the name of CAVALI, in favor of the lender. The interests generated in the bank account belong to the borrower. Issued in the name of CAVALI

Peru: Securities Lending market model Source: Bolsa de Valores de Lima. Recall Agreement Lender and borrower can settle early. Borrower pays interest for the real term. No agreement Only the borrower can settle early. Borrower pays interest for the period originally agreed Borrower in default Lender broker agent receives the lent securities due to a forced execution The lender keeps the main guarantee and the borrower the additional guarantee Lender broker agent asks to abandon the operation If the collateral is not enough to buy lent securities, CAVALI asks additional collateral to borrower broker agent. If there is collateral remaining, CAVALI gives it back to the borrower broker agent. End of suspension The Bureau of Market Surveillance of Lima Stock Exchange selects a broker agent in order to execute the operation. Cash collateral is used to purchase lent securities lent. Securities on guarantee are sold to buy lent securities. Borrower broker agent is suspended until one of these happen: Borrower broker agent must comply in order to end suspension End of suspension Lender’s decision

Introduction Agency Lending Negotiation OTC Negotiation. Intermediary Executed through a lending desk. Lending Structure Omnibus model. Collateral Transferred to lender. Latam Securities Lending Negotiation Colombia & Peru: On Exchange. Chile: OTC, registered On Exchange Intermediary Negotiation directly between the investor and the broker as in spot market Lending Structure Colombia & Peru: Segregated. Chile: Omnibus model Collateral Blocked at the exchange / CSD. Securities Lending market presentation Expert Track Securities Lending market presentation Expert Track

Chile: Securities Lending market model Main considerations There is no ownership of the securities transferred from the lender to the borrower. The economic rights remain with the lender and the political rights are transferred to the borrower. The BCS is in charge of the daily mark to market and requests replacement of guarantees to the borrower if necessary. Stock market transaction regulated by rules of the BCS (not mutual). Collateral can be placed in local or foreign securities.

Chile: Securities Lending market model Broker Agent Lender Lent securities Guarantees t ≤ t+360 1st Leg Spot transaction 2nd Leg Future transaction Broker Agent Borrower Guarantees Lent securities Lent securities : Spot amount = Spot price x Amount negotiated Guarantees: Main guarantee + Additional guarantee >= Hedge amount

Chile: Securities Lending market model Source: Bolsa de Comercio de Santiago. Second leg settlement Securities lending Transaction registration Linkage with Short Sale Collateral Requirement Short sell and Securities Lending transaction settlement T+0T+2T+n Short Sale Negotiation Second leg Settlement

Chile: Securities Lending market model Source: Bolsa de Comercio de Santiago. Loan Main guarantee (100%) Equity: Lists of reference provided by the BCS Cash: CLP + USD Fixed Income Values: List of Reference Values Additional guarantee (20%) Equity: Lists of reference provided by the BCS Cash: CLP + USD Treasuries held at DTCC Fixed Income Values: List of Reference Values Lendable assets Assets subject to be granted as collateral Treasuries held at DTCC Bolsa de Comercio de Santiago has a linkage with DTCC to allow Treasuries to be used as collateral posting

Chile: Securities Lending market model Guarantees Equities Cash US Treasuries Main Blocked in DCV on a Bolsa de Comercio de Santiago’s account. Blocked in a bank account in the name of Bolsa de Comercio de Santiago. No remuneration. Blocked in favour of Bolsa de Comercio de Santiago Fixed Income Additional Blocked in DCV on a Bolsa de Comercio de Santiago’s account. Blocked in a bank account in the name of Bolsa de Comercio de Santiago. No remuneration. Blocked in favour of Bolsa de Comercio de Santiago Source: Bolsa de Comercio de Santiago.

Chile: Securities Lending market model Source: Bolsa de Comercio de Santiago. Recall Agreement Borrower pays interest for the real term. No agreement Borrower pays interest for the real term. Borrower in default Bolsa de Comercio de Santiago executes collateral to cover lent securities + any losses incurred by the lender Borrower broker agent is suspended:

Securities Lending Expert Track Citi’s standardized operational development for investors to execute securities lending transactions.

Citi: Operational Model Securities Lending: SECL: DF/RF DF (MT542) 20C: SEME / Client Reference 1 22F: SETR / SECL 19A: TRTE / XXXXXXX (Prima: cop $) 98A: TERM / YYYYMMDD RF (MT540) 20C: SEME / Client Reference 2 22F: SETR / SECL 19A: TRTE / XXXXXXX (Prima: cop $) 20C: PREV / Client Reference 1 Securities Borrowing: SECB: RF/DF RF (MT540) 20C: SEME / Client Reference 3 22F: SETR / SECB 19A: TRTE / XXXXXXX (cop $) 98A: TERM / YYYYMMDD DF (MT542) 20C: SEME / Client Reference 4 22F: SETR / SECB 19A: TRTE / XXXXXXX (cop $) 20C: PREV / Client Reference 3 Collateral Posting: COLO: If Securities: DF (MT542) 20C: SEME / Client Reference 5 22F: SETR / COLO 20C: PREV/ Client Reference 3 RF (MT540) 20C: SEME / Client Reference 6 22F: SETR / COLO 20C: PREV / Client Reference 5 If Cash: Cash Out (MT202) :20: Transaction Ref Number :21: Client Reference 3 :32A: YYMMDDCOP ,99 :53B:/ (SK account number or Cash account number) :57A: BCHICLRMCUS :58D:// Intermediary SWIFT or Counterparty name :72:/REC/COLO (Mandatory field that requires including word “COLO”) Cash In (MT210) :20: Transaction Ref Number :30: YYMMDD :21: Client Reference 3 :32B: CLP ,99 :52D:/ (SK account number or Cash account number) /COLO (Mandatory field that requires including word “COLO”) :56A: Intermediary SWIFT or Counterparty name

Securities Lending Expert Track Q&A

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