1 Retail vs Wholesale Models 10 th November 2006 Presentation to ACSDAs Seminar in Sao Paulo - Brazil MONICA SINGER CEO STRATE Ltd

2 Examples of Retail, Wholesale or Limited Level Models Wholesale USA France Belgium UK (Mixed) S Africa Italy (with restrictions) Canada Mexico Retail Denmark Sweden Norway Greece Turkey India China Saudi Arabia South American CSDs All Asian CSDs Limited Levels Spain Romania Kazakhstan Russia Thomas Murray Wholesale vs Retail

3 Wholesale Model Central Securities Depositories Beneficial owner Foreign nominee Beneficial owner Intermediary Nominee Beneficial owner Thomas Murray Wholesale vs Retail

4 Wholesale Model No restriction on the number of levels Beneficial owner is the one at the bottom of the chain Intermediaries are licensed depositories that often act via nominee accounts. These are omnibus accounts that allow efficient settlement but offer lower levels of protection Also known as the Indirect Holding model Typically only several hundred accounts at the CSD Thomas Murray Wholesale vs Retail

5 Retail Model CSD and Central Registrar Beneficial owner Foreign nominee Beneficial owner Foreign nominee Beneficial owner Beneficial owner Beneficial owner Beneficial owner Beneficial owner Thomas Murray Wholesale vs Retail

6 Retail Model All domestic accounts held at the first level Each beneficial owner has their own account at the CSD The CSD acts as central registrar – the notary that grants legal title. (Other registration functions can be carried out by third party registrars e.g. Calling AGMs, paying dividends etc. Genuine nominee accounts only allowed for foreign participants Also known as the Direct Holding model Structure could result in millions of accounts at the CSD No intermediaries required. Participants act as Account Operators to maintain details across all accounts Thomas Murray Wholesale vs Retail

7 Thomas Murray Wholesale vs Retail Technology is now much cheaper, with reconciliation systems widely available Move away from cost efficiency to ensuring legal certainty and minimisation of risk Ironically those countries with the largest populations have adopted the retail model, such as China and India CRESTCo in the UK recently became the de facto central registrar for dematerialised equities As markets dematerialised it became obvious that the Central Securities Depository (CSD) could perform the role of central registrar, which was adopted in Scandinavian countries Issuers and regulators are increasingly concerned about who owns the securities. Wholesale vs Retail

8 Securities Ownership Register (SOR) Definition The SOR is defined as a Cross Market, Centralised, Real Time Electronic Securities Ownership Register, held at Beneficial Owner Level, and fundamental to a Retail Model, with the following features: –Increased disclosure and transparency. –Settlement at Beneficial Owner Level. –Ability to cater for BIS Models 1, 2 or 3

9 Current South African Environment Wholesale Model Investors obtain information from their custodians or brokers Issuers obtain information from the Transfer Secretaries, or through the CSD, which obtain it from the custodian and brokers The custodians and brokers have a direct relationship with their clients, the Beneficial Owners or Nominees and keep records of relevant information relating to them The custodians in South Africa foresee that the introduction of a SOR could negatively impact their current role and the related services they are able to deliver

10 CSD Respect and protect confidentiality of information not in the public domain Provide accurate and reliable information to duly authorized recipients via appropriate, secure, channels The CSD may provide White Label Services to the investors via their custodians Custodian Continue to be responsible for client information and account maintenance. Know your client legislation Continue to provide services to the client, with the relationship between the custodian and the client remaining Difference in roles between CSDs and Custodians in Retail Model

11 International SOR Best Practices Move towards an SOR, although there is no accepted standard as to the level of information or the structure of the information to be kept Disclosure, with a large focus on anti-terrorism legislation and the prevention of money laundering Increase of information flows to the Authorities, Issuers and underlying clients

12 Benefits for CSDs of Retail Model Allows CSD to act as central registrar and eliminate any time gap between Delivery vs Payment (DVP) and registration. Finality of settlement is synchronous with DVP Allows CSD to combine holdings of a single individual across multiple securities (equities, government debt, mutual funds) which, if combined with a price file allows the CSD to provide portfolio valuations at the individual level. Possibility to calculate tax at the CSD level Possibility to provide asset servicing support for issuers – advice on corporate actions and updating of Register immediately upon settlement Economies of scale and less costs are achieved in the market as there is less duplication of technology solutions by the different custodians and potential cross- subsidation across securities.

13 Benefits for CSDs of Retail Model Additional services to issuers provides an additional source of revenue for the CSD. (In VPC (Norway) 50% of their revenue comes from the issuers). Potential to act as the central source of corporate action information for the market, generating additional revenues (but with additional liabilities). Prevents internalisation of settlements at the intermediary and therefore generates more settlement revenue for CSD. Payment of dividends to shareholders in Central Bank funds Reduces barriers of entry, would allow foreign competition and smaller local banks, brokers and asset managers could act as custodians

14 Benefits of the Retail Model for Issuers Ownership is very clear. Insolvency of an intermediary does not result in loss of records. Investors do not have to rely on accuracy of intermediarys records. No long holding chains Split between foreign and domestic ownership levels are easy to monitor Issuer has immediate access to list of beneficial owners. No need to drill down the chain of ownership Allows issuers to track predator activity and follow changes in ownership in real time, instead of having to request information via the intermediary chain. Closer link between issuer and investor; under the wholesale model the issuer is disintermediated from the investor by the intermediary Provision of shareholder information at AGMs and enables greater efficiency for electronic proxy voting

15 Benefits of the Retail Model for Investors Investors all treated as shareholders and can attend AGMs and vote. Seamless transition management if a custodian records are lost. A full historic record is available for tax, exchange controls, buy & hold restrictions etc. Combined with internet access, allows individuals to view their account at the CSD. This provides the highest level of comfort. Access to statements of holdings across custodians.

16 Disadvantages of the Retail Model It is a domestic model only and does not work for cross border business. –Foreign CSDs and foreign custodians want to operate via nominee accounts –Foreigners will be given exemption in this regard –No CSD links currently exist within STRATE Relies on custodians to maintain the accounts correctly at CSD (although individual investors can check the details). Netting at the beneficial owner level may require a more sophisticated netting algorithm. Retail model potentially allows CSD to disintermediate custodians. It therefore requires very good corporate governance. Does not allow the intermediary to internalise settlements and therefore offer a cheaper solution (the Euroclear Bank model). Increases operational risk (and possibly financial risk) within CSD Additional administration with stock borrowing/lending if all accounts at beneficial owner level. However, functionality to automate is currently in existence

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