T2S and corporate actions CorpActions July 2011 Hugh Simpson Advisor, T2S

Questions to answer  Why is T2S happening?  How will it work?  Who is involved?  What does it mean for corporate actions?

Why? To achieve a  Harmonised  Integrated and  Efficient Settlement infrastructure for  All European securities in  Euros and other currencies

How? T2S will be a central IT platform  Operating securities accounts on behalf of CSDs  Operating cash accounts on behalf of central banks  With sophisticated facilities for transactions between these accounts CSDs and central banks  “Out-source” their accounts to T2S  Remain legally responsible  And provide any additional value-added services T2S will charge €0.15 per side for a DVP transaction Starts in September 2014

Who?  Developed and financed by the Eurosystem  30 CSDs have signed MoU with T2S: ­ All euro area CSDs ­ 8 EU, non-euro CSDs (Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, the UK) ­ 3 non-EU CSDs (Iceland, Norway and Switzerland) Outside the euro area:  Central banks of Denmark, Lithuania, Norway, Sweden, Switzerland and UK are discussing participation of their currencies

What does it mean for corporate actions?  T2S is a settlement engine.  It provides the key elements required for settlement: ­ accounts for cash and securities; and ­ the means to make movements between them  It is not an asset servicing system  But it is a driver of harmonisation  The account holding relationship remains between the account-holder and the CSD  The results of CAs, delivering or exchanging cash and/or securities, can use the T2S mechanisms  Consider implications of T2S for CAs on stocks and on flows

CAs on holdings  Responsibility for identifying and notifying beneficiaries of CAs, collecting their elections remain with account-holding CSDs  Transfers of cash and securities processed through T2S  T2S standards based on recommendations of CAJWG  Benefits from T2S: ­ Use of a single cash account to receive distributions across multiple CSDs ­ T2S as a driver for harmonisation in CA processing ­ Potential for a single entry point

T2S and CAs on flows  Market claims, transformations and buyer protection may arise when a transaction is pending during the period of a CA  T2S Advisory Group mandated CASG to work on CAs transaction management standards  CASG has developed “T2S Corporate Action Standards” ­ Market claims ­ Transformations ­ Buyer protection  Approved by the AG in September 2009: see l  CSDs obliged to comply by January 2014

8 Market Claims  Concept of Instruction Owner CSD (IOC): responsible for detecting and instructing market claims in T2S  IOC is defined as the CSD that provides the securities accounts on which the participant has sent an underlying instruction  There are always two IOC per transaction. Could be either the Issuer or the Investor CSD taking up the role.  Obligation for participating CSDs to adopt harmonised approach

9  CCPs or IOCs will manage transformations  Counterparties can choose to opt-out (new additional matching field)  Transformations triggered by IOCs/CCPs  Matched locally or in T2S Transformations

10  As per CAJWG standards, CSDs not obliged to offer buyer protection (BP) for their securities  If CSDs offer BP, they must comply with standards and deadlines  If an issuer CSD offers BP, the investor CSDs which have chosen to hold its securities should also offer BP  If two investor CSDs offer BP, but the issuer CSD does not, then BP functionality can still be used  Detection of BP instructions takes place outside of T2S; only resulting settlement of BP agreement is processed in T2S  Upward harmonisation Buyer Protection

11 Compliance with T2S standards for CAs on flows Source: CASG 2010 survey

What are the implications of T2S? Investors and issuers can look at Europe as a single space Choices for investors about how to participate in T2S  Outsource everything to custodian/agent bank(s) – as now  Consolidate activity in one CSD  Direct participation in multiple CSDs for settlement and asset servicing  Use different solutions for settlement and asset servicing Potential for a fundamentally different market structure  Lower barriers for entry – as CSD?  New opportunities in asset servicing?  More choice for issuers?