Central Depository AD

Transcription

1 Central Depository AD FEASIBILITY STUDY Target 2 Securities (T2S) Project Central Depository AD June P a g e

2 Feasibility Study Authorization Memorandum I have assessed the Feasibility Study for the joining of Central Depository AD to the T2S Project. This document has been completed in accordance with the ECB requirements. MANAGEMENT CERTIFICATION Please check the appropriate statement: The document is accepted. The document is accepted pending the changes noted. The document is not accepted. We fully accept the changes as needed improvements and authorize initiation of work to proceed. Based on our authority and judgment, the joining of Central Depository AD in the T2S Project is authorized. Vasil Golemanski, Program Manager / /... 2 P a g e

3 Table of Contents Executive Summary... 5 Background and Assumptions... 5 Internal Project Organization... 6 Legal Feasibility... 6 Summary... 6 Registry... 7 Legal Options for Opening an omnibus Account for Book-entry of Financial Instrument by Central Depository AD... 8 Settlement... 8 Pledges, Distraints, Financial Collaterals... 9 Cash Payments... 9 Other Services Functional and Business Processes Feasibility End-to-End Business Processes Feasibility Assessment under T2S Static Data Settlement and Liquidity Management Information Management Functional Interfaces with T2S Connectivity Interoperability Business Day National Market Specificity on End-to-End Business Process Technical Feasibility Adaptation Approach and Plan for CDAD Systems Data Storage and Format Technical Interoperability between CDAD System and T2S. Testing Interoperability Testing Planned Connectivity Business Continuity Assuarace P a g e

4 Organizational Feasibility Planned Integration with Related Areas and Participants T2S Project Calendar Deadlines Timeline for Development and Implementation of IT Solutions for Bridging Identified Gaps Business Community and Environment Feasibility Appendix Article Article Article 34, paragraph 1, paragraph 5 and paragraph P a g e

5 Executive Summary The main objective of this feasibility assessment is to give an overview of the legal, functional and technical specifications of the processes related to Central Depository AD (CDAD) activities in relation to the T2S platform requirements. The legal feasibility assessment shall ensure that participation in T2S is in line with national legal and regulatory framework. The end-to-end business process including settlement and liquidity management, information management, calendar and national market specificity are described along with gap analysis and adaptation plan to fit the T2S migration and testing schedules and ensure continuity and quality of service. A technical part addressing specifics of the adaptation approach and plan for the CDAD systems (CDADS) is presented. This includes overview of data storage and format, static data definition and account structure and organization in light of current CDAD Internal System and the introduction of a new system envisaged by the Board of Directors. The last part of the document addresses the planned integration with related areas and participants and the migration approach and planning to ensure smooth introduction of T2S offering all possible benefits to the participants. Background and Assumptions CDAD processes settles and keeps registry of both regulated and OTC market transactions in Bulgaria with the exception of Government-issued securities. The CDADS employs end-investor model in the account structure and organization where each investor has a separate account related to one investment intermediary and there is a separate registry for investors that have not used the services of investor intermediaries (e.g. acquisitions through the mass privatization process). The current CDADS information exchange is based on ISO However, CDAD intends the implementation of a CDADS 1.The new CDADS will segregate the registry and settlement modules. The segregation in modules will facilitate migration of the settlement module in T2S. This new model of the system will supersede the current one and will allow for layered account structure which is the model to be used in the T2S participation. The new CDADS, like the previous one, will be developed in-house, which ensures independence from vendors, reduces risk when adding customizations and timely response to necessary adaptations and maintenance. This system will also implement the extended ISO standard and ultimately target a STP process. The introduction of a new CDADS parallel with joining to the T2S platform will bridge the majority of 1 Expected go-live date is September P a g e

6 gaps presented below and is a key item in the adaptation plan. This will ensure the maximum utilization of T2S functionalities by CDAD and other participants and minimize the impact of connecting to the T2S platform. Internal Project Organization On the side of CDAD the T2S implementation project governance is headed by the following participants: - VasilGolemanski, CEO, v.golemanski@csd-bg.bg - Georgi Karadzhov, Head of Registry and Settlement Directorate, g.karadzhov@csd-bg.bg - Desislava Georgieva, International Standards Department, d.georgieva@csd-bg.bg Legal Feasibility Summary I. Establishment and structure CDAD is a joint-stock company with one-tier system of governance. It was established on 13 August 1996, under Art. 91 of the Securities, Stock Exchanges and Investment Intermediaries Law (SSEIIL). Operations commenced in January CDAD is now supervised by the Financial Supervision Commission. Currently CDAD is owned by the Ministry of Finance (43,70%), and 32 minority shareholders, most of which investments intermediaries, commercial banks and other financial institutions which play an active role on the securities market. The Board of Directors is the operational body which implements the management control over CDAD. The Board of Directors appoints one of its five members as a Chief Executive Officer who leads and manages the daily activities and reports to the rest of the Board members at least once a month. The services of CDAD are compulsory for companies-issuers of publicly traded securities. All transactions are subject to the rules and procedures approved by the Board of Directors of CDAD, agreed and accepted by participants upon joining. Commercial banks, investment intermediaries, managing companies, stock exchanges and entities organizing OTC- market for securities, as well as foreign depository and clearing institutions are permitted to become members of the CDAD. II. Legal basis and supervision The Law on Public Offering of Securities, the Law on Markets in Financial Instruments /MiFID/ and Ordinance No 8 of the Financial Supervision Commission set the basic rules for the organization and operation of the CDAD. The institution performs its activities in conformity with the established Rules and Regulations of CDAD, as well. 6 P a g e

7 The deputy chairperson of Financial Supervision Commission /FSC/ and the Minister of Finance have control over the activity of the CDAD. The ongoing regulation and supervision of CDAD is mainly exercised by the Financial Supervision Commission, which exercises a market related control and focuses on protection of the investor via regulations. III. Functions and services provided CDAD is required to maintain a reliable system for the book-entry registration of dematerialized securities, records of securities transactions and holders` registers on behalf of issuers. The CDAD also executes blocking/unblocking and immobilization of securities, services related the registration of new issues, corporate actions and assigns ISINs. It acts as the issuer CSD and securities settlement system and clears and settles all dematerialized securities. Bulgarian Government Bonds are subject to a special regulation, therefore registration, settlement and trade services for Government Bonds, are of the competence of the Bulgarian National Bank. Registry The CDAD maintains the national registration system for dematerialized securities and performs registration of dematerialized securities and of transfers of dematerialized securities, as well as storing and maintaining of data about dematerialized securities by opening and keeping of accounts of their issuers and holders. It also manages the administration of dematerialized securities, including keeping of a book of the holders of dematerialized securities, distribution of dividends, interests and other payments. The registered securities are kept in securities accounts, each one with its account holder. The accounts are administered in accordance with the principles of double entry and taking into consideration the criteria for securities code adoption. The CDAD maintains the securities accounts managed by each member in a way that separates the securities accounts of the member from the accounts of its clients. The accounts are administered on proprietary and representative principle. The CDAD operates a regime of direct holding for the private bonds and securities so it maintains a register of beneficial owner accounts. On the other hand foreign investment intermediaries and CSDs are entitled to hold an omnibus type of accounts with CDAD. The securities accounts are administered by the CDAD and its members authorized to perform that, in accordance with the principles of double entry accounting, separate registration for each security, completeness, interdependence and clearness. According the Bulgarian legislation2, CDAD is obliged to maintain a system of beneficial owner accounts of book-entry financial instruments. For the purposes of cross-border settlement, CDAD opened omnibus accounts within Cleastream and Roclear. 2 See Appendix 1 7 P a g e

8 Legal Options for Opening an omnibus Account for Book-entry of Financial Instrument by Central Depository AD The relevant disposition in respect of defining omnibus account is article 41 of the Law on Markets in Financial Instruments, relevant for investment intermediaries: Foreign persons entitled under their national law to perform the services and activities under Article 5, Paragraph 2, who have acquired financial instruments on their behalf but on the account of other foreign persons under the terms of Article 15, Paragraphs 5 and 6 or as clients of the investment intermediary for which the Republic of Bulgaria is the home country, shall identify before the Commission their clients and the transactions effected on their account within three working days from the written request. (2) The obligations for regular notification of the Commission by foreign persons under Paragraph 1, who have acquired securities on their behalf but on the account of other foreign persons, shall be set out in an ordinance.3 For the purposes of cross-border trading of book-entry securities, CDAD made a special correspondence with the Financial Supervision Commission on the problematic issues concerning the type of opened account on book-entry financial instruments. The issues, subject for cross-border trading were proposed to be partially blocked /the part of the issues that were to be traded on the respective foreign market/. In accordance with article 56 and 58 of the International Private Law Code, the status of the issuer has to be regulated by the law of the State of registration or the State of the headquarters of the issuer. On the other hand, by virtue of article 62, paragraph 2, item 3 of the International Private Law Code, the law of the State, where the agent has acted shall be applied for the transaction, in case that the agent has acted on a stock exchange or an auction. In respect of the settlement finality the Law on Payment Systems and Payment Services and the Law on Public Offering of Securities shall be applied. /The settlement cycle could be interrupted by a distraint order of public or private enforcement agents./ Central Depository AD was proposed to fulfill its obligations on registration of special pledges, distraints and financial collaterals, maintaining the books of holders of book-entry financial instruments and respective corporate actions, in the framework of the information on final beneficial owner, provided after the transactions. Settlement CDAD operates a single intra-day settlement processing cycle, with DvP gross settlement of securities and netting of cash (through RTGS). The BNB acts as cash clearing agent via RTGS for the commercial banks. Within CDAD, clearing and settlement of securities takes place on T+2. CDAD uses the telecommunications standard ISO and S.W.I.F.T. The activities of the CDAD and its members regarding stock exchange transactions are carried out in consecutive order as of the day of registration of the transaction in the Central Depository, referred to as day Т and completed on day Т+2 with entries in the registers. 3 See Appendix 1 8 P a g e

9 The activities of the CDAD and its members regarding DVP transactions on unregulated market are carried out in consecutive order as of the day of registration of the transaction in the Central Depository, referred to as day Т and completed on day Т+2 with entries in the registries. All activities of the CDAD and its members regarding FOP transactions and performing transfers on nonregulated market are carried out in consecutive order as of the day of registration of the transaction in the Central Depository, referred to as day Т and completed on the same day with entries in the registries. Pledges, Distraints, Financial Collaterals CDAD maintains the registers of pledges on dematerialized securities, incl. distraints, by virtue of the Law on Special Pledges, Civil Procedure Code and Tax and Social Insurance Procedure Code, as well as pledges according to the Law on financial collaterals arrangements /transposing Council Directive 2002/47/EC on Financial Collaterals Arrangements/. The distraints on book-entry financial instruments are registered by order of public and private enforcement agents by virtue of the provisions of Civil Procedure Code and Tax and Social Insurance Procedure Code. The legal obligation of the CDAD on the registration of the distraints on book-entry financial instruments is based on the concept of the beneficial owner accounts of book-entry financial instruments in Bulgaria. The Civil Procedure Code /Chapters 57, 58, 58a/ contains the special regulation to arrange the proceedings on recognition of legal orders of other EU Members States on enforcement and execution of judgements. Corporate actions /splits, dividend payments, interest payments/ of book-entry financial instruments are also based on the concept of beneficial owner accounts. Special pledges, distraints and financial collaterals remain in effect in the system of the CDAD after the respective corporate action is executed, in accordance with the agreement of the contracting parties and the legal requirements in this respect /article 73c, article 261d, article 262w, paragraph 5 of the Commercial Law/. Cash Payments The T2S platform will allow settling transactions on a Central Bank Money DVP basis between participants of the various CSDs connected to T2S and in all T2S eligible currencies. Currently, the CDAD is maintaining electronic connection with the System for Gross Settlement in Real Time (RTGS) for the transfer of applications for settlement in an electronic format, determined by the Bulgarian National Bank4 and all payments are executed in national currency /BG lev/. RTGS is a payment system with settlement finality which transfers monetary funds in levs between settlement accounts of the participants finally, individually (transaction by transaction) and in real time upon the receipt by the system of a transfer order on the part of the participants5. 4 Requirement of Ordinance No 8 on Central Depository on securities article 18, paragraph 3 and Intruction of Bulagarian National Bank and Central Depository AD No 19 of 2006 concerning payments for transactions with book-entry securities 9 P a g e

10 According to article 37 of the Proposal for a Regulation of the European Parliament and of the Council on improving securities settlement in the European Union and on central securities depositories (CSDs), for transactions denominated in the currency of the country where the settlement takes place, a CSD shall settle the cash payments of its respective securities settlement system through accounts opened with a central bank operating in such currency whenever practical and available. When it is not practical and available to settle in central bank accounts, a CSD may offer to settle the cash payments for all or part of its securities settlement systems through accounts opened with a credit institution. Other Services CDAD organizes the payment of dividends, interests and principals through the RTGS. Additional corporate services for the issuers are registration of capital increase/decrease and new issues of financial instruments. CDAD is a National Numbering Agency with regard to the ISIN allocation of dematerialized or immobilized securities. ISIN allocation is implemented by virtue of the Regulation of the CDAD and the ISIN code is an obligatory prerequisite for registration of an issue in the IT system. Functional and Business Processes Feasibility This section describes the end-to-end impact of the adaptation to the T2S from a functional point of view. It addresses static data management, schedule of settlement and liquidity management, information management, calendar and other relevant national market specificities. These are considered in their current as-is state as compared to T2S platform requirements, leading to possible gaps identification and relevant adaptation plan. End-to-End Business Processes Feasibility Assessment under T2S Static Data Account Structure and Organization The CDAD Account Structure is to be mirrored in the T2S using layered account structure model which will be used with the introduction of the new CDADS. This implies separate registry accounts and settlement omnibus accounts of each investor/s with their investment intermediaries. Only the settlement omnibus accounts will be migrated in T2S whereas the registry accounts will be kept in house. In addition to the standard account definition, CDAD may opt for inclusion of market specific attributes. The existing T2S account structure model may be enriched with additional public account contractual data from the relevant accounts in CDADS. The presence of such data will aid the counterparties to ensure correct and optimal business serving. 5 The Bulgarian National Bank may also be the operator of a system component to the settlement system in euro, the Trans-European AutomatedReal-time Gross Settlement Express Transfer System (TARGET 2). 10 P a g e

11 Figure 1: Account Structure of the New CDADS Participants in the CDADS will be divided into three types: Clearing Member, Non-Clearing Member and Direct Participant. A Clearing Member is a participant in the settlement process that can register trades for itself/its clients and for Non-Clearing members. These participants will be predominantly banks. Nonclearing members will be participants who trade but cannot send settlement instructions for trades in the CDADS directly. They will settle the trades via Clearing Members. These participants will be predominantly small and medium investment intermediaries. Direct participants will be able to send settlement instructions for trades in the CDADS only for themselves. These will be predominantly large investment intermediaries. Currencies According to the hierarchical party model, currencies are set up by the T2S Operator. The concept of currency, as related to denomination of securities and denomination of trades will be applied in the respective currency with the standard static data set-up, including BGN. For applications in terms of 11 P a g e

12 eligibility and valuation of securities for auto-collateralization and/or client collateralization, as well as denomination of external CDADS accounts and DCAs, EUR should be used as BNB, the CB of Bulgaria, uses Target 2 in EUR.BNB has not signed a Currency Participation Agreement. In terms of country specifics, Bulgaria is in a Currency Board regime and the BGN is pegged to the EUR. Instruments All instruments, both on the regulated and OTC markets in Bulgaria settle through CDAD with the exception of Government-issued securities transactions and repos thereof, which are settled through BNB. CDAD will provide: The identification of the security (e.g. ISIN, long name, short name (e.g. Stock Exchange Code)); Validity period of the security (e.g. issue date, maturity date, expiry date); Settlement-related data (e.g. minimum settlements amounts); Country of issuance; Currency; Optionally, market-specific additional data as defined in the CDADS of CDAD. CDAD will also supply configuration of securities CSD links to facilitate cross-csd and external CSD settlement. CDAD will opt for opening one (or more) omnibus accounts in the books of any other CSD for the same financial instrument. Parties Configuration Current and under-development CDADS handles parties on the same level as legal entities and recognizes, among others, the following types: end investors, investment intermediates, payment banks, BNB, other CSDs, and other CBs. This has implications on the account structure as explained above in item Account Structure and Organization. These parties are also segregated into Clearing, Non-Clearing Members and Direct Participants (cf. Account Structure and Organization ). The BIC numbers are an attribute in the counterparty definition, and a mapping will be created to ensure that parties defined in the CDADS properly reflect parties as defined in the T2S platform. Obviously, this mapping will not be a bijection. The CDADS will ensure the proper party management as related to the business sections undertaken by the legal entity so that the appropriate BIC-BIC combinations according to the hierarchical structure model described in the UDSF are applied. Settlement and Liquidity Management To ensure a proper business validation process of settlement instructions or liquidity transfer instructions, static data of the concerned parties, instruments and concerned account structure need to be in place. This is provided by CDADS set-up and relevant internal procedures. Where the static data specifics differ (as in the case of Party definition) proper mapping will be applied to meet T2S configuration mode. 12 P a g e

13 CDAD uses only DVP and DFP settlement modes, both for regulated and OTC securities. PFoD and DWP settlement modes are outside of the scope of T2S integration. All required checks (duplicate check validation, privilege checks validation, instructing party validation) related to Settlement Instruction, Settlement Restriction or Maintenance Instruction (Cancellation Instruction, Amendment Instruction or Hold/Release Instruction) will be taken into consideration in CDAD procedures, CDADS architecture and set-up and internal business process. The matching criteria for settlement in CDAD are defined as: - ISIN Code; - Securities amount; - Trading date; - Settlement date; - Buying side; - Selling Side; - Per Unit Price; - Proceeds. The price is set without tolerance in order to identically match the proceeds. T2S allows clients to manage liquidity transfers between different Dedicated Cash Accounts (DCA) or between T2S DCA and CDADS accounts. Therefore, liquidity transfers can be classified as internal, inbound and outbound. Further, depending on the execution time, liquidity transfers are divided into immediate, predefined or standing and CDAD will use all three types. Liquidity transfers will be managed in the CDADS for BGN and through BNB Target 2 account for EUR. CDAD does not plan to avail of the auto-collateralization functionality and any limits will be monitored in the CDADS as the fact that BNB has not yet decided to join T2S with the first wave or sign the CPA restricts the CMB functionality. CDAD applies pre-matching with the participants to ensure sufficiency of securities/funds. This functionality can be applied only through the Hold/Release mechanism. In CDADS OTC deals can be unilaterally cancelled if they have not reached matching, cancelled by bilateral agreement if they are matched, and irrevocable when settled, which is in line with T2S envisioned functionality. Deals on the regulated market become irrevocable once concluded. Therefore, in the recycling process, these deals cannot be canceled but must be recycled again until settled (current local practice is delayed 13 P a g e

14 settlement T+7 and then amendment instruction should be sent; with the introduction of the new CDADS all deals on the regulated market will have to be settled without delay). According to CDAD procedures, the parties involved in an unsettled deal on the regulated market are subject to penalties which serve as an incentive to close the deal in its entirety. Reservation restrictions envisaged in T2S platform cannot be applied because they may result in partial settlement which is not acceptable. CDAD will not employ partial settlement algorithms as Bulgarian law explicitly prohibits partial settlements. With the introduction with the new CDADS a guarantee fund is envisaged to be created. Participation in this guarantee fund will be required from the counterparties involved in trading on the Bulgarian Stock Exchange. Thus, any provision for the cash leg of a failed settlement can be covered from this guarantee fund. Alternatively, a Central Counterparty (CCP) clearing could be used, but current market consensus leans for the introduction of the Guarantee Fund solution. For provision of the securities leg on a delayed settlement, a centralized pool of securities consisting of amounts of the most traded securities will be created and these securities will be available for lending/borrowing. This pool will be similar to a securities lending program. In this way it is ensured that there are no deals on the regulated market which remain with delayed settlement and that there will be no such deals to be canceled after recycling. For OTC deals the T2S recycling and cancellation schedule is in line with current market practice. In case the counterparties still wish to keep the deal after this cancellation, they need to send specific amendment instructions. Participants in the Stock Exchange will need to sign a buy-in/sell out option clause to allow for the forced clearing of delayed settlement to be applied. Information Management Real-Time Communication CDADS has eight batches per day. This design decision is valid also for the new CDADS. Therefore, realtime communication would be possible only in the case when CDADS receives messages. Settlement instructions and Account Management will arrive in batches. CDAD may opt in for real-time querying of T2S. Reports Requisite reports should be based on: Completed transfer; Periodic (to be received from T2Sat the end of each business day). Notifications The T2S platform is a settlement platform. However, as specified in the T2S Business Process Description document, the platform may send corporate actions notifications to the parties eligible for reception. In the case of participants with accounts managed in CDAD, CDADS will subscribe to such messages as an Account Manager for the relevant market participants. 14 P a g e

15 Corporate Actions Harmonization T2S does not provide any functionality to deal with corporate actions, so they will continue to be processed on the CDSDS platform. However, as securities and cash are held on the T2S platform, any debit or credit in securities and/or cash resulting from corporate actions will be processed on the T2S platform. The corporate actions should be executed and settled on the T2S platform, according to both T2S Corporate Actions Subgroup (CASG) and Corporate Action Joint Working Group (CAJWG) standards. Following the consistency of the started harmonization process, the newly formed Bulgarian MIG plans to finish Gap Analysis of the full set of corporate actions in the next months and thus to outline the necessary changes to be committed in the current market practice and in the legislation (if needed). The intentions of the CDAD are to accelerate the activities directed to dismantling the barriers that prevent harmonized execution of corporate action on stock. The CDAD will take the necessary steps to identify and plan the way forward to apply Corporate Action Standards into the national market practice. The special article that outlines the basic timeline points will be included in the updated feasibility assessment in December Data Size Traffic sent to or from T2S is subject to a size limitation derived from transport layer restrictions. The current message limit is foreseen at a size of 32 KB for both inbound and outbound traffic. In case of messages exceeding the maximum foreseen size CDADS will utilize the technical solutions within T2S: - Outgoing traffic messages sent to T2S will be split to different requests; - Mechanisms will be set in place in order to correctly receive and handle incoming from T2S traffic (by uploading of files). Functional Interfaces with T2S Connectivity CDAD will imply A2A connectivity with its CDADS. As a CSD, CDAD will have direct connectivity to T2S and the A2A choice should facilitate automation and STP. Direct connectivity of other market participants as DCPs will also be possible on CDAD side. In this case, CDAD will still receive a copy of the DCP s instructions through CDADS and reports as required. However, payment banks will have to wait for BNB s joining the T2S platform if they wish to be DCPs as Payment Banks in BGN. The connectivity channel of choice for CDAD would be Core Net3 of ECB to ensure that all market participants are covered. The value-added network via SWIFT and SIA COLT is still under consideration whether it would be offered in parallel. Considerations include, among other things, implications on the required investments on the part of CDAD and DCPs. The new CDADS will be able to support the valueadded network connectivity. GUI (U2A) usage is still under consideration. 15 P a g e

16 Access Rights and Security Access rights and privilege level are specified in CDAD procedures. These are strictly followed in order to ensure proper access and processing. Connectivity security will be achieved through protocol for communication as described in the UDSF and the accompanying T2S documentation. Interoperability The current CDADS communicates with ISO messages and system-specific messages sent to domestic counterparts. The new CDADS is planned to operate under extended ISO standard which is fully in line with T2S message protocols. There is ongoing evaluation of the parsing, mapping and conversion between the two standards for local participants so as to ensure interoperability of the interested DCPs, which will avail of the planned time for parallel support of both standards in T2S. Business Day Queuingand Cut-off times CDADS processes the settlement instructions in eight batches in a day. The timing of these batches will be adjusted so as to coincide with the T2S business day and times for real-time processing. Same day settlements will be accepted up to and including batch seven (of eight) in order to ensure they are not left for the T2S night batch. All other items can be left for the night batch in case T2S is not able to process them in real-time because of cutoff times. Time Conversion and Clock Synchronization CDADS will be tailored to take into account the time zone difference between T2S and CDADS, including summertime clock adjustment. Batches schedule will be synchronized accordingly. This synchronization will not affect business day schedule of CDAD as T2S business day schedule begins with night-time session at 18:00 CET/CEST (19:00 EET/EEST).The part of the business day when real-time processing takes place starts at 5:00 CET/CEST (6:00 EET/EEST) and ends at 18:00 CET/CEST (19:00 EET/EEST). This fully encompasses CDAD s business day schedule which begins at 7:00 CET/CEST (8:00 EET/EEST) until 17:30 CET/CEST (18:30 EET/EEST). Calendar and Holidays Both CDAD and T2S are open from Monday to Friday. Bulgarian specific closing days will be provided to the T2S operator to be inserted as static data. In general, the holiday calendar is known at the end of the year for the next calendar year. A specificity of Bulgarian calendar is that in the event of a public holiday/s appearing two days before or after the weekend, the Government almost always takes a decision to merge the holidays and the adjacent weekend. This additional holiday is compensated with a working Saturday. This Saturday must be in the same month in which the additional holiday happens and may precede or follow the long weekend. These working Saturdays not are open for trading and there will also be no settlements and no payments on working Saturdays. 16 P a g e

17 National Market Specificity on End-to-End Business Process Key market specificity for Bulgaria is the Currency Board Regime which implies no foreign exchange market risk between EUR and BGN. Hence, the choice of CDAD to use BNB Target 2 account in EUR for payments, which will not entail FX risk. CDAD activities are regulated by the Law on Registered Pledges, Law on the Contracts and Financial Collaterals, Civil Procedure Code, Tax and Social Security Procedure Code, Law on the Markets in Financial Instruments and Law on the Public Offer of Securities. CDAD activities also relate to Financial Supervision Commission s Ordinance 8, Ordinance 16 and Ordinance 38. National specificities related to these laws and codes which relate to CDAD are strictly kept on the Registry side and will not affect the settlement side, which will be integrated in the T2S platform. As already elaborated, settlement and registry segregation is applied in the new CDADS and the registry side will remain on end-investor (final beneficial owner) level. Overall, national market specificities will not affect the interoperability of CDADS and T2S. Technical Feasibility Adaptation Approach and Plan for CDADS Data Storage and Format Currently, there is an ongoing SWIFT certification project of the outgoing interfaces generating the ISO messages, used for communication with CDAD-related entities. In parallel, CDAD is running internal business and data rule synchronization (both in CDADS and legal) in accordance with T2S specifications. Overall, CDAD commits to bringing its system and its planned upgrade to a state where all outbound communication from CDADS meets T2S structure, format and business rule validations to ensure proper communication with T2S. Technical Interoperability between CDADS and T2S. Testing To ensure technical interoperability, CDAD, following the stipulations in the Framework Agreement, will engage in all requisite testing phases, particularly: Connectivity test (July 7 th, 2014); User test (September 2 nd, 2014); Interoperability testing (October 1 st, 2014). 17 P a g e

18 Figure 2: Testing Stage Organization i These tests ensure readiness of CDAD for the Migration to and operation on the T2S Platform as well as the ability to extract static and Transactional Data from T2S for reverse migration. CDAD will also appoint a single point of contact for all topics related to User Testing. CDAD has already started development and implementation of the new CDADS as described above and recognizes that successful inclusion to the T2S Platform is contingent to the additional development that CDAD has undertaken. Therefore, CDAD will inform the Eurosystem, in a timely manner, about any developments, which may prevent that CSD or its DCP(s) from completing its/their testing activities. Respectively, as part of the PMG, CDAD may request plan changes related to User Testing according to the Programme Plan Preparation, Adaptation and Assessment Review Process in section 7.2 of Schedule 2 (T2S Programme Planning and Monitoring). In any event, CDAD has and taken and will take in future all necessary steps to ensure adherence to schedule and will have addressed all requirements for initiating tests as elaborated below. Connectivity Test As per the Framework Agreement, the scope of Connectivity testing consists of: Testing the ability to reach the welcome pages of the U2A interface and performing the login to the system; Exchange of messages on application level; Push-and-pull services for reports. As CDAD will use a Dedicated Link Connection, the testing shall also cover the testing of the technical communication protocol (DEP). The aim of the Connectivity test is to confirm to the Eurosystem that CDADS can successfully exchange message-based communication and receive pushed messages on application level with T2S. 18 P a g e

19 User Test Based on the of Eurosystem Acceptance Testing (EAT) functional test cases and test scenarios, provided by the Eurosystem for information purposes as an input for the CDAD s test preparation, CDAD shall define and perform requisite User Acceptance Tests. CDAD shall provide regular reporting on the results of its tests in the form of status reports to the Eurosystem. This report shall cover at minimum the number of test cases and test scenarios successfully executed and failed and propose measures to compensate for potential delays, when required. Defined and performed tests will validate CDAD s declaration that T2S complies with Schedule 5 (T2S Service Description) and the T2S Scope Defining Set of Documents. Interoperability Testing As stipulated in the Framework Agreement, in the bilateral interoperability testing stage, the Contracting CSD tests T2S to ensure the readiness of its adapted IT System to interoperate with T2S and verifies that all T2S Services (e.g. settlement processes, migration procedures) in T2S are working as required. CDAD shall test the migration processes (loading Static Data, loading Transactional Data, migration weekend rehearsals, reverse migration, etc.) and, together with the Eurosystem, will evaluate the test results at the end of the bilateral interoperability testing stage to assess readiness. CDAD Certification CDAD will be certified by the Eurosystem after completing the above described tests in whose preparation CDAD, the PMG and Eurosystem shall be involved. This certification proves the interoperability of CDADS and the T2S Platform and ensures that CDADS cannot harm T2S due to an inappropriate technical communication or operational procedure. Planned Connectivity Connectivity Mode CDAD will use real-time connectivity to T2S for implementation of queries on accounts (balance, current account situation, etc.) in order to maintain up-to-date account and party configuration. CDAD may also opt in for real-time account updates. The correct management of Corporate Actions Notifications also requires real-time communication. In addition to the real-time communication (RT), CDADS will also utilize store-and-forward connectivity mechanisms, needed for processing of large real-time messages ii, as well as for the transmission of outgoing CDADS batch requests after the end of each batch processing period. The maintenance of store-and-forward (SNF) communication between CDADS and T2S requires CDADS to implement a direct connection to T2S using CoreNet WMQ-DEP protocol. Hence, interfaces with Value-Added Service Providers (VA-NSPs) may be implemented at a later stage as the need of store-andforward communication related to the chosen mode of operation (batches) requires maintaining interfaces for direct connection to T2S iii. 19 P a g e

20 Certificate Management On behalf of CDAD, a point of contact is going to be provided for certificate management and security authorization. The person in charge would act as Security Officer, managing A2A and U2A certificates needed for the correct communication between CDADS and T2S. CDAD currently has such a position for its internal system certificate management and the same person on duty would present a signed version of procedures for sensitive data management document and sensitive data management certificate to T2S to ensure commitment to the highest standards of information security. Dedicated Links Connectivity The table below specifies the dedicated link connections utilized by CDADS incoming channel. For all the queues listed, local queue type and CDADS consumer are assumed: Queue Name Scope Channel CD0F.in.msg_rt.L01 RT incoming message requests CD0F.MRT.IN.REC.01 CD0F.in.msg_rt.ack.L01 RT incoming ACK message from GW CD0F.MRTK.IN.REC.01 CD0F.in.file_rt.L01 RT incoming file requests CD0F.FRT.IN.REC.01 CD0F.in.file_rt.ack.L01 RT incoming ACK file from GW CD0F.FRTK.IN.REC.01 CD0F.in.msg_snf.L01 SNF incoming message requests CD0F.MSF.IN.REC.01 CD0F.in.msg_snf.ack.L01 SNF incoming ACK message from GW CD0F.MSFK.IN.REC.01 CD0F.in.file_snf.L01 SNF incoming file requests CD0F.FSF.IN.REC.01 CD0F.in.file_snf.ack.L01 SNF incoming ACK file from GW CD0F.FSFK.IN.REC.01 CD0F.in.cmd.L01 Command response from GW CD0F.CMD.IN.REC.01 The table below specifies the dedicated link connections utilized by CDADS outgoing channel. For all the queues listed, remote queue type and T2S middleware consumer are assumed: Queue Name Scope Transmission Queue Channel CD0F.out.msg_rt.R01 MSG RT outgoing response CD0F.out.msg_rt.trn.R01 CD0F.MRT.OUT.SEN.01 CD0F.out.msg_rt.ack.R01 MSG RT outgoing ACK to GW CD0F.out.msg_rt.trn.R01 CD0F.MRTK.OUT.SEN.01 CD0F.out.file_rt.R01 RT outgoing file CD0F.out.file_rt.trn.R01 CD0F.FRT.OUT.SEN P a g e

21 CD0F.out.file_rt.ack.R01 File RT outgoing ACK to GW CD0F.out.file_rt.trn.R01 CD0F.FRT.OUT.SEN.01 CD0F.out.msg_snf.R01 MSG SNF outgoing request CD0F.out.msg_snf.trn.R01 CD0F.MSF.OUT.SEN.01 CD0F.out.msg_snf.ack.R01 MSG SNF outgoing ACK to GW CD0F.out.msg_snf.trn.R01 CD0F.MSFK.OUT.SEN.01 CD0F.out.file_snf.R01 File SNF outgoing request CD0F.out.file_snf.trn.R01 CD0F.FSF.OUT.SEN.01 CD0F.out.file_snf.R02 File SNF outgoing request CD0F.out.file_snf.trn.R02 CD0F.FSF.OUT.SEN.02 CD0F.out.file_snf.R03 File SNF outgoing request CD0F.out.file_snf.trn.R03 CD0F.FSF.OUT.SEN.03 CD0F.out.file_snf.ack.R01 File SNF outgoing ACK to GW CD0F.out.file_snf.trn.R04 CD0F.FSFK.OUT.SEN.01 CD0F.out.cmd.R01 Command request to GW CD0F.out.cmd.trn.R01 CD0F.out.cmd.trn.R01 Architecture in Brief CDADS will include special dedicated IBM WebSphere WMQ service center with message queue handling and failover infrastructure capable of supporting the message queues listed in chapter Dedicated Links Connectivity. CDAD will commit to keeping high failover standards on all levels required for uninterruptible operation of the servers on its premises to ensure message non-repudiation. In addition to the message queue server redundancy, existing DNS should be used for named resolution of the message queue access points maintained in CDAD. CDAD will maintain the CDADS in accordance to its own IT Infrastructure Management rules. Internet Connectivity CDAD will use Internet connections that provide the required 1GbE connectivity with T2S. Further, CDAD will use alternative Internet access points which provide for enough redundancy in case of network failures (excluding Bulgarian backbone Internet connectivity issues). Business Continuity Assuarace CDAD is ISO/IEC certified to cover Information technology - Security techniques - Information security management systems (ISMS) requirements, including Business Continuity Planning (BCP). 21 P a g e

22 Organizational Feasibility Planned Integration with Related Areas and Participants The joining of CDAD to the T2S platform will inevitably impact the Bulgarian capital market. The clients of CDAD can be divided in two groups (1) Members and (2) Companies whose dematerialized securities are with book entry registration in CDAD. The Members of CDAD primarily settle deals with dematerialized securities for their own account and/or for Client accounts, which also include settlement with global custodians. The accounts of Bulgarian physical persons and Bulgarian legal entities are booked at final beneficial owner (end-investor model). According to the Law on Markets in Financial Instruments, which incorporates MiFID in the Bulgarian legislature, the global custodians can open omnibus accounts as well. The companies with dematerialized securities with book entry registration in CDAD use CDAD s services for organizing and conducting corporate actions. The Members of CDAD will be able to do cross-border settlement of transactions and send the settlement instructions for these transactions via CDADS. This will facilitate the access of investment intermediaries (including banks offering this service) to the international markets and will speed up the settlement process of transactions. The instructions for transfers between the Members of CDAD and/or their Clients will be pre-matched in the CDADS and then sent to T2S. The instructions related to transactions with members of other CSDs and/or their Clients, will be matched in T2S. The critical time periods related to the reflection of the transfer of possession (schedule of receiving and processing batches from CDADS to T2S, and vice versa) will be addressed with the introduction of changes to the guidelines and requirements to Members of CDAD. These guidelines and requirements will stipulate the time frame for receiving instructions and the time period for transfers after the receipt of instructions. The accounts of companies having dematerialized securities with book entry registration will be directly registered in T2S. Hence, the transactions with these securities will be with faster and safer settlement. Local investors will gain access to foreign issued securities at the same conditions and lighter settlement process. The process of standardization of corporate actions that runs in parallel will provide for identity of processes in different CSDs in relation to end users and their participation in corporate actions. T2S Project Calendar Deadlines According to the Framework Agreement, migration will take place in a maximum number of four migration waves. The minimum period between them is set at 3 months. A contingency migration wave is also envisaged, but not later than 6 months after the date of the last migration wave. The period between the date of the first migration wave and the contingency migration date is limited to 18 months. Based on the criteria and conditions specified in the Framework Agreement, Schedule 4 (Migration) and schedule 2 (T2S Programme Planning and Monitoring) the Eurosystem will consider the decision on the composition waves. 22 P a g e

23 The CDAD is targeted to meet the deadlines set the list of Synchronization points and timeline of the testing periods outlined in the text. The introduction of the new CDADS will significantly assist and support the T2S joining process. Timeline for Development and Implementation of IT Solutions for Bridging Identified Gaps Steps Deadline Description Assessment and analysis of the documentation provided by Eurosystem with regard to CDAD connectivity and the needs for development of the new CDAS to operate with the Eurosystem Preparation of the Expression of Needs for the new CDADS to operate with Eurosystem Selection of a vendor for the new CDADS to operate with Eurosystem Eurosystem Development and pilot implementation of the new CDADS to operate with Eurosystem Internal testing of the developed new CDADS to operate with Eurosystem CDAD reviews the Eurosystem Acceptance Test (EAT) documentation and determines possible specific additional test cases, in order to improve the sensitivity of EAT to the present specific market requirements and sets the developed system for the test. Business Community and Environment Feasibility The majority of the market participants and infrastructures supports T2S project given its crucial significance for the post-trading integration and settlement services harmonization in an integrated technical environment. The discussions held with the national security community led to the consolidation of a common national position. The market stands for any initiatives targeted to create a pan-european efficient financial infrastructure dismantling barriers between national markets. Appendix 1 Law on Public Offering Of Securities 23 P a g e

24 Article 127 (1) The issuing and disposition of dematerialized securities shall take effect as from the registration thereof at the Central Depository. Article 136 (1) (Amended, SG No. 39/2005, SG No. 86/2006, SG No. 52/2007) In the register of the Central Depository there shall be recorded the names of the holders of dematerialized securities, as well the names of the non-resident persons referred to in Article 41, Paragraph 1 of the Markets in Financial Instruments Act who or which have acquired securities acting in their own name but for the account of other non-resident persons. (2) The Central Depository shall maintain the registers of shareholders of companies issuing dematerialized shares, as well as the registers of holders of other dematerialized securities, according to a procedure established in the ordinance provided for in Article 140 herein. (3) (Amended, SG No. 39/2005, SG No. 52/2007) As to the creditors of the Central Depository, the investment intermediaries referred to in Article 5, Paragraph 3, item 1 of the Markets in Financial Instruments Act and any other third parties, any securities recorded in the Central Depository shall be deemed to be securities owned by the holders thereof. Law on Markets In Financial Instruments Article 34, paragraph 1, paragraph 5 and paragraph 7 (1) The investment intermediary shall separate its financial instruments and funds from those of its clients. The investment intermediary shall not be responsible to its creditors with the financial instruments and funds of its clients as well as with underlying securities in respect of depository receipts. (5) The investment intermediary shall safekeep the financial instruments of its clients in a depositary institution on client accounts to the account of the investment intermediary or on accounts opened to the account of a third party, under conditions and procedure set out in an ordinance. (7) Except in the cases set out in an ordinance the investment intermediary may not use: 1. on its account the funds and financial instruments of its clients; 2. on account of its client funds and financial instruments of other clients; 3. on account of its client its own funds or financial instruments. Article 41 (1) Foreign persons entitled under their national law to perform the services and activities under Article 5, Paragraph 2, who have acquired financial instruments on their behalf but on the account of other foreign persons under the terms of Article 15, Paragraphs 5 and 6 or as clients of the investment intermediary for which the Republic of Bulgaria is the home country, shall identify before the 24 P a g e