N Title. The continuous net settlement objective is to reduce the number of Net Fails.

Transcription

1 N Title Instruction III.4-2 PROCEDURE FOR SETTLING NET FAILS ON TRANSACTIONS REGISTERED IN THE CASH AND DERIVATIVES CLEARING SYSTEM Pursuant to Articles to of the Clearing Rule Book. In this Instruction: - the terms selling Clearing Member are referring to the Clearing Member which holds the selling Open Positions ; - the terms buying Clearing Member are referring to the Clearing Member which holds the buying Open Positions ; and - the terms Securities provider are referring to any Clearing Member, other than the selling Clearing Member, wishing to participate to the buy-in process. CHAPTER 1 SETTLEMENT NETTING Section 1 - CONTINUOUS NET SETTLEMENT Article 1 The continuous net settlement process consists in aggregating the Net Fails to the Open Positions registered in the Delivery Account which are not submitted to the buy-in or sell out procedure. The continuous net settlement objective is to reduce the number of Net Fails. Within each Delivery Account, the continuous net settlement works as follows. Open Positions to be settled, calculated as described in the Article of the Clearing Rule Book, are netted with Net Fails on the same Security, under the following conditions: Oldest Net Fails are offset in priority; The amounts are netted together independently from the quantities and; The intended Settlement Date of the Open Positions and/or Net Fails having the greatest amount in absolute value is applied to the result. Article 2 Remaining Open Positions related to the same Security, for which the intended Settlement Date is before or on the next Clearing Day, are aggregated into one unique delivery versus payment instruction. This instruction is sent to the Settlement Addresses corresponding to this Delivery Account. Article 3 A buy-in procedure is triggered to process the remaining Net Fails when they have reached the deadline mentioned in Article 9, subject to Articles 4, 22, 23 and 24, when applicable. If so, the relevant Net Fails are removed from the next process dedicated to the preparation of the settlement instruction. Article 4 As a consequence of the process described in Article 1, the age of selling and buying Net Fails can be different and the quantity of Securities that are not delivered (across all the Delivery Accounts) per intended Settlement Date may be unbalanced. 1

2 Hence, the buy-in algorithm will match together Net Fails having potentially different intended Settlement Dates. A buying Net Fail can be recycled for four (4) days but not necessarily the corresponding selling Net Fail, or vice versa. Section 2 - SETTLEMENT DATE NETTING The below Articles 5 to 6 exclusively apply for the settlement of the Transactions in the National Bank of Belgium settlement system only. Article 5 The settlement date netting process consists in sending, in D, settlement instructions to the National Bank of Belgium which exclusively comprise Open Positions which intended Settlement Date corresponds to the following Clearing Day (D+1). In the event the Open Positions are not settled in D+1, the corresponding Net Fails are recycled in the National Bank of Belgium settlement system and, therefore, are not aggregated to the Open Positions to be settled in D+2. Article 6 A buy-in procedure is triggered when the Net Fails, recycled in the National Bank of Belgium settlement system, have reached the deadline mentioned in Article 9, subject to Articles 4, 22, 23 and 24, when applicable. If so, the relevant Net Fails shall be cancelled in the National Bank of Belgium settlement system. For this purpose, Clearing Members grant LCH SA the irrevocable authority to cancel, in the National Bank of Belgium settlement systems, the Net Fails on the fourth Clearing Day following the intended Settlement Date (intended Settlement Date +4). CHAPTER 2 SETTLEMENT FOR NET FAILS Section 1 SETTLEMENT FOR NET FAILS ON SECURITIES Article 7 LCH SA can reduce the timeframe for a buy-in mentioned below, at its discretion, if it deems that excessive risk would be incurred otherwise. An alert is made to the concerned Clearing Member by LCH SA. Sub section 1 Buy-in procedure Article 8 When a selling Open Position remains wholly or partially unsettled on the evening of the third Clearing Day following the intended Settlement Date (intended Settlement Date +3), the selling Clearing Member receives an electronic alert from LCH SA, through its access solution. Such alert requires the selling Clearing Member to settle the relevant selling Open Position by making sufficient provision on its central Securities depository or Securities settlement system account, to allow the Net Fail to be settled in the normal daily settlement process, at the latest on the evening of the fourth Clearing Day following the intended Settlement Date (intended Settlement Date + 4) of the selling Open Position, otherwise LCH SA initiates the buy-in procedure for the quantity of Securities necessary to settle the Net Fails. Article 9 Except for Open Positions related to non-novated Transactions, LCH SA initiates a buy-in for any selling Open Position (, which remains wholly or partially unsettled the evening of the fourth Clearing Day following the intended Settlement Date (intended Settlement Date +4) of such selling Open Position. 2

3 Article 10 In addition, on the evening of the fourth Clearing Day following the intended Settlement Date (intended Settlement Date +4), the selling Clearing Member and the corresponding buying Clearing Member(s) receive, through their access solution, an electronic confirmation that the buy-in will be initiated. Article 11 LCH SA charges a flat fee as defined in the fee grid, pertaining to the initiation of the buy-in, to the selling Clearing Member, even if such Clearing Member actually delivers the Securities. Article 12 Neither the alert mentioned in Article 8 nor the confirmation mentioned in Article 10, is a condition precedent to the buy-in. Failure to receive such alert or confirmation does not prevent LCH SA from performing the buy-in and charging it. Article 13 On the morning of the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5), a buy-in attempt is launched using a tender price. The tender price, together with the list of Securities to be bought in, and for each Security, the relevant quantity, are posted on LCH SA website. For any type of Security the tender price is deemed to be a maximum amount above which no offer of buy-in will be made. It is defined in a Notice. Article 14 Any Securities provider wishing to participate to the buy-in process shall provide LCH SA with a notification of delivery, by electronic mail, using the dedicated form available on the website, on the Clearing Day of the buy-in attempt, within the timeframe as set out in a Notice. Article 15 If at least one Securities provider has sent an offer, LCH SA will inform the selling Clearing Member that it shall send, on the same Clearing Day and within the timeframe as set out in a Notice, a notification of delivery, if it delivers fully or partially the relevant Securities. Such notification shall be sent by electronic mail, using exclusively LCH SA standard document which is available on the website. Failure to provide such a notification within the hereabove mentioned timeframe will be deemed to constitute a non-delivery statement. If the selling Clearing Member proposes to fulfil wholly or partially its obligation to deliver the Securities, then LCH SA gives priority to its full or partial delivery upon any other Securities provider offer. If the selling Clearing Member does not propose to deliver any Security or proposes to deliver them partially, LCH SA chooses for the whole or remaining quantity the cheapest Securities provider and if there is more than one Securities provider with the same price and quantity, LCH SA chooses the first one presented. Article 16 If there is no offer by a Securities provider, the selling Clearing Member which account structure is setup in hold mode (as described in the relevant European Central Bank documentation) and which intends to partially deliver the relevant Securities, shall on the same Clearing Day within the timeframe as set out in a Notice, send to LCH SA a notification of delivery using exclusively LCH SA standard document which is available on the website. For the avoidance of doubt, no notification of delivery will be required by LCH SA from: - selling Clearing Members which account structure is set-up in hold mode and intend to fulfil wholly their obligation to deliver the Securities or do not intend to deliver Securities at all; - selling Clearing Members which account structure is set-up in release mode (as described in the relevant European central Bank documentation). 3

4 Article 17 The notification of delivery sent to LCH SA,by the selling Clearing Member or the Securities provider, is a unilateral promise of delivery which constitutes an obligation to deliver the relevant Securities and quantity if LCH SA selects the offer. In case of failure to perform fully its obligation to deliver, a penalty is applicable as defined in a Notice. The proceeds from the fine will be passed onto the Clearing Members according to the calculation method mentioned in Chapter 4 of Instruction III.4.3. Article 18 The selling Clearing Member s Securities account is debited by LCH SA directly and/or the Securities provider delivers the Securities to LCH SA's dedicated buy-in account opened in the books of the relevant central Securities depository or Securities settlement system. In both cases, the delivery of the Securities will be performed in delivery versus payment. The delivery of the relevant Securities occurs on the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5). The timing within which the Securities provider and/or the selling Clearing Member shall deliver the Securities is mentioned in a Notice. On the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5) the selling Clearing Member and/or the selected Securities provider s account is credited of the relevant cash amount and a delivery versus payment instruction is sent for settlement on the same day to the relevant cash and Securities accounts of the relevant buying Clearing Member(s). Article 19 As an exception to the principles mentioned in articles 15 and 16, as regards to the Transactions relating to the activity of Bourse du Luxembourg which settled exclusively in Euroclear Bank and Clearstream Banking Luxembourg, selling Clearing Members are required to send a notification of delivery to LCH SA, on the Clearing Day of the buy-in attempt, within the timeframe as set out in a Notice, whether a Securities provider has sent an offer or not. Failure to provide such a notification within the hereabove mentioned timeframe will be deemed to constitute a non-delivery statement. As an exception to the principles mentioned in article 18, as regards to the Transactions relating to the activity of Bourse du Luxembourg which settled exclusively in Euroclear Bank and Clearstream Banking Luxembourg, LCH SA requests, on the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5), the selling Clearing Member and/or the chosen Securities provider(s) to deliver the relevant Securities to LCH SA's dedicated buy-in account opened in the books of the central Securities depository or Securities settlement system, free of payment. The timing within which the Securities provider and/or the Clearing Member shall deliver the Securities is mentioned in a Notice. In such a case, after receiving the Securities, LCH SA sends: - an instruction to credit the selling Clearing Member and/or the Securities provider s account, of the relevant cash amount; and - a delivery versus payment instruction to the relevant cash and Securities accounts of the relevant buying Clearing Member(s). For the sake of clarity, these instructions will be settled on the sixth Clearing Day following the intended Settlement Date (intended Settlement Date +6). Article 20 If the Securities provider does not receive the request to deliver from LCH SA before the time set out in a Notice, LCH SA shall be deemed to have rejected the proposal and therefore the obligation to deliver, mentioned in Article 17, is void. 4

5 Article 21 If the selling Clearing Member and/or the Securities Provider deliver(s) too many Securities, in such exceptional case, LCH SA will do its best effort to return these Securities. Sub Section 2 Early buy-in procedure Article 22 When a buying Open Position remains wholly or partially unsettled on the evening of the fourth Clearing Day following its intended Settlement Date (intended Settlement Date +4), LCH SA initiates an early buy-in procedure on the selling Open Position which matches such buying Open Position. Therefore, LCH SA can launch an early buy-in attempt, for a selling Open Position as from its intended Settlement Date. Such early buy-in attempt is launched in the morning of the Clearing Day following the above mentioned electronic confirmation. Article 23 The processes and obligations described in the provisions of Chapter 2 Section 1, Sub-Section 1, dedicated to the buy-in procedure, apply mutatis mutandis, except for the following: a) The selling Clearing Member will not receive the alert referred to in Article 8; b) The actions mentioned in articles 9 and 10 are replaced by the actions mentioned on article 22; c) On request of the selling Clearing Member through the standard form of the notification of delivery mentioned in Article 15 and within the same timeframe,, the settlement of the selling Open Position can be postponed until on the fifth Clearing Day following the intended Settlement Date (intended Settlement Date + 5) of its selling Open Position at the latest; d) The actions mentioned in article 16 are replaced by the following one: If there is no offer by a Securities provider, no notification of delivery will be required by LCH SA from the selling Clearing Member and the instruction will be recycled until the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5) of its selling Open Position. e) Timeframes applicable are as follows : As an exception to article 10, the confirmation will be sent on the Clearing Day immediately preceding the launch of the early buy-in attempt; The actions mentioned in articles 13 to 15 and 3, are applicable on the Clearing Day of the early buy-in attempt; The timeframes mentioned in articles 18 and 19 apply on the Clearing Day of the early buy-in attempt or at a later date in application of the right of the selling Clearing Member to postpone the settlement as set out in Article 23. Article 24 LCH SA charges a flat fee as defined in the fee grid, pertaining to the initiation of the early buy-in, to the selling Clearing Member in case of partial or non-delivery. Sub Section 3 Cash compensation Article 25 Selling Open Positions, for which Securities remain undelivered after the performance of buy-in in the evening of the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5) are settled by cash compensation. The selling Clearing Member pays the cash compensation to LCH SA, at the latest, on the sixth Clearing Day following the intended Settlement Date (intended Settlement Date + 6). On the same 5

6 Clearing Day, LCH SA passes on the entire amount to the Clearing Member(s) suffering from the Net Fail(s). In the early-buy in procedure, selling Open Positions for which Securities remain undelivered after the following events are settled by cash compensation: - the performance of buy-in on the Clearing Day set out in Article 22 ; or when applicable, - the expected date of delivery, stipulated in the notification form, within the limit of Article 23.c). The selling Clearing Member pays the cash compensation to LCH SA, on the Clearing Day following the above mentioned events. On the same Clearing Day, LCH SA passes on the entire amount to the relevant buying Clearing Member(s). Article 26 Cash compensation can be performed earlier if the relevant Securities are not listed anymore or have expired before the evening of the fifth Clearing Day following the intended Settlement Date (intended Settlement Date +5). In case of faillure to deliver warrants, or any Financial Instruments, that have expired prior to the maturity date defined by the issuer (notably, but not only, knock-out warrants), the cash compensation is performed on the Clearing Day following the intended Settlement Date (intended Settlement Date +1). As an exception to the above principle, for warrants that were negotiated and have expired on the same Clearing Day, the cash compensation is performed on the third Clearing Day following the intended Settlement Date (intended Settlement Date +3) on request of the selling Clearing Member subject that: the Securities are registered in the accounts opened in the books of the relevant CSD in the name of the selling Clearing Member but the latter is prevented from delivering such Securities on intended Settlement Date due to internal technical/operational failure; and the relevant (I)CSD maintains the Securities available in their system for settlement. Article 27 For any type of Security, the cash compensation amount is calculated as set-out in a Notice. In order to limit the damages suffered by the buying Clearing Member, notably in case of high market volatility, the cash compensation cannot be inferior to the amount corresponding to the netted absolute value of the Open Position remaining on the evening of the fifth Clearing Day following the intended Settlement Date (Intended Settlement Date +5) or the Open Position remaining at an earlier timeframe subject to Chapter 2 Section 2. Section 2 SETTLEMENT FOR NET FAILS ON CASH: SELL-OUT PROCEDURE Article 28 For Net Fails due to a lack of payment for which Securities have been received from the selling Clearing Member but have not been delivered to the buying Clearing Member, LCH SA sells out the Securities corresponding to any buying Open Position which remains unsettled on the morning of the first Clearing Day following the intended Settlement Date (intended Settlement Date + 1). Article 29 On the Clearing Day when the cash failure occurs, the relevant buying Clearing Member receives an alert from LCH SA, electronically through its access solution. Article 30 This alert requires the Clearing Member to settle the relevant Open Position by crediting its central bank or commercial bank account to allow the Net Fail to be settled in the normal daily settlement process at the latest on the following Clearing Day otherwise LCH SA initiates the sell-out procedure and sells the quantity of Securities necessary to settle the Net Fails. 6

7 Article 31 LCH SA can change the timeframe for a sell-out, at its discretion, if it deems that excessive risk would be incurred otherwise. CHAPTER 3 SETTLEMENT FOR NET FAILS ON RIGHTS Article 32 Regarding Financial Instruments giving rights to a Security (e.g subscription rights, warrants, convertibles etc.), a buying Clearing Member suffering from a Net Fail on those Securities can ask LCH SA to be delivered: - the relevant Financial Instruments, if they are still traded and available on the market or; - corresponding new Securities, if the Financial Instruments are no longer available on the market, in which case LCH SA can require the Clearing Member suffering from the Net Fail to adjust its relevant Open Position or; - existing Securities, if the subscription rights are not available on the market and the corresponding new Securities have not yet been issued. LCH SA will comply with this request within a timeframe subject to the market conditions. Regarding Net Fails on coupons LCH SA shall pay to the buying Clearing Member the following amounts: the net amount of the coupon fixed by the issuer, and If as a result of the different tax regimes of coupon payments and compensation payments, the buying Clearing Member is due to pay taxes, then, in addition to the amount above mentioned, an indemnity will be paid to neutralise the tax effects under the conditions set out in a Notice. 7

8 DATE ANNEX 1 EXAMPLE OF AN EARLY BUY-IN PROCEDURE A first Clearing Member (CM A) holds a buying Open Position of 100 Securities to be received on day S from LCH SA. Another Clearing Member (CM B) holds a selling net Open Position of 100 Securities to be delivered on S to LCH SA. The settlement of these two net Open Positions fails on S and therefore they are included in the recycling process. The buying Open Position of CM A remains a Net Fail in its Delivery Account while the selling Open Position of CM B remains a Net Fail in its Delivery Account. On day S+1, CM B makes a buy trade of +100 to receive from another clearing member (CM C). Settlement date of this transaction is S+1+2 = S+3. In application of the continuous net settlement, CM B benefits on S+2 evening from the netting of its Open Positions, as described in Article 2, resulting in no Open Position to deliver/to receive and therefore in the cancellation of its Net Fail. As a consequence, until CM C does not deliver the requested Securities, the original buying Open Position of CM A remains a Net Fail while the selling Open Position of CM C remains a Net Fail. On S+4, the buying Net Fail of CM A will become eligible for buy-in and will match the selling Open Position of CM C as if it was a four-day Net Fail. EVENT CM A DELIVERY ACCOUNT CM B DELIVERY ACCOUNT CM C DELIVERY ACCOUNT S-2 Transaction where CM A is buyer and CM B seller against LCH SA. Buy 100 Sell 100 S morning Instructions sent to the settlement platform are unsettled and thus recycled for the next day (Net Fails). +/ /- 100 S+1 morning Both instructions unsettled. +/ /- 100 (1st day of (1st day of Net Fail) Net Fail) Transaction where CM B is buyer and CM C is seller against LCH SA. Buy 100 Sell 100 S+2 morning The Net Fails remain (instructions unsettled) for CM A and CM B. +/+ 100 (2nd day of Net Fail) -/ / /- 100 CM B and CM C Open Position remains. (2nd day of Net Fail)

9 S+2 evening On S+2 evening, thanks to the continuous net settlement, the buy trade of +100 made by CM B is netted with his selling fail position of No open position remains for CM B +/+ 100 (2nd day of Net Fail) -/- 100 ZERO settle to +/+ 100 ZERO settle to -/- 100 S+3 Morning Instructions sent for settlement regarding CM A buyer and CM C seller against LCH SA. +/+ 100 (3 rd day of net fail) Zero to settle for CM B -/- 100 S+4 morning CM A Net Fail remains. CM C did not deliver for the intended Settlement Date and thus its Open Position becomes a Net Fail. S+4 evening Net Fail belonging to CM A has reached S+4, CM A Net Fail matches CM C Net Fail and buy-in is triggered for the latter. +/+ 100 (4th day of Net Fail) -/- 100 (1st day of Net Fail) S+5 morning Tendering price communicated by LCH SA pursuant to Article 22 CM C can contact LCH SA to deliver in priority against other Securities providers, if it has provision corresponding to its selling Net Fail. If not, CM C can ask for an extension until S open days to deliver the Financial Instruments. If the extension is granted by LCH SA, the net fail positions of CM A and CM B are recycled for settlement day S+6. S+6 morning The two recycled instructions can settle if Financial Instruments are available on CM C account. If not, they will be recycled again for settlement date S+7 S+8 If CM C selling position is not settled before S+8, CM C will have no choice than delivering the shares at S+8 before 4:00 PM CET Paris time. Otherwise, a cash indemnity (120% of the adjusted closing price) will be processed for value date S+9 and a 10% penalty will be charged. +/+100 (5 th day of net fail) +/+100 (6 th day of net fail) +/+100 (8 th day of net fail) -/- 100 (2 nd day of net fail) -/- 100 (3 rd day of net fail) -/- 100 (5 th day of net fail)