Questions and Answers

Questions and Answers Transition to T+2 for the Swedish market 11 September 2014

Background The upcoming implementation of the Central Securities Depository Regulation (CSDR) mandates a T+2 settlement cycle with the aim to reduce risk and improve efficiency in post trade transactions. The adjustment to a T+2 settlement cycle affects all markets in scope of the CSDR regulation. All participants of the Swedish market will have to be prepared and make the necessary adjustment to settlement according to the new settlement cycle. This document is meant to work as guidance in the adoption of the new settlement cycle. Purpose The purpose of this document is to provide responses to the most commonly posed questions regarding the transition to T+2 settlement for the Swedish market. Questions and answers This document is intended to be continually edited and updated as and when new questions are received and when new information is available. Document history Version history: Version 1 published on March 4, 2014 Version 2 published on May 19, 2014 Version 3 published on September 11, 2014 Questions added between document versions are marked with the text **new**, questions modified between versions are marked with the text **modified**. Only changes from the most previous version are reflected in the document. The information in this document is believed to be reliable and has been obtained from sources believed to be reliable. The information in this document could be subject to change without notice. Svenska Fondhandlareföreningen makes no representation as to the accuracy or completeness of the information and it should not be considered advice. 2

Section 1: General 1.1 What is the background for the move to a T+2 settlement cycle? **modified** The implementation of a T+2 settlement cycle is mandated in the Central Securities Depository Regulation (CSDR) which was officially decided on July 23, 2014. 1.2 Who is coordinating the T+2 implementation activities for the Swedish market? The Swedish Securities Dealers Association (SSDA) is coordinating the implementation for the Swedish market in close cooperation with market participants, stock exchange(s), CCP(s) and CSD(s). 1.3 Is there any documentation available regarding the transition to T+2? This Q&A document as well as other applicable information will be made available or referenced on the SSDA s website at. 1.4 Which markets are affected? All markets affected by CSDR are in scope for making a transition to T+2. 1.5 What is the CSDR timeline for implementation of T+2? The current draft wording of CSDR sets a timeline for T2S markets to move to T+2 at a minimum of six months before the market migrate to T2S but no later than January 1, 2016. Other markets affected by CSDR are to move to T+2 by January 1, 2015. 1.6 When will the Swedish market implement T+2? Market participants have decided that T+2 for the Swedish market will be implemented on October 6, 2014 and that the implementation will take place independently of the adoption of CSDR. 1.7 Will the implementation likely take place at the planned date? At the time of publication of this Q&A there were no indications that the implementation would be postponed. 1.8 How will the transition to T+2 be achieved for the Swedish market? Intended settlement day for the two trade dates, i.e. October 3 and October 6, will be on October 8, 2014. 1.9 Is there a working group within market infrastructures/users for the preparation and roll-out of T+2? The SSDA s Clearing & Settlement working group has been appointed to coordinate the transition for the Swedish market. On a European level the T2S Harmonisation Steering Group (HSG) has appointed a working group for the implementation of T+2, the T2S T+2 Task Force. Swedish market participants are represented in the T2S T+2 Task Force. 3

1.10 What is the T2S T+2 Task Force and what is the group s assignment? The T+2 Task Force is a working group of the T2S Harmonisation Steering Group (HSG) with the primary focus to ensure coordination between the respective T2S markets move to T+2. In addition the group will encourage coordination with other European markets also moving to T+2. The T+2 Task Force s assignment is to develop and publish a number of recommendations as well as monitor the implementation of these recommendations and the process for moving to T+2. The T+2 Task Force recommendations will be agreed by the HSG and endorsed by the T2S Advisory Group (AG). The T+2 Task Force can only propose recommendations for best practices to the T2S relevant governance structures (HSG and AG). The Advisory Group will take a final decision as to what recommendations should be issued and to whom. According to the draft CSDR provisions, the competent supervisory authorities of the trading venues are the sole regulatory actors for T+2. 1.11 Where will the Task Force s recommendations be published? **modified** The T+2 Task Force s recommendations for best practices were published on May 2, 2014 and can be found at the following link http://www.ecb.europa.eu/paym/t2s/governance/ag/html/taskforcet2/index.en.html. The T2S Programme Office will publish any relevant official information on T+2 it will receive on the T2S webpages, under the letterhead and the responsibility of the publishing entity (and not the one of the ECB T2S Programme Office). 1.12 What are the implications for market participants when moving to T+2? The implications for moving to a T+2 settlement cycle will vary depending on many factors and each market participant must review its own operation and assess what impact the change will have. Below are some general implications that have been identified. Participants mid and back offices will have to do in two days what they have previously done in three days Settlement funding could be impacted as liquidity managers will have one day less to ensure the necessary liquidity for settlement Clearing houses will have less time to settle trades of underlying instruments in connection to e.g. expiration and exercise Static data management could be affected During the T+2 implementation period there can be a temporary (2-3 weeks) peak of settlement fails (failed transaction [fail] is a transaction that does not settle on the intended settlement date) 1.13 Who is coordinating the T+2 implementation activities for other Nordic markets? The Danish Securities Dealers Association and the Danish Bankers Association are jointly coordinating the implementation in the Danish market. Euroclear Finland is coordinating the implementation in the Finnish market. 4

NASDAQ OMX Iceland and the Icelandic Securities Depository are jointly coordinating the implementation in the Icelandic market. NASDAQ OMX stock exchanges in Tallinn, Riga and Vilnius are coordinating the implementation in the Baltic markets. VPS is coordinating the implementation in the Norwegian market. Section 2: Rules & Regulations 2.1 Will there be changes to the Euroclear Sweden rulebooks? No changes will be made in the Euroclear Sweden Clearing & Settlement rulebook. Minor updates will be made to the Issuer rulebook with regard to the payment schedule for dividends. 2.2 Will there be any changes to the NASDAQ OMX Nordic Member Rules? Yes, the NASDAQ OMX Nordic Member Rules and the NASDAQ OMX Derivatives Markets Rules and respective rule related documents will need to be amended as a consequence of the change in standard settlement cycle. The rule changes will be communicated to the members in due time in accordance with the regular process. 5

Section 3: Affected securities and transactions 3.1 What securities are applicable for a T+2 settlement cycle? 1,2 **modified** According to the current text of CSDR the T+2 settlement cycle is applicable to any operations in transferable securities which are executed on trading venues and settled in an (I)CSD i.e. on a meaning Regulated Market MTF or an OTF (if and when applicable) a) Cash Equity b) Listed funds (ETFs) are in scope c) Domestic debt securities d) International debt securities (Eurobonds) - to be confirmed e) Securities settlement stemming from derivatives contract f) Convertible bonds listed on a regulated market g) Warrants h) Lottery bonds (premieobligationer) i) Repurchase agreements first leg will be T+2 or shorter. For exchange (NasdaqOMX) traded repos settlement will be T+1. 1 Comment from Euroclear Sweden: All Euroclear Sweden securities are in dematerialised form thus no physical settlement at CSD level. 2 Comment from NASDAQ OMX: NASDAQ OMX will adopt standard T+2 settlement to all transferable securities admitted to trading in NASDAQ OMX Stockholm, Helsinki and Copenhagen exchanges and the respective First North markets. In practice, according to NASDAQ OMX s view, this means all cash equity and fixed income products traded under NASDAQ OMX Nordic Member Rules. Referring to e), NASDAQ OMX will adopt the T+2 settlement to derivatives exercise on those equity derivatives at NASDAQ OMX Derivatives Markets, which are exercised through a delivery of the relevant underlying in exchange for an amount equivalent to the exercise price. In practice this means equity derivatives where the underlying instrument is a transferable security. Since there might not be full clarity in the instruments listed in a)-g), NASDAQ OMX might adjust the scope of instruments in accordance with the regulation or recommendations. See also section 0 for instruments verified not to be in scope for T+2 settlement. NASDAQ OMX will provide further detailed information on the implementation of T+2 in its all asset classes directly to its participants. 6

3.2 What securities are not applicable for a T+2 settlement cycle? **modified** The following types of securities were at the time of publication not believed or confirmed not to be applicable for T+2 settlement. a) UCITS funds b) Other investment funds 3.3 What transactions are not applicable for T+2 settlement cycle **new** The following types of transactions were at the time of publication not believed or confirmed to be applicable for T+2 settlement. a) The so called grey trading in connection with an IPO. The T+2 rules are not applicable for a security that is not issued. b) None cash settlement (delivering of underlying bonds) of NASDAQ OMX derivatives on government and mortgage bonds. Section 4: Settlement 4.1 Will the transition to T+2 be mandatory for all transactions executed on a trading venue? Yes, T+2 will be applicable for all transferrable securities executed on a Regulated Market, MTF or OTF (if and when applicable). For further details, see Section 3: Affected securities. 4.2 Will the transition to T+2 also include OTC transactions? The CSDR requirements are not applicable to OTC transactions. However, by default all OTC transactions will follow the T+2 settlement cycle unless the counterparties have agreed otherwise. 4.3 Are validation rules foreseen, preventing counterparties to agree on other terms than T+2 (for OTC transactions)? No, there are no validation rules foreseen to limit the terms for OTC transactions. 4.4 Will the buy-in period for failed transactions be impacted by T+2? No, fail trade rules refer to the intended settlement date and not to the trade date. 4.5 Will the recycling rules be impacted by T+2? No, the recycling rules will not be impacted for either on-exchange or OTC transactions. 4.6 Will the lending and borrowing rules and processing be impacted by T+2? **modified** The lending and borrowing rules and processing will at present not be impacted, but the settlement cycle will follow the new T+2 rules. 7

4.7 Will there be any specific measures taken to monitor the settlement during the transition to T+2? Euroclear Sweden will, for a limited period of time, distribute relevant market data to its members covering certain aspects of market performance relating to the introduction of T+2. 4.8 How will the trade netting at the CCP be done for the two trading days with the same settlement? **new** Euro-CCP will use the Trade Date netting model. This means that trading undertaken on Friday 3 October will settle on a T+3 basis whereas trading undertaken on Monday 6 October will settle on a T+2 basis. This will result in two net trades created with settlement date 8 October Section 5:. Asset Servicing 5.1 How will corporate action risks be mitigated during the transition to T+2? The date of implementation has been chosen as to minimise the impact to corporate actions. It has been requested from each market (CSD) that they contact issuers and request they do not plan corporate actions during the T+2 transition period. 5.2 How will the market manage the corporate action announcements pre and postmigration to T+2? Both the CSD (Euroclear Sweden) and the Swedish Securities Dealers Association have urged all issuers, and other initiators of corporate actions, to avoid corporate action events during the migration period. 5.3 Are corporate action dates affected by the T+2 implementation? The type of dates in a corporate action event is not affected, but the relationship between some dates is affected. For more information, please see 5.4. 5.4 Can you confirm whether there will be a change in the order of dates with the move to T+2? The Swedish market is a record date market, and ex date is one settlement cycle - 1 business day before record date. This will not change, but since the settlement cycle is changed from T+3 to T+2, ex date will be moved one business day closer to record date. Ex date is only applicable to mandatory distributions, as per the European standards for corporate actions processing. For mandatory reorganisations with debit of the entire outstanding issue, the key trading-related date is the last trading date. This is one settlement cycle before record date, and will thus also be affected by the change in settlement cycle from T+3 to T+2. 5.5 Can you confirm that the interval between the key corporate action dates will be aligned to the T+2 settlement cycle? Yes. 8

5.6 Will there be difference in the order of dates according to type of corporate actions (mandatory cash distributions, stock distributions, others)? No. 5.7 Will the timing of sending pre-advices (or pre-entitlement) prior to income payment change? No. 5.8 Will there be any changes in relation to General Meetings and the record date for dividends? Euroclear Sweden will preserve the market practice of trading including dividend on the day of the shareholder meeting when markets change settlement cycle from T+3 to T+2. To achieve this Euroclear Sweden will amend the relationship between the general meeting and the record date in its CSD system (the VPC system) so that the record date in the system will take place two business days following the general shareholder meeting. For further information see Euroclear Sweden s website at https://my.euroclear.com/dam/esw/public%20lists%20and%20statistics/open%20documents/se_mark et_practise_general_meeting_and_dividend_record-date.pdf (if you don t have a Euroclear account, click go straight through ). Section 6: Transaction Management 6.1 Will the market accept corporate actions events where the market claim detection period starts before the migration and is continuing after the migration? There is no official market claim detection period in the Swedish market. It is still the settled position on record date which ensures entitlement. Section 7: Tax 7.1 Will this new rule have an impact on tax withheld? No. Section 8: Migration 8.1 How will the migration take place for the Swedish market? A big-bang approach is the current direction for the move to T+2 for the Swedish market, i.e. all applicable instruments will move to T+2 on the same date. 9

8.2 Is any system development needs foreseen in relation to the transition to T+2? As a general assumption changing the settlement cycle normally does not require significant systems changes as participants, both local and international, normally have systems that can cope with different settlement cycles. 8.3 Are there any known changes to interfaces for Euroclear Sweden s systems in regards to the implementation of T+2? There will be no change to the general CSD interfaces, but the new standard settlement cycle will be reflected in those GUI screens that currently show T+3 dates by default. 8.4 Is there a client external testing foreseen prior to the migration on the market/csd? For details on testing see Section 9: Testing. 8.5 Will there be any impact on the recycling OTC transactions on migration date? No. 8.6 Will there be any impact on the recycling Stock Exchange transactions on migration date (only applicable to 'trade date netting' transactions)? No. 8.7 Are there any known changes to interfaces for NASDAQ OMX systems in regards to the implementation of T+2? No, the change has no impact on any protocols used for INET Nordic and there will be no implications on any Genium INET protocols only the value of the standard settlement field will be changed. Section 9: Testing 9.1 Is there any mandatory testing for the transition to T+2? There is no mandatory testing but it is highly recommended to perform testing before the migration to T+2. Market and infrastructure participants will offer testing of the transition, further details can be found below. 9.2 What are the agreed testing period(s)? NASDAQ OMX T+2 standard settlements will be available in both INET Nordic and Genium INET for testing in two phases: Phase 1 for early testing: June 16 June 27, 2014 Phase 2 for testing: August 18 October 3, 2014 10

During the period from June 30 to August 15, 2014, current T+3 standard settlement is rolled back to test systems. For end-to-end testing including settlement, members are advised to make necessary arrangements themselves with the cash CCP (when applicable) and with the relevant CSD(s). Up to date information on T+2 and testing can be found on NASDAQ OMX website at http://www.nasdaqomx.com/transactions/posttrade. Euroclear Sweden Euroclear Sweden s system allows for different settlement cycles including T+2 and members have the possibility to test T+2 at their preference. It is recommended for all members to test T+2 settlements prior to migration. For those members requiring real data to align securities flow from exchange to settlement Euroclear Sweden can provide test data. To test trade to settlement it is important to ensure that necessary arrangements are in place with the exchange and in those instances it is applicable, the central counterparty. For support please contact Euroclear Sweden at +46 (0)8 402 91 25 or clear_settle@euroclear.eu. Up to date information on T+2 and testing can be found on Euroclear Sweden s website at https://my.euroclear.com/esw/en/knowledge-base/public/tplus2.html (if you don t have a Euroclear account, click go straight through ). 11