Citi Markets & Banking EXECUTION POLICY July 2010
CITI MARKETS & BANKING EXECUTION POLICY July 2010 This policy, which we refer to as the General Policy, sets forth the general basis on which Citi Markets & Banking (we refer to ourselves in this policy as Citi, we or us ) will provide best execution as required by the European Union s Markets in Financial Instruments Directive (known as MiFID ) and the Conduct of Business Rules (the COBS ) of the UK Financial Services Authority (the FSA ). Where a particular Citi business has established additional policy requirements applicable specifically to that business, we refer to each of those policies as a Desk Policy. All Desk Policies together with the General Policy are referred to as the Policy. The General Policy is divided into six sections: Scope and Purpose Achieving Best Execution Compliance with Client Instructions Choosing an Execution Venue Updating the Policy Contact Details The Desk Policies for the Equities and Fixed Income, Commodities and Currencies businesses follow this General Policy. This policy applies to non-retail business only. If you are a retail customer, please contact one of the people named in the Contact Details section below to obtain the applicable policy. I. Scope and Purpose What is the purpose of the Policy? We value our relationship with all of our clients, and we strive in all cases to act fairly and reasonably in dealing with our clients. Additionally, in certain cases where we are providing order execution services to our clients, we are required under MiFID and the COBS to establish and comply with a policy on best execution. The purpose of the Policy is to fulfil that obligation to our clients in a clear and concise manner. You will be deemed to provide consent to this policy when you place an order with us after 1 November 2007. When does the Policy apply? The Policy applies when we are executing an order on your behalf in respect of any of the financial instruments covered by MiFID. This will be the case when: We act on your behalf; and We agree to achieve the best price or other terms for you in the market. 1
In general, the Policy will not apply when we are not executing an order on your behalf, or where we transact with you but not on the basis of having received an order from you. This would be the case: Where we are acting as a dealer and offering to enter into a transaction with you or accepting to enter into a transaction with you as a principal. Where we are acting as your counterparty for our own account. When you transact with us as principal on the basis of a published quote or a request for quote. To the extent that we are following your instructions to execute your order in a particular manner. When you are categorised by Citi as an Eligible Counterparty. (in case of doubt as to your categorisation, please contact Citi as set forth under Contact Details). The financial instruments covered by MiFID include most financial instruments but do not include: Spot FX transactions; and Spot commodity derivative transactions. The Policy applies to all UK-based Citi legal entities through which Citi Markets & Banking effects transactions with clients established in the European Economic Area ( EEA ), including Citigroup Global Markets Limited, Citigroup Global Markets UK Equity Limited, Citibank International plc and Citibank, N.A. London Branch. II. Achieving Best Execution What does best execution mean? Best execution means: That we have established this Policy that is designed to achieve the best result (taking into account all relevant factors described below) across all orders on a consistent basis for any financial instrument covered by MiFID and executed by us for our clients. That we are committed to comply with the Policy. That we will regularly review and update the Policy to ensure that it continues to achieve such results. Demonstrating best execution does not necessarily involve a transaction-by-transaction analysis, but rather involves an assessment of a record of transactions over a period indicating that overall the best result is achieved by executing orders on your behalf on the venues and in the manner described in the Policy. 2
What factors do we take into account to achieve best execution? In achieving best execution, we take into account a number of factors (unless otherwise instructed by you, as discussed in Section III below). These include: Price; Costs; Speed; Likelihood of execution and settlement (liquidity); Size; Nature; Type and characteristics of financial instrument; Characteristics of the possible execution venues; and Any other consideration relevant to the execution of the order. While price is generally a key factor, the overall value to a client of a particular transaction may be affected by the other factors listed above. The relative importance of each of the factors will differ depending on: The characteristics of your order; The characteristics of the financial instruments to which your order relates; and The characteristics of the venues (if there is more than one) where we are able to execute your order. What is our responsibility when your order is executed for us by a third party? On occasion we may pass an order on to another Citi entity or a third party (which may be a broker) to execute. We may pass an order to an affiliated Citi entity in cases where the entity with which you have a direct relationship does not have the ability to execute the order but the affiliated entity does have that ability. In such cases, we have standard procedures and integrated systems for passing orders to our affiliate for execution. In cases where our affiliate is outside of the EEA and we do not have an entity that can execute the order from within the EEA (such as where our affiliate is the only Citi member of the relevant exchange), our non-eea affiliate may not be subject to requirements similar to the best execution requirements under MiFID. We may nevertheless execute your order through our affiliate unless either (i) the circumstances require otherwise or (ii) you explicitly instruct us otherwise and we are able to follow your instructions to use an alternative venue. If we are not able to follow your instructions, we may not be able to accept your order. We may pass an order to a non-affiliated third party broker or dealer to execute your order. In such cases, we will have processes to review periodically our choice of third party brokers and dealers to ensure that, taking into account all the relevant factors, the third party broker or dealer is providing best execution on a consistent basis. In some cases, however, we may make this determination on the basis of a review of the best execution policy of the relevant broker or dealer. What is our responsibility when we execute your order from our own book? In some cases we may choose to internalise your order by executing it in part or wholly from our own principal book. In the case of a transaction in shares that is subject to the systematic 3
internalisation rules of MiFID and the COBS, we will follow those rules if we are operating as a systematic internaliser. In all other cases, we will treat our principal book as an execution venue and apply the Policy. In other words, we will internalise transactions only where, applying the factors that apply to the choice of venue, it is reasonable to conclude that internalisation of the order provides best execution on a consistent basis. How does the Policy apply to structured and over-the-counter transactions? Where we execute an order on your behalf in respect of a structured transaction, such as a forward, future, option or other derivative, on a regulated exchange or multilateral trading facility, we also will apply the same approach to achieving best execution as when we execute orders on your behalf in other financial instruments on such venues. Where we execute an order on your behalf in respect of an OTC structured transaction, with respect to pricing we may rely on internal models that are subject to our internal verification requirements or other methods as set forth in the relevant Desk Policy. However, in most cases in respect of structured transactions we do not act on your behalf, but act as your counterparty for our own account. III. Compliance with Client Instructions What happens if you give us specific instructions as to how to execute your order? Where we have accepted your instructions with respect to the execution of your order, we will follow them to the extent it is possible for us to do so. You should be aware that to the extent that we accept and follow your instructions, the Policy will not be applicable, although the Policy will be applicable to other execution factors to the extent that they are not covered by your instructions. For example: Where you instruct us to execute your order on a particular venue, we will not be responsible for selecting the venue. Where you instruct us to execute your order at a particular time or over a particular period, regardless of the price available, we will endeavour to execute your order at that time or over that period in the best possible manner but will not be responsible for the timing or any of the consequences for price or other factors that results from the timing of execution. IV. Choosing an Execution Venue Which trading venues will we use? For purposes of MiFID, a venue includes an exchange, a multilateral trading facility, a broker, a market maker, a systematic internaliser or another liquidity provider. Unless we agree with you otherwise, we will use a selection of venues that will be reviewed periodically. Sometimes there is only one appropriate venue, and, in such cases, we will only use a single venue. A list of the primary venues of which we are a direct participant and on which we may execute orders on your behalf will be available upon request. 4
Where your order is to be executed on a particular exchange or trading platform of which a Citi Markets & Banking entity is a member, your order may be executed by the Citi entity that is a member of that exchange or trading platform. In such cases, in the event that the executing entity is other than the entity of which you are a client, the executing entity will be acting on behalf of the entity of which you are a client unless we agree with you otherwise. Where your order is executed through a third-party broker, we will review, periodically, the brokers that we use to execute client orders taking into account the factors we describe below for determining execution venues to ensure that the broker or brokers that we use are providing best execution taking into account all orders executed during the review period. Where it appears in a particular case that better execution is available from a broker that we do not ordinarily use, we may use such other broker on a case-by-case basis. However, we are not under any obligation to check a variety of brokers with respect to each transaction unless we have otherwise undertaken an obligation to do so in a Desk Policy. What factors are taken into account in determining the execution venues? Factors that we consider in determining the execution venue for your orders in respect of a particular financial instrument include: General prices available; Depth of liquidity; Relative volatility in the market; Speed of execution; Cost of execution; Creditworthiness of the counterparties on the venue or the central counterparty; and Quality and cost of clearing and settlement. How might factors vary between choices of venue? In some markets, price volatility may mean that timeliness of execution is a priority. In other markets that have low liquidity, the fact of execution may itself constitute best execution. In other cases, our choice of venue may be limited because of the nature of your order or your requirements. For example, when investment products are more illiquid, there may be little (or no) choice of venue. How often do we review our venues? Generally, we will review annually the venues we use to execute your orders. Where we have a choice of venues in respect of a particular order, how do we choose? In some cases, taking into account factors such as cost and benefits of accessing multiple venues and the accessibility of the venues, we may have access to more than one venue for executing an order in a particular financial instrument. In such cases, we will endeavour to choose the best venue for the order taking into account the factors applicable to choosing venues. 5
V. Updating the Policy How often will we update the Policy? We will update the Policy periodically to take into account changes as and when appropriate. How can you obtain the most recent version of the Policy? We expect to post the most recent version of the Policy on the Citi website. If you would like to receive a copy of the most recent Policy, however, please contact us in the manner described in the next section. VI. Contact Details How do you contact Citi in connection with this Policy? If you have queries about the Policy, please contact any of the individuals listed below or send an inquiry via email to mifid.inquiries@citi.com. Nicholas Child, Head of Sales & Trading Compliance +44-20-7508-6821 nicholas.child@citi.com Espen Marthinussen, Equity Sales & Trading Compliance +44-20-7986-6628 espen.marthinussen@citi.com Gary Muller, Fixed Income Sales & Trading Compliance +44-20-7508-6822 gary.muller@citi.com Stephen Bartlett, Head of Equities Legal +44-20-7508-9510 stephen.bartlett@citi.com Jonathan Asher, Head of Fixed Income Legal +44-20-7508-6160 jonathan.asher@citi.com 6
EQUITIES DESK POLICY 1. Relationship to Citi General Policy This Equities Desk Policy is part of the Citi Execution Policy (the General Policy ) to which it is annexed, and you should read it together with the General Policy. If there is any inconsistency between the General Policy and this Desk Policy with respect to the equities businesses covered, the more specific policy set forth in this Desk Policy applies. We use the same defined terms in this Desk Policy as defined in the General Policy. This Desk Policy applies to transactions executed by the EMEA Equities division of Citi Markets & Banking for the following groups of equities products and services that we provide: cash equities, equity and hybrid derivatives, equity finance and equity capital markets. 2. Cash equities (a) General Citi operates across all EEA equities markets either through direct exchange membership and/or by the use of local brokers as set forth in the General Policy. (b) Types of Execution The General Policy sets forth the circumstances under which best execution applies, namely where we are executing an order on your behalf and we agree to achieve the best price or other terms for you in the market. Where we are acting on your behalf and you have not specified an exchange or given us other specific instructions, we will look at the venues to which we have access. We will consider all execution factors as set forth in the General Policy when determining the venue. We may execute your order over a period of time, or request an affiliated entity or a third party broker to execute over a period of time (of up to several days where permitted by local regulation) in order to achieve the best result. Where you give us parameters (such as VWAP), we will endeavour to execute a transaction or a series of transactions such that the overall execution of the order is achieved within the parameters, taking into account the size of the order, the liquidity available for the instrument or instruments that are the subject of the order, the period over which we may execute the order and the venues available at the time of the order. In giving us such an order, you acknowledge that there are many possible ways that the order could be worked, that we will have the discretion to work the order as we believe is in your best interest except to the extent that you give us specific instructions and that the result is by the nature of the type of order uncertain. (c) Self Directed Trading When you use our Direct Market Access ( DMA ) or Direct Server Access ( DSA ) products, you will have the ability to select certain parameters and strategies for the order yourself. We will follow your instructions to the extent possible for us to do so, and will not accept responsibility for those parameters selected by you as factors for providing you with best execution. However, we will provide best execution based on any remaining factors. 7
DMA and DSA connect only to certain exchanges, MTFs and brokers. In some circumstances, and where it is no less advantageous to you, we may internally cross DMA orders instead of seeking execution on another venue. In such circumstances, we would of course, be providing you with best execution. (d) Program Trading When we are carrying out non-risk business, we will be providing best execution and will endeavour to provide the best overall result in relation to the aggregate portfolio rather than in relation to individual transactions within the portfolio. We believe that liquidity and timing of execution are more important factors than price in many cases. When we are risk trading in a basket of securities, we are acting as your counterparty for our own account. (e) Equity Convertibles The Equity Convertibles market is one of limited liquidity. A small proportion of equity convertibles are exchange-traded. Where this is the case and you ask for execution on your behalf on exchange, we will provide that service. However, in most cases we will be acting as your counterparty for our own account. 3. Equity and Hybrid Derivatives Where we act on your behalf with respect to a derivative product, including products in securitized form, we will provide best execution as set forth in the General Policy. 4. Equity Finance When you are executing an equity swap with us or requesting a stock loan or equity repo from us, we are acting as your counterparty for our own account. 5. Equity Capital Markets Our Equity Capital Markets division may act for you as a corporate client to carry out block trades in a rights issue where there is a rump, or where you, as a corporate client or a shareholder, want to buy or sell a block of securities. In these cases, we are acting as your counterparty for our own account and do not provide best execution since we will be making risk prices taking into account the state of the market and our own risk appetite. On occasion, Equity Capital Markets may act on behalf of a shareholder to sell a block of securities using a book-build. Since we will not be going on risk, we will provide best execution as set forth in the General Policy. Where we are effecting a stock buy-back transaction for you that involves working an order in the market, Equity Capital Markets will pass the order to our trading desks. It is understood that such an order will not be given to any other dealing desk because to do so could alert the market to the planned buy-back. Where our trading desk is working an order in the market in connection with a planned stock buy-back for you, we will endeavour, in consultation with you, to work the order so as to carry out your objectives as they have been communicated to us. Such an order, however, will be subject to the Types of Execution approach described in Section 2(b) above. 8
Where we are asked by you or agree with you to effect a buy-back at a particular price, or on particular terms we will endeavour to carry out your instructions. 9
FIXED INCOME, CURRENCY AND COMMODITIES DESK POLICY 1. Relationship to Citi General Policy This Fixed Income, Currency and Commodities ( FICC ) Desk Policy is part of the Citi EMEA Execution Policy (the General Policy ) to which it is annexed, and you should read it together with the General Policy. If there is any inconsistency between the General Policy and this Desk Policy with respect to the fixed income businesses covered, the more specific policy set forth in this Desk Policy applies. We use the same defined terms in this Desk Policy as defined in the General Policy. This Desk Policy applies to transactions executed with you by the FICC division of Citi Markets & Banking. Most transactions are effected by FICC as a dealer and a principal with you, and are not effected on your behalf. As discussed in the General Policy, although we expect to be competitive, the best execution provisions are not applicable to such transactions. Where we do act on your behalf but we follow your instructions, such as where we are instructed to execute on a particular venue (or in an instrument that only trades on one venue) and at a particular price, we will follow your instructions insofar as we are able to do so and the best execution provisions are not applicable to the extent that we do. 2. General: Worked Orders In some cases, we may act on your behalf where we agree with you that we will work an order in the market to achieve the best overall or weighted average price. In such a case we will endeavour to execute a transaction or a series of transactions such that the overall execution of the order is achieved at the best overall or weighted average price, taking into account the size of the order, the liquidity available for the instrument or instruments that are the subject of the order, the period over which we may execute the order and the venues available at the time of the order. In giving us such an order, you acknowledge that there are many possible ways that the order could be worked, that we will have the discretion to work the order as we believe is in your best interest except to the extent that you give us specific instructions and that the result is by the nature of the type of order uncertain. 3. General: Use of Third-Party Dealers or Brokers Where we access a market on your behalf using a third-party dealer or broker, we will periodically review the panel of dealers and brokers with whom we deal to ensure that they represent best execution. We will generally deal with dealers and brokers who have been subject to such periodic review. Although we are not obliged to use other dealers or brokers, however, we may on occasion do so if we have reason to believe that it would be in your interest to do so. 4. Futures Where we are executing transactions in commodity or other futures in the over-the-counter market with market makers or brokers, unless the circumstances warrant otherwise, we will generally endeavour to obtain quotes from two or more market makers or brokers with whom we deal on a regular basis. We will periodically review the panel of market makers. 10