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Omgeo Industry Relations

Omgeo Industry Relations. Briefing on T+2 in Europe Thomas Trepanier Director of Relationship Management Americas Region. Context. Europe currently has 3 settlement cycles T+2 (Germany), T+3 (most other markets) and T+5 (some minor markets)

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Omgeo Industry Relations

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  1. Omgeo Industry Relations Briefing on T+2 in Europe Thomas Trepanier Director of Relationship Management Americas Region

  2. Context • Europe currently has 3 settlement cycles • T+2 (Germany), T+3 (most other markets) and T+5 (some minor markets) • A reduced and harmonized settlement cycle discussion has been ongoing since 2009 and is driven by: • Credit risk: 2 days credit exposure is better than 3 or 5 days exposure • Harmonization: the creation of a truly harmonized single-market requires a single cycle • Operational risk: areas like corporate actions will enjoy reduced operational risk • T2S: the European Central Bank Target 2 Securities system (due for launch across Europe in 2014) will benefit from a single harmonized settlement cycle • Short-selling: policy-makers believe that abusive short-selling (especially naked short-selling) will be made more difficult within a T+2 environment • Automation: regulators believe T+2 will drive higher levels of post-trade automation with improved systemic operational resilience and better regulatory transparency • The European Commission-sponsored industry working party, HSWG (or Harmonisation of Settlement Cycles Working Group), has been active throughout 2010 and is chaired by Paul Bodart of BNY Mellon • Omgeo has contributed by providing data on the benefits of SDA (Same Day Affirmation) and central matching. In Europe, the Omgeo community achieved an 80% SDA rate, with AsiaPac at 90%+ and the US below 50%.

  3. Likely actions • The HSWG will deliver its final report in January 2011 • Informal consensus is that a mandated move to T+2 will be recommended • T+2 is likely to be covered by the forthcoming legislation on CSD’s (central securities depositories). This will be a regulation and, therefore, mandatory in all 27 EU member states. • A consultation on the CSD regulation will be published in January 2011 and final draft legislation will be ready in June 2011. It will then go to a 12 month legislative proposal for final adoption in mid-2012. • The CSD legislation will define the scope (likely equity and fixed-income markets) and timing. • It is expected that a phased implementation of T+2 will be required before implementation of T2S.

  4. Impact • All market participants will need to review operational and IT capabilities in order to meet tighter timeframes. For example, • Impact on investment into Europe from the Americas and Asia Pacific needs to be reviewed • Impact on FX processing for x-border trades needs to be assessed • Intermediaries (such as global custodians) need to review cut-off timings and the transaction flow from clients into CSD’s • US and AsiaPac markets are likely to examine benefits of a T+2 cycle • SDA becomes more prevalent • Markets with low SDA rates need to review their industry operating models • How will non-automated buy-side firms respond? • Some market flows (such as Hedge Fund to Prime Broker instructions on T+1) will need to be upgraded

  5. Projected timetable • Jan 2011: European Commission consultation paper issued (with 6-8 week response period) • June 2011: Legislative proposal delivered to European Parliament • Q3-4 2012: Legislative process completed • Q1-2 2013: Phased implementation of T+2 in Europe • Q3 2013: T2S 12 month testing phase starts • September 2014: T2S live (phased approach)

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