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The move to T+3

The move to T+3. Brett Kotze Clearing & Settlement Division 08 February 2010. Agenda. Introduction Settlement timelines – on-exchange and off-exchange Separation of Proprietary Deals and Controlled Clients Settlement Assurance for T+3 Corporate Actions Securities Lending & Borrowing

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The move to T+3

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  1. The move to T+3 Brett KotzeClearing & Settlement Division 08 February 2010

  2. Agenda • Introduction • Settlement timelines – on-exchange and off-exchange • Separation of Proprietary Deals and Controlled Clients • Settlement Assurance for T+3 • Corporate Actions • Securities Lending & Borrowing • Conversion from T+5 to T+3

  3. Moving to T+3 Project • Phase 1 Producing a document detailing the potential barriers and the high-level activities to overcome such barriers (to accompany the JSE’s 2008 license renewal application); • Phase 2 Nomination of responsible parties to further the investigations within their working groups, coordinated by the JSE, with their combined outputs being the creation of a “Blueprint for T+3” document; and • Phase 3 Impact analysis and agreeing an implementation plan for T+3 with all market participants

  4. Phase 1: Output • The JSE submitted the document detailing the barriers and the high-level activities to overcome such barriers to the FSB with the JSE’s 2008 license renewal; • The FSB accepted the document and requested a quarterly update on the status of the action items; • The JSE initiated Phase 2 with the parties that would address the 58 action items.

  5. Phase 2: Further Investigations • Phase 2 was about getting the nominated parties to further investigate the action items and identified issues and define solutions (the “blueprints”); • The workgroups reported into the JSE Clearing & Settlement Division; • Representatives from the Clearing & Settlement Division (and other JSE Divisions where applicable) sat on each committee or workgroup; • Forms of Business Requirement Specifications were created and signed off by the market; and • Blueprint completed by the JSE.

  6. Phase 2: Completion of blueprint • The output for Phase 2 was the creation of a blueprint for the move to T+3 which was tabled and approved by JSE Exco in May 2009

  7. Phase 3: Impact Analysis and Implementation Plan • Phase 3 is about the impact analysis and implementation plan for moving to T+3; • The implementation plan will detail how the transition from T+5 to T+3 is going to be managed; • Where possible, changes will be made immediately, as opposed to waiting for moving to T+3 (has already started); and • JSE SRP dependency - how the systems may be developed for T+3 and implemented in 2011 after SRP.

  8. JSE Impact Analysis and Implementation Plan • CSAC – sub-committee reconstituted • Met on 29 May 2009 • All market constituents on sub-committee • JSE on committee – also Project Managed by JSE

  9. Phase 4 • Project Management • System Changes • Management of timelines • Changes to Listing requirements • Changes to JSE and Strate Rules and Directives • Marketing and Education • Making sure everyone is ready to go-live • Go-live

  10. T T+1 T+2 T+3 T+4 T+5 Settlement Order Deemed Affirmation Client / Broker Broker Net Non-Controlled Client Breach Principal Assumption Failed Trade Current T+5 Settlement Cycle Deal Execution Deal Allocation Contract Note Client Affirmation to CSDP or Client Rejection to Broker Broker Re-Allocation Client Affirmation on Re-Allocation CSDP Commitment SA Margining Broker Borrowing CSDP Commit SA Borrowing Settlement

  11. Possible T+3 Settlement Cycle Reducing the timeframe in which to conduct the existing processes and activities will result in quicker settlement.

  12. On-market activities current versus future

  13. On-market activities current versus future Cont…

  14. Off-markets activities current versus future

  15. Off-markets activities current versus future Cont…

  16. Off-markets activities current versus future Cont…

  17. Separation of Controlled Clients from Proprietary accounts • From A risk management perspective agreed to separate controlled clients and proprietary deals • Linked to T+3 due to Impact of system • Separate custody accounts • May be same or different CSDP for custody accounts • EOD T+1 a brokers net will be created for proprietary accounts and a controlled clients net for controlled clients • Per instrument /per trade type/per settlement day

  18. Controlled Clients Net S Client A P S Client B P S Client C P 1,000 AAA 200 AAA 800 AAA Controlled client net created for DVP 400 AAA shares

  19. Brokers Net- Same Broker S Stock Acct A P S P S Stock Acct C Stock Acct B P 2,000 AAA 200 AAA 600 AAA Brokers net created for RVP 1,200 AAA shares

  20. Settlement Allegements EOD T+1 Brokers Custody Acct Brokers Net ECS Strate Controlled Clients Net Controlled Clients Custody Acct

  21. Controlled Clients Net S Client A P S Client B P S Client C P 1,000 AAA 200 AAA 800 AAA No Securities Compulsory Reverse Substitution Brokers net created for DVP 400 AAA shares

  22. Compulsory Reverse Substitution Controlled clients Brokers custody Acct Controlled Clients Acct S P S P RVP DVP 400 AAA MT 586 200 AAA 1,200 AAA MT 586 200 AAA Reverse Substituted

  23. Daily Reconciliation Controlled Clients Custody Acct MT 535 MSS Brokers Custody Acct MT 535 MSS

  24. Rolling Of SettlementNew Leg Process NON-CONTR CLIENT B NON-CONTR CLIENT A S P S P 100 AAA 100 AAA 100 AAA 100 AAA NEW CONTRACT NOTE FOR NEW SETTLEMENT DATE WITH ORIGINAL TRADE DATE BROKER C BROKER D P P S S 100 AAA 100 AAA 100 AAA 100 AAA 100 AAA 100 AAA 100 AAA 100 AAA 0 0 SETTLEMENT AUTHORITY WILL BOOK SETTLEMENT ORDERS 100 AAA

  25. Failed Trades RetransactionsSettlement Process NON-CONTR CLIENT B NON-CONTR CLIENT A S P S P 100 AAA 100 AAA 100 AAA 100 AAA VOLUNTARY REVERSE SUBS COMPULSORY REVERSE SUBS 0 0 CONTRACT NOTE CANCELLED BROKER C BROKER D P P S S 100 AAA 100 AAA 100 AAA 100 AAA 0 0 SETTLEMENT AUTHORITY WILL BOOK SETTLEMENT ORDERS 100 AAA

  26. Failed Trades RetransactionsNew Leg Process NON-CONTR CLIENT B NON-CONTR CLIENT A S P S P 100 AAA 100 AAA 0 NEW CONTRACT NOTE WITH ORIGINAL TRADE DATE BROKER C BROKER D P P S S 100 AAA 100 AAA 100 AAA 100 AAA 100 AAA RETRANSACT 100 AAA 0 0 CLAIM LOSS/PROFIT

  27. Failed Trades Compensation Settlement Process NON-CONTR CLIENT B NON-CONTR CLIENT A S P S P 100 AAA 100 AAA 100 AAA 100 AAA VOLUNTARY REVERSE SUBS COMPULSORY REVERSE SUBS 0 0 CONTRACT NOTE CANCELLED BROKER C BROKER D P P S S 100 AAA 100 AAA 100 AAA 100 AAA 0 0 SETTLEMENT AUTHORITY WILL BOOK SETTLEMENT ORDERS 100 AAA

  28. Failed Trades Compensation Compensation Process NON-CONTR CLIENT B NON-CONTR CLIENT A S P S P BROKER C BROKER D P P S S 100 AAA 100 AAA 100 AAA 100 AAA 0 0 COMPENSATION PAID

  29. T+3: Barrier 4 – Corporate Actions

  30. Barrier 4.1 - Corporate Action Model Analysis • The types of Corporate Action Events have been broken down into the following categories: • Mandatory Events; • Elective Events Choice/Voluntary Events; and • Warrants

  31. Best Practice Principles Analysis • The Corporate Actions Model for T+3 has been devised to adhere to the following principles: • Entitlements can be traded on LDT + 1; • Payment Date is as close to Record Date as possible (RD + 1) • Based on the high-level recommendations from the Giovannini Group and International Organization of Securities Commissions (IOSCO)

  32. Mandatory Events Corporate Action Events

  33. Market Decision: Event Information Mandatory Events • The minimum required information on Declaration Date for Mandatory Events must be: • Last Day to Trade (Cum), Ex Date, Record Date and Expected Pay Date • Cash Rates and Share Ratios can be announced no later than Finalisation Date by 12h00. • Exceptions to this will be dealt with on a case by case basis. • If applicable (Mandatory Security or Mandatory Cash and Security): • Delisting Date/Termination Date, Suspension Date, Effective Date • New ISIN

  34. Market Decision Mandatory Events • The Market has agreed on the following: • Should not all information have been made available on Declaration Date then the cut off date for the Event Finalisation should be no later than 12h00 on Finalisation Date. • Exceptions to this will be dealt with on a case by case basis. • Record Date will always be a Friday. In the event of a Public Holiday, Record Date will be the previous business day. • Pre-Advices will be sent from Strate from 16h00 onwards.

  35. New Timeline (all Mandatory Events) Mandatory Events

  36. Elective Choice/Voluntary Events Corporate Action Events

  37. New Timeline - Elective Events (Excluding Dividend Reinvestments) Elective Events - Choice/Voluntary Events

  38. Market Decision: Event Information Elective Events - Choice/Voluntary Events • The minimum required information on Declaration Date for Elective Events must be: • Last Day to Trade (Cum), Ex Date, Record Date, Election Deadline Date and Expected Pay Date • Cash Rates and Share Ratios can be announced no later than 12h00 on Finalisation Date. • Default Option and whether Part Elections and/or Restrictions are applicable • Elections will be sent to Strate at 13h00 with possible amendments being submitted up until 14h00. • Pre-Advices will be sent from Strate from 14h00 onwards. • Strate to forward Election Instructions to Transfer Secretary at 15h00

  39. New Timeline - Dividend Reinvestments Elective Events - Choice/Voluntary Events

  40. Market Decision: Before Declaration and Finalisation Date Elective Events – Dividend Reinvestments • The minimum required information on Declaration Date for Dividend Reinvestments must be: • Last Day to Trade (Cum), Ex Date, Record Date, Election Deadline Date and Expected Pay Date, SA Rate Conversion Date • SA Dividend Rate announced no later than 12h00 Finalisation Date. • Dividend rate in foreign currency and whether Part Elections are applicable • Restrictions • All announcements on Finalisation Date will be made by 12h00. • Strate to send Record Date Positions at E.O.D Record Date • Elections will be sent to Strate at 13h00 on Election Deadline Date

  41. Spreadsheets and Fractions Barrier 4.9 and Barrier 4.3 Spreadsheets and Fractions

  42. Market Decision Spreadsheets and Fractions • It has been decided that for all companies listed locally, the rounding convention utilised will be to round down all entitlements. Fractional payments will be paid in cash, with a tolerance level to be decided on at a later stage. • Spreadsheets will be required for Initial Public Offerings (IPOs). • For Foreign and Dual-Listed Companies, their rounding principles/conventions will be applied. • Restrictions will be communicated and it will be the beneficial owner’s obligation to observe such restrictions and adhere to legislative requirements of their own jurisdiction. CSD Participants will not monitor this and should an investor remain silent or make an election, it will be deemed to indicate that the investor can receive such entitlements.

  43. Parked Action Items Parked Action Items

  44. Parked Action Items • It was agreed by all Market participants that the following action items will be parked and discussed at a later stage: • The Elimination of Spreadsheets for surplus rights take-ups, and; • The impact of tax legislation on the Corporate Actions model for T+3.

  45. Securities Lending & BorrowingIncrease Liquidity • Securities Lending & Borrowing is an enabler for T+3 • Focus is on creating more liquidity around Securities Lending & Borrowing:- • Education with lenders that they will be protected on any corporate action entitlements – do not have to recall • Education that lenders may start lending out entitlements from LDT+1 for PD • Increase limits for lending – Pension Funds,etc • More lenders • Controlled clients loaning out shares

  46. Securities Lending & BorrowingAutomation • Same day Securities Lending & Borrowing • Same day Securities Lending & Borrowing returns • Collateral movements – securities – Linked to STT • Changes to Securities Lending & Borrowing for Corporate Actions • Automation of loan confirmations - FIX

  47. Securities Lending & Borrowing Settlement Authority • Educate the market on the role of the JSE Settlement Authority – settlement related • Set up direct arrangements with Pension Funds, etc • Possible systems to be implemented

  48. Conversion

  49. Assumptions • Limit amount of Corporate Actions • No huge market activity – price movements • No jobbing across settlement days • Migration will not take place over a month end • Migration will not take place over a futures close out • No public holidays on week of migration

  50. Actions • Market education on conversion process and requirements • Securities Lending & Borrowing • Rolling Of Settlement • Off-market timelines may be moved to facilitate settlement with no penalties • Align timelines where possible before go-live of T+3

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