Rules and Regulations SIX x-clear Ltd

Transcription

1 xcl-501 December 2015

2 Table of contents 1.0 Purpose of the Clearing Terms List of Securities eligible for Clearing Grey Market Stocks Technical and operational specifications Formation of Contracts Real-time margining module Margining method Initial margin and risk rating coefficient Initial margin Principle Risk netting coefficient I (intra-bucket) Risk netting coefficient II (inter-bucket) Initial Margin Extreme net open risk position Risk rating coefficient Variation margin Total margin Stress Margin Add-On Margin calls Settlement of Margin calls through a Payment Bank Margin collateral deposits Accepted collateral types Delivery into the x-clear Collateral Accounts Withdrawal from the x-clear Collateral Accounts Initial margin validation and calibration module Link Margin Element Preliminary remarks Link Margin Element Model Definitions Calculation of the Link Margin Element Margin Call Withdrawal and replacement of Link Margin Element collateral into the x-clear Link Margin Element Accounts Additional Link Margin Element for OTC Extended Window Clearing Service Default Fund Definitions Additional Default Fund Contributions Change in Average Initial Margin Price fluctuations Use of the Cash Markets Default Fund Segment (replenishment duty) Calculation of Default Fund Contribution Delivery and withdrawal of pledged collateral into and from the Default Fund 21 xcl HEM xcl-501-e.doc 2 36

3 9.0 Order of realization of collateral (defense lines) Collateral concentration limits Issue-specific maximum concentration limits Trading-volume-related maximum concentration limits Collateral-type-related maximum concentration limits Minimum concentration limit for cash plus SNBGC collateral Account structure Clearing Accounts Margining x-clear Collateral Accounts for Margin Deposits x-clear Securities Collateral Account x-clear Cash Collateral Account Dispo Collateral Accounts Default Fund Collateral Accounts Link Margin Element Accounts Segregated account structures Omnibus Client Segregation (OCS) Individual Client Segregation (ICS) Mini-Omnibus Client Segregation (Mini OCS) Portability Competitive Clearing Settlement General remarks Settlement Netting Shaping Strange nets / Exotic instructions Place of Settlement Settlement instruction generation Late Settlement and Buy-In Corporate actions Claims Elective Events Stamp Duty and Capital Gains Tax Amendments to the Clearing Terms Address for x-clear Members wishing to contact x-clear 35 xcl HEM xcl-501-e.doc 3 36

4 1.0 Purpose of the Clearing Terms In accordance with the Contract for Clearing Services (English Law) between SIX x-clear Ltd (hereinafter "x-clear") and the x-clear Member, these Clearing Terms form part of the Contractual Relationship between x-clear and the x-clear Member and shall be read in conjunction with the Contract for Clearing Services (English Law), the Pledge Agreements and the General Terms and Conditions of Business for Clearing of Trading Platform Transactions (English Law) (the "GTCB"). Certain requirements set out in the GTCB will be defined in more detail in these Clearing Terms. Capitalized terms used in these Clearing Terms shall, unless specifically provided otherwise, have the meanings given to them in the GTCB and, where appropriate, any other documents of the Contractual Relationship as mentioned in the paragraph above. The specifications of the technical infrastructure (such as information technology or communications) are described separately in the Business Partner Specifications and are published on the x-clear website. 2.0 List of Securities eligible for Clearing A list of LSE Products (Securities traded on the LSE market and designated for Clearing by x-clear) is published on the x-clear website. x-clear decides which LSE Products will be supported for Clearing and reserves the right in individual cases to exclude from Clearing certain LSE Products. 2.1 Grey Market Stocks In the event that a when issued LSE Product is added to the list of tradable instruments by LSE, x-clear Members must note that any obligations of x-clear in respect of any prospective Single Contract for that LSE Product will only arise in the event that the LSE Product is listed as planned. In the event that the listing does not proceed on the planned day of listing, x-clear shall deem any prospective Single Contract registered in that LSE Product to be null and void ab initio. x-clear will reject it from clearing and return any Permissible Collateral received or held by it in respect of such prospective Single Contracts. x-clear will have no other obligation or liability. 3.0 Technical and operational specifications The x-clear Member may not commence operations that result in the provision of Clearing by x-clear to that member until it has confirmed in writing to x-clear that it has conducted tests that demonstrate that it is technically and operationally ready to participate in Clearing. The relevant confirmation form will be provided to the x-clear Member by x-clear and will form part of its application for membership. xcl HEM xcl-501-e.doc 4 36

5 4.0 Formation of Contracts Single Contracts arising from the provision of Clearing by x-clear to the x-clear Member are formed in accordance with the provisions of the GTCB. x-clear Members should note that: 1. The scope of Clearing by x-clear is restricted to orders matched and executed on the LSE Trading Platform s order books (namely, the Dark and Visible Order Books as defined in the LSE multi-lateral trading facility Rule Book) as well off-order book transactions. 2. The LSE Rules determine how orders on the LSE Trading Platform are matched and executed so as to result in LSE Transactions. 3. x-clear provides Clearing in respect of LSE Transactions where at least one party to such transaction is an x-clear Member or an x-clear NCM. Where at least one counterparty to an LSE Transaction is neither an x-clear Member nor an x-clear NCM (but the other counterparty is one of these), the Co-CCP acting for such counterparty will act on a backto-back basis and an Inter-CCP Contract shall arise between x-clear and the relevant Co- CCP in accordance with the relevant Link Agreement. The corresponding Single Contract between x-clear and the x-clear Member shall arise no earlier than the time when the Inter-CCP Contract arises. 4. Pursuant to the GTCB, x-clear reserves the right to refuse to clear an LSE Transaction or to cancel the corresponding Single Contract if the LSE Transaction was not executed on the LSE Trading Platform in accordance with the LSE Rules, any data in relation to such transaction was not transmitted in accordance with the transmission specifications as agreed between LSE and x-clear, if LSE confirms by the end of the trading day that the LSE Transaction arose as a result of an error, or any other ground or basis set out in the GTCB. 5.0 Real-time margining module 5.1 Margining method Real-time margins are calculated for each product type considering the risk characteristics of the respective asset class, i.e. the real-time margining module calculates the open positions and margins for bonds and equities separately using an individual methodology to calculate the respective market risk and the asset-class-related wise margins. Margin requirements are basically calculated at the clearing account level and then aggregated across all clearing accounts belonging to the same credit group. Credit groups are used for margin collection; they allow for a segregation of the margining and collateral management process. xcl HEM xcl-501-e.doc 5 36

6 5.2 Initial margin and risk rating coefficient Initial margin Principle The Initial Margin requirement is continually calculated for each Security and currency held in a clearing account on the basis of the net positions in all Outstanding Contracts of Exchanges and MTFs for which x-clear provides Clearing. In the case of multiple listed Securities, the x-clear Member s open position as well the Initial Margin will be computed by taking into account that member s net position from Outstanding Contracts on all Exchanges and MTFs in respect of which x-clear provides Clearing. In so doing, the maximum value resulting from the calculation of the short-term and long-term VaR is decisive. For the calculation of the Initial Margin, Securities are allocated to different risk buckets. Using the historic Value-at-Risk (VaR) model, the current VaR is calculated per Security. For this purpose, the historic data of the previous 2 years (approximately 500 working days) are adopted for the long-term VaR and the previous 3 months (approximately 90 days) for the short-term VaR, by calculating the 2-day VaR for equities and ETFs, based on a confidence interval of 99% for equities and ETFs. The VaR is generally calculated on a weekly basis; in case of difficult market conditions, it may also be calculated daily. If the same Securities are traded on different Exchanges and MTFs, they are subject to the same risk bucket structure. Risk buckets are formed at intervals of 5% for equities and ETFs and 1.5% for bonds. Securities eligible for Clearing with similar risks (defined by the VaR) are allocated to the same buckets and, for this purpose, the respective differentiated Initial Margin is calculated on the basis of the positions that have been netted per bucket. Bucket structure for equities and ETFs Risk bucket VaR range in % Initial margin in % No. 1 0 to No. 2 5 to No to No to No to No or more 27.5 For all Securities where trading prices are not available for a period of at least 250 Exchange or LSE trading days during the last 2 years of the observation period, the expected VaR amounts to between 10% and 15% for equities and ETFs and between 3% Risk netting coefficient I (intra-bucket) Due to the fact that the Securities contained in a risk bucket do not correlate perfectly, a risk netting coefficient (based on the average correlation) is used to net the respective Securities positions within the same bucket (risk netting coefficient I). For each Security, the Initial Margin is therefore calculated first on the basis of the net position (long or short) in that xcl HEM xcl-501-e.doc 6 36

7 Security. Subsequently, the total of all net long positions and the total of all net short positions within the same bucket are netted using the risk netting coefficient I for the smaller of both values Risk netting coefficient II (inter-bucket) Additionally, a further risk netting coefficient is applied between the risk buckets of the same asset class. The net Initial Margins per risk bucket (positive/negative values) are aggregated across all buckets, taking into account the algebraic sign (plus/minus). This results in the total of the Initial Margins net long and the total of the Initial Margins net short. The smaller of these two figures is multiplied by the inter-bucket coefficient and the Initial Margin is reduced by that amount Initial Margin Initial Margin requirements vary in real time with each transaction in a Security. The total amount of the Initial Margin per clearing account is derived from the net position of all Outstanding Contracts relating to Securities and arising from transactions on all Exchanges and MTFs cleared by x-clear contained in a risk bucket, by adding up all buckets Extreme net open risk position In the case of extreme net open positions of a participant (i.e. the absolute values of a net long open minus a net short open position) of CHF 750 million or above (taking into account the consolidated position of the x-clear Member across all Exchanges and MTFs cleared by x-clear), the participant's existing risk rating coefficient is increased for the period in which this situation persists, i.e. the Initial Margin requirements are accordingly higher (see table below). The x-clear Member will be informed in the event that its Initial Margin requirements are increased on this basis. RC = Risk Rating Coefficient IRC = Initial Risk Rating Coefficient (see 4.2.2) monetary amounts in [CHF] Risk coefficient table RC=IRC+0.75 RC=IRC+1.00 RC=IRC+0.50 RC=IRC+0.25 RC=IRC Net open market position Up to 750 m 750 m to 1,000 m 1,000 m to 1,250 m 1,250 m to 1,500 m As of 1,500 m Risk rating coefficient The risk rating coefficient depends on the x-clear Member's credit rating and has a direct bearing on the Initial Margin requirements. The risk rating coefficient is the factor by which the Initial Margin is multiplied to arrive at the Initial Margin requirement. x-clear accepts ratings from the following external rating agencies: - Standard & Poor's xcl HEM xcl-501-e.doc 7 36

8 - Moody's - FITCH/IBCA The risk rating coefficient takes into account the probability of non-performance on the part of an x-clear Member. The risk rating coefficient is determined on the basis of the x-clear Member's credit rating and is used to weight the Initial Margin, i.e. Initial Margin requirements increase or decrease depending on the x-clear Member's credit rating. The level of the risk rating coefficient is reviewed at least once a year and is determined as follows: Rating Standard & Poor's Moody's FITCH Risk rating coefficient AAA to A- Aaa to A3 AAA to A- 1 BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- 1.5 BB+ to BB- Ba1 to Ba3 BB+ to BB- 2 B+ or lower B1 or lower B+ or lower determined case by case x-clear uses the long-term rating. If several credit ratings are available, the second best rating is used. If an institution does not have an external rating or the external rating deviates strongly from x-clear s credit assessment, x-clear will determine an internal rating by means of a benchmarking process. Major benchmarking criteria include: - Capital resources - Degree of self-financing - Profitability - Background (company history, ownership structure, etc.) - Domicile - Reputation 5.3 Variation margin The Variation Margin requirement covers market price fluctuations that impact upon open positions per Security. The Variation Margin requirement is marked to market several times daily, normally every hour, on the basis of the net position of all Outstanding Contracts of the x-clear Member per Security. The level of the Variation Margin depends solely on the market valuation. Positive and negative values (price gains/losses) are netted out across all Securities. Based on these values, negative values are charged additionally, while positive values offset Initial Margin requirements. 5.4 Total margin After the initial and variation margin for each clearing account have been calculated, the total margin per credit group and per clearing member, respectively, is computed using the risk rating coefficient to scale the margins: xcl HEM xcl-501-e.doc 8 36

9 TM j n i 1 max RC IM VM,0 (1) j i i where: TM Total margin per credit group j and per clearing member respectively j RC Risk rating coefficient of the clearing member Lambda factor for credit group j (as explained in chapter 6.2) j IM Initial margin calculated for the clearing account i i VM Variation margin calculated for the clearing account i i n Number of clearing accounts belonging to the credit group j / clearing member The required amount of Permissible Collateral to be provided by an x-clear Member is reviewed by x-clear on a regular basis to enable a prompt response to market developments and to any changes in an individual x-clear Member's situation. If an x-clear Member is an LSE Member or a participant in other Exchanges and MTFs in respect of which x-clear provides Clearing, the Margin requirement for all such Exchanges and MTFs (including the LSE Trading Platform and other Trading Platforms) in which the x- clear Member is a participant can be consolidated on the basis of all Outstanding Contracts (for the purpose of these Clearing Terms, this term refers to unsettled contracts with x-clear as the Central Counterparty arising from transactions on all Exchanges and MTFs in respect of which x-clear provides Clearing) of each such Exchange and MTF. All Margin requirements are computed in Swiss francs (CHF). 5.5 Stress Margin Add-On The Stress Margin Add-On forms part of the default waterfall of SIX x-clear. This Add-On serves as an additional protective layer for the mutualized default fund, i.e. contributing to the application of the default fund becoming more remote as large stress exposures are covered by additional resources. Stress Margin Add-Ons will be charged whenever stress losses calculated under extreme but plausible market scenarios on a credit group level exceed a certain threshold of the default fund, i.e. For those members connecting to the SECOM platform, the applied method shall be: Stress Margin Add-on = xcl HEM xcl-501-e.doc 9 36

10 where: SL j = Stress Loss for credit group j (negative value) SIG = Applicable skin-in-the-game of SIX x-clear 1) DFF = Applicable default fund size 2) 1) A maximum of 25 per cent of the capital of x-clear (as defined by Swiss Law, in particular in FINMA Circular 15/1 Accounting banks ), c.f. chapter 9 2) Default fund size of segment a member is active in (cash market, derivatives), c.f. chapter Margin calls If, at any time, the Margin provided is insufficient, or if the value of the Default Fund falls below x-clear s requirements for whatever reason, such that there are outstanding obligations of an x-clear Member to pay Default Fund Contributions, x-clear will automatically issue a Margin call in real time denominated in Swiss francs (CHF). The following rules apply: 1. The margin call is in principle to be met in the form of cash. 2. Every member is required to designate an account which x-clear is entitled to debit with the amount of the margin call in accordance with the General Terms and Conditions of Business (Swiss law). The following types of account may be used: a. Account denominated in sterling (GBP) or Euro (EUR) at the x-clear Member s Payment Bank; or b. SIX Interbank Clearing Account ("SIC account"); or c. Ordinary money account at SIS SIX Ltd ("SIX SIS"). The x-clear Member may designate one charge account only (SIC or ordinary money account at SIX SIS). Generally, a SIC account is required for margin calls. Usage of an ordinary money account of SIX SIS is only accepted on an exceptional basis and until revocation by x-clear. For credits, x-clear will open an x-clear money collateral account at SIX SIS for each member in accordance with Art of these Clearing Terms. xcl HEM xcl-501-e.doc 10 36

11 3. Each margin call must be met within the deadline communicated by x-clear. Margin calls issued no later than 5:00 pm CET have a deadline on the same day. All deadlines have to be met within a maximum of sixty minutes after the call is issued. If a margin call after 5:00 pm CET cannot be satisfied on the same day, it has to be fulfilled by no later than 9:00 am CET on the next business day. Under extraordinary circumstances, margin calls may also be issued after 5:00 pm CET. 4. If the x-clear Member has opted for the OTC Extended Window Clearing Service, the Member has to provide margin collateral due to a Margin call in USD or securities by 9:00 pm CET at the latest on the same day. 5. If the margin call is not satisfied by the x-clear Member within the stipulated time and the Margin requirements have still not been met as outlined above, Clearing by x-clear of future transactions to which that x-clear Member is a party shall be suspended from that time and x-clear shall cease to act as Central Counterparty in respect of that x-clear Member. x-clear will have an option at the same time to issue a Default Notice and declare the x-clear Member to be in Default. Any Default of an x-clear Member will be notified to the respective Trading Platform Settlement of Margin calls through a Payment Bank As a membership requirement, an x-clear Member which decides to satisfy Margin calls through a Payment Bank must have an account denominated in sterling (GBP) or euro (EUR) at its Payment Bank. Margin calls will be processed by SIX SIS (on behalf of x-clear) directly debiting the x-clear Member s sterling (GBP) or euro (EUR) account at its Payment Bank, in favor of the cash collateral account at SIX SIS, in the name of x-clear. Before Clearing by x-clear can commence in relation to an x-clear Member, SIX SIS (on behalf of x-clear) requires an appropriate direct debit authority/mandate signed by both the x-clear Member and its Payment Bank. Upon an x-clear Member s request for the withdrawal of cash, subject to the availability of sufficient underlying Permissible Collateral to meet Margin and Default Fund Contribution requirements (so that such requirements would continue to be satisfied after such withdrawal), x-clear shall arrange for the return of cash to the x-clear Member s account denominated in sterling (GBP) or euro (EUR) at its Payment Bank. Such available cash collateral is transferred/paid by SIX SIS (on behalf of x-clear) via its Payment Bank (whether a concentration or a correspondence bank) in London. x-clear has secured the co-operation of several financial institutions with regard to the required Margin call settlement services, whose names are published on the x-clear website. The x-clear Member is responsible for meeting all banking charges imposed or charged by its Payment Bank. xcl HEM xcl-501-e.doc 11 36

12 5.7 Margin collateral deposits Accepted collateral types x-clear will generally accept different types of collateral as Permissible Collateral. For further details see the separate lending norm rules which are described in the "Lending Norms" and can be accessed on the Clearing pages of the SIX Securities Services website at > Clearing. Permissible Collateral deposited is accounted for at market value and subject to a Haircut. Due to Applicable Laws, Securities and other instruments issued in the United States of America cannot be accepted as Permissible Collateral. Collateral must be replaced 15 days prior to the maturity of the relevant instrument posted as collateral. Following the expiry of the maturity date of an instrument posted as collateral, it shall no longer be counted as satisfying the x-clear Member s Margin requirements. Upon request, other types of collateral can be examined for eligibility by x-clear on a caseby-case basis Delivery into the x-clear Collateral Accounts Every x-clear Member may transfer Margin deposited in its respective Collateral Account as required by the Margin requirements of x-clear ("Margin Deposits") to the x-clear Collateral Accounts at all times. The delivery of securities can be initiated through SIX SIS or Euroclear UK and Ireland. The delivery of cash can be initiated through SIX SIS or Payment Banks by x-clear Members. The transfer is effected via an ATF (MT542 or MT ) instruction for Securities or MT202 instruction for cash transfers, which is to be issued by the x-clear Member. x-clear accepts as Margin Deposits only the Permissible Collateral defined in Art of these Clearing Terms Withdrawal from the x-clear Collateral Accounts The withdrawal of Margin Deposits may be instructed automatically by each member (ATF or MT 202/200) or manually by x-clear. The x-clear Member is, in the case of manual processing, required to submit an appropriate request in writing, by fax or by , to x-clear. Margin Deposits may be withdrawn only when no longer required to satisfy the x-clear Member's Margin requirements. If an x-clear Member wishes to replace Margin Deposits, the new Permissible Collateral must be delivered prior to withdrawing the old Permissible Collateral. Margin Deposits requested by 5:00 pm CET will be delivered to the x-clear Member on the same day by taking into account the currency transfer deadlines of SIX SIS; requests received after 5:00 pm CET will be executed as soon as reasonably practicable. xcl HEM xcl-501-e.doc 12 36

13 6.0 Initial margin validation and calibration module x-clear s real-time margining module (c.f. Art. 5.0) is supplemented by a margin validation and calibration module performing up to six daily (and if required on an ad hoc basis) riskfactor-based Monte Carlo simulations of the margin requirement. This approach allows for an independent and comprehensive portfolio-based assessment of the margin requirement and a comparison with the initial margins calculated by the real-time margining module. x-clear reserves the right to adjust the margin requirements based on the outcome of this margin validation. 6.1 Simulation technique of the validation module x-clear s operational real-time margining module is mainly based on historical volatilities of the underlying instruments, volatility buckets and static intra-bucket and inter-bucket netting. x-clear s margin validation and calibration module employs a risk-factor-based Monte Carlo simulation technique for a state-of-the-art portfolio-based assessment of the replacement risk of the clearing portfolios. This technique takes into account the prevailing volatilities and correlations between the risk factors. It further reflects the prevailing regression mapping of the returns of the underlying securities within the clearing portfolios to the returns of the risk factors, as well as the residual intrinsic risk of the securities. The methodology underlying x-clear s initial margin validation and calibration module consists of the following five main elements: I. Risk factor set definition A consistent set of potential risk factors with a high explanation power for the return of the securities in the clearing portfolios is defined. The chosen risk factors can be broken down into the following asset classes: - Cash: Cash risk factors capture the FX risk based on portfolio currencies. All key currencies are represented. - Equity: A variety of country-specific and regional (mostly emerging markets) stock indices as well as a full set of sector indices (developed countries) is chosen. - Fixed Income: 5-7 years duration aggregate indices are taken for the long leg, while the short leg is represented by the corresponding cash risk factors. - Alternative Investments (AI) and Commodities: AI and commodity indices are included because they can be particularly useful to explain the return dynamics of certain equity instruments, such as oil-related firms. Also the risk dynamics of ETFs and Funds can often be determined by commodity price movements. II. Mapping the underlying securities to the risk factors The returns of all securities of the clearing portfolios are mapped to the risk factor returns via a regression technique: xcl HEM xcl-501-e.doc 13 36

14 Security Return = (Risk Factor Return i x ß i ) + Intrinsic Risk This allows the exposure vector ß to be recalibrated on a daily basis. III. Scenario generation for security returns Potential future distributions of the security returns are derived from daily combined Monte Carlo Simulations of the potential future distributions of the risk factor returns and the intrinsic risk of the security returns. Hence, each Monte-Carlo-simulated security return consists of a set of Monte-Carlo-simulated risk factor returns multiplied by the securities exposure vector ß plus a Monte-Carlo-simulated uncorrelated intrinsic risk component. In order to calibrate the Monte Carlo simulations of the risk factor returns, the risk model considers historical observations of the risk factor returns from a rolling non-overlapping time window using a Filtered-Historical-Simulation approach. The variance-covariance matrix of the risk factor returns is derived from Exponentially Weighted Moving Average (EWMA) time series analyses. These time series analyses are performed on a daily basis. The residual intrinsic risk of the regression of the securities returns to the risk factor returns is simulated using a Student-t-distribution. IV. Scenario generation of portfolio returns The potential future distribution of clearing portfolio returns is calculated from the aggregation of the simulated security returns of the positions of a clearing member. This aggregation takes place at the credit group level; i.e. the open positions of all clearing accounts belonging to the same credit group are considered to be one single portfolio. Hence, x-clear s margin validation and calibration module fully takes into consideration the potential diversification benefit between the various asset classes cleared and the open positions from the clearing accounts belonging to the same credit group. V. Measuring the clearing portfolio risk In order to validate and calibrate the initial margin calculated by the real time margining module, x-clear applies a portfolio VaR at 99% confidence level. In addition the simulation approach of x-clear s margin validation and calibration module allows for taking into account further risk components as required by the applicable regulation in the EU and in Switzerland. x-clear reflects these additional risk components in its margin validation and calibration process: a. Stressed VaR This feature allows periods of stressed marked conditions (i.e. stressed variance-covariance matrices) to be incorporated into the Monte Carlo Simulations of the risk factor scenarios. b. Liquidity-adjusted VaR xcl HEM xcl-501-e.doc 14 36

15 x-clear s margin validation and calibration module takes into account the adverse price movements of relatively high holdings in single securities within a clearing portfolio. This liquidity premium depends on - the relative position size of the underlying instruments compared to their market capacity; - the current and simulated market risk of the underlying instrument and on its bid/ask spread. The liquidity risk component of the margin validation and calibration module therefore implements the liquidity uncertainty as a function of the simulated market scenario, which results in increased VaRs for the clearing portfolios. c. Variable close-out periods x-clear s margin validation and calibration module allows for an asset-class-specific setting of VaR horizons. x-clear sets these asset-class-specific VaR horizons in accordance with its prevailing assumptions about realistic close-out periods per asset class. Stress testing and defense line calibration: x-clear s margin validation and calibration module is also used for the calculation of historical and hypothetical stress tests as required by the applicable regulation in the EU and in Switzerland. x-clear reflects the respective stress test results in the design and calibration of its defense lines. 6.2 Adjustment of initial margins x-clear may adjust the margin requirement based on the outcome of the margin validation process described in chapter 6.1. For this purpose a scaling factor (lambda) for every credit group j of a clearing member has been implemented in order to align the initial margins with the portfolio VaR (calculated by the margin validation module) of the open positions in the respective credit group j. The adjustment of the margin requirement through is based on a comparison of the initial margin (computed by the real-time margining module) with the portfolio VaR resulting from the margin validation module. That is to say: For each credit group j the sum of the initial margins of all clearing accounts i ( ) in credit group j is compared to the Portfolio VaR ( ) for the totality of open positions in credit group j and the value of that enters equation (1) in chapter 5.4 to adjust the margin requirement is determined by: (2) xcl HEM xcl-501-e.doc 15 36

16 However in order to avoid procyclical effects the be smaller than 1. -value entered in equation (1) will never Adjustments of and the risk rating coefficient are principally independent of each other,. i.e. the regime for adjusting scaling factor. 7.0 Link Margin Element 7.1 Preliminary remarks is not affected by the margin calibration through the When Members trade in inter-operative markets, inter-ccp exposures arise between the two Co-CCPs involved due to the different CCP memberships and inter-ccp collateral requirements of a Co-operating Clearing House (Co-CCP). Regulators require that these credit exposures are measured, monitored and mitigated separately by the holding of collateral. Such inter-ccp collateral has to be funded and covered by additional assets, which must be independent and segregated from other collateral provided by the x-clear Member. As a consequence, each x-clear Member shall, in addition to providing Margin and making Default Fund Contributions, provide the Link Margin Element to x-clear for the financing of the Inter-CCP Collateral. Such Link Margin Element shall be provided in accordance with and subject to the Pledge Agreement for Margins and its amendment agreement as further described below. The Link Margin Element will always be levied when x-clear is providing clearing services to an x-clear Member on Trading Platforms which are also cleared by a Co-CCP. The amount defined by SIX x-clear to cover the overall Co-CCP collateral requirements of all x-clear Members for all interoperable markets shall be called the Link Margin. The individual contribution by the x-clear Member shall be referred to as the Link Margin Element. SIX x-clear can use the Link Margin Elements (LMEs) to cover inter-ccp Collateral requirements only. 7.2 Link Margin Element Model The following additional clauses will regulate the Link Margin Element model: i. The Link Margin Elements shall enable x-clear to meet the margin requirements from the Co-CCP under the respective Link Agreement. ii. The Link Margin Element shall be based on the Link Margin set by x-clear. x-clear shall calculate the Link Margin based on the recent margin requirements applicable to x-clear according to the obligations under the Link Agreements with the Co-CCP(s). The Link Margin contains a scaled add-on based on the volatility of the requirements over a rolling period of 30 Business Days in order to cover expected fluctuations above the recent margin requirements. xcl HEM xcl-501-e.doc 16 36

17 7.3 Definitions iii. The Link Margin set by x-clear shall apply until a new Link Margin is deemed necessary, for example in a situation of unexpected fluctuations in the margin requirements applicable to x-clear under the Link Agreement(s). iv. The Link Margin Element payable by the respective Member shall be the Link Margin distributed between the relevant Members on a pro rata basis. The percentage ratio shall be estimated at the end of each calendar month, based on the Member s Average Initial Margin over the previous 30 Business Days. v. x-clear may, if required and at any time, vary the Link Margin and Link Margin Element, including but not limited due to intra-day margin calls made by a Co-CCP. The Link Margin Element shall be posted in cash or securities as defined in the Lending Norms. vi. x-clear shall disclose the Link Margin to the x-clear Member and also notify them of the individual pro rata distribution ratio and the resulting Link Margin Element. Average Initial Margin (AIM) for Link Margin Element The Average Initial Margin (AIM) over the last 30 Business Days is calculated monthly on the daily EOD clearing positions. 7.4 Calculation of the Link Margin Element The Link Margin Element (LME) liability is established by means of an Irregular Pledge based on the Contractual Relationship, especially the Pledge Agreement for Margins and its amendment agreement, which are governed by Swiss law. The LME is determined monthly on the pro rata share of the Link Margin based on the Member s Average Initial Margin (AIM) in proportion to the Average Initial Margin (AIM) of all x-clear Members based on the defintion according to clause 7.3 for financial instruments subject to the Link Agreements. The LME is rounded up to the next Swiss franc (CHF) 0.1 million increment. The LME is calculated on a monthly basis and has to be delivered within two Business Days after receipt of a Utilization Request (Margin Call). If the requested LME is not received after 2 (two) Business Days, x-clear may initiate a direct debit and thus obtain the necessary funds from the account provided for Margin of the relevant x-clear Member. x-clear may recalculate the Link Margin at any time during the month and initiate a margin call in case the Link Margin has to be resized in accordance with clause 7.2. ii of these Clearing Terms. The value of the Securities and/or currencies provided for the purpose of financing the LME is calculated on the basis of their current market value after applying the applicable Haircut (see Lending Norms published on the x-clear website) and not on the nominal value of the Securities or currencies deposited in the Collateral Accounts. x-clear can issue to an x-clear Member a Margin Call in order to top up the LME if the value of the LME made available by the x-clear Member has been reduced (whereby this value is xcl HEM xcl-501-e.doc 17 36

18 calculated on the basis of the current market value less the applicable Haircut) and this reduction in value has caused the value of the LME to fall below the level required from the respective x-clear Member. The transfer is effected via an ATF (MT542 or MT ) instruction for Securities or MT202 instruction for cash transfer, which is to be issued by the x-clear Member. The x-clear Member is, in the case of manual processing, required to submit an appropriate request in writing by fax or by Margin Call The same rules as under clause 5.5. of these Clearing Terms apply for a Margin Call for the LME. 7.6 Withdrawal and replacement of Link Margin Element collateral into the x-clear Link Margin Element Accounts The withdrawal of excess funds (as defined in the Margin Pledge Agreement) may be instructed manually by each x-clear Member or by x-clear. The x-clear Member is, in the case of manual processing, required to submit an appropriate request in writing to x-clear either by , fax or letter. Upon receiving a written request for a withdrawal from the x- clear Member, x-clear will retransfer any excess funds. If an x-clear Member wishes to replace Securities and/or Currencies deposited for the purpose of the Link Margin Element, the new Securities and/or Currencies must be delivered prior to withdrawing the old Securities and/or Currencies (see chapter Accepted collateral types). Eligible Securities deposited for the purpose of a Link Margin Element must be replaced fifteen days prior to the maturity date or redemption of Securities (and from the date of such replacement, such Securities cease to be treated as a Link Margin Element). Upon termination of the Pledge Agreement for Margins and its amendment agreement(s), x-clear will retransfer Link Margin Element collateral at the end of the current monthly calculation period. 7.7 Additional Link Margin Element for OTC Extended Window Clearing Service In case the x-clear Member has opted for a Trading Platform for which x-clear provides the OTC Extended Window Clearing Service (18:30 CET 19:30 CET), the respective x-clear Member has to cover the additional overnight risk between the Co-CCPs with an additional Link Margin Element on the top of the current Link Margin Element. The following Trading Platform provides OTC Clearing transactions during the extended clearing window: - Traiana xcl HEM xcl-501-e.doc 18 36

19 Members which have opted for the Trading Platform with OTC Extended Windows Clearing Service have to ensure support for Margin Calls until 21:00 CET as described in clause 5.5. If several x-clear Members have opted for such Trading Platforms, the overnight risk will be allocated on the basis of the Member s Average Initial Margin (AIM) over the last 30 Business Days in proportion to the Average Initial Margin (AIM) over the last 30 Business Days of all x-clear Members who have opted for such a Trading Platform with an extended clearing window for equities only. 8.0 Default Fund SIX x-clear has established one single default fund with several ring-fenced default fund segments along the following product lines: a. Cash Markets (equities/bonds) b. Derivatives (derivatives/securities lending & borrowing). Only the Cash Markets Default Fund Segment is applicable for the London Stock Exchange. The sizes of the default fund segments are defined to cover the default of the two largest participants or participant groups ( cover 2 principle ). The current Default Fund Segment sizes are published on the official website of SIX Securities Services: Clearing > Services > Risk Management > Default Fund Structure. The amount of the Default Fund Contribution payable by the x-clear Member into the Cash Markets Default Fund segment is dependent both on the membership category (x-clear ICM/x-clear GCM) and on the Average Initial Margin over the last 30 Business Days or over the last 90 Business Days, whichever is higher. The value of the Securities and/or currencies (in relation to cash) deposited by way of Default Fund Contribution is calculated on the basis of their current market value after applying the applicable Haircut (published on the x-clear website) and not on the nominal value of the Securities or currencies deposited. The types of Permissible Collateral and their respective values are specified in Clause of these Clearing Terms. However, Securities which are equity securities (including, but not limited to, shares in the capital of a company, or other securities or instruments with a similar or higher risk profile) will not be accepted as Permissible Collateral for the Default Fund. If applicable, Permissible Collateral in the form of Securities must be replaced fifteen days prior to the maturity date or redemption of the Securities (and from the date of such replacement, such Securities cease to be treated as a Margin Deposit). 8.1 Definitions Average Initial Margin (AIM) for Default Fund Contribution xcl HEM xcl-501-e.doc 19 36

20 The Average Initial Margin (AIM) over the last 30 Business Days or over the last 90 Business Days, whichever is higher, is calculated monthly on the daily EOD clearing positions. 8.2 Additional Default Fund Contributions x-clear Members are obliged to make additional Default Fund Contributions to the Cash Markets Default Fund segment if any of the following occur: Change in Average Initial Margin The Average Initial Margin is calculated on a monthly basis according to Clause 8.1 of these Clearing Terms. A change in the Average Initial Margin (increase/decrease) will necessitate an adjustment to the Default Fund Contribution to be made. The amount of the Default Fund Contribution is adjusted in accordance with Clause 8.4 of these Clearing Terms. If the Default Fund Contribution needs to be adjusted, the relevant x-clear Member shall be notified of the same. The adjustment must be effected within two calendar days of the notification. If the additional Default Fund Contribution is not made within the stipulated period of two calendar days, x-clear will issue a Margin call and perform a direct debit. The debit is made to the x-clear Member's designated account for direct debits applicable to Margin requirements in accordance with Clause 5.5 of these Clearing Terms. The provisions of Clause 5.5 above apply to Margin calls issued under this Clause Price fluctuations If, as a result of a diminution in the value of the Permissible Collateral provided by way of a Default Fund Contribution, the Default Fund Contribution requirements are not met and x-clear notifies the x-clear Member of the same, the x-clear Member shall provide additional Permissible Collateral within sixty minutes of being so notified by x-clear. 8.3 Use of the Cash Markets Default Fund Segment (replenishment duty) Any drawdown be it partial or full of the Default Fund Segment affected by an x-clear Member Default gives rise to an obligation on each non-defaulting x-clear Member to replenish this Default Fund Segment by Supplementary Contributions and thus restore its total amount to the level as required at the time of its reassessment ( Replenishment Obligation ). Reassessment will be effected 5 Business Days prior to the end of the Cooling-off Period (as defined hereafter). Following any full or partial drawdown of a Default Fund Segment, a grace period ( Cooling-off Period ) sets in for a time of 20 Business Days. During this period, non-defaulting x-clear Members are relieved from making Supplementary Contributions in respect of that drawdown. xcl HEM xcl-501-e.doc 20 36

21 The Replenishment Obligation of the respective Default Fund Segment will continue throughout the entire Membership of an x-clear Member. Notifications requiring the x-clear Member to provide additional Permissible Collateral in favor of the Default Fund segment will be made by x-clear to x-clear Members in writing. Permissible Collateral by way of Default Fund Contribution to restore the amount drawn down must be transferred to x-clear one Business Day after the end of the cooling-off period at the latest (D+21). 8.4 Calculation of Default Fund Contribution The Default Fund Contribution liability towards the Default Fund is secured by means of a Regular Pledge governed by Swiss law in favour of x-clear and is determined monthly on the pro rata share of the default fund segment size based on the Member s Average Initial Margin (AIM) in proportion to the Average Initial Margin of all x-clear Members based on the defintion according to clause 8.1. The following minimum contributions apply (with no upper cap limit): - x-clear ICM: Swiss francs (CHF) 0.5 million - x-clear GCM: Swiss francs (CHF) 5.0 million All Contributions are rounded up to the next Swiss franc (CHF) 0.1 million increment. An upfront Default Fund Contribution defined by x-clear will be required for the initial phases of the Clearing of Trading Platform Transactions. 8.5 Delivery and withdrawal of pledged collateral into and from the Default Fund The pledged collateral for the Default Fund will remain in the x-clear Member's Default Fund Collateral Account(s) (Securities and/or cash) at SIX SIS. A corresponding pledge entitlement for x-clear will be annotated on the x-clear Member s accounts. 9.0 Order of realization of collateral (defense lines) The Initial Margin, the Variation Margin and the Default Fund shall be realized/sold on the open market in the circumstances provided for in the GTCB and the Pledge Agreements in the following order: xcl HEM xcl-501-e.doc 21 36

22 1. Permissible Collateral provided by the Defaulting x-clear Member to satisfy its Margin obligations and equivalent obligations in respect of Single Contracts subject to clearing by x-clear (pursuant to the Pledge and Financing Agreement for Margins); 2. Default Fund Contributions of the Defaulting x-clear Member to the relevant Default Fund (pursuant to the Pledge Agreement for Default Funds); 3. a maximum of 25 per cent of the capital of x-clear (as defined by Swiss Law, in particular in FINMA Circular 15/1 Accounting banks ); 4. Default Fund Contributions made by non-defaulting x-clear Members to the relevant Default Fund (pursuant to the Pledge Agreement for Default Funds); 5. additional collateral (whether or not Permissible Collateral) arising from replenishment of the relevant Default Fund (pursuant to the Pledge Agreement for Default Funds); and 6. the remainder of x-clear's provisions and its capital and reserves. The purpose of this Art. 9 and, inter alia, the provision of Margin and Default Fund Contributions is to address and prevent the incidence of systemic risk that may arise in relation to Clearing, the LSE Trading Platform and other platforms operated by LSE or other Exchanges or MTFs in respect of which x-clear provides Clearing Collateral concentration limits In order to ensure that the default fund and margin collateral remains sufficiently diversified to allow its liquidation without a significant market impact SIX x-clear has established issuespecific, trading-volume-related and collateral-type-related maximum concentration limits. In addition, there is a minimum concentration limit for cash plus securities collateral from the SNB GC basket). Concentration limits are established for each clearing member at the credit group level. Collateral exceeding the respective concentration limits has to be replaced such that the concentration limits are met after the replacements. Further details, including the current values of all concentration limits, can be found in the lending norms of SIX x-clear and SIX SIS Issue-specific maximum concentration limits Issue-specific concentration limits are only applicable for bonds accepted as collateral for margins and the default fund of SIX x-clear. The issue-specific limits are based on the face value of the bond and set as a percentage of the respective bond issue size (total issued capital). xcl HEM xcl-501-e.doc 22 36

23 10.2 Trading-volume-related maximum concentration limits The trading-volume-related concentration limit is only applicable for equities accepted as collateral for margins. The trading-volume-related concentration limit is set as a percentage of the 30-day average daily trading volume (ADTV) on the most liquid stock exchange for the respective ISIN Collateral-type-related maximum concentration limits Concentration limits with respect to types of collateral are used for the margin and default fund collateral of SIX x-clear. These limits are set as a percentage of the total collateral provided Minimum concentration limit for cash plus SNBGC collateral The minimum concentration limit for cash plus SNBGC collateral is applicable for margin and default fund collateral of SIX x-clear. The minimum limit is set on the collateral value of the cash collateral plus the securities collateral from the SNB GC basket as a percentage of the total collateral value provided Account structure Each x-clear Member is required to maintain specific accounts for the purposes of Clearing. It is immaterial for this purpose whether the x-clear Member is an x-clear GCM or an x-clear ICM or NCM. A distinction is made between accounts where positions are recorded: - "Clearing Accounts", which comprise "House Accounts" and/or "Client Accounts" for each x-clear Member or NCM (in case of individual client segregation), - Accounts where collateral for the purposes of Margin, Default Fund Contributions or Link Margin Element is maintained (for cash collateral in a "Cash Collateral Account" and for Securities collateral in a "Securities Collateral Account", each a "Collateral Account"). SIX SIS account query options are defined in the Business Partner Specifications. x-clear Members have to maintain cash and custody accounts for collateral management at SIX SIS (on behalf of x-clear). x-clear may use accounts at the x-clear Member's Payment Bank in order to collect amounts owing in cash from x-clear Members following a Margin call and pay on request amounts owed in cash to x-clear Members Clearing Accounts The x-clear Member's or NCM s Outstanding Contracts from trades effected on LSE are recorded in Clearing Accounts. The Clearing Accounts are maintained at x-clear. xcl HEM xcl-501-e.doc 23 36

24 11.2 Margining As standard, x-clear will open two Clearing Accounts (a House Account and a Client Account) for x-clear Members who are x-clear GCMs. Trades which the x-clear GCM is clearing for itself will be allocated to the House Account and those being cleared by the x-clear GCM for x-clear NCMs will be allocated to the Client Account. In case of individual segregation for an NCM a separate position account will be opened. On the basis of the net positions of all Outstanding Contracts per Security, the required Margin is calculated on the basis of these Clearing Accounts and matched against the Permissible Collateral x-clear Collateral Accounts for Margin Deposits For the purpose of posting Margin, x-clear will open for each x-clear Member or NCM (in case of individual segregation) Collateral Accounts (cash and Securities) at SIX SIS in the name of x-clear. The Permissible Collateral will be provided to x-clear by way of an Irregular Pledge under a Pledge Agreement for Margins. The x-clear Member shall at all times ensure that its x-clear Collateral Accounts show a credit balance in the amount of the deposits made by it to fulfil its obligations to provide Margin and satisfy Margin calls. The extent of usage of the collateral can be called up by the x-clear Member at any time x-clear Securities Collateral Account x-clear accepts cash and Securities as Permissible Collateral in accordance with Art of these Clearing Terms x-clear Cash Collateral Account In addition to Permissible Collateral in the form of Securities, x-clear Members may also provide collateral in the form of cash. x-clear will open a Cash Collateral Account for each currency in which cash is provided Dispo Collateral Accounts At the end of each Business Day x-clear will transfer any Permissible Collateral not required to meet the x-clear Member s Margin requirements (Securities and/or cash) from the x-clear Collateral Accounts to the relevant Dispo Collateral Account(s) operated on behalf of the x-clear Member. Permissible Collateral which is transferred from the Securities or Cash Collateral Account(s) to the Dispo Collateral Accounts shall be rounded down to the next smallest unit (for cash) or denomination (for Securities). At the beginning of each Business Day x-clear will retransfer any Permissible Collateral in the Dispo Collateral Accounts from the x-clear Member's Dispo Collateral Accounts to the x-clear Collateral Accounts. xcl HEM xcl-501-e.doc 24 36

25 11.3 Default Fund Collateral Accounts x-clear will open Default Fund Collateral Account(s) at SIX SIS for each x-clear Member (Securities and/or cash) for the purposes of Default Fund Contributions (a Default Fund Collateral Account ). The accounts will be in the name of the x-clear Member. The credit balance of the Default Fund Collateral Accounts will be pledged to x-clear by means of a Regular Pledge under a Pledge Agreement for the Default Funds as governed by Swiss law Link Margin Element Accounts x-clear will open Link Margin Element Account(s) at SIX SIS for each x-clear Member (Securities and/or cash). The Link Margin Element Accounts at SIX SIS will be in the name of x-clear. The credit balance of the Link Margin Element Accounts will be transferred to x-clear according to the Pledge Agreement for Margins as governed by Swiss law. In case of the default of x-clear, the Inter-CCP Collateral financed by the x-clear Members will be used to cover the inter-ccp exposure Segregated account structures x-clear will offer the following omnibus and individual client segregation models for positions and assets for GCM and their NCMs only: - Omnibus Client Segregation (OCS) - Individual Client Segregation (ICS) - Mini-Omnibus Client Segregation (Mini OCS) The segregated account structures for GCMs/NCMs affect x-clear s clearing and margin collateral accounts only. The collateral accounts for the Default Fund will remain the property of the GCM and will be used in case the Margins for the GCM/NCM positions are not sufficient.the Inter CCP Collateral financed by the Link Margin Element will be used by Co-CCPs if x-clear defaults. Later on in this chapter, a detailed set-up of each account structure is explained including a visual simplification Omnibus Client Segregation (OCS) The graphic below depicts the account structures at GCM level. The GCM positions and assets are segregated from those of its NCM(s). The Omnibus client segregation shall be requested by the Member in case of a regulatory provision to segregate between the positions and assets of the GCM (proprietary clearing transaction in the House Clearing Account) and NCM (client clearing transactions in the Client Clearing Account). The cross- xcl HEM xcl-501-e.doc 25 36

26 netting (cross-margining) of positions takes place at the Clearing Account level. OCS is the standard solution offered by x-clear. A segregation of collateral accounts containing the GCM s and all NCMs assets will ensure a clear client segregation. The segregated collateral accounts will cover the margin requirements according to the open client trading positions and open house trading positions. From a risk management and default management point of view, the account set-up is viewed at the credit group level. The credit group combines, on a technical level, Clearing Account(s) with the respective Collateral Account(s) for a transfer (portability)/close-out unit. This applies to stress testing, default management, close-out possibilities and porting options of the NCM in the case of a GCM default. Legal requirement: If opting for the OCS solution, NCM instruction(s) shall be given by using a standard form of x-clear to initiate client segregation. The instruction shall be based on a contractual agreement of the designated (new) GCM with the GCM to reflect the NCMs collateral and positions and portability preferences. This form can be found under: > Clearing > Forms & Guides > Forms Individual Client Segregation (ICS) The graphic below depicts the account structure at NCM level. The GCM positions and assets are segregated from those of its NCM(s). In addition, each NCM is segregated from the other NCM(s). The account structure for the ICS model allows dedicated individual and segregated Clearing and Collateral Accounts to be held that show receivables and liabilities in terms of assets and positions of an NCM. The cross-netting (cross-margining) of positions takes place at the Clearing Account level. If the clearing member chooses to use one Clearing Account, the other account is set as inactive in the system. xcl HEM xcl-501-e.doc 26 36

27 Figure 1: Individual client segregation (ICS) In terms of the Collateral Accounts, the x-clear Member can choose for each NCM between segregated Collateral Accounts for each client and a House Clearing Account (model A) or an omnibus Collateral Account (model B) for both Clearing Accounts. The collateral of the GCM is always segregated from the individual NCM s collateral. The GCM has to pass through the collateral amount or positions requested by the NCM if the collateral fulfills the collateral eligibility requirements of SIX x-clear. From a risk management and default management point of view, the account set-up is viewed at the credit group level. The credit group combines, on a technical level, Clearing Account(s) with respective Collateral Account(s) for a transfer (portability)/close-out unit. This applies to stress testing, default management, close-out possibilities and porting options of the NCM in the case of a GCM default. Legal requirement: If opting for the ICS solution, an NCM instruction shall be given by using a standard form of x-clear. The instruction shall be based on a contractual agreement of the designated (new) GCM with the NCM to assume the latter s collateral and positions and portability preferences. This form can be found under: > Clearing > Forms & Guides > Forms. The ICS account structure is the only one supporting a change in clearing member status in case of a GCM default. Specifically, the NCM can choose to become an individual clearing member (ICM), under the condition that the member requirements are fulfilled. This form can be found under: > Clearing > Forms & Guides > Forms. xcl HEM xcl-501-e.doc 27 36

28 12.3 Mini-Omnibus Client Segregation (Mini OCS) The picture below depicts the account structure at NCM level. The GCM positions and assets are segregated from those of its NCMs. Similar to the Client Account in the OCS model, but at NCM level, the NCMs share an omnibus Clearing Account. The Mini-OCS model is a partial segregation, contrary to the ICS model, whereby a group of NCMs of a GCM use one Clearing Account. This model offers GCMs the possibility to have multiple omnibus accounts. The cross-netting (cross-margining) of positions takes place at the Clearing Account level. If the clearing member chooses to use one Clearing Account, the other account is set as inactive in our system. Figure 2: Mini-omnibus client segregation (Mini OCS) In terms of the Collateral Accounts, the clearing member can choose for its NCM between segregated Collateral Accounts for each client and a House Clearing Account (model A) or an omnibus Collateral Account (Model B) for both Clearing Accounts. The collateral of the GCM are segregated from the NCM group collateral. From a risk management and default management point of view, the account set-up is viewed at the credit group level. The credit group combines, on a technical level, Clearing Account(s) with respective Collateral Account(s) for a transfer (portability)/close-out unit. This applies to stress testing, default management, close-out possibilities and porting options of the NCM in the case of a GCM default. xcl HEM xcl-501-e.doc 28 36