COLLATERAL MANAGEMENT SERVICE. Service Description

Transcription

1 COLLATERAL MANAGEMENT SERVICE Service Description

2 LEGAL DISCLAIMER The content of this document is subject to change without notice. Although this document has been prepared on the basis of the best information available at the moment of preparation, NASDAQ OMX Group, Inc., NASDAQ OMX Clearing AB and their affiliates make no representations or warranties with respect to the information and accept no liability for any decision taken on the basis of this document or for any other use made of the contents of this document. NASDAQ OMX Group, Inc., NASDAQ OMX Clearing AB and their affiliates assume no responsibility for any errors or omissions. 2

3 PREFACE Capital efficiency is a cornerstone in the changing clearing landscape and an important driver to reduce costs for market participants. Nasdaq Clearing offers a truly capital efficient clearing solution to the market and has a clear ambition to continue to be at the forefront of delivering capital efficient solutions to its members going forward. Nasdaq Clearing s model is based on three main components: Margin model Proven and efficient margin models, tailored for each asset class Regulatory capital The model is designed to minimize the need for regulatory capital Collateral Nasdaq Clearing provides solutions to optimize use of collateral and minimize the cost This document describes the details of Nasdaq Clearing s collateral management service, a service designed to maximize capital efficiency and to offer a high degree of flexibility to market participants. In addition the model is based on a structure with full automation and STP. Please note that all information provided in this document has been prepared for information purposes only and should not be relied upon as any form of advice and does not form the basis of any contractual relationship between the recipient and Nasdaq Clearing. Such relationship is governed solely by the terms and conditions of Nasdaq Clearing s applicable clearing rules, custody account agreements and other legal agreements between the clearing participant and Nasdaq Clearing. Amendments to the clearing rules and custody account agreement to accommodate the changes to Nasdaq Clearing s collateral management service will be published separately in accordance with Nasdaq Clearing s ordinary procedures for such amendments. There are number of key assumptions in the way the service is modelled A single collateral pool is used to cover exposures in all asset classes, both listed and OTC products Optimization of all cash flows between the participant and the clearinghouse One harmonized model regardless of products cleared Direct debit model used for automating payments Same day value on all cash and securities transactions. Extensive list of eligible collateral Messaging based on industry standards such as SWIFT Nasdaq Clearing s ambition is clear to be a strong partner in creating efficiency in the collateral space. Nasdaq Clearing operates central counterparty clearing for derivative instruments and offers clearing of equity and index derivatives on Swedish, Norwegian, Finnish, Danish and Baltic instruments; Fixed Income derivatives on Swedish, Norwegian and Danish underlying; Commodity derivatives on Nordic power, emission rights, gas, German and Dutch power as well as derivative contracts on the British electricity market. Nasdaq Clearing also clears OTC trades executed outside the regulated markets and reported to the clearinghouse for clearing. October

4 CONTENTS 1 COLLATERAL MANAGEMENT SERVICE OVERVIEW SYSTEMS ACCOUNTS END-OF-DAY MARGIN REQUIREMENT DAILY CASH SETTLEMENT COLLATERAL ELIGIBLE COLLATERAL COLLATERAL VALUATION MARGIN CALLS END-OF-DAY MARGIN CALLS INTRADAY MARGIN CALLS BASE CURRENCY CASH OPTIMIZATION CURRENCY SETTINGS AND LIMITS MANUALLY ADJUSTING COLLATERAL BALANCES CLIENT ACCOUNT TRANSACTIONS PAYMENT SYSTEM WITH DIRECT DEBIT DAILY CYCLE BANK HOLIDAYS COLLATERAL TRANSACTIONS POSTING COLLATERAL CALLING BACK COLLATERAL SUBSTITUTION OF COLLATERAL DEFAULT FUND REQUIREMENT REPORTS BANKS AND CSD/ICSD APPROVED SETTLEMENT BANKS POWER OF ATTORNEY STANDING SETTLEMENT INSTRUCTION CONCENTRATION AND CENTRAL BANKS CSD/ICSD STANDING SETTLEMENT INSTRUCTION CORPORATE ACTIONS CLEARING RULES AND LEGAL AGREEMENTS LEGAL FRAMEWORK THE LEGAL STATUS OF NASDAQ OMX CLEARING AB RULES AND REGULATIONS

5 4.1.3 CUSTODY ACCOUNT AGREEMENTS INTEREST ON CASH COLLATERAL FEES TAX TAX ON CASH CONTRIBUTIONS TAX ON COLLATERAL IN THE FORM OF SECURITIES US MEMBERS AND US SECURITIES FATCA FOREIGN ACCOUNT TAX COMPLIANCE ACT PARTICIPANT OBLIGATIONS SYSTEM AND USER ACCESS INTERFACES USER ACCESS TESTING CONTACT

6 DOCUMENT DATA + REVISIONS 16 January, 2015 Deadlines for the daily cycle updated 6

7 GLOSSARY AND DEFINITIONS + MARKETS This document contains information for members and clients of both Nasdaq Financial Markets and Nasdaq Commodities. A member or client is collectively referred to as a participant. Unless explicitly specified, the information in this document applies for members and clients of both markets. Information specified to apply for Nasdaq Financial Markets is directed to members and clients clearing equity and fixed income derivatives. Information specified to apply for Nasdaq Commodities is directed to members and clients clearing power and gas derivatives, European Union Allowances (EUAs) and Certified Emission Reductions (CERs). + GLOSSARY AND DEFINITIONS Bank day Clearing house Day (other than a Saturday or Sunday) on which commercial banks are generally open for business. Central counterparty Nasdaq Clearing. Clearing Client Clearing Member Clearing Participant See Participant. A Clearing Client means an entity that has been approved by the Clearing house to have transactions subject to clearing through a Client Representative, for registration in a clearing account where the Clearing Client is account holder. Only applicable for Nasdaq Commodities. For Nasdaq Financial Markets, a Clearing member refers to a General Clearing Member (GCM) or Direct Clearing Member (DCM). For Nasdaq Commodities a Clearing Member refers to a membership category that clears on its own behalf. Clearing System Client Representative CMS See Genium INET Clearing. A Client Representative represents Clearing Clients in respect of trading. Only applicable for Nasdaq Commodities. Nasdaq s collateral management service. CMS Web application CSD Custody Account Custody Account Agreement Custody System Default Fund A Nasdaq web application that enables Participants to view and administrate collaterals held on their Custody Accounts with Nasdaq. Central Securities Depository. The account(s) to be opened with Nasdaq by Clearing Participants for safekeeping (securities) and reflecting (cash) posted as collateral to Nasdaq. An agreement between Nasdaq and each Clearing Participant in relation to the Participant s Custody Accounts with Nasdaq. See WIZER Custody. Nasdaq member-sponsored Default Fund. 7

8 Direct Pledging Customer A physical person or a legal entity who (i) has entered into a customer agreement, and (ii) has opened a separate trading account and a separate clearing account with the Clearing house through a Clearing Member Only applicable for Nasdaq Financial Markets. EMIR European Markets Infrastructure Regulation - Regulation (EU) 648/2012. FoP Genium INET Clearing Free-of-payment transaction at CSD/ICSD. The Nasdaq clearing system. ICA ICSD Member MQ Nasdaq Clearing Individual Client Segregated Account as defined in the Rules and Regulations. International Central Securities Depository For Nasdaq Financial Markets, a Member refers to a General Clearing Member (GCM) or Direct Clearing Member (DCM). For Nasdaq Commodities a Member refers to a General Clearing Member, Clearing Member and Clearing Client. Message oriented middleware that allows independent and potentially non-concurrent applications to communicate with each other. NASDAQ OMX Clearing AB. Nasdaq Deposit Rate (NDR) The NDR is the rate at which Nasdaq will compensate Participants for cash collateral. Nasdaq Participant NASDAQ OMX Clearing AB. Member (see Member) of NASDAQ OMX Clearing AB, Direct Pledging Customer or other concerned parties, e.g. ISVs. Rules and Regulations The Clearing Rules of Nasdaq Derivatives Markets or the Clearing Rules of Nasdaq Commodities, as applicable. Segregated Securities Account Accounts opened in a Participant s own name and pledged to Nasdaq. Settlement Agent A financial institution acting on behalf of a Participant in the settlement of securities transactions in a CSD or ICSD. SWIFT Net SSI WIZER Custody Exchange of standardized messages between organizations connected to services on the SWIFT Net network. Standing Settlement Instruction for cash and securities Nasdaq system for maintaining custody accounts for safekeeping and administration of Participants collateral held on Custody Accounts with Nasdaq. 8

9 1 COLLATERAL MANAGEMENT SERVICE 1.1 OVERVIEW The Nasdaq Collateral Management Service (CMS) is the service managing collateral for clearing on Nasdaq Financial and Commodities derivatives markets. The service manages both cash and non-cash collateral for covering margin requirements as well as cash transactions for daily cash settlement (premiums, fees, variation margin (mark-to-market)). The collateral flows are managed in an advanced collateral optimization process taking into account both cash and non-cash collateral to optimize each participant s use of collateral and to minimize the number of cash transactions to and from the service. Participants hold specific custody accounts for use with the service and all custody accounts in the service can hold both cash and non-cash collateral integrated on the same account. In addition, participants must hold a bank account within an approved settlement bank in each applicable currency for managing cash transfers to and from the service. To enable efficient cash transactions the service has an integrated payment system that with the use of direct debit instructions enable automatic cash transfers. Automatic cash transfers are, together with the use of the cash optimization feature, used to fully automate the flow of cash collateral to and from the collateral management service. To control the flow of collateral, participants can also instruct collateral transactions outside the automated flow. Posting of supplementary cash collateral to a custody account is achieved by depositing cash to a Nasdaq collateral bank account in one of the settlement banks approved for the service. Bank accounts for this purpose are available for each of the eligible cash collateral currencies. Posting securities to a custody account is done through one of the CSDs/ICSDs connected to the collateral management service. Participants do not need to be a direct member of a CSD or ICSD, but can use a settlement agent for executing securities transactions. For more information on banks approved to be used with the service as well as SSIs for posting cash and non-cash collateral, please see the Nasdaq website 1. Collateral posted to Nasdaq can be segregated by House Client or on a client-by-client basis, based on the participant s account setup

10 The process of valuation and evaluation of collateral is fully automated and is done per segregation category (e.g. for house, client and individual clients respectively). Posted collateral is valued daily using market prices taking into account applicable haircuts and pending transactions, and is then evaluated to make sure the collateral value is sufficient to cover the participant s margin requirement(s). In the case of a deficit a direct debit transaction is executed to cover the shortage and in the case of a surplus a credit instruction is automatically executed (subject to settings on each account). Margin requirements, daily cash settlement information as well as information on cash optimization transactions are retrieved through Genium INET Clearing Workstation 1 and 2, over the OMnet API, or via CMS Web. Settlement instructions for posting and withdrawing cash and securities are done via SWIFT Net, over MQ or through the CMS Web application. The figure below shows an overview of the collateral management service and the following sections gives a more detailed description of the different parts of the collateral management service. Figure 1 - Overview of CMS 10

11 1.2 SYSTEMS The collateral management service builds primarily on two systems. Genium INET Clearing, referred to in this document as the clearing system, a multi-asset clearing, risk management, settlement and collateral management system. All accounts referred to as clearing accounts, margin requirement accounts and cash settlement accounts reside in the clearing system. Participants can access the clearing system via Clearing Workstation 1, Clearing Workstation 2, the CMS Web application or over the OMnet API. WIZER Custody, referred to in this document as the custody system, handles settlement and safekeeping of collateral and holds accounts reflecting participants collateral balances and also handles all cash and securities transactions to and from the service. All accounts referred to as custody accounts reside in the custody system. Participants can access the custody system via the CMS Web application or over SWIFT Net or MQ. The two systems are interconnected and exchange of data between them is fully automated and takes place in real-time. 1.3 ACCOUNTS In the clearing system margin requirement accounts are used to summarize margin requirements for a whole participant, or a subset of the participant s clearing accounts. The use of margin requirement accounts allows for segregation of house, client and individual client margin requirements. Each margin requirement account in the clearing system is linked to a custody account in the custody system. Custody accounts are used for the registration of posted cash and security collateral balances. A single custody account can hold all types of eligible collateral. The collateral balances are mirrored in the clearing system and evaluated against the margin requirement on the margin requirement accounts. 11

12 Figure 2 - Account relationship example Cash settlement accounts are used to summarize the cash settlement amounts that are to be paid to or received from the clearing house for a whole participant or a subset of the participant s clearing accounts. The cash settlement accounts allow for segregation of settlement on house, client and further levels. Cash transactions are combined into a single settlement instruction per currency through a cash optimization account. The cash optimization account handles cash collateral and cash settlement amounts for all client accounts of one participant with one transaction, while maintaining segregation through books and records. + ACCOUNT SUMMARY Clearing system o Clearing account account holding positions o Margin requirement account account summarizing margin requirements o Cash settlement account account summarizing daily cash settlement transactions o Cash optimization account account summarizing cash optimization transactions Custody system o Collateral custody account account holding cash and/or securities for covering margin requirements 12

13 1.4 END-OF-DAY MARGIN REQUIREMENT The margin requirement is the amount that an account holder has to cover with collateral. The margin requirement corresponds to the expected cost of closing out the account holder s positions in the worst case of several predefined potential future market scenarios, taking into account any netting effects allowed in the margin model. The margin requirement includes four main components: initial margin, contingent variation margin, payment margin and delivery margin. Initial margin is calculated to cover the clearing house s potential future exposures to counterparties in the interval between the last margin requirement and the close-out of contracts and liquidation of collateral following a counterparty s default. Contingent variation margin is calculated to cover changes in market value in respect of contracts which are not settled daily and may be credited or debited to the margin requirement account. Payment margin is collected to cover the next payment that has fallen due under the contracts and may be credited or debited to the margin requirement account. Delivery margin is collected to cover deliveries that have fallen due under the contracts and may be received or delivered by an account holder. Delivery margin can in turn be divided into initial margin (potential future exposure) and contingent variation margin (market value not settled). In addition to the above mentioned margin components, commodities members also have to cover base collateral requirements, which are based on expected trading volumes and potential credit risk of the counterparty. Detailed information on the Margining Methodology can be found on the Nasdaq website 2. Margin requirements are presented in the instrument-, or risk currency and are evaluated against collateral values in the clearing system. End-of-day margin requirements do not include variation margin (mark-to-market settlement). 1.5 DAILY CASH SETTLEMENT The daily cash settlement is the cash flow covering all payments that need to be settled in full each business day. The daily cash settlement corresponds to the amount to cover for a participant s change in variation margin (mark-to-market settlement) for futures style products and to cover premiums, fees and other cash settlement except those directly related to the delivery of securities. The daily cash settlement for a participant can be both negative (participant to pay to the clearing house) and positive (participant to receive from the clearing house). Daily cash settlement has several components: Variation margin the mark-to-market value Premiums premiums for options Fees exchange and clearing fees

14 Cash settlement obligations with respect to the contracts cleared at Nasdaq are settled in DKK, EUR, GBP, NOK, SEK and USD and are all settled through the collateral management payment system. Daily cash settlements are always settled in the respective instrument currency. 1.6 COLLATERAL Collateral refer to assets posted to Nasdaq for the purpose of covering margin requirements (cash collateral will also be used to cover daily cash settlement requirements). Participants can post both cash and non-cash assets as collateral. All collateral is subject to eligibility criteria and discounting (haircuts) according to the from time to time applicable collateral list. To fulfil its obligations each participant is required to hold sufficient collateral with Nasdaq to cover its margin requirement(s). Cash and securities collateral are held as: Cash title transfer reflected on the participant s custody account Securities pledged on the participant s custody account ELIGIBLE COLLATERAL Eligible collateral is found in the rules and regulations of the respective market. For the Nasdaq Financial Markets, the collateral list can be found under the clearing rules appendices section (Appendix 14) of the Clearing Rules of Nasdaq Derivatives Market 3. For Nasdaq Commodities, the collateral list can be found under the clearing appendices section (Appendix 10) of the Clearing Rules of Nasdaq Commodities 4. The collateral list includes general conditions for eligible collateral and principles regarding valuation, concentration limits, haircuts etc COLLATERAL VALUATION Collateral held on custody accounts in the collateral management service are continuously valued. The prices used for valuation are retrieved from an external price vendor. Securities posted as collateral are valued using the previous business day s prices. For shares and other securities traded on markets with a market close before CET, the end of day price is used. Securities traded on markets with a market close after CET are valued using a price taken from the price vendor at CET. If a price for the previous business day is not available, e.g. due to a bank holiday, the latest available price is used. In case of a corporate action event that will have an impact on the price of a security, the valuation price is adjusted accordingly after closing on the day before the ex-date. European Union Allowances (EUA) and El-Certs posted as collateral (pre-delivered assets) are valued using the previous business day s price for the nearest futures/forward contract

15 The prices retrieved at market close (or 18:30 CET where applicable) are used for valuation of collateral instruments during the following business day including end-of-day valuation, intraday valuations and intraday margin calls. 1.7 MARGIN CALLS END-OF-DAY MARGIN CALLS The value of the collateral on a custody account is evaluated against the end-of-day margin requirement to verify that the value of collateral is sufficient to cover the margin requirements. The end of day evaluation and possible deficits are distributed to clearing participants end of day one business day prior to the day on which collateral shall be posted. Sufficient collateral shall be available to Nasdaq on each applicable custody account at the final end-of-day evaluation at 11:00 CET every business day. Should the collateral value be insufficient, Nasdaq reserves the right to act according to its default rules (see section 1.8 of the Clearing Rules of Nasdaq Derivatives Market and section 8.1 of the Clearing Rules of Nasdaq Commodities) INTRADAY MARGIN CALLS Intraday margin calculations, preliminary evaluations, take place continuously throughout the day and intraday margin calls can be executed when deemed necessary by the clearing house according to the Clearing Rules. The participant will be notified of the intraday margin call in accordance with the rules. An intraday margin requirement is calculated based on real-time positions and real-time prices. In addition to the margin requirement components the intraday margin includes an intraday variation margin covering the risk of liquidating the futures positions at the prevailing market prices. The evaluation against collateral values is done using the latest available end of day prices for the collateral. If there is insufficient collateral according to Nasdaq Clearing s intraday margin call policies 5 and an intraday margin call is performed, the participant has 90 minutes from the notification of the intraday margin call to add additional collateral. This timeframe includes the confirmation lead time of the settlement bank and/or CSD/ICSD. When additional collateral has been posted an evaluation is made to compare the intraday margin requirement with the value of the participant s posted collateral. If an intraday margin call is done before the participant has met its end-of-day margin call (before CET), the intraday margin call overwrites the official margin call, which means that the participant shall meet the new (intraday) requirement within 90 minutes. Margin guidelines with more information on calculations can be found on the Nasdaq website

16 1.8 BASE CURRENCY The base currency is used to present the total net collateral surplus/deficit for a specific custody account in a single currency. Base currency conversion is applied to the surplus/deficit for each currency, i.e. margin requirements are presented in the instrument- or risk currency (for commodity contracts always in the risk currency) and collateral values in the corresponding currency are first subtracted before base currency conversion is applied. DKK, EUR, GBP, NOK, SEK or USD can be chosen as base currency Cash collateral can be posted in all eligible currencies independently of the base currency chosen Margin requirements are calculated for each instrument or risk currency individually and posted collateral is initially matched against the collateral currency s margin requirement Net amounts are summarized and the surplus/deficit is presented in the chosen base currency Figure 3 - The figure shows an example base currency conversion. Currency conversion will be made on the net required margin, i.e. margin requirement is measured against posted collateral in each currency before being converted to a chosen Base Currency. The exchange rates used and are subject to currency risk haircut/parameter, haircut on Securities collateral is 30% in the example. 16

17 1.9 CASH OPTIMIZATION The collateral management service combines payments in respect of cash collateral and daily cash settlement into one optimized flow. For a specific custody account this is done using the following principles: Both cash collateral and daily cash settlement transactions are recorded on the same account Cash collateral on the account is used to cover daily cash settlement requirements (per currency) Positive daily cash settlement is recorded on the account to cover margin requirement (per currency) Direct debit instructions are created for the account if o a daily cash settlement requirement still remains after subtracting cash collateral 7 o there is a total collateral deficit on the account in the base currency Credit instructions are created for the account (with same day value) if there is a total collateral surplus in the base currency after the daily cash settlement is finalized the credit instructions can include both automatic cash collateral call backs and positive cash settlement Figure 4 - In this example the member is only active in one currency (SEK). The SEK 70 million in held cash collateral on the custody account is used to cover a cash settlement requirement of SEK 20 million (A,K). The remaining SEK 50 million in cash together with SEK 360 million in held securities (E) is used to cover the margin requirement (B) of SEK 400 million. The total collateral surplus is SEK 10 million (H) and this amount is automatically withdrawn from the custody account (J) credited the member (M,O). 7 Daily cash settlement requirements are always settled in each applicable currency and can only be offset by positive cash collateral in the same currency. 17

18 Figure 5 - In this example the member is only active in two currencies (SEK and EUR with base currency SEK). The SEK 70 million and EUR 2 million in held cash collateral on the custody account is used to cover a cash settlement requirement of SEK 20 million and EUR 0.5 million respectively(c,d,k). The remaining SEK 50 million and EUR 1.5 million in cash together with SEK 360 million in held securities (E) partially cover the margin requirement (B) of SEK 400 million. The total collateral deficit in base currency is SEK million (H). Since there is a collateral deficit is in EUR but a collateral surplus in SEK the cash optimization routine calculates the sufficient amount to debit the member of EUR million in order to cancel the deficit. This amount is is sent as a direct debit to the member (M,N) and deposited on the custody account (J). 18

19 Figure 6 - Example of cash optimized account structure with house and client omnibus segregation. Margin and cash settlement requirements are summarized on house and client omnibus respectively and result in a single payment per currency and segregation level. Cash transactions for margin and cash settlement are traceable through clearing records. Figure 7 - Example of cash optimized account structure with three Individual Client Accounts (ICA). Margin and settlement requirements are calculated per ICA and summarized into a single payment per currency. The cash transactions for margin and settlement are segregated between each ICA in clearing records. 19

20 1.9.1 CURRENCY SETTINGS AND LIMITS Each participant can configure a number of parameters for the cash optimization feature. Parameters are set for each margin requirement account meaning that a different behaviour can be achieved for different accounts (i.e. different behaviour for house and client or for specific individual accounts). The parameters that are set for each margin requirement account are: + DIRECT DEBIT CURRENCY The parameter specifies in which currency direct debit instructions are created for cash collateral deficits on the account. Possible values are either margin currency or base currency. By default the parameter will be set to margin currency. Direct Debit in margin currency (default) Margin currency is the currency in which a margin requirement is presented, for the Financial Markets this is by default the same currency as the traded instrument s currency and for the Commodities Markets all margin requirements are by default converted to a single risk currency. With the parameter set to margin currency the system will optimize cash transactions currency by currency. If there is a total net collateral deficit for the account the system will, after taking into account any daily cash settlement transactions in the applicable currency, create direct debit transactions for each of the currencies creating the deficit. With this setting cash collateral is optimized per currency in order of priority (see below). Direct Debit in base currency The base currency is used to present the net total collateral surplus/deficit for an account in a single currency 8. With the parameter set to base currency the system will optimize cash transactions based on the selected base currency. If there is a total net collateral deficit for the account the system will, after taking into account any daily cash settlement transactions, create a direct debit instruction for the total deficit amount in the base currency. With this setting the base currency is used to cover all collateral deficits. + CURRENCY PRIORITY The currency priority specifies in which order currencies are prioritized for direct debit and credit of cash collateral. The setting will for example decide in which currency/currencies credits are created in case of an automatic cash collateral surplus call back (some cash collateral might have to be kept as not to create a deficit on the account) and also to determine in which currency to create a direct debit should there be a bank holiday for a participant s selected base currency. 8 The base currency can be set to any of the six available currencies; DKK, EUR, GBP, NOK, SEK and USD. 20

21 + CURRENCY LIMIT The currency limit defines, per currency, an amount of cash to be excluded from an automatic cash call back in case of a collateral surplus (as part of the cash optimization process), i.e. creating a buffer of cash on the account. The value of the limit can range from zero (never keep any surplus cash collateral on the account, i.e. no buffer) to infinite (never attempt to call back any cash surplus from the account). Note that the currency limits are always overridden by daily cash settlement transactions, i.e. positive cash collateral will be used to cover a daily cash settlement requirement before the limit is evaluated. + LOCKED CURRENCY LIMIT A currency limit locked for a certain currency. A locked limit defines an amount of cash collateral to be kept on the account at all times, i.e. a fixed buffer of cash collateral that cannot be used to cover daily cash settlement movements. Apart from helping the participants to keep a constant cash amount on their custody account to cover margin requirements, the limit can also help reduce the individual participant s concentration to collateral issuers in case the participant is also posting on-demand bank guarantees or securities as collateral. Locked limits are set by the clearing house in collaboration with the participant MANUALLY ADJUSTING COLLATERAL BALANCES The cash optimization feature will assume that any deficit in collateral is to be covered by cash, i.e. by creating one or several direct debit instruction(s) according to the settings on each account. Preliminary reports will be created where participants can see the result of the calculation and what payments will be executed should they take no further action. It will still be possible to alter collateral balances on an account before any debit instruction is executed by doing so before the final cash optimization calculation is run at 09:30 CET in which payments are re-calculated using the actual collateral balance at that time. This will allow participants who prefer to cover deficits with non-cash collateral to do so CLIENT ACCOUNT TRANSACTIONS For participants with multiple client accounts, cash transactions for all these accounts are aggregated to a single direct debit or credit transaction per currency. For individually segregated accounts configured not to allow automatic credits a separate call back bank account can be specified allowing the customer to make a call back directly to their own bank account. This applies to cash call backs only. 21

22 1.10 PAYMENT SYSTEM WITH DIRECT DEBIT Cash transactions created in the collateral management system through its cash optimization feature are executed in the system s integrated payment system. The payments system utilizes direct debit instructions and credit instructions to automate cash flows and to enable full straight through processing of cash transactions. To enable direct debit and credit payments between the participants and the clearing house through the payment system each participant opens bank account(s) with one or more settlement banks approved by Nasdaq. Separate bank accounts will need to be set up for each eligible currency in which the participant is active. In order for Nasdaq to be able to debit the participant s account(s), the participant authorizes (i) Nasdaq Clearing to issue payment instructions, and (ii) the relevant settlement bank(s) to debit the participant s account(s) in accordance with such instructions. Such authorizations are obtained for each bank account by the following arrangements: under the Clearing Rules (or alternatively under a separate written and signed mandate), each participant authorizes Nasdaq Clearing (and Nasdaq Clearing is entitled) to issue instructions to debit the participant s bank account(s), and by issuing a power of attorney in favour of the settlement bank, the participant authorizes the settlement bank to debit the participant s bank account(s) in accordance with Nasdaq Clearing s instructions. In addition, a participant may transfer supplementary cash collateral to designated Nasdaq Clearing bank accounts as further described in section 0. Payments are executed on fixed points in time during the collateral management services daily cycle as described below DAILY CYCLE The daily cycle, illustrated in the figure below, provides an overview of the daily events and when they occur. At 19:25 CET the end-of-day clearing process, including calculations of daily cash settlement and margin requirements starts. The result of the calculations are available to participants through Clearing Workstation (CW1 and CW2), the OMnet API and on CMS Web at approximately 21:30 CET. Clearing reports are then produced and are available to participants by 07:00 CET on the following day. The final calculation for cash optimization is run at 09:30 CET. This is the deadline for manually altering collateral positions before direct debit instructions are sent. Direct debit payment instructions are sent at 09:45 CET to the participant s bank account. The participant must ensure that the necessary balance is available on the account for the direct debit. If the direct debit fails, any call backs of collateral will be stopped. At 11:00 CET the end-of-day margin requirement is evaluated against the participant s collateral value and if there is a collateral deficit a margin call is issued. 22

23 At 14:00 CET, credit payment instructions are sent to the participant s bank account. Any direct debit instruction sent to the participant in the morning needs to be completed before any credit instructions (e.g. cash call backs) are executed BANK HOLIDAYS Participants active in several markets must always cover their total margin requirement if any of the markets on which they are active on are open. Figure 8 - The example depicts a bank holiday scenario for a participant active in three markets of which two have a bank holiday (M=Margin requirement, P=Posting of collateral). In case there is a bank holiday for the participants preferred currency to cover cash collateral deficits, a direct debit will be sent in the second ranked currency according to the currency settings on the participant s custody account. Pre-funding or posting of additional collateral can be made in advance if the following day is a bank holiday for the preferred currency or security. Participants, who are active only on markets that have a bank holiday, have to cover the margin requirement the next bank day. Figure 9 - The example depicts a bank holiday scenario for a participant active in only one market which has a bank holiday (M=Margin requirement, P=Posting of collateral). 23

24 1.12 COLLATERAL TRANSACTIONS The collateral management service also handles collateral outside of the cash optimization process, i.e. posting and call back of non-cash collateral as well as supplementary cash collateral postings and call backs POSTING COLLATERAL Collateral is posted to a custody account through a Nasdaq bank account at an approved settlement bank and/or through a CSD/ICSD connected to the service. On-demand bank guarantees and European Union Allowances are registered by the clearing house on request and are held by Nasdaq. + CASH A number of currencies are available to use as cash collateral and a deposit is made by transferring cash to a designated Nasdaq bank account. The custody account number must be provided for each deposit. When the cash transfer reaches the designated bank account, Nasdaq will receive confirmation from the settlement bank of the deposit with the custody account number as reference. The reference to the custody account is crucial to identify the deposit. If the proper custody account reference is missing from the deposit, additional manual handling may be needed, which can result in delays, collateral deficit and ultimately default management procedures being initiated against the relevant participant in accordance with the relevant Clearing Rules. The cash deposit is reflected on the referenced custody account. Participants can subscribe to deposit confirmations via SWIFT Net or over MQ. Deposits can also be viewed in the CMS Web application. Cash collateral can be posted at any time while CMS and the applicable banks are open. + SECURITIES Eligible securities can be used as collateral and is posted to a custody account through a CDS/ICSD connected to the service. Participants, or their settlement agent, must - apart from instructing the CSD/ICSD directly instruct Nasdaq via SWIFT Net, MQ or through the CMS Web application about a securities transfer. Nasdaq will then create a corresponding settlement instruction and send it to the CSD/ICSD to match the participant s instruction. Settlement instructions to CSDs/ICSDs should always be sent according to local market practice. When the settlement instruction has settled in the CSD/ICSD, Nasdaq will receive confirmation of settlement from the CSD/ICSD. 24

25 If a settlement instruction does not comply with local market practice additional manual handling may be needed, which can result in delays, collateral deficit and ultimately default management procedures being initiated against the relevant participant in accordance with the relevant Clearing Rules. Securities transferred to Nasdaq as collateral should be transferred through matching transactions i.e. deliver free and receive free messages. The CSD s/icsd s settlement cycles as well as matching settlement instructions determine when the collateral transfer instruction settles. Securities are registered on the designated custody account and are pledged to Nasdaq. Participants can subscribe to settlement status and confirmations via SWIFT Net or MQ. Settlement status and settlement confirmations can also be viewed in the CMS Web application. Securities can be posted at any time while CMS and the applicable CSD/ICSD are open. The securities transaction must be settled and confirmed to Nasdaq from the CSD/ICSD prior to 11:00 CET to be included in the current business day s official margin call. + ON-DEMAND BANK GUARANTEES Participants qualifying as non-financial counterparties as defined in EMIR, are entitled to provide commercial ondemand bank guarantees as collateral. At present, commercial bank guarantees can be posted as collateral in respect to positions that are: Derivatives relating to electricity or natural gas produced, traded or delivered in the European Union; Derivatives relating to the transportation of electricity or natural gas in the European Union To post on-demand bank guarantees, the participant, or the guarantee issuer must deliver the guarantee to Nasdaq for registration. Details for registered guarantees can be found in the CMS Web application. Changes to guarantee details such as amount and expiration date must be confirmed to Nasdaq from the guarantee issuer prior to 11:00 CET to be included in the current business day s official margin call. + EUROPEAN UNION ALLOWANCES AND EL-CERTS Commodities members can use European Union Allowances (EUAs) and El-Certs as collateral up to a maximum equal to the sum of all net short positions in futures and forward contracts (pre-delivered assets). To post EUAs and/or El-Certs participants must deliver the instruments to a Nasdaq registry account and instruct Nasdaq in writing. EUAs and/or El-Certs posted as collateral are reflected in the clearing system and can be viewed in reports. Transactions relating to pre-delivered EUAs and/or EL-Certs must be confirmed on Nasdaq registry account prior to 11:00 CET to be included in the current business day s official margin call. 25

26 CALLING BACK COLLATERAL Within certain time frames collateral can be called back from a custody account. All call backs are subject to collateral evaluations as well as opening times at applicable banks and CSDs. Different procedures apply for different types of collateral as described below. + CASH Participants with surplus cash collateral on a custody account can make a collateral call back request. Cash call backs can be made via SWIFT Net, MQ or through the CMS Web application. A call back can only be made within a certain time frame. An evaluation of current collateral values against margin requirements and account cash limits is always done before a call back is approved. Once approved, payment is credited to the bank account associated with the applicable custody account on the next bank day. The procedure is as follows Participant request call back from 07:00 CET Requests entered between 07:00 CET and 11:00 CET will be pending until 11:00 CET Requests are processed from 11:00 CET until cut off in each currency Requests entered after cut off will be rejected and must be re-entered again next day Cash call back requests that are rejected by Nasdaq will be communicated to the participant or to their settlement agent through , SWIFT Net, MQ or through the CMS Web application depending on how the call back request was received The available level of surplus collateral is determined by comparing collateral values and intraday margin calculation in connection to the call back request Valuation of collateral is done according to the standard procedure for collateral valuation Outgoing payments are made with next (bank) day value The bank account associated with the custody account shall be credited before 13:00 CET on the value date Cash call back payments are made to the bank account defined in the cash SSI for the custody account and currency applicable to the cash call back Cash call back payments are halted if there is an outstanding direct debit instruction + SECURITIES Participants with surplus securities collateral on a custody account can make a securities call back request. A call back of securities can be made via SWIFT Net, MQ or through the CMS Web application. A call back can only be made within a certain time frame. An evaluation of current collateral values against margin requirements is always done before a call back is approved. Once approved, a settlement instruction according to the instrument SSI associated with the custody account will be created by Nasdaq and sent to the applicable CSD/ICSD and will be matched and settled with the corresponding participant or their settlement agents instruction to the CSD/ICSD. 26

27 The procedure is as follows Participant or their settlement agent request a securities call back from 07:00 CET Requests entered between 07:00 CET and 11:00 CET will be pending until 11:00 CET Requests are processed between 11:00 CET until Nasdaq cut off times for securities call back for each CSD/ICSD Requests entered after cut off times will be rejected and must be re-entered again next day The available level of surplus collateral is determined by comparing collateral values and intraday margin calculation in connection to the call back request Valuation of collateral is done according to the standard procedure for collateral valuation Securities call back requests that are rejected by Nasdaq will be communicated to the participant or to their settlement agent through SWIFT Net, MQ or through the CMS Web application depending on how the call back request was received Participants, or their settlement agent, must instruct the CSD/ICSD of an approved securities call back through a free-of-payment (FoP) settlement instruction - Nasdaq will send a corresponding a settlement instruction to the CSD/ICSD to settle the securities call back transaction Settlement instructions for approved securities call back transactions are sent to the CSD/ICSD with same day settlement When matched the securities call back will be settled in the next possible CSD/ICSD settlement cycle Securities call back settlement instructions are made to the CSD/ICSD defined in the instrument SSI for the custody account applicable to the securities call back Securities call back settlement instructions are halted if there is an outstanding direct debit instruction + ON-DEMAND BANK GUARANTEES Participants with surplus guarantee amounts on a custody account can make a guarantee call back request. A call back of guarantee is made via instruction to Nasdaq by with a scanned version of the document (note that the original must be sent to Nasdaq). A call back can only be made within a certain time frame. An evaluation of current collateral values against margin requirements is always done before a call back is approved. Once approved, the guarantee level is adjusted by Nasdaq. The procedure is as follows Participant request call back from 07:00 CET Requests are processed from 11:00 CET until 17:00 CET Requests entered between 07:00 CET and 11:00 CET will be pending until 11:00 CET Guarantee call back requests that are rejected by Nasdaq will be communicated to the participant The available level of surplus collateral is determined by comparing collateral values and intraday margin calculation in connection to the call back request Valuation of collateral is done according to the standard procedure for collateral valuation Guarantee call back amendments are made by Nasdaq and a call back is confirmed to the bank either by fax or by Call backs of on-demand bank guarantees will not be approved if there are outstanding direct debit instructions. 27

28 + EUROPEAN UNION ALLOWANCES European Union Allowances and EL-Cert call backs can be made via the Entry Form but only within a certain time frame. The procedure is as follows Participant request call back between 07:00 CET and 18:00 CET Requests are processed between 11:00 CET and 18:00 CET Requests entered between 07:00 CET and 11:00 CET will be pending until 11:00 CET A call back requests that are rejected by Nasdaq will be communicated to the participant The available level of surplus collateral is determined by comparing collateral values and intraday margin calculation in connection to the call back request Valuation of collateral is done according to the standard procedure for collateral valuation Call backs are returned to the participant s pre-defined registry account stated in their Entry Form Call backs will not be approved if there are outstanding direct debit instructions SUBSTITUTION OF COLLATERAL Participants can replace collateral within the limits defined in the Clearing Rules. Substitution of collateral is not a simultaneous activity, but is handled as one posting and one call back of collateral as described above. The posting of new collateral in a substitution, must be settled and confirmed to Nasdaq before any call back can be approved DEFAULT FUND REQUIREMENT General Clearing Members, Direct Clearing Members, Direct Pledging customers and Clearing Clients on the Nasdaq Derivatives Market and the Nasdaq Commodities market are all required to contribute to the default fund. Contributions to the default fund are normally made on a quarterly basis. Specific eligibility criteria apply to collateral eligible for covering default fund requirements and collateral for the default fund is held on specific custody accounts. However, the procedure for posting cash and non-cash collateral follow the procedure for covering margin requirements. Further information on the default fund can be found on the Nasdaq website