CDS Services for Stripped Securities

Transcription

1 CDS Services for Stripped Securities An overview for traders and investment managers 1 Revised: August 2004; Minor revision: April 2005

2 Table of contents What are stripped securities? Overview 3 Book-entry strips 3 Strip bond packages 4 Receipt security strips 4 CDS book-entry strips and packages 5 How do CDS book-entry strips and packages work? Stripping securities by book-entry 6 Reconstituting underlying securities from book-entry strips 6 Creating packages of book-entry strips 6 Separating packages into book-entry strips 7 Coupons and residues from physically stripped bonds 7 Depository positions, trading and entitlements 7 How can I use... CDS book-entry strips? 8 Packages? 9 How do I... Strip securities by book-entry? 10 Reconstitute underlying securities from book-entry strips? 13 Create packages of book-entry strips? 16 Separate packages into book-entry strips? 19 Interpret the security descriptions and ledger positions? 21 Deposit coupons and residues from physically stripped bonds? 26 2 How do receipt security strips work? Creating receipt security strips 27 Deposits and withdrawals 27 Conversion to book-entry strips 27 Depository positions, trading and entitlements 28 How to interpret the statistics related to strip bonds, packages, and stripped 29 underlying bonds? Frequently asked questions 32 Glossary 34 Appendices: A: A history of innovation 39 B: Quick reference guide to book-entry strip bonds and packages 40 CDS is 43 Corporate addresses 44 All rights reserved. No part of this publication may be reproduced by any means, nor transmitted, nor translated into computer language, without prior written permission from The Canadian Depository for Securities Limited. This document is also available in French. Ce document est également offert en français. CDS does not make any recommendation regarding any security or type of securities nor the advisability for any particular investor of investing in securities generally.

3 What are stripped securities? Overview Since the early 1980s, the financial community has separated, or stripped, many securities into component parts (such as individual payments) to create new investment products that better match investor objectives such as reduced reinvestment risk, increased yields, increased potential for capital gains, and desired cash flows. The most common form of stripping involves separating bonds into individual interest and principal payment components. Each individual payment (strip bond) is then held and traded separately based on face value due on payment date. Book-entry strips Originally, strip bonds were created by actually separating or clipping individual coupons from bearer bond certificates. This resulted in high-risk handling of bearer securities which were small in size, and added significant costs for the financial community. Ultimately, these costs were passed on directly or indirectly to investors. To eliminate the risks of handling strip bonds in bearer form, and associated costs, the Canadian financial community moved to stripping bonds primarily electronically, on a book-entry only basis, through CDS s depository service. The ledger system at CDS is used to separate the underlying securities into the corresponding strip components. Once created, these strip components are held and transferred within CDS s depository service. Book-entry strip components may also be reconstituted into the original security. Since this service was first introduced in 1987, the total face value of CDS bookentry strip bonds has grown to more than $197 billion; the total face value of the original underlying bonds has increased to more than $90 billion. Growth of Strip Bonds on Deposit (Face value $ billion) July July July CDS book-entry strips - electronic CDS book-entry strips - physical Growth of Underlying Bonds Stripped by Book-Entry (Face value $ billion) July July July July July April July July April 3

4 Strip bond packages CDS book-entry strip bonds may be reassembled in a variety of new combinations and proportions, to create packages. By adjusting the strip components selected and the quantities of each component in the package, an almost limitless number of combinations are possible. This allows participants to design packages of strip bonds to meet the needs of investors. The two basic types of packages are:» Bond-type packages that pay interest at regular intervals from a specified date until maturity and have a balloon or lump-sum payment at maturity.» Annuity-type packages that pay fixed amounts at regular intervals from a specified date until maturity, but do not have a balloon payment at maturity. Once created, these packages are held and transferred within CDS s depository service. Packages may also be separated into the underlying book-entry strip components. Face Value of Packages on Deposit (excluding reconstituted securities) (Face value $ billion) July July Face Value of Strip Bonds in Packages (including reconstituted securities) (Face value $ billion) July July July July July July April July July April 4 Receipt security strips In some circumstances, stripped securities are created by depositing the underlying security with a custodian, who then issues receipt certificates representing interests in the strip components. These certificates may be transferable. The receipt security strips are normally eligible for deposit into CDS s depository service. To minimize the issue costs, the receipt security strips are frequently created as book-entry only issues. For these issues, certificates are not available to investors; trading and transfers occur only within CDS s depository service. Receipt security strips are not eligible for the CDS strip bond packages service; the availability for reconstitution depends on the terms of the receipt security strips.

5 CDS book-entry strips and packages Features Securities stripped by book-entry are maintained in their original form. Benefits» Reduces risks and costs by stripping within the ledger system only. Exchanges from underlying securities and packages into strip components are permitted. Exchanges also are permitted from strip components into underlying securities and packages.» Allows the customization of cash flows to meet both issuer and investor needs. Periodic reports on stripped underlying securities and packages are available.» Allows more accurate estimates of the market supply in underlying securities, strip components and packages. Equivalent components (i.e. having the same issuer, payment date, currency, component type and no other distinguishing features) are blended into a single generic component.» Improves market liquidity for strip bonds. Deposits of physically stripped coupons and residues (principal components) are accepted. Physical strip bonds are blended with book-entry strip bonds from the same issue into a single component for each payment date.» Eliminates confusion between book-entry and physical strip bonds. 5 Book-entry strip components may be reconstituted into any related original-issue security which is eligible for deposit at CDS.» Improves market efficiency. Payment components are supported.» Improves liquidity for the strip components and reduces costs for the financial community.

6 How do CDS book-entry strips and packages work? Stripping securities by book-entry To initiate the process, participants acquire a security and instruct CDS to strip the security into its component parts. CDS then exchanges the specified ledger position in the underlying security for equivalent ledger positions in the strip components. After this exchange, each component is held and transferred separately within the ledger system. As income and other entitlements are received on the original underlying securities, CDS distributes them to the holders of the appropriate strip components. Reconstituting underlying securities from book-entry strips CDS book-entry strips can be reconstituted into a related original-issue security. Participants acquire the required strip components and instruct CDS to reconstitute the original-issue security. CDS exchanges the positions in the strip components for the specified equivalent position in the original underlying security within the ledger system. The underlying security then can be traded or held in CDS s depository service. The service supports the electronic reconstitution of physically-stripped bonds and reconstitution beyond the quantity originally issued. 6 Creating packages of book-entry strips Once the strip components have been created or acquired, they can be packaged or reassembled in new combinations and proportions to create packages with different characteristics. Acting on participant instructions, CDS exchanges the corresponding strip component ledger positions for the equivalent ledger position in the specified package. The package is then held and transferred under its own ISIN within the ledger system. As income or other entitlements are received on the strip components that make up the package, CDS distributes them to the holders of the package. Stripping securities by book-entry Underlying Security Strip Component Strip Component Reconstituting underlying securities from book-entry strips Strip Component Strip Component Underlying Security Creating packages of bookentry strips Strip Component Strip Component Package

7 Separating packages into book-entry strips If required, packages can be separated back into the original strip components. On receipt of participant instructions, CDS exchanges the specified quantity of the package for the equivalent positions in the strip components within the ledger system. The strip components are then held and traded individually under their own ISIN as if they had never been packaged. Separating packages into book-entry strips Package Strip Component Strip Component Coupons and residues from physically stripped bonds If required, participants may deposit coupons from physically stripped bonds with CDS, for credit within the ledger system. CDS may impose restrictions on the deposit of physical strip bonds. Details of current restrictions are available from CDS Customer Service. Once deposited, the strip bonds are immobilized and may not be withdrawn prior to maturity, to reduce risks for the financial community. These physical strip bonds become commingled or fungible with the equivalent book-entry strip bonds which were created electronically within the ledger system. Depository positions, trading and entitlements Book-entry strips and packages are held and traded separately within CDS's ledger system. CDS assigns ISIN and CUSIP identification numbers to each strip component created from an underlying security and to each book-entry strip package. Where possible, CDS commingles strip components having the same issuer, payment date, payment currency, payment type (interest, principal, or blended payment) and the same rights under a single generic strip description. 7 Book-entry strips and packages are usually traded in standard units, in accordance with Investment Dealers Association of Canada (IDA) standards. CDS also supports trading in non-standard units. Fractional units are not currently supported. As income and other entitlements are received on the underlying securities, CDS distributes them to the holders of the appropriate strip components and packages. In the event of a payment default on the underlying security, CDS distributes any payments received to the holders of the related interest and principal components, based on the proportionate economic interests calculated using approximate market values. Book-entry strips and packages are not available in certificated form under any circumstances. For additional information on the characteristics of these investments, please see the Quick Reference Guide at the end of this document.

8 How can I use... CDS book-entry strips? Use them to reduce reinvestment risk.» Since there are no interest payments which would be reinvested at future interest rates, the return on strip bonds is fixed at the time of purchase. Use them as substitutes for T-bills.» A significant proportion of all book-entry strip bonds outstanding at any one time have maturity dates within the next year. More than 24.8 per cent ($12.8 billion) of the face value in Canada book-entry strips outstanding as of July 31, 2004 will have matured by the end of For both treasury bills and these strip bonds, payments are made by the Government of Canada. The returns on short-term strip bonds are normally competitive with returns on T-bills of similar maturity. Use them as substitutes for GICs and term deposits.» The face value of strip bonds which mature within five years is also larger than many would expect. Of the $188 billion in face value outstanding as of July 31, 2004, approximately $53 billion (28%) will have matured within five years. The GICs have, at best, a government guarantee of payment up to $60,000, while the interest and principal payments on the bonds represent obligations of the issuer involved with no limits. In some cases, the issuers payments are backed in full by a government guarantee (e.g. Hydro Quebec). The returns on strip bonds are normally competitive with those on GICs and term deposits of similar maturity. As well, strip bonds may be traded or sold prior to maturity to realize a capital gain or to have access to the funds; in comparison, most GICs are locked in until maturity. 8 Use them as long-term GICs with interest compounded.» For strips, terms of five to 30 years (or more) are available. GICs available through banks and trust companies are normally not available for terms exceeding five to 10 years. Use them to match future obligations.» Future obligations to make a lump-sum payment can be offset by purchasing strip bonds. With strip bonds, this matching can be much closer than with normal bonds. Use them as a trading instrument.» Various strategies have been developed for trading bonds. These are generally based on anticipated movements in yield curves or changes in the spreads between yield curves. Most of these strategies can also be applied to strip bonds. In addition, new strategies are being applied involving 1) creating strip bonds from original-issue securities or packages, 2) reconstituting original-issue securities, and 3) creating packages.

9 How can I use packages? Use them as substitutes for bonds.» Two of the first large-value packages were structured to make interest and principal payments just like a bond from the same issuer, but with coupon rates lower than those for conventional bonds with the same maturity date. This allowed investors to benefit from higher yields without facing a capital loss at maturity. Use them as substitutes for GICs (paying periodic interest).» With bond-type packages, the cash flows can be designed to be equivalent to those of a GIC paying interest annually, semiannually, quarterly, or monthly. The payments on the underlying strip bonds (interest and principal) flow through to the holders of the packages. As indicated previously, interest and principal payments on bonds represent obligations of the issuer; also, packages may be traded or sold prior to maturity. Use them as substitutes for annuities.» Most of the packages created to date are structured to pay zero per cent interest until a fixed date, and then a fixed coupon rate semiannually until maturity and a lump-sum payment at maturity. Effectively, these provide the investor with the same cash flow as available from deferred annuities. Packages of this type also can be created without a lump-sum payment at maturity. These are called annuity-type packages. 9 There is some flexibility in the payment frequencies and maturity dates available, depending on the availability of strip bonds from the issuer selected. Frequencies supported include monthly, quarterly, semiannual, and annual payments. Use them to match future obligations.» Future obligations to make periodic payments can be offset by purchasing packages. With packages, there is some flexibility to adapt the security to the cash flows required by the investor. Use them as a trading instrument.» For packages, most trading strategies used to date involve creating packages from strip bonds, or separating packages into strip bonds.

10 How do I... Note: note When creating bookentry strip components, compliance with legal requirements, including securities laws, regulations, and policy statements, is the responsibility of the participant or its client. Strip securities by book-entry?» Acquire the underlying security.» Request International Securities Identification Numbers (ISINs) for the strip components (if required). To determine if the related interest and principal components for an underlying bond have been assigned and made eligible: - check recent CDS eligibility bulletins. These are available at the CDS Web site ( for CDS participants. To view the bulletins for eligible strip bonds, select the Bulletin Service, and then Depository Bulletins by Category. Strip bonds are listed in the Eligible Debt Strip category. The most recent bulletins are at the end of the list. Alternately, you can use the Search function to find all bulletins containing Strip Component.» Sell the strip components for delivery within CDS s depository service.» Instruct your securities operations department to strip the underlying bond by bookentry on (or before) settlement date for the strips. 10

11 Tips Note: CDS allows you to strip note any quantity of the underlying security, even if a fraction results for the face value of the strip component. However, CDS rounds the fraction down when crediting your account for the strip components. ISIN requests» Allow time (normally one or two days) to request ISINs for the strip components. An additional two or three days may be required if the ISIN for the underlying security is requested at the same time, or if the underlying security has special features.» Before requesting ISINs, particularly for strips from non-government bonds or government (or government-guaranteed) bonds with unusual characteristics, investigate the provisions of the relevant Securities Acts, securities regulations and policy statements as they apply to the contemplated deal.» When requesting ISINs for strip components from new issues, Yankee bonds, Eurobonds, and any other issues not currently depository-eligible, CDS will require legal documentation describing the terms of the underlying security. You can minimize delays by providing this information with your request for ISINs for the strip components.» When stripping corporate bonds, contact CDS in advance to minimize delays in receiving the ISIN.» Ensure that an ISIN request is submitted to CDS if a bond is being stripped for the first time, even if you believe that all the required strip bonds exist. (CDS reviews the terms of each bond and will assign non-generic ISINs to the strip components if appropriate. Also, CDS must set up the required relationships in its systems between the underlying security and its strip components.) 11 Stripping bonds» To minimize the delay between paying for the underlying bond and delivering out the strip components, take delivery of the underlying bond through CDS only. If taking physical delivery of the underlying security: - allow at least one additional day for processing the deposit - allow for additional costs such as transfer fees, courier fees and CDS deposit fees.» For bonds held in CDSX, same-day redelivery is allowed only if the securities are available in your firm s segregation account (SA) account and instructions delivered to CDS prior to 10:00 a.m. Eastern time.» Before stripping bonds or other securities, particularly non-government bonds or other securities and government bonds with unusual characteristics, investigate the provisions of the relevant Securities Acts, securities regulations and policy statements as they apply to the contemplated deal.

12 More tips Delivery in other depositories» To deliver CDS book-entry strips in another depository: - ensure that the strips are eligible for deposit in the depository. (If not currently eligible, contact the appropriate depository to request that the strips be made eligible.) - deposit the strips by delivering the securities to their Canadian custodians within CDS s depository service.» Delivery to U.S. depositories is not available at this time. Book-entry strips with trust agreements» Before creating strip bonds which are subject to a trust agreement (i.e. those that have TR in the description), check that the terms of the trust agreement allow this. 12

13 Note: When reconstituting a note security beyond the quantity stripped by book-entry, compliance with legal requirements, including securities laws, regulations, and policy statements, is the responsibility of the participant submitting the request. How do I reconstitute underlying securities from book-entry strips?» Request ISINs for the strip components (if required). To determine if the related interest and principal components for an underlying bond have been assigned and made eligible: - check recent CDS eligibility bulletins. These are available at the CDS Web site ( for CDS participants. To view the bulletins for eligible strip bonds, select the Bulletin Service, and then Depository Bulletins by Category. Strip bonds are listed in the Eligible Debt Strip category. The most recent bulletins are at the end of the list. Alternately, you can use the Search function to find all bulletins containing Strip Component.» Determine if the security to be reconstituted is eligible to be reconstituted beyond the quantity stripped by book-entry. - the security must be eligible for deposit at CDS - there must be a valid CDS strip component listing for the security. Note: For securities eligible to be reconstituted beyond the quantity stripped by book-entry, CDS uses its strip bond packaging service to create a package that is fungible with the security being reconstituted. Note: If you fail to reconstitute a position reserved note for reconstitution, a penalty fee will be charged ($1,000 per million face value per business day reserved).» If the security is eligible for reconstitution beyond the quantity stripped by book-entry: - finalize the purchase or acquisition of the strip components related to the security being reconstituted - finalize the sale of the reconstituted security - instruct your securities operations department to reconstitute the security on or before the settlement date for the sale of the reconstituted security.» If the security is not eligible for reconstitution beyond the quantity stripped by book-entry: - ensure that CDS has the required position in the underlying security available for reconstitution. - because of this limitation on reconstitution, CDS has implemented a process to reserve (on trade date) positions in the underlying security for reconstitution on settlement date (up to three days after trade date). - check the latest Underlying Bonds for Book-Entry Strips report (available on If the quantity stripped by book-entry is relatively small, or may be fully taken by other possible deals, ask your securities operations department to submit a Reconstitution Reservation Request form (CDSX 237 available on to CDS before finalizing the trades. 13 Note: Some bonds may not be available for reconstitution, even if you acquire all of the related strip bonds, due to the following factors: 1. Strip bonds in physical form cannot be reconstituted unless all of the pieces from the same original certificate are matched, reassembled, and then presented to the issuer/agent. 2. CDS cannot create more of the underlying security than has been stripped by book-entry, except through its strip bond packaging service as noted above.

14 - check time frames for reserving for reconstitution - finalize the purchase or acquisition of the strip components related to the security being reconstituted Reservation request received by CDS Toronto Before 10 a.m. Between 10 a.m. and 2 p.m. Between 2 p.m. and 4 p.m. After 4 p.m. (All times shown are Eastern time) Reservation confirmed Within 1 hour of receiving fax By 3 p.m. Within 1 hour of receiving fax By 9:30 a.m. next business day - finalize the sale of the reconstituted security - instruct your securities operations department to reconstitute the security on or before settlement date for the sale of the reconstituted security. Note: This step is not required if a Reconstitution Reservation Request was confirmed by CDS. 14

15 Tips Reconstitution» For strip bonds held in CDSX, if all the required strip components are in your firm s SA account and CDS receives instructions by 10:00 a.m. on the processing date, the reconstituted bond can be delivered against payment on the same day. If you are creating the required strip component positions by stripping another bond or separating a package, CDS will process the other transaction first if so requested.» Ensure that a ISIN request is submitted to CDS if the bond has not been previously stripped, even if you believe that all the required strip bonds exist. (CDS reviews the terms of each bond and will assign non-generic ISINs to the strip components if appropriate. Also, CDS must set up the required relationships in its systems between the underlying security and its strip components.)» Reconstitution may not be available for book-entry strips subject to trust agreements (i.e. strips with TR in the description). For these issues, check the terms of the trust agreement.» Consider using packages as an alternative if you are unable to reconstitute a particular bond. Reserving for reconstitution» Using the Reconstitution Request form wherever possible can save you transaction costs and potential penalty fees if you fail to reconstitute a reserved position. If the underlying bond has a large quantity stripped by book-entry (e.g., more than $1 billion), and you wish to reconstitute a relatively small portion of the total (e.g., $100 million or less), there is a very high probability that the position will be available when you need it. Therefore, you may wish to reserve the position only if other requests to reconstitute the same security are considered likely.» If you submitted a Reconstitution Reservation Request, CDS will automatically process the reconstitution on the date specified; no further instructions are required on the settlement or reconstitution date.» The penalty fees for failing to complete the reconstitution after reserving a position are waived if CDS is satisfied that the failure was due to a failed receive from another participant and in certain other limited circumstances. 15 Fractions» When reconstituting, CDS rounds fractions up. If you need a quantity of one in each strip component due to this rounding, you can request the positions from CDS when submitting the Reconstitution Request or Reconstitution Reservation Request form. If the positions are available in CDS s fractions account, CDS will make them available to you when processing the reconstitution.

16 Note: When creating packages, compliance with note legal requirements, including securities laws, regulations and policy statements, is the responsibility of the participant or its client. How do I create packages of book-entry strips?» Request ISINs for the package (if required). To determine if a package has been made eligible: - check recent CDS eligibility bulletins. These are available to CDS participants at the CDS Web site ( To view the bulletins for eligible strip bonds, select the Bulletin Service, and then Depository Bulletins by Category. Strip bonds are listed in the Eligible Debt Strip category. The most recent bulletins are at the end of the list. Alternately, you can use the Search function to find all bulletins containing Strip Component.» Acquire the strip components related to the package.» Sell the package for delivery within CDS s depository service.» Instruct your securities operations department to create the package on or before settlement date for the sale of the package. 16

17 Tips Note: Packages will be note made eligible in the same depository system as the related strip components. If, for any reason, this is not possible, the request will not be processed by CDS. ISIN requests» Allow time (normally one or two days) to request an ISIN for the package. Allow additional time if ISINs for the strip components are being requested at the same time.» Before requesting ISINs for packages, particularly for packages of book-entry strips from non-government bonds or other securities and government (or government-guaranteed) bonds with unusual characteristics, investigate the provisions of the relevant Securities Acts, securities regulations and policy statements as they apply to the contemplated deal.» To quickly determine whether a package has been made eligible, check the CDS Book- Entry Strip Bond Packages report to determine if the package currently exists. (This will not work if the report was produced after the package was made eligible but before it was created in the ledger or if the package has been separated.)» If creating a package that has the exact same components and rates remaining as an existing package, you may save time and money by using that existing package. This also increases the liquidity of the package. Example: On March 31, 2004, you wish to create a package of Government of Canada strips, paying 11% semiannually from June 1, 2004 to June 1, 2009, with a lump-sum of principal (equal to the face value) on maturity. When checking the CDS Book-Entry Strip Bond Packages report, you find an existing package that is the same (ISIN - CA13501ZAK53, CDA PKG 11% S ), except that it began paying interest in Since the remaining components and rates are the same, you may use the existing package. 17» If the strip components are subject to special provisions (e.g. certain corporate strips created with trust agreements), they are not eligible for packaging. Creating packages» Before creating packages, particularly those including strips from non-government bonds or other securities and government bonds with unusual characteristics, investigate the provisions of the relevant Securities Acts, securities regulations and policy statements as they apply to the contemplated deal.» Consult tax advisors regarding the tax consequences or refer to the IDA Information Statement on Strip Bonds.

18 More tips» For strip bonds held in CDSX, if all the required strip components are in your firm s SA account and CDS receives instructions by 10:00 a.m. on the processing date, the reconstituted bond can be delivered against payment on the same day. If you are creating the required strip component positions by stripping another bond or separating a package, CDS will process the other transaction first if so requested.» For bonds held in CDSX, indicate on the package request form that the strip request must be processed first. Delivery in other depositories» To deliver CDS book-entry strip packages in another depository: - ensure that the packages are eligible for deposit in the depository. (If not currently eligible, contact the appropriate depository to request that the packages be made eligible.) - deposit the packages by delivering the securities to their Canadian custodians within CDS s depository service.» Delivery to U.S. depositories is not available at this time. Fractions» When packaging, CDS rounds fractions up. If you need a quantity of one in each strip component due to this rounding, you can request the positions from CDS when submitting the package request form. If the positions are available in CDS s fractions account, CDS will make them available to you when processing the package. 18 Converting a package to the underlying security» To convert a package to the corresponding underlying security, separate the package into the strip components and then reconstitute the underlying security.» CDS does not automatically convert packages to the underlying securities when they become identical, due to potential tax implications for the holders.

19 How do I separate packages into book-entry strips?» Acquire the package.» Sell the strip components for delivery within CDS s depository service.» Instruct your securities operations department to separate the package on or before settlement date for the strip components. Special situations Callable bonds» Callable bonds are normally stripped only to the next call date.» Bonds which become callable under very limited and unusual circumstances (e.g. global bonds which become callable if certain changes in withholding tax laws occur) may be stripped to maturity. (Investors are protected under defaults and accelerated payments of principal as outlined below.) Retractable bonds» Normally stripped only to the next retraction date.» After the last retraction date, can be stripped to maturity. Defaults and accelerated early payments of principal» Early payments of principal are allocated to the holders of the related interest and principal components on basis of proportionate economic interest calculated using recent yields (i.e. approximately in proportion to market value). 19 Voting rights» These rights are allocated to the holders of the related interest and principal components on basis of proportionate economic interest calculated using recent yields (i.e. approximately in proportion to market value). Other issues with special features» Requests to strip securities other than those meeting the standard criteria and to create strip components and/or packages with special characteristics will be considered by CDS.» CDS Customer Service arranges for these to be evaluated individually. Yankee bonds» Bonds issued by Canadian issuers into the U.S. market ( Yankee bonds ) may be stripped by book-entry if the normal guidelines are satisfied.» Generic CUSIPs are used for strips derived from Yankee bonds where appropriate.» Normal procedures apply. Underlying bonds are delivered to CDS s 5099 account at DTCC.» Payments on these issues are made in U.S. dollars.

20 Eurobonds» Eurobonds denominated in Canadian or U.S. currency may be stripped by book-entry if the normal guidelines are satisfied. Special procedures are followed for these issues. Global issues» Bonds issued into multiple markets may be stripped by book-entry if the normal guidelines are satisfied.» Strip bonds derived from a global issue are not made generic if the issue may become callable under specified circumstances (e.g., changes in tax laws).» Normal procedures apply. If the issue is not eligible for deposit with CDS, a fully registered certificate (registered in CDS s nominee name) must be delivered to CDS. 20

21 How do I interpret the security descriptions and ledger positions? Book-entry strips CDS assigns an ISIN number to each strip component created from an underlying security. Where possible, CDS commingles strip components having the same issuer, payment date, payment currency, payment type (interest or principal) and the same rights into a single generic strip component. Sample: Description for an interest component from a Government of Canada domestic issue. Generic strip bonds Ledger quantity = Amount payable on maturity date. General format: [Issuer] GENERIC [Component type] [Maturity date of component] Payable in Cdn dollars: Payable in U.S. dollars: Issuer name (abbreviation) Indicates that the strip bond may be backed by more than one underlying bond CDA GENERIC INT 12/01/2020 CDA GENERIC PRIN $US 08/28/06 Type of strip bond INT = Interest PRIN = Principal Maturity date of strip bond (MM/DD/YYYY format) Sample: Description for an interest component from an Hydro Quebec global issue. Non-generic strip bonds Ledger quantity = Amount payable on maturity date. General format: [Issuer] [Component type] [RR] [TX] [CYC] [TR] [$US] [Characters 9, 10 and 11 of the ISIN of the underlying security] [Maturity date of component] Issuer name (abbreviation) Codes to identify special features of the strip bond HYQ INT TX DZ3 07/15/2018 Maturity date of strip bond (MM/DD/YYYY format) 21 Type of strip bond Characters 9, 10 and 11 of the ISIN of the underlying security Sample: Description for interest component from a callable Province of Quebec domestic issue. Principal components from a callable or retractable bond Ledger quantity = Amount payable on call date (or face value of underlying security to be received on call date) General format: [Issuer] [Component type] [Characters 09, 10 and 11 of the ISIN of the underlying security] [Maturity year of underlying bond] [Call date of underlying bond (Maturity date of component)] Issuer name (abbreviation) Characters 9, 10 and 11 of the ISIN of the underlying security Maturity date of strip bond* (MM/DD/YYYY format) QUE PRIN BQ /01/2008 Type of strip bond Maturity year of underlying bond *Note that the year is not the same as the maturity year of the underlying bond.

22 Abbreviations used to identify special features in strip bond descriptions Abbreviation TR RR $US CYC TX CALL IN Explanation Indicates that a separate trust agreement governs the strip bond for certain events (e.g., defaults and voting rights). Reconstitution and packaging may not be available for these strip bonds. Indicates that the strip bond payment is from a real return bond and the payment will be adjusted accordingly. Indicates that the strip bond pays in U.S. currency. Indicates that the underlying security and/or the strip bond may be called by the issuer at a price based on current Government of Canada yields. Indicates that the underlying security may be called by the issuer if there are changes in withholding tax laws. Indicates that the underlying security may be called by the issuer at any time. Indicates that the strip bond payment will be adjusted for the change in an index. 22

23 Packages CDS assigns an ISIN to each package created from book-entry strip components. If a new package matches all of the details of another package (e.g., issuer, interest rate, payment frequency, next payment date, maturity date), the same ISIN number may be used for both packages. Existing packages that have identical features, except for the first payment date, may be amalgamated once the payments have started. In these cases, the remaining package will not have the first payment date appearing in the description. Sample: Description for package of Canada strip bonds. Bond-type packages» Interest and principal packages Ledger quantity = General format: Lump-sum payment due on maturity date. [Issuer] PKG [Interest rate of package] [Payment frequency] [First payment date in MMDDYY format] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN (if the securities in the package have special characteristics)] Issuer name (abbreviation) Annualized interest rate Date of first interest payment for package CDA PKG 10.25% S Package type PKG (or PK) indicates principal component is included in the package Code for payment frequency* Maturity date of package *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, etc. Sample: Description for package of Canada strip bonds.» Interest-only and residue-only packages Ledger quantity = General format: Lump-sum payment due on maturity date. [Issuer] [IP or RP] [Interest rate of package] [Payment frequency] [First payment date in MMDDYY format] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN (if the securities in the package have special characteristics)] Issuer name (abbreviation) Annualized interest rate Date of first interest payment for package CDA IP 11.25% S IP indicates that all payments are funded by interest components; RP indicates that all payments are funded by principal (residue) components Code for payment frequency* Maturity date of package *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, etc.

24 Sample: Description for package of Ottawa Carleton Regional Municipality strip bonds.» Dual-rate packages Ledger quantity = General format: Lump-sum payment due on maturity date. [Issuer] DR [Interest rate for first period] [End date for first interest rate] [Interest rate for second period] [Payment frequency] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN (if the securities in the package have special characteristics)] Issuer name (abbreviation) Interest rate for first period Interest rate for second period Maturity date of package OCRM DR 7% % S Package type End date for first interest rate Code for payment frequency* Sample: Description for package of Ontario strip bonds.» Callable residue packages Ledger quantity = General format: *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, B = Bimonthly, T = Triannually. Lump-sum payment due on maturity date (or face value of underlying security to be received on call date). [Issuer] CP [Interest rate of package] [Payment frequency] [First payment date in MMDDYY format] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN (if the securities in the package have special characteristics)] Issuer name (abbreviation) Annualized interest rate of package Coupon rate from underlying bond Maturity year of underlying bond 24 ON H CP 8.5% S % 2010 Package type CP Code for payment frequency* Maturity date of package *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, etc. Sample: Description for multiple rate package of Ontario strip bonds.» Multiple rate packages Ledger quantity = General format: Lump-sum payment due on maturity date. [Issuer] [MPK, MIP, MRP, or MCP] [Interest rate for first period (if space permits)] [Interest rate for final period] [Payment frequency] [First payment date in MMDDYY format] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN] Issuer name (abbreviation) Interest rate for first period Code for payment frequency* Maturity date of package ONT MIP 8% 18% S BN Package type* Interest rate for final period Date of first interest payment for package Characters 9 and 10 of the package ISIN *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, etc. *Multiple rate package types correspond to other types of packages, as shown in the following table. Code for multiple rate package MPK MIP MRP MCP Corresponding single rate package type PKG IP RP CP

25 Annuity-type packages Sample:» Interest-only packages Description for Ledger quantity = Annualized payment amount. package of (i.e. [periodic payment amount] x [number of payments per year]) Canada strip General format: [Issuer] ANN PKG [Payment frequency] [First payment date in MMDDYY bonds. format] [Maturity date of package in MMDDYY format] [Characters 9 and 10 of the package ISIN (if the securities in the package have special characteristics)] Issuer name (abbreviation) First annuity payment date CDA ANN PKG S Type of package ANN PKG indicates annuity package Code for payment frequency* Last annuity payment date (no lump sum payable) *S = Semi-annual, Q = Quarterly, A = Annual, M = Monthly, B = Bimonthly, T = Triannually. 25

26 How do I deposit coupons and residues from physically stripped bonds?» Ensure that the strip bonds are eligible for deposit with CDS. Corporate strip bonds may not be deposited under this service. Contact CDS Customer Service for current restrictions.» Purchase or acquire the coupon(s)/residue(s).» Arrange with your securities operations department to have the physical strip bonds deposited with CDS, or arrange for the seller to deposit the physical strip bonds prior to delivery.» Once CDS has accepted the deposit, CDS credits the depositor s ledger account. Tips Pricing» If your firm will be depositing the physical strip bonds, factor the costs of depositing the physical strip bonds (including potential settlement delays) into the price offered, to ensure that the trade remains profitable for your firm. Contact CDS Customer Service for current CDS fees. Fractions» For deposits of strip bonds, CDS rounds fractions down. Where possible, trade in quantities large enough to avoid fractions (e.g. multiples of 200,000 face value in the underlying bond if the coupon rate is %). 26

27 How do receipt security strips work? Creating receipt security strips To initiate the process, participants (or other financial institutions) acquire a security and establish a custodial, agency, and/or issuer contract with a custodian. The security is then deposited with the custodian, and the issuer/agent of the receipt security issues receipt certificates representing interests in the future-dated interest/ principal payments due on the underlying security to the participant. The participant may deposit the receipt certificates with CDS (if eligible for deposit) or hold the receipt certificates. Receipt security strip bonds currently eligible for deposit include Sentinels, TIGRs, Cougars and non-branded coupon/residue receipts (e.g. Royal Bank coupon/residue receipts). Deposits and withdrawals Deposits and withdrawals of receipt certificate strip bonds are handled in the same way as for the underlying bonds. 27 In some cases, book-entry only receipt certificates are issued. In these cases, a single deposit of each component is made when the certificates are issued and withdrawals are not permitted except under exceptional circumstances. Contact CDS Customer Service for additional information on CDS requirements for book-entry only securities. Conversion to book-entry strips For TIGRs, which are all backed by coupons and residues in bearer (physical certificate) form, the holders have the right to exchange their certificate for the coupon or residue in bearer form. To convert a TIGR to the corresponding CDS book-entry strip bond, the holder may:» exchange the certificate for the coupon or residue in accordance with the provisions for the issue, on payment of the applicable fees; then» deposit the coupon or residue with CDS, for credit as a book-entry strip bond. Note: Contact the transfer agent for details on the conversion cost. Contact CDS Customer Service fo details on the CDS costs.

28 For Sentinels, which are all backed by fully registered bonds, the holders do not have the right to exchange their certificates for coupons and residues. For Cougars and other forms of strip bond receipt certificates, holders should review the terms of their issue to determine if they have the right to exchange the certificate for the coupon or residue. These terms are normally outlined on the certificate and/or in the original offering documentation. If the right exists, holders may convert their position to the corresponding CDS book-entry strip bond following the procedure outlined above for TIGRs. For additional information on the terms of their issue and the fees applicable to the exchanges, contact the transfer agent, custodian or issuer directly. Reconstitution and packaging features are not available for receipt security strip bonds, unless specifically indicated in the related legal documentation and the custodian, issuer and/or agent have appropriate procedures in place. Depository positions, trading and entitlements Each eligible strip bond issue is held and transferred separately within CDS s ledger system, under its own ISIN. To date, generic strip components have not been used for any receipt certificate strip bonds which are eligible for deposit. 28 Trading for receipt certificate strips is normally in denominations established as part of the issue. This practice is recommended if there is any possibility that certificates may be requested or required (e.g. under exceptional circumstances where the issue is made ineligible for deposit at CDS). As income and other entitlements are received on the underlying security, the custodian/ agent distributes the entitlements to the registered holders of the receipt security strip bonds. Where the receipt certificates are held by CDS, CDS then distributes the entitlements to the appropriate holders.

29 How do I interpret the statistics related to strip bonds, packages, and stripped underlying bonds? The statistics related to strip bonds, packages, and stripped underlying bonds should be interpreted with caution. Outlined below are some notes that may assist in the interpretation of these reports.» Accuracy» Stripped underlying securities reports» Estimates of bonds stripped physically and using receipt securities» Strip bond packages reports» Strip bonds reports. Accuracy» These reports are based on information that CDS believes to be accurate. The information is subject to correction of errors that may occur in daily processing or in preparation of estimates. CDS assumes no liability for any errors or omissions.» See the separate note on how CDS estimates the quantity of bonds stripped physically and using receipt securities. Stripped underlying securities reports» All securities (other than package securities) that have valid CDS strip component lists, as of the report date, are shown.» The net quantity stripped by book-entry represents the quantity stripped by book-entry through CDS (if the value is greater than zero) or the quantity reconstituted through CDS using the CDS strip bond packaging facility (if the value is less than zero), as of the end of the reporting period.» Two situations may cause the value to be less than zero: - physical strip bonds were used to reconstitute the security; and/or - generic book-entry strip components derived from one or more other bonds of the same issuer were used to reconstitute the security.» In either case, the available quantity in the security equals: [the outstanding quantity on the issuer s records] - [the net quantity stripped by bookentry through CDS] - [the quantity stripped physically or by receipt securities]» For subscribers, CDS publishes estimates of the quantity stripped physically or by receipt securities. These estimates are updated infrequently.» For subscribers, the stripping and reconstitution activity represents the net activity during the reporting period.» The outstanding amount is based on information obtained from the issuers, their agents, or other sources believed to be reliable. This amount represents the outstanding quantity in the security on the records of the issuers or their agents, as of the end of the reporting period. While CDS attempts to update this information to reflect changes in the outstanding amounts, the outstanding amounts shown may be incorrect. If you notice an error, please notify CDS at strips@cds.ca: CDS will then investigate the error and make corrections as appropriate.» The percentage stripped is the net quantity stripped (book-entry + estimated physical + estimated receipts) divided by the outstanding amount. 29