Guidelines for Members On- Exchange Trade Reporting in Fixed Income Instruments on NASDAQ OMX Iceland. Version 1.2 October 2014

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1 Guidelines for Members On- Exchange Trade Reporting in Fixed Income Instruments on NASDAQ OMX Iceland Version 1.2 October 2014 EFFICIENT SECURITIES TRANSACTIONS

2 1. General information on reporting 1.1 The Reporting Guidelines for Fixed Income Instruments These Reporting Guidelines supplement the NASDAQ OMX Nordic Member Rules ( NMR ) and offer guidance on the reporting/publishing of trades in fixed income instruments executed outside the order book. NMR regulate in a general manner the members requirements to report manual trades, i.e. trades that members execute under the NMR but outside the order book in financial instruments admitted to trading on the Exchange ("Manual Trades"). These Reporting Guidelines cover publishing situations for fixed income instruments admitted to trading on NASDAQ OMX Iceland (The Exchange). The specific use of the different Trade Types is also described accordingly. Please note that this document is intended as practical guidelines on the publishing of the most common transactions and does not purport to be comprehensive. Situations may arise that are not covered by these Reporting Guidelines. Surveillance can be contacted if there are any questions. 1.2 Trading Members can either make trades in the order book or outside the order book (manual trades). In accordance with article in the NMR, all trades in fixed income instruments admitted to trading on NASDAQ OMX Iceland that are entered into outside the order book shall be reported on the Exchange. All fixed income trades must be made in accordance with the NMR. 1 The members therefore benefit from our regulatory environment and Market Surveillance. This means that the Exchange is responsible for the trading environment and ensures that the demands of a fair and orderly execution, as well as requirements on neutrality and non-discriminatory treatment, are being satisfied. Thereby the Exchange upholds efficient trading for all members. 1 It must be clarified that it is not the intention of NASDAQ OMX to regulate in NMR how the agreement between the member and the client is entered into. How the member agrees with its client when executing Manual Trades is not specifically stated in NMR and from the Exchange perspective this can be described in the members order execution policy and other terms for trading, if in accordance with applicable law. Rules for the reporting and publishing of a Manual Trade to NASDAQ OMX are determined in NMR. EFFICIENT SECURITIES TRANSACTIONS 2(8)

3 On-Exchange Trades Fixed income trades come in two varieties: Trades that are the result of automatically matched buy and sell orders in our order book and Manual Trades. On-Exchange Trades are shown schematically below: On-Exchange Trades Trades automatically matched in our order book in accordance with the NMR. Trades executed off order book, but in accordance with the NMR and reported to us (Manual Trades) 1.3 Trade Types The Trade Types set out below should be used when reporting trades to the Exchange: Trade type Standard Trade Derivative Related Transaction Portfolio Trade Volume Weighted Average Price Exchange Granted Trade 2 Non-standard Settlement Definition A Trade concluded on standard market terms in respect of price, Time of the Trade and with standard delivery and settlement schedule Exercise or expiration of options, forwards or futures contracts that imply an exchange of securities or a trade that relates to a derivatives trade and that forms an unconditional part of a combination together with a derivative trade. A transaction in more than one security where those securities are grouped and traded as a single lot against a specific reference price. A Trade, which price is based on a volume weighted average of trades made within a pre-defined period. A Trade pursuant to an individual or general authorisation from the Exchange A trade that deviates from the standard settlement and delivery period 2 The Trade Type Exchange granted trade presupposes that the Member has either obtained prior authorization from the Exchange for the specific case and Trade or that the Exchange has granted a general authorization to all Members for a particular kind of Trade. The Exchange shall notify general authorizations through an Exchange Notice. EFFICIENT SECURITIES TRANSACTIONS 3(8)

4 1.4 How to report Manual Trades Reporting Manual Trades There are separate order books for each instrument. There are two submarkets: OMX ICE DP Fixed Income (traded on dirty price) and OMX ICE CP Fixed Income (traded on clean price). Double-sided reporting is used and each party must report his/her own leg. Trades with a non-member must be reported as internal/cross trades, i.e. the member reports both legs him-/herself. 1.5 Information to be entered when reporting a Trade The following trade information must be reported in respect of Manual Trades: Order Book Identity; Buy or sell code; Trade price; Volume; Identity of counterpart Member; Date and Time of the Trade; Trade Type; Capacity (client / own account / riskless principal / issuer s holding / market maker / stabilization); Settlement date; 1.6 Time for reporting Trades that take place during opening hours must be reported/published as soon as possible, however, no later than three minutes from the time of the agreement. Manual Trades which are entered into within three minutes prior to the closure of the Trading Hours and which, taking into consideration the circumstances, cannot be reported during the Trading Hours, must be reported no later than in the Pre-Trading Session on the following Exchange Day. 1.7 Price Risk and Capacity Section of the NMR requires that trades shall be marked as executed on behalf of own account or client, as well as some specific cases as market maker, riskless principal, issuer s holding and stabilisation. The factor determining whether the member s trade must be marked as effected on behalf of a client or on behalf of own account is whether the member runs a price risk when executing the trade. The member runs a price risk: If the member trades securities on its own account and does not have a client behind the trade, or If the price at which the trade should be delivered is unknown at the time of the trade. EFFICIENT SECURITIES TRANSACTIONS 4(8)

5 If the member runs a price risk, the trade must be marked as effected on behalf of the member s own account and the trade with the client must subsequently be reported separately. This applies often to VWAP trades, trades concluded at the closing price, etc. The member shall only report an own account trade if the member incurs an actual and real price risk, but not when the price risk may be deemed to be theoretical. The assessment of whether an actual and real price risk is present should be based on the specific situation, including the size of the trade relative to the amount available in the order book, liquidity at the time of the transaction, etc. If the member does not run a price risk the trade must be marked as effected on behalf of a client. The subsequent client report is superfluous and no separate reporting shall be done. This rule ensures that all trades published within the opening hours of the trading system are current trades. As a general rule, the price reported must be the price at which the member has traded, i.e. the total price excluding any fee. The owner category Riskless principal shall be used when the member firm enters orders in a principal capacity, but where there is an agreement by which executions of such orders are passed on to a client by back to back transactions, whereas the member firm is not exposed to any price risk. This is also known as Principal Brokerage. "Issuer holding" shall be used when the client for whom the trading takes place is the issuer of the financial instruments. "Market making" shall be used when trading takes place under a market making agreement. EFFICIENT SECURITIES TRANSACTIONS 5(8)

6 2. Transactions subject to reporting/publishing obligations The general principle is that transactions on a primary market, or a first transfer, should never be reported while all trades on the secondary market must be reported. The primary market is where financial instruments are sold for the first time. Primary market transactions are, for example, the transfer of newly issued bonds resulting from a bond auction. Conversely, the secondary market is where previously issued financial instruments are bought and sold. All secondary market transactions should be reported, subject to the guidelines set forth in 1.4. Transactions related to fixed income derivatives should be reported at the expiration, or exercise, of the contract, as a Derivative Related Transaction. Other trades which are reported and form an unconditional part of a combination together with a derivative trade should also be reported as Derivative Related Transactions. When a fixed income instrument is sold and the seller simultaneously agrees to buy the instrument back at a fixed price at a later date (such as a repurchase agreement or a sell/buy-back / buy/sell-back) both transactions should be reported as Derivative Related Transactions. Transactions in which the Central Bank of Iceland sells bonds to banks or investors on the primary market, or repurchase agreements transacted by, or with, the Central Bank of Iceland, should not be reported. The diagram below sets forth examples of various transaction situations and the reporting obligations applicable thereto if the transactions are made as Manual Trades. Transaction situation 1. Situations that relate to the financial instrument: 1.1 Subscription for and sale of fixed income instruments prior to listing. 1.2 Subscription for and sale of newly issued fixed income instruments. 1.3 Buy-back by the issuer for the purpose of cancellation of fixed income instruments, which, at the time, are still admitted to trading on the Exchange. Reporting obligation Shall not be reported. The instruments are not admitted to trading on the Exchange at this time. Shall not be reported. It is a transaction on the primary market. Must be reported. Trade type Standard Trade. Capacity (Owner category) EFFICIENT SECURITIES TRANSACTIONS 6(8)

7 1.4 Recall or compulsory redemption of fixed income instruments in accordance with terms of the instruments, which, at the time, are still admitted to trading on the Exchange. 1.5 Conversion of convertible bonds into shares. 2 Situations that relate to the transaction: 2.1 Trade between companies within the same group 2.2 The member has no price risk: client sell or buy order is placed in own trading book in order to be subsequently bought or sold, possibly together with a larger unit. 2.3 The member has price risk: Client sell or buy order is placed in own trading book in order to be subsequently bought or sold, possibly together with a larger unit. 2.4 Manual Trades in which the price is set at a guaranteed VWAP (Volume-Weighted Average Price). Shall not be reported. Shall not be reported. Must be reported. Entails a transfer of ownership between different legal entities. Client order shall not be reported as a trade. Client order must be reported as a trade. Must be reported when the clients price becomes known, because of the member s price risk. Standard Trade. Standard Trade. VWAP Both the buy and sell side must be marked as on behalf of client. The related Manual Trade between members shall be marked as on behalf of client. The related Manual Trade between members shall be marked as on behalf of own account. The related trade between members shall be reported continuously with the indication that the trade is effected on behalf of Own account. 2.5 Buy and sell orders from clients matched internally at the member (internal Manual Trades). The final trade with the client must be marked on behalf of client on one side and on behalf of own account on the other side. Must be reported. Standard Trade The member reports the trade as a clientclient trade, i.e. both the buy and the sell EFFICIENT SECURITIES TRANSACTIONS 7(8)

8 2.6 Trades in which the settlement date deviates from the standard settlement time (T+1) 2.7 Trades according to a special permit from the Exchange 2.8 A repurchase agreement, sell/buy-back / buy-sell back or similar financing transactions. 2.9 Exercise or expiration of options, futures or other derivative products, with delivery where the underlying asset is admitted to trading on the Exchange Transfer of economic cost and benefit of owning a fixed income security where the ownership of the underlying security does not change, e.g. a total return swap When a member acts as a client to another member. Must be reported Must be reported Must be reported Must be reported. May be reported. Shall only be reported by the member executing the trade on behalf of the client (the other member) or Both members must report their leg of the trade. Non-standard Settlement Exchange Granted Trade Both legs should be reported as Derivative Related Transaction Derivative Related Transaction Derivative Related Transaction Standard Trade sides are marked as on behalf of client. EFFICIENT SECURITIES TRANSACTIONS 8(8)