Regulatory Update The CSDR is with Us, but the Force isn t

Oversight No. 15 September 2014 Regulatory Update The CSDR is with Us, but the Force isn t Well, while the attention of the world was distracted further East, and South (nothing to do with regulation, I hasten to add), we finally have had sight of two regulatory «masterpieces», affecting our industry. First, on 28th August, the EU CSD Regulation was published in final form. Its first provisions come into force on 17 September, and, once all the various add-ons through the so-called Regulatory Technical Standards are drafted and finalised, it will be sometime in Q2 2016 that the whole package will take effect. This edition summarises all the key benchmarks and timelines for readers. There will be plenty for us to do here. > EU Initiatives Affecting the Value Chain 02 > EU Institutional Developments 04 > Market Infrastructure Initiatives by Other Standard-setters 06 Second, following a period of consultation, the Swiss Federal Council released on 3 September a revised draft of the Swiss FMI Act (dubbed «FinfraG») and presented it to the Swiss Parliament for adoption. As well as introducing new requirements for the authorisation and supervision of FMIs, the Act will also cover aspects of EMIR, such as, in relation to OTC derivatives, the clearing obligation and the obligation to report these transactions to a Trade Repository. This is obviously important for the Swiss market as well. Then, we have the summer «no-shows». There has been only a little progress to report on finalising all aspects of EMIR. The applications for recognition are still being processed for a number of EU and Third Country CCPs. This is all happening much later than anticipated. Despite the European Commission s promise to address «shortly» the equivalence of a number of Third Country jurisdictions, particularly the USA, nothing has been heard during the traditional summer hiatus, and so a key deadline of 15 December may have to be postponed again. There was progress, however, in ESMA coming forward with its proposals on defining the categories of IRS and CDS to be subject to central clearing. The IRS consultation has now closed but that for CDS remains open until 18 September. Another summer no-show have been the long-awaited proposals from CPSS- IOSCO and the Financial Stability Board for FMI Recovery and Resolution Plans. We expect them soon, but in the meantime, the CPSS has decided to re-name itself the «CPMI» although we understand that its mandate, staffing and purpose remain unaffected. Thomas Zeeb CEO SIX Securities Services Oversight Brought to you by SIX Securities Services. Welcome to Oversight our quaterly update on market policy developments and the regulatory landscape. If you would like to subscribe to this newsletter electronically please send an e-mail to oversight@six-group.com If you would like to learn more about topics covered in this edition, please contact: Alex Merriman, Head of Global & European Regulatory Affairs (alexander.merriman@six-group.com) or at +44 (0)20 7550 5442. Securities Services

EU Initiatives Affecting the Value Chain Both the MiFID and CSDR negotiations have been concluded and the texts are being finalised. A new proposal on Shareholders Rights has issued. a) General Outlook Changes since the last edition of Oversight are highlighted in bold in the table below Segment of the Value Chain Trading Clearing Settlement Underpinning Law Measure Review of Market in Financial Instruments Directive (MiFIDII/MiFIR) Regulation on OTC Derivatives, central counterparties & Trade Repositories (EMIR) Central Securities Depositories Regulation (CSDR) Securities Law Legislation (SLL) Proposed (Published) Adopted (Finalised) Entry into Force (after Technical Standards) 20 October 2011 13 May 2014 Q4 2016 / Q1 2017 15 September 2010 July 2012 15 March 2013 7 March 2012 28 August 2014 Q2 2016 Q1 2015? End 2016? 2017 / 18? b) Central Securities Depositories Regulation (CSDR) As mentioned, the CSDR was published in final form in the EU Official Journal on 28 August. It will enter into force on 17 September, and the table below explains which provisions apply when. A key current concern for CSDs and the industry generally are the requirements relating to Settlement Discipline (SD) Articles 6-8. We are anxious to ensure that regulators in general and ESMA in particular do not over-complicate the relevant RTS. Particular issues revolve around the mechanism for buy-ins, the scope of asset classes covered, the formula for calculating penalties and «pass-through» the value chain. This is new territory for many CSDs, and will be discussed at an ESMA workshop with industry (including representatives of the buy-side) on 16 September. Thereafter, the next step will be for ESMA to publish its Consultation Paper, which will include draft RTS for a number of Articles including SD and the information (Article 25) to be provided by Third Country CSDs when applying for recognition to ESMA under the CSDR. THE EU CSD REGULAtiON TIMetABLE OF KEY EFFECtive IMPLEMENTAtiON DAtes 2014 16 September ESMA Industry Roundtable on Settlement Discipline 17 September CSDR Enters into Force December Articles 1-2 (scope etc.) 3-9 (securities settlement) and 67-76 (final provisions 2015 1 January Settlement Cycle: T+2 becomes mandatory Q1 ESMA DP and Draft RTS October (approx.) Article 9 reporting obligation for settlement internalisers (after RTS) November (approx.) Article 7 (settlement fails) and 72 (deletion of Article 15 of SSR on buy-rules (after RTS) 2016 May (approx.) Deadline for EU and TC CSDs to apply for recognition under CSDR June (approx.) Articles 10-53 (CSD requirements), 54-60 (banking-type services), 61-66 (sanctions) This is also a convenient place to remind readers that the Swiss securities settlement cycle, in common with a number of other European markets, will be shortened to T+2 on 6 October. 02 SIX Securities Services Regulatory Update No. 15 September 2014

c) Revision of the Market in the Financial Instruments Directive (MiFID II/MiFIR) Despite the shortness of the deadlines over the summer, ESMA received nearly 600 responses to its discussion and consultative papers on the draft RTS and ITS, of which about 430 have been published. Industry concerns continue to revolve around: Calibration of pre-trade transparency requirements, particularly for fixed income (bonds) Adverse effects of the double cap for dark pool transactions, leading to lower liquidity in, and more price volatility of, the affected stocks The effective deferral of access requirements, enabling (some vertically-incorporated) infrastructures to continue to monopolise posttrade services Inconsistencies in the application of the OTF category (which doesn t cover equities) Voluminous reporting requirements, particularly in respect of available rates and best execution. d) The EU Regulation on OTC Derivatives, central counterparts, and trade repositories (EMIR) ESMA has sent SIX x-clear a third additional information request, which we have to complete in November. As readers will know, the process of recognizing EU and TC CCPs under EMIR continues to take longer than expected. 13 out of about 20 EU CCPs have now been recognized, while EMIR recognition for 40 or so TC CCPs still remains outstanding. Despite Commissioner Barnier s earlier promise, the first of the Commission s Equivalence Decisions for TC CCP requirements have yet to see the light of day. Negotiations, in particular, with the US, continue. As a result, Oversight suspects that the Commission will have to move again to postpone for a second time the entry into force, under the CRR of the designation of non-qualifying CCPs, to mid-june 2015. We should also reiterate again, for the avoidance of doubt, that these are process issues, and that all CCPs currently clearing the EU market remain grandfathered under their existing permissions, until such time as recognition from ESMA, or a national regulator, is received. More positively, ESMA has now produced two consultative papers on the classes of derivatives to be subject to central clearing, one on Interest Rate Swaps (IRS) and the other on Credit Default Swaps (CDS). The consultation for IRS has closed but that for CDS remains open until 18 September. Typical market comment on the IRS proposal was broadly supportive of ESMA s proposals, notably on scope and range of instruments to be covered, as well as an exemption of covered bonds, although it was also suggested that the scope should be expanded beyond G4 currencies, In a related development, ISDA has written to the Basel Committee and IOSCO arguing for a deferral of the introduction of the capital treatment for noncentrally cleared OTC derivatives, due by end-2015. The grounds for this are that the required operational and legal changes (particularly for contracts between counterparties) are very extensive and burdensome, and will require a long time to introduce. As Oversight went to press, we learned that a postponement was also supported by ESMA, in a letter written by its Chairman, Stephen Maijoor, to Michel Barnier, in respect of the «front-loading» of reporting OTC transactions, until such time as the framework for IRS and CDS had bedded down. If you would like to find out more on EU financial market infrastructure legislation or on any other regulatory topic, please contact: Alex Merriman, Head of Global & European Regulatory Affairs (Alexander.Merriman@six-group.com) or by phone to +44 (0)20 7550 5442. Previous editions of Oversight and other regulatory information about us are also available at: www.six-securities-services.com SIX Securities Services Regulatory Update No. 15 September 2014 03

EU Institutional Developments We continue this occasional Oversight feature as the re-manning of the European institutions continues after the summer break. The Commission also publishes its report on its functioning of the European System of Financial Supervision; ESMA re-shapes its Consultative Working Groups, amid budgetary pressures. a) European Commission The shaping of the new European Commission continues. As mentioned in the last edition, Jean- Claude Juncker was duly appointed as President of the European Commission by the European Council in June, followed closely on 30 August, by the appointments of Donald Tusk as President of the Council and Frederica Mogherini as Permanent High Representative for External Affairs. As Oversight was going to press, Mr Juncker was due to announce his proposals for filling the remaining Commissioner posts. Media comment suggests that there will be some re-engineering of Commission portfolios, including one for Better Regulation, and some potential change in the role of DG Markt as well. Personnel changes at DG Markt. It was confirmed that the vacancy, at Director, Financial Services level, caused by the retirement last July of Emil Paulis, has been filled by Martin Merlin. Patrick Pearson, who had been Director a.i., returns to his Head of the Market Infrastructure Unit (G2) post. b) Economic and Monetary Affairs Committee of the European Parliament (ECON) Following the EP elections in May, MEPs finalised key appointments, including the composition of Committees and their Chairs. An Italian S & D MEP, Roberto Gualtieri was named as Chair of ECON. Although a number of long-standing members of ECON have been re-appointed (such as Kay Swinburne, Sven Gielgold, Walter Langen and Pervanche Berès), there are otherwise a considerable number of new members. c) European Central Bank While the ECB continues to build, under Banking Union, and the Single Supervisory Mechanism, its Banking Supervision function (which is due to go live on 14 November), it has also re-jigged the organisation of its Market Infrastructures Directorate-General. Marc Bayle has taken over from Daniela Russo the responsibility for a new merged D-G, which includes all the mainstream oversight and standards work, as well as Target 2 Securities. Oversight understands that Mme Russo will remain as an adviser in this area, while Jean-Michel Godeffroy remains titular head of the T2S Programme, continuing to chair the T2S Advisory Group, but no longer having responsibility for Programme staff. The merged Directorate General for Payments and Market Infrastructure and T2S now falls under the responsibility of Executive Board member Yves Mersch. d) Review of the European System of Financial Supervision (ESFS) The Commission published its review on 8 August. It said that the ESAs (EBA, EIOPA and ESMA) had overall performed well during their first three years of operations. The Commission argued that they have successfully built functioning organisations, started delivering on their mandates and developed their own profiles. Notably by preparing uniform standards and contributing to supervisory convergence and coordination, it said the ESAs have successfully contributed to shaping the development of a single rulebook applicable to all 28 EU Member States and thus to the good functioning of the Single Market. SIX Securities Services Regulatory Update No. 15 September 2014 04

The ESAs report identifies several areas for improvement which can be implemented by the ESAs and the Commission in the short term and would not require legislative action. In particular, the ESAs should give a higher profile to issues related to consumer/investor protection, and strengthen the focus on supervisory convergence, amongst other things, by making better use of peer reviews. For the longer term, the report suggests that there could be a need to further consider other issues which would imply changes to the legislative framework for the ESAs. Any such future steps would also have to take into account the functioning of the Banking Union which is currently being established. Areas for consideration in the longer term would include: The governance of the ESAs, in particular to further improve the capacity of the Board of Supervisors to take decisions in the interest of the EU as a whole. A revision of the existing funding arrangements so that the ESAs could fulfil their broad range of tasks, taking into account the EU and national budgetary constraints. The Commission also commented that possible extensions of the ESA s current mandates should be thoroughly assessed in the light of the subsidiarity principle and against costs and benefits. Potential areas for further tasks to be assigned to the ESAs concerned (and picked up by ESMA in its reaction) include: consumer / investor protection the area of International Financial Reporting Standards (IFRS) enforcement a stronger oversight role on internal model validation shadow banking direct supervision of highly integrated market infrastructure, such as CCPs. However, no legislative changes are proposed for the immediate future. ESMA commented that «it will now consider the proposals for short-term improvements contained in the Report. Strengthening the ESFS will help to ensure the protection of investors and stable and transparent markets.» Critically, if the ESAs are to take on additional responsibilities, the basis of their funding (currently roughly split between the Commission and national regulators) will need to change. In a speech in April, the Chair of ESMA, Stephen Maijoor, raised again the spectre of supervisory fees from more categories of institutions, such as CCPs, while the Budget Committee of the European Parliament proposed a 10% increase in the (Commission) Budget line for ESAs in 2015, so that ESMA and others could hire more staff, to meet its increasing responsibilities. e) ESMA Consultative Working Groups (CWGs) As the original mandates have expired, ESMA has been calling for expressions of interest for membership of its existing CWGs and the creation of a new task force during the summer. Oversight understands that the thrust is very much to obtain more industry and practitioner input into its work. With this in mind, there was a heavy user / buy side bias to the composition of the CWG to the new Commodity Derivatives Task Force, with Martin Wheatley of the FCA in the Chair, announced in mid- August. This bent was also evident in the membership (broadly spread among banks, infrastructures, and other institutions) of the CWG for the Secondary Markets Standing Committee (SMSC), which was announced a week later. It will also be chaired by Martin Wheatley. The role of the SMSC relates to ESMA s work on the structure, transparency and efficiency of secondary markets for financial instruments, including trading platforms and OTC markets (regulated markets, MTFs, systematic internalisers, other organised trading platforms and the activity of intermediaries in trading platforms). MiFID will be a core subject. Expressions of interest for a third ESMA CWG, that for the Post-trade Standing Group, closed on 18 August, while that for the more-broadly based Securities and Markets Stakeholder Group (for users of financial services), closed on 5 September. 05 SIX Securities Services Regulatory Update No. 15 September 2014

Market Infrastructure Initiatives by Other Standard-setters The CPSS-IOSCO and the FSB recovery and resolution frameworks remain outstanding; the CPSS changes its name; Preparation of the ECB s T2S project continues; the ECB publishes its work on repo and collateral harmonisation issues; ESMA publishes Guidelines of the adoption of the CPMI Principles by EU Member State supervisors and overseers. a) Recovery and Resolution Plans for FMIs At the time of writing, the final versions of the Frameworks being devised by the CPSS-IOSCO for recovery and the Financial Stability Board (FSB) for resolution of FMIs, are still outstanding, but are promised by the time of the G-20 Brisbane Summit in mid-november. In a widely reported interview, the Chairman of the CPSS, Benoît Cœuré, noted the delays, suggesting that it had not been easy to ensure a consistency between the two frameworks in the use of recovery and resolution tools, though accepting that there should be a freely usable menu of such tools. It would appear that the most detailed part of the proposals will focus on CCPs, while recognizing that other FMIs have unique characteristics. It remains to be seen how these finalized papers will influence the issuance of the European Commission s proposal on RRPs for CCPs, which can now only realistically be expected in H1 2015. b) CPSS renamed CPMI On 1 September, the Bank for International Settlement (BIS) announced that the Committee for Payments and Securities Settlement would be renamed the Committee for Payments and Market Infrastructure. The mandate, remit, membership and responsibilities of the CPMI are said not to be changing. c) ESMA Guidelines on the implementation of the CPSS-IOSCO Principles for Financial Market Infrastructures in respect of CCPs ESMA published these in draft on 5 August, with their aim at EU national competent authorities (NCAs). EMIR and the regulatory and implementing technical standards made under it establish requirements which are consistent with the Principles for Financial Market Infrastructures (PFMIs) published by the CPSS-IOSCO. The objective of the Guidelines is to ensure that existing EMIR rules for CCPs, in particular Article 22 on the authorisation and supervision of CCPs, are applied in a way consistent with the PFMIs. When carrying out the duties resulting from EMIR for the authorisation and supervision of CCPs, NCAs should ensure that CCPs established in their territory comply with these requirements in accordance with the PFMIs and operate in a manner that is consistent with them. With the Guidelines, ESMA also wanted to ensure that the EU itself as a jurisdiction is considered by CPSS- IOSCO as compliant in their assessment of PFMI implementation. The Guidelines have now been published in all the EU languages, and have taken effect, on 4 September, with NCAs obliged to make a comply or explain statement to ESMA within the next two months. SIX Securities Services Regulatory Update No. 15 September 2014 06

d) European Central Bank (ECB) Our T2S preparations remain on track. We will be briefing Swiss participants, via the usual consultative groups, in the next coming weeks on a change in the proposed participant settlement account structure. The T+2 Settlement Cycle is being rolled out across all participating T2S markets on 6 October. Following the changes announced at the ECB (see above), Marc Bayle will take over the Chairmanship of the COGESI working group, which next meets on 24 October. In July, the ECB finalised and published its three papers on various aspects of harmonisation of collateral and repo practices namely: «Collateral eligibility requirements a comparative study across specific frameworks» «Improvements to commercial bank money (COBM) settlement arrangements for collateral operations» «Euro repo market: improvements for collateral and liquidity management» Oversight understands that harmonisation work on collateral and repo settlement should continue. In particular, we note that agreement has been reached 07 for a formal timetable in the roll-out of the repo settlement enhancements to the Bridge between Euroclear and Clearstream, lasting until 2017. e) The Swiss Legal Framework for FMIs On 3 September, the Federal Council adopted its despatch on, and published a revised draft of, the FMI Act («FinfraG»), as it was presented to the Swiss Parliament for legislative deliberations in the two houses. To re-cap, the FMI Act will honour the G-20 undertakings to have a framework in place for the trading, central-clearing and repor ting of OTC derivatives. In a variation to EU rules, there will be a de minimis threshold for non-financial counterparties. It will also introduce new licensing and supervisory requirements for FMIs (mirroring CCP requirements in EMIR), as well as introducing new categories of trading venues, such as MTFs and OTFs. This is a major change from the first draft issued in December of last year. Self- regulation of the Stock Exchange will be retained, which is a Swiss characteristic. For further information on any of these issues, please contact: Alex Merriman, Head of Global & European Regulatory Affairs (Alexander.Merriman@six-group. com or +44 (0)20 7550 5442). SIX Securities Services Regulatory Update No. 15 September 2014