Notice and Request for Comment – Proposed Amendments to CDS Participant Rules related to Post-Trade Modernization – CDS Clearing and Depository Services Inc.

1

1.2.1 (definitions of Securities Account, Collateral Account, Memo Account, Pledge Account, Rehypo Given Account (new), Rehypo Balance Account (new), Pledge, Rehypothecation (new), and Trade)

Include Rehypothecation as a Trade and add related provisions

The introduction of the term "Rehypothecation" in the Rules is intended to:

4.1.2, 4.1.4

6.1.3(iv), (v), 6.5.1, 6.5.2(i), (ii), 6.5.3, 6.6.6

7.2.5 (new), 7.5.4

(a) reflect the enhancement of the Pledge functionality in the new system, which gives the Pledgee Participant the right to Rehypothecate the Pledged Securities; and

(b) set out the rights and obligations of CDS and of Participants to the extent Participants are using the new system to process the terms of a Rehypothecation under the bilateral agreements between them.

The new system will not have a Rehypothecation functionality per se. Instead, CDS will be enhancing its Pledge functionality by adding a new flag that will identify whether or not the Securities that are being Pledged may be Rehypothecated. When entering a Pledge in the new system, the Pledgor Participant will check off the new flag if the Pledgee Participant has the right to Rehypothecate the Pledged Securities. Provided the flag is checked off, the Pledgee Participant will be able to Rehypothecate the Pledged Securities by way of a new Transaction with another Participant in the system. The new Transaction can be a Pledge, loan, transfer, etc., provided it accurately reflects the terms of the bilateral agreement between the Participants.

Pledged Securities with the right to Rehypothecate are delivered to the Securities Account of the Pledgee Participant, with such Securities reflected in the Rehypo Given Account (a new Memo Account) of the Pledgor Participant, and in the Rehypo Balance Account (a new Memo Account) of the Pledgee Participant.

Pledged Securities without the right to Rehypothecate are delivered to the Collateral Account of the Pledgee Participant, with such Securities reflected in the Pledge Account (a Memo Account) of the Pledgor Participant.

2

3.3.1(ii)

Remove the ability of Participants to designate their own settlement holidays

This functionality will no longer be supported in the new system. Participants will no longer be able to add additional settlement holidays to their profiles (ledgers). All settlement restrictions will be limited to $USD and $CAD "holidays" that are consistent with the U.S. Federal Reserve and Payments Canada clearing holidays.

3

6.10.2, 6.10.3(i)

Change the eligibility of Pooled Securities and make specific references to the Procedures for criteria applicable to Pooled and Stripped Securities.

With the new system, the ability to strip restricted securities (ie., non-eligible Securities) will no longer be supported.

Specific reference is made to the Procedures, which will set out the criteria applicable to a Pooled Security and a Stripped Security.

4

7.3.7, 7.3.8, 7.4

Replace Batch/CNS Process with Settlement Optimization Process and amend related provisions

The Batch/CNS Process will be replaced with the new Settlement Optimization Process.

The Batch/CNS Process is a batch net settlement process that increases settlement efficiency by combining the settlement of trades targeted to settle by CNS and Trade-for-Trade ("TFT"). The objective of this settlement optimization process is to reduce a Participant's requirements for security positions, funds, System-Operating Cap, credit and Collateral.

The Settlement Optimization Process is a batch net settlement process that increases settlement efficiency by running one or more iterations of a TFT settlement optimization batch followed by CNS settlement. The TFT optimization batch allows TFT activities to net against each other in the optimal way. The CNS settlement that follows uses funds and Securities delivered in the TFT batch for Settlements in the CCP Function. The iterative nature of the design allows for progressively improving upon overall settlement efficiency.

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1.2.1 (definitions of Entitlement Processor and Paying Agent)

Include Paying Agent as a defined term

The new system will have the role of a Paying Agent. Hence, the definition of Payment Agent is added to the Rules.

6.2.9(i)(h), 6.4.1

The exact roles and responsibilities of a Paying Agent will be set out in the Procedures, which will provide more clarity and certainty for CDS, Participants and those who perform the role of a Paying Agent.

11.6.2

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1.2.1 (definition of Withholding Agent)

Include Withholding Agent as a defined term and add related provisions

The new system will have the role of a Withholding Agent. Hence the definition of Withholding Agent and the topic of withholding tax are added to the Rules.

6.5.5 (new)

The exact roles and responsibilities of a Withholding Agent will be set out in the Procedures, which will provide more clarity and certainty for CDS, Participants and those who perform the role of a Withholding Agent.

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6.6.6

Change the details relating to distribution of Entitlements.

The Rules will rely on and refer to the Procedures for details relating to distribution of Entitlements.

1

1.2.1

Deletion of RSP Account

An RSP Account is intended to hold Securities that relate to RSP investments and be used for all CDSX Transactions except for Trades to be Settled by CNS. The new system will no longer support an RSP Account. Currently, no Participants have Securities in an RSP Account. Prior to implementation, Participants will not be allowed to open an RSP Account or move Securities into an RSP Account.

6.1.3(ii)

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8.3.4

Expansion of accounts under automatic segregation

Under the new system, the restriction of automatic segregation being limited to the Accounts of the same Ledger of a Participant will be removed.

3

8.3.4

Removal of segregation by exception indicator

Under the new system, a Participant will no longer have the option of exempting its General Account or certain Securities in its General Account from automatic segregation.

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11.1, 11.4.4, 11.4.7, 11.4.8, 11.4.12, 11.5, 11.5.1, 11.5.2, 11.5.3, 11.5.5

Removal of all references to Deferred Certificate Inventory ("DCI")

The new system will no longer support the certification format of DCI. DCI will fall within the scope of the certificate format of Non-Certificated Inventory ("NCI").

5

3.1.1(b)i.

Update the roles of User Administrator and User

The new system will not distinguish between the roles of User Administrator and User. A single Administrator role will provide for both functions.

6

1.2.1

All references to TRAX (for deposits and withdrawals) are removed and the term "Transfer Request" is added

TRAX transfer requests will be incorporated into the depository functions of the new system, which will be called "Transfer Request" in the new system.

6.1.5 (deleted), 6.2.3, 6.3.1

11.3.2, 11.4.3

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1.2.1

All references to CALMS are removed

The new system will not support CALMS.

6.9.5 (deleted)

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5.11.1(c)

Streamline of Collateral Pools

In respect of the Pool Contributions of Participants in the same Category of Participant, the Participants will Pledge to the same Collateral Administration Ledger.

9

10.2.5

DTC & NSCC reports from DTC directly

Post-PTM, Cross-Border Participants will receive the reports from DTC and NSCC directly, instead of through CDS.

10

11.5.7

Amend TA related fee arrangements for clarity

The Rule is amended for better clarity to reflect the current processes of CDS.

11

1.2.1 (added "funds" in the first bullet of the definition of Pledge)

Changes to pre-entry system edits

Under the new system, a Pledge may be used to transfer funds without transfer of Securities between the Participants.

7.2.2

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12.2.5(ii)

Allow Participant to move all Ledger positions from Limited Purpose Participant to Full Service Participant at the end of day

A new feature in the system will be available to allow a Participant to move all Ledger positions from the Account of a Limited Participant to a Full Participant.

Details on the new feature will be set out in the Procedures.

13

6.6.3(ii)

Flexibility with payout of Entitlements to Accounts

Under the new system, payout of Entitlements may be set up by a Participant at the Account level or Ledger level.

14

1.2.1

Rename "Entitlements Ledger" of CDS to "Entitlements Account" and related amendments

The Rules are being updated to replace "Entitlements Ledger" with "Entitlement Account" to reflect its nature in the new system. The relevant Rules relating to "Entitlements Ledger" will not otherwise impacted.

5.12.4(b), 5.15.3

6.6.2, 6.6.3, 6.6.4, 6.6.5, 6.7, 6.8.4, 6.11.2(i)

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5.10.6(ii)

Delete Special Margin Collateral Contribution

Since the de-leveraging of the RCP CAD Pool a few years ago, the prescribed Special Margin Collateral Contribution in the case of early warning levels 1 and 2 is no longer required.

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9.3.7(iii)(b)

Incorporate changes regarding delivery of Category Credit Ring Collateral to a Survivor who is a non-LVTS Settlement Agent

The proposed amendments are to incorporate the amendments re non-LVTS Settlement Agent as set out in OSC's Notice #12 of March 2018, which has received regulatory approval.

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1.2.1 (definitions of Fund, Fund Contribution, and Member), 1.10.8

To more accurately apply the terms "Fund" and "Fund Credit Ring" in the Rules

The proposed amendments are to more accurately apply the terms "Fund" and "Fund Credit Ring" in the Rules, based on the respective context of the Rules, and in particular, taking into account the fact that CNS Function has the default fund and the participant fund, with the former subject to mutualization and the latter not being so.

5.2.1, 5.7.1, 5.7.2, 5.7.3, 5.7.4, 5.9.6(b)(iii), 5.11.3

9.2.9, 9.3.3, 9.4.5, 9.5.1, 9.5.5, 9.5.6(b), 9.5.7(a)

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3.3.3

Removal of references to Rule 8 re cut-off times

The proposed amendment is to correct an inaccurate cross-referencing. Rule 8 does not set out the cut-off times.

19

1.6.1

To follow the language of the Recognition Order

The proposed amendments update the meaning of a technical amendment of the Rule to mirror the language in the Recognition Order.

20

1.9.2(ii)

Update language to reflect that CDS may open USD account at one or more financial institutions.

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

21

7.1.1(e)

Delete Certificate Based Settlement Method

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

22

1.2.1 (added a new paragraph (a) under the Definition of "Account")

Amend the definition of Account by including CDS Account under Rule 1.9.2; this is to accurately reflect the meaning of the term as it is currently used in the Rules

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

23

1.2.1

Amend the definition of Payment Item

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

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3.2.4

More accurately describe CDS Use of the System

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

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5.2.4(c)

Amend wording re Settlement Service Collateral for clarity

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

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6.1.3(vi)

Amend wording re Accounts for Tenders for better clarity

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

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7.3.3

Amend wording re Novation of Trades Prior to Settlement to reflect reality

The proposed amendment is matter of a technical nature in routine operating procedures and administrative practices relating to the CDS services.

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2.2.7

stylistic formatting, including changes to headings or paragraph numbers

The proposed amendments are stylistic formatting, including changes to headings or paragraph numbers.

3.7.3, 3.9.3, 3.9.6

4.3.4, 4.3.5

5.5.3, 5.7.8(b), 5.14.2, 5.14.4, 5.14.5(ii)

6.2.9(ii), 6.3.3, 6.9.4

7.3, 7.3.4, 7.3.9, 7.3.11, 7.4.2

8.1.1, 8.5.4

9.6.2

10.5.3, 10.6.1, 10.8.4(v), 10.8.5, 10.9.1, 10.9.8, 10.10.1(ii), 10.10.2

11.2.2, 11.6.4