Notice and Request for Comments – Material Amendments to CDS Rules – Soft Cap for the New York Link Service – CDS Clearing and Depository Services Inc.

A. DESCRIPTION OF THE PROPOSED CDS RULE AMENDMENTS

CDS proposes rule amendments to introduce a soft cap and related monitoring mechanism for the net payment obligations of the New York Link service ("NYL" or "NYL service") sponsored CDS participants to the Depository Trust Company ("DTC") and to the National Securities Clearing Corporation ("NSCC"). The soft cap for the NYL service is a threshold established by CDS and designed to reduce the size of the end of day payment obligations for individual NYL participants. The soft cap amount will be the same for each NYL participant and it will be calculated on a quarterly basis using the following methodology:

• Total CDS Liquidity Facility Available
• Less: Liquidity Facility Required for CAD Receivers Collateral Pool ("RCP")
• Less: Liquidity Facility Required for USD RCP
• Less: Liquidity Facility Required for DTC Direct ("DDL") service
• Equal: Soft Cap for NYL service (in USD equivalent)

Upon implementation of this soft cap and related monitoring mechanism, all NYL participants will be required to manage their daily payment obligations to NSCC and to DTC in such a manner that their individual net payment obligations to NSCC and to DTC combined do not exceed the soft cap or pre-funding through their DTC or NSCC accounts may be required. CDS's Risk Management division will monitor each NYL participants' payment obligations and soft cap compliance on:

a) Day before settlement:

If the next day projected value of the NSCC settlement for a NYL participant exceeds the existing soft cap, CDS will contact that NYL participant to advise them that they may not be compliant with the soft cap on settlement day, and that pre-funding through their DTC or NSCC accounts may be required.

b) Day of settlement:

If the settlement day projected value of the NSCC settlement for a NYL participant exceeds the existing soft cap, CDS may contact that NYL participant to advise them that they may not be compliant with the soft cap and that pre-funding through their DTC or NSCC accounts may be required.

c) Day after settlement.

CDS will also review NYL participants' DTC and NSCC settlement activity on a post-settlement basis to determine if any NYL participant had a combined DTC and NSCC actual net settlement obligation the previous day in excess of the soft cap. If yes, CDS will advise the NYL participant through CDS's Electronic Alert Service ("EAS") or a similar facility, and the NYL participant's primary regulator directly via e-mail, of the soft cap non-compliance. Other NYL participants, in addition to the non-compliant participant's regulator, will be advised once there are five or more instances of soft cap non-compliance over a twelve-month rolling period. All NYL participants that exceed the soft cap will be assessed non-compliance fees by CDS. A variable fee will also be imposed by CDS on NYL participants that breach the soft cap, and will be based on the amount by which the NYL participant has breached the soft cap and CDS's standby borrowing cost.

NYL participants will have access to a facility that provides them with the next day's projected value of their NSCC settlements. Historical data outlining soft cap non-compliance over a rolling twelve-month period will also be available on a daily basis for reconciliation and billing purposes to both NYL participants and internal CDS departments.

B. NATURE AND PURPOSE OF THE PROPOSED CDS RULE AMENDMENTS

The rule amendments proposed pursuant to this Notice are considered material as they introduce a new important measure to mitigate the liquidity risk associated with defaulting NYL participants' NSCC payment obligations. NSCC settlements for NYL participants are not subject to the net debit cap used for DTC settlements. As a result, there is no limit to the size of a payment obligation of a NYL participant resulting from its NSCC settlements. The credit risk resulting from the default of a NYL participant's NSCC settlements are not contained, and only partially mitigated by the value of the defaulter's security positions. The magnitude of the liquidity risk associated with a defaulting NYL participant's NSCC payment obligation is the amount of the payment obligation. This risk is currently mitigated, in part, by the collateral provided by NYL participants to the newly established CDS Participant Fund for New York Link ("NYL Fund"). This collateral can be converted to USD cash through CDS's collateralized line of credit. The current amount of the line of credit is the USD equivalent of CAD 90 million, out of which CAD 60 million must be fully collateralized. Although these liquidity facilities cover the requirements for most potential default scenarios, there have been several instances where the payment obligation of a participant would have exceeded the available liquidity facilities. In fact, given the unlimited nature of potential NSCC payment obligations, it is not possible to establish a pre-arranged liquidity facility that could address all default scenarios.

Replacement cost risk in the NYL service is addressed by NSCC which acts as a central counterparty through its daily mark-to-market of guaranteed trades and collateralization of potential closeout costs through daily risk-based margining ("RBM") collateral, which is pledged by the NYL participants in the form of USD cash. These controls are intended to cover 99% of potential defaults, the residual risk being borne by surviving NSCC members. In the circumstance of the default of another NSCC participant resulting in an uncollateralized loss, the portion of the residual loss allocated to CDS would in turn be re-allocated to the surviving NYL participants according to the CDS loss allocation rules for the service.

The implementation of the soft cap and related monitoring mechanism is designed to manage liquidity and payment risks in the NYL service. Since NSCC payment obligations are not capped, there remains, as stated above, a possibility that an individual NYL participant's net payment obligations to DTC and NSCC could exceed the lines of credit available to mitigate the payment risk. Since the new NYL Fund is designed to cover the default of an NYL participant with the largest net payment obligation to DTC and NSCC in most cases, CDS will therefore introduce the proposed soft cap and monitor NYL participants whose net payment obligations to DTC and NSCC exceed such soft cap.

C. IMPACT OF THE PROPOSED CDS RULE AMENDMENTS

C.1 Competition

These rule amendments are not expected to have any impact on competition to CDS Clearing, CDS participants, and/or other market participants. NYL participant compliance with the new soft cap requirements will reduce the market settlement risk for CDS and for its NYL participants. CDS participants who currently do not subscribe to the NYL service will not be impacted by these proposed rule amendments.

C.2 Risks and Compliance Costs

The risk of not implementing this initiative is that the DTC and NSCC settlement obligations of NYL participants would likely exceed CDS's liquidity arrangements on a more frequent basis. This could expose CDS to settlement obligations that could be in excess of its available liquidity facilities to a foreign entity in the event that a CDS participant who subscribes to the NYL service defaults.

Costs to develop the soft cap monitoring tools will be incurred by CDS, but are acceptable considering the ability it will provide to mitigate DTC and NSCC settlement risk. Ongoing Risk Management resources will also need to be allocated to monitor soft cap compliance by NYL participants.

C.3 Comparison to International Standards -- (a) Committee on Payment and Settlement Systems of the Bank for International Settlements, (b) Technical Committee of the International Organization of Securities Commissions, and (c) the Group of Thirty

In the NYL service, CDS sponsors its participants in NSCC and DTC to settle trades eligible for NSCC's central counterparty service ("CNS") as well as DTC. As NSCC payment obligations are not capped, there is a possibility that an individual NYL participant's net payment obligations to DTC and NSCC will exceed CDS's line of credit available to satisfy the payment risk. Recommendation 5 of CPSS/IOSCO Recommendations for Central Counterparties states: "A CCP should maintain suffcient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions." Moreover, Recommendation 11 of the same states: "CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis. There should be a framework for cooperation and coordination between the relevant regulators and overseers."

Although CDS's existing liquidity facility covers the vast majority of payment obligations arising out of DTC and NSCC, CDS's decision to increase its liquidity facility and implement the soft cap for the NYL service will enhance its financial resources as well as will enable CDS to proactively manage settlement risks resulting from its NYL service.

D. DESCRIPTION OF THE RULE DRAFTING PROCESS

D.1 Development Context

The implementation of the soft cap and related monitoring mechanism is designed to manage liquidity and payment risks in the NYL service. Since NSCC payment obligations are not capped, there remains, as stated above, a possibility that an individual NYL participant's net payment obligations to DTC could exceed the lines of credit available to mitigate the payment risk. Since the new NYL Fund is designed to cover the default of an NYL participant with the largest net payment obligation to DTC in most cases, CDS will therefore introduce the proposed soft cap and monitor NYL participants whose net payment obligations to DTC and NSCC exceed such soft cap.

D.2 Rule Drafting Process

Each amendment to the CDS Participant Rules is reviewed by CDS's Legal Drafting Group ("LDG"). The LDG is a committee that includes members of Participants' legal and business groups. The LDG's mandate is to advise CDS management and the Board of Directors on rule amendments and other legal matters relating to centralized securities depository and clearing services in order to ensure that they meet the needs of CDS, its participants and the securities industry generally. The LDG reviewed the new soft cap and related monitoring mechanism rule amendments on March 18, 2010. The comments of the LDG are reflected in this proposed text of the rule amendments.

The proposed rule amendments were reviewed and approved by the Board of Directors{1} of The Canadian Depository for Securities Limited on April 21, 2010.

D.3 Issues Considered

CDS's primary concern has been to enhance the reliability of its risk management processes by further mitigating the liquidity and payment risks associated with defaulting NYL participants' DTC and NSCC payment obligations. The effort required to implement this soft cap initiative and the nature of its monitoring processes have also been duly considered.

D.4 Consultation

Implementation of the soft cap and related monitoring mechanism is being pursued by CDS after extensive internal consultation and discussion with CDS's Risk Advisory Committee ("RAC"). The proposed rule amendments were also reviewed and approved by the Board of Directors of The Canadian Depository for Securities Limited on April 21, 2010.

D.5 Alternatives Considered

On June 23, 2009, CDS management recommended to the Board of Directors that the NYL and DDL services be terminated effective November 1, 2009 and that participants using these services either become direct participants of DTC and NSCC or make other alternate arrangements. This recommendation was based on the assumption that these services would not be economically viable given the expected cost of mitigating the risk of a participant default and the expected migration of larger participants to direct DTC/NSCC participation. The Board directed management to provide affected participants with additional time to consider the impact of direct DTC/NSCC participation and to determine if a sufficient number of participants would be willing to commit to continue to use the services, even with additional collateral cost and potential fee increases. The response of affected participants was overwhelmingly in support of CDS continuing to provide the NYL and DDL services, while recognizing the need for CDS to introduce measures such as the soft cap, to mitigate the liquidity risk associated with defaulting NYL participants' DTC and NSCC payment obligations.

D.6 Implementation Plan

CDS is recognized as a clearing agency by the Ontario Securities Commission pursuant to section 21.2 of the Ontario Securities Act. The Autorité des marchés financiers has authorized CDS to carry on clearing activities in Québec pursuant to sections 169 and 170 of the Québec Securities Act. In addition CDS is deemed to be the clearing house for CDSX^®, a clearing and settlement system designated by the Bank of Canada pursuant to section 4 of the Payment Clearing and Settlement Act. The Ontario Securities Commission, the Autorité des marchés financiers and the Bank of Canada will hereafter be collectively referred to as the "Recognizing Regulators".

The proposed rule amendments will become effective upon approval/non-disapproval of the rule amendments by the Recognizing Regulators, following public notice and comment. The target date for implementation is July 26, 2010.

E. TECHNOLOGICAL SYSTEMS CHANGES

E.1 CDS

CDS will add several new features to its internal processes which will provide for the development of soft cap monitoring tools. Changes include a new input screen accessible from the CDSX Risk Management Menu titled "NYL Soft Cap Parameters". The screen will provide a manual dual entry capability to Risk Management and have the following fields: NYL Soft Cap: up to 15 numeric characters; Variable non-compliance fee: a maximum of three numeric characters followed by a decimal with a maximum of two numeric characters. This field is an expression of percent (e.g. 3 ¼% would be expressed as 3.25).

CDS will also introduce an end-of-day CDSX process that will determine if a NYL participant's DTC and NSCC settlement has exceeded the value of the existing soft cap. CDSX will determine if each participant's DTC and NSCC net settlement was a credit or a debit value. CDSX will compare each participant's net DTC and NSCC settlement amount to the soft cap value. Settlement values below or in excess of the soft cap will be identified and reflected in both an internal and external soft cap monitoring facility. CDSX will also generate an e-mail message to CDS's Risk Management division for each NYL participant that has exceeded the soft cap. Billing codes will also be assigned and the existing billing protocol will be updated to include the new billing codes. PeopleSoft, CDS's billing front end will capture and report billable items and the related fees.

E.2 CDS Participants

CDS NYL participants will be required to develop internal processes to monitor their DTC and NSCC settlements and pre-funding obligations if required. CDS NYL participants that exceed the soft cap will be subject to non-compliance fees as determined by CDS. Non-compliance fees will be included on a NYL Participant's monthly CDS billing invoice.

E.3 Other Market Participants

There are no external development impacts to other participants in the Canadian financial markets.

F. COMPARISON TO OTHER CLEARING AGENCIES

CDS is not aware of any other clearing agencies that have soft cap mechanisms in place.

G. PUBLIC INTEREST ASSESSMENT

CDS has determined that the proposed amendments are not contrary to the public interest.

H. COMMENTS

Comments on the proposed rule amendments should be in writing and submitted within 30 calendar days following the date of publication of this notice in the Ontario Securities Commission Bulletin to:

Legal Department

CDS Clearing and Depository Services Inc.

85 Richmond Street West

Toronto, Ontario M5H 2C9

Fax: 416-365-1984

e-mail: [email protected]

Copies should also be provided to the Autorité des marchés financiers and the Ontario Securities Commission by forwarding a copy to each of the following individuals:

CDS will make available to the public, upon request, all comments received during the comment period.

I. PROPOSED CDS RULE AMENDMENTS

Appendix "A" contains text of the current CDS Participant Rules marked to reflect the proposed amendments as well as text of these Rules reflecting the adoption of the proposed amendments.

{1} Pursuant to a unanimous shareholder agreement between The Canadian Depository for Securities Limited ("CDS Ltd.") and CDS, effective as of November 1, 2006, CDS Ltd., which acts under the supervision of its Board of Directors, assumed all rights, powers, and duties of the CDS Board of Directors.

APPENDIX "A"

PROPOSED CDS RULE AMENDMENTS