Request for Comments – Material Amendments to CDS Rules – Real Time Continuous Net Settlement Process – CDS Clearing and Depository Services Inc.

A. DESCRIPTION OF THE PROPOSED CDS RULE AMENDMENTS

The proposed CDS Participant Rule amendments replace the intraday continuous net settlement process with a real time continuous net settlement process.

The intraday continuous net settlement process currently runs four times a day with cycles scheduled at 10:00, 12:00, 14:00 and 15:30.{1} The new real time continuous net settlement process will eliminate the four intra-day cycles and run throughout the day from the commencement of CDSX^® daily processing to the start of payment exchange.

B. NATURE AND PURPOSE OF THE PROPOSED CDS RULE AMENDMENTS

The proposed CDS Participant Rule amendments create a new real time continuous net settlement process that will eliminate the 30 minute gap differential in completion times as well as creating a settlement process to match the real time running of the TFT settlement process.

Currently, the end of day intraday continuous net settlement process cycle runs at 15:30. The real time TFT{2} settlement process ends at 16:00. The 30 minute gap between the completion of each settlement process results in securities received through one settlement process being unavailable for use in the other settlement process. For instance, securities received through the real time TFT settlement process after 15:30 cannot be subsequently input into the intraday continuous net settlement process since the intraday continuous net settlement process would already be completed. Similarly, with intraday continuous net settlement process being completed at 15:30, no securities would be received that could be input into real time TFT settlement process between 15:30 and 16:00.

The amendment to CDS Participant Rule 7.4.1 corrects a typographical error.

C. IMPACT OF THE PROPOSED CDS RULE AMENDMENTS

As noted, the real time continuous net settlement process will be synchronized with the TFT settlement process allowing for settled positions to be used in the other settlement process right up to 16:00. For example, when a purchase trade in the TFT settlement process trade settles between 15:30 and 16:00, the received position may be used to settle an outstanding deliver position in the real time continuous net settlement process. Similarly, when a receive position settles in the real time continuous net settlement process between 15:30 and 16:00, that position may be used to settle a sell trade in the TFT trade settlement process. Participant's exposure to settlement and financial risk will hence be reduced as positions settled under one settlement process can subsequently be used in the other settlement process.

Due to the new real time continuous net settlement process running continually throughout the day, buy-in liabilities associated with outstanding CNS Obligations may be reduced.{3} Currently, the final buy-in execution list is generated at 14:30 while the intraday continuous net settlement process cycle runs at 14:00, creating a 30 minute gap where settlements are not effected and hence unavailable to reduce buy-in liabilities. Under the real time continuous net settlement process, settlements will continue to be effected up to 14:30, eliminating the 30 minute gap.

It is expected that the real time continuous net settlement process may result in additional settlement costs (compared to intraday continuous net settlement process) as trades are settled on a partial fill basis (as securities become available) as opposed to the four discrete cycles in the intraday continuous net settlement process (where securities are aggregated up to the running of each cycle). Generally, it is believed that the partial fills will not be significant in number and the benefits from reduced risk exceed any additional costs.

C.1 Competition

There is no expected impact on competition. The proposed amendments create a new settlement process that will be available to all CDS Participants.

C.2 Risks and Compliance Costs

Under the current intraday continuous net settlement process, CDS Participants may be exposed to settlement and financial risk through unnecessary collateral and capital charges, and unexpected cash outlays. Furthermore, CDS Participants incur added costs to mitigate against these risks.

The real time continuous net settlement process can reduce risk for CDS and its Participants by decreasing outstanding positions (due to the processing window being extended to 16:00).

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

The Committee on Payment and Settlement Systems of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions have issued a joint consultative report (March 2011) for financial market infrastructures.{4} Principle 8 of this report addresses settlement finality and advocates final settlement intraday or in real time. To this end, the proposed amendments are consistent with Principle 8.

Recommendation 4 of the Group of Thirty's Report "Global Clearance and Settlement - A Plan of Action" provides that the timing between different clearing and settlement systems and associated payment and foreign exchange systems should be synchronized.{5} Moving to real time settlement processes increases the likelihood of synchronization between different clearing and settlement systems. Settlements under a real time settlement process become available to other clearing and settlement systems earlier than settlements obtained through cyclically run settlement processes (i.e. must wait for cycles to be run).

D. DESCRIPTION OF THE RULE DRAFTING PROCESS

D.1 Development Context

The Debt & Equity Subcommittee of CDS's Strategic Development Review Committee ("SDRC") requested that CDS find a solution to the end of day 30 minute time differential between the two settlement processes.

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 its Board of Directors on CDS Participant 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.

These amendments were reviewed and approved by the Board of Directors of CDS Ltd. on April 20, 2011.

D.3 Issues Considered

The primary concern was to eliminate the risk associated with unsynchronized settlement processes.

D.4 Consultation

The Debt & Equity Subcommittee of the SDRC has been kept apprised of the status of the initiative. The SDRC will vet the CDS Procedure amendments associated the initiative (a separate Notice addressing Procedure amendments regarding, inter alia, the real time continuous net settlement process is expected to be concurrently released for comment with this CDS Participant Rule amendments Notice).

D.5 Alternatives Considered

One alternative explored was to add a 16:00 cycle for the intraday continuous net settlement process to correspond with the end of the real time TFT settlement process. While this alternative would address the end of day timing differential, moving to a real time continuous net settlement process would also achieve the synchronization goal and add other benefits (such as reducing buy-in liabilities as discussed in section C above).

Another alternative that was explored was to schedule an additional combined batch net settlement/ continuous net settlement process cycle (normally run at 04:00) prior to payment exchange (which occurs at 16:00). The intended effect would be to synchronize as closely as possible the completion times of the intraday continuous net settlement process and real time TFT settlement process. However, the combined batch net settlement/ continuous net settlement process cycle requires significant technological processing capacity. If the combined batch net settlement/ continuous net settlement process was run at 16:00 (exactly synchronized), payment exchange would be significantly delayed. If combined batch net settlement/ continuous net settlement process was run at any other time after 15:30 but before 16:00, synchronization would not be achieved; additionally the real time TFT settlement process would need to be suspended during such cycle. In light of these limitations, this alternative was discarded.

It was also considered that a new CDS CUID{6} could be set up for the purposes of receiving securities from CDS Participants for input into the intraday continuous net settlement process after the last cycle at 15:30 (currently, no deliveries into intraday continuous net settlement process are permitted after 15:30). This alternative was rejected primarily on the basis of being more costly to develop than the other options. Furthermore, this alternative would require non-automated intervention by CDS Participants to input securities after 15:30 and thus be unappealing from an efficiency perspective.

While these options would address the timing issue faced by CDS Participants in part, the members of the Debt & Equity Subcommittee of the SDRC preferred moving to a real-time continuous net settlement process as this solution would more effectively address the timing issue.

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 amendments to CDS Participant Rules may become effective upon approval of the amendments by the Recognizing Regulators following public notice and comment.

E. TECHNOLOGICAL SYSTEMS CHANGES

E.1 CDS

CDS will need to undertake minor technological system changes to implement the real time continuous net settlement process. The changes will follow CDS's system development life-cycle protocol.

E.2 CDS Participants

No technological system changes will be required by CDS Participants.

E.3 Other Market Participants

No technological system changes will be required by other market participants.

F. COMPARISON TO OTHER CLEARING AGENCIES

Implementing a real time continuous net settlement process will align CDS's settlement process with NSCC's comparable CNS settlement process that operates on a daily ongoing-basis (analogous to real time settlement).{7}

G. PUBLIC INTEREST ASSESSMENT

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

H. COMMENTS

Comments on the proposed amendments must 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:

Me Anne-Marie Beaudoin  Secrétaire del'Autorité  Autorité des marchés financiers  800, square Victoria, 22eétage  C.P. 246, tour de la Bourse  Montréal (Québec) H4Z 1G3 Télécopieur: (514) 864-6381  Courrier électronique:   [email protected]

Manager, Market Regulation  Capital Markets Branch  Ontario Securities Commission  Suite 1903, Box 55,  20 Queen Street West  Toronto, Ontario, M5H 3S8 Fax: 416-595-8940  e-mail: [email protected]

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

I. PROPOSED CDS RULE AMENDMENTS

Attached at Appendix A are the clean and blacklined versions of the proposed procedural amendments.

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

{1} All time references in this Notice are Eastern Time.

{2} Trade for trade.

{3} See CDS Participant Rule 7.4.8(b) for a description of the buy-in procedure.

{4} http://www.bis.org/publ/cpss94.pdf

{5} http://www.group30.org/rpt_12.shtml

{6} CUID is customer unit identifier.

{7} See Procedure VII. CNS Accounting Operation, C. Receipt and Delivery of Securities, 4. Day Cycle at p. 210 of the NSCC Rules and Procedures http://www.dtcc.com/legal/rules_proc/nscc_rules.pdf.

APPENDIX "A"

PROPOSED CDS PARTICIPANT RULE AMENDMENTS