3 420536v-eng-lf-Istruzioni Express II - Servizio di ... · Net Settlement Instructions 07_12_2010 Date of entry into force: 01/01/2011 6-“Remote Participant”: a participant in

Net Settlement Instructions 1 07_12_2010

Date of entry into force: 01/01/2011

INSTRUCTIONS

EXPRESS II SERVICE

NET SETTLEMENT

NOVEMBER 2010

Net Settlement Instructions 07_12_2010


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C O N T E N T S

1 INTRODUCTION ..........................................................................................3

1.1 DEFINITIONS ..............................................................................................3 2 DESCRIPTION OF THE SERVICE............................................................7 3 CHARACTERISTICS OF THE SERVICE.................................................8

3.1 FINANCIAL INSTRUMENTS ADMITTED.........................................................8 3.2 AVAILABILITY OF THE SERVICE .................................................................8

3.2.1 Pre-settlement ..............................................................................8 3.2.2 Net settlement and overnight settlement ......................................9 3.2.3 Net settlement and daytime settlement.........................................9

3.3 PARTICIPATION ........................................................................................10 3.3.1 Communications ........................................................................10 3.3.2 Fees............................................................................................10 3.3.3 Access methods ..........................................................................10

4 SERVICE FUNCTIONALITIES................................................................10 4.1 SERVICE OPERATIONS..............................................................................10

4.1.1 Pre-settlement phase..................................................................10 4.1.2 Net settlement phase and overnight settlement cycle.................11 4.1.3 Verification of balances and activation of automatic securities lending ...................................................................................................13

4.1.4 Net settlement and daytime settlement phase ............................16 4.2 PARTICIPANTS’ OPERATIONS ...................................................................19

4.2.1 Pre-settlement phase..................................................................19 4.2.2 Net settlement and overnight settlement phase..........................22 4.2.3 Net settlement and daytime settlement.......................................25



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1 INTRODUCTION These Instructions, together with the “Operating Rules for Express II Settlement Services" (hereinafter “Operating Rules”), describe the operations of the overnight and daytime net settlement cycles of the Express II service. Net settlement and gross settlement constitute the two components of the clearing and settlement system provided by Monte Titoli.

1.1 DEFINITIONS

- “General clearing member”: a party that assumes vis-à-vis the Central Counterparty the contractual positions for transactions made on its own behalf and/or on behalf of third parties that assume the role of non-clearing members.

- “Non-clearing member”: a party that enters into an agreement with a General Clearing Member so that the latter may assume vis-à-vis the Central Counterparty the contractual positions for transactions made by the Non-Clearing Member on its own behalf and/or on behalf of third parties.

- “Individual clearing member”: a party that participates in the Central Counterparty System on its own behalf and/or on behalf of its clients.

- “Annexes”: the Rules, the Price Lists, the Service Manuals, where provided, that are appended to the Instructions and/or to Contracts.

- “Correspondent Bank”: the bank engaged by the Intermediary to perform, on the latter’s behalf, the function of a “vehicle” for the accounting of funds between the Paying Agent and the Intermediary itself.

- ‘Paying Agent: the bank engaged by the Issuer to make payments ordered by Monte Titoli arising from transactions involving the Centralised Administration Service. In addition to its own payments, the Paying Agent also handles those of Intermediaries.

- “Client”: a party that enters into a Contract with the Service Provider Company for one or more Services.

- “Compensazione Giornaliera dei Recapiti” (also called BI-COMP): A Retail subsystem – Monte Titoli Applications;

- “Transfer”: the operation by which an intermediary transfers securities or cash to a counterparty with or without the corresponding movement of cash or securities.

- “Collateral agent”: a paying participant whose services a “remote participant” uses for collateralisation operations.

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- “Service Communication”: a communication drafted and sent by Monte Titoli to disseminate messages of a purely informative nature.

- “General Conditions”: Parts I and II of the General Conditions.



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- “General Conditions Part I”: these general conditions, applicable to all services provided by companies of the Borsa Italiana Group, including the Service Provider Company.

- “General Conditions Part II”: the general conditions applicable to specific aspects of the services provided by the Service Provider Company.

- “Contract”: the agreement between the Client and the Service Providing Company for the provision of the Service(s) indicated in the Application for Services.

- “Central Counterparty”: (hereinafter “CCP”) a party interposed between two contracting parties by novation of the original obligation, which becomes the buyer of the sold trade and the seller of the bought trade, thereby guaranteeing the successful conclusion of obligations assumed.

- “Counterparty”: in the context of an individual transaction, a member of the X-TRM Service that acts as a non-declarant counterparty in a transaction.

- “Data”: elementary and/or aggregate data and information entered into or generated by the Systems used to provide the Service(s), together with all data and information concerning the Service(s) which is the property of the Service Provider Company.

- “Services Data”: the Services Data as defined in Part I of the General Conditions, in particular data that comes into a Client’s possession as a result of their participation in the Services or that is made available in any manner to the Client in the context of the provision of the Services.

- “Corporate Action information”: the operating instructions issued by Monte Titoli for specifically identified individual transactions.

- “Participation Documentation”: the documentation, data and information required from a Client for participation in the Service(s).

- “Issuer”: the companies and entities that issue financial instruments that are admitted to the centralised administration service.

- “Accounting day”: an operating day according to the “TARGET” calendar. - “Technological Infrastructure”: the hardware devices and/or network

infrastructure and/or software products supplied by the Service Provider Company to the Client to be used for the Service(s).

- “Intermediaries”: entities that hold securities accounts with Monte Titoli through which financial instruments and relevant rights thereto may be transferred through centralised administration.

- “Investor CSD”: a Cross-Border Body that has a participation contract with an Issuer CSD.

- “Issuer CSD”: a Cross-Border Body that has a direct participative relationship with the Issuers of Financial Instruments.

- “Instructions”: the documentation issued by Monte Titoli containing the operating and generally applicable rules for the Services that govern the operation and fruition of requested Service(s).



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- “Settlement Instructions”: transactions sent from the X-TRM Service to the settlement services in the form of individual trades or bilateral balances with the Central Counterparties automatically cleared by the X-TRM Service.

- “Settlement Agent”: a member of the settlement services that settles securities on its own behalf and/or on behalf of others (Traders).

- “Services Manual”: the technical/operational documentation of the Service Provider Company concerning the requested Service(s).

- “MT-X”: the web-based communication platform managed by Monte Titoli for sending/receiving instructions and document flows between Monte Titoli itself and members of the System.

- “Trader": an intermediary that is a member of one or more regulated or non-regulated markets.

- “Bonds”: bonds and other domestic debt instruments (issued by companies or banks under Italian law) which are tradeable on the financial market.

- “Operation”: the set of items of information that constitutes a transaction. - “Foreign Institutions: (also called CSDs): institutions of EU and non-EU

member states that perform activities analogous to those performed by Monte Titoli.

- “Parties (also called Participant): the Client and the Service Provider Company. - “Paying participant” (also called Payer): a participant in the Target2 cash

settlement services that operates in the Express II service on its own behalf or on behalf of third parties.

- “Indirect participant”: a participant in the Express II settlement service that participates directly in the settlement service on the financial instrument side, but uses the services of a third party (a Paying participant) on the cash side.

- “Pool factor”: in Asset Backed Securities, the value, in decimal form, of the unredeemed share of the nominal value of the initial issue.

- - “Bank of Italy/Consob Regulation”: the joint Bank of Italy / Consob Regulation

of 22 February 2008 entitled “Regulation of centralised administration, settlement and guarantee services of the respective management companies".

- “Purchasing power”: in the context of the Express II net settlement service, the cash available to the Payer or the Remote Participant.

- “Rule(s)”: the Rules and Instructions of the Service Provider Company governing the operation and fruition of the requested Service(s).

- “Service Rules”: the “Rules of the centralised administration service and related activities”, approved by Consob by agreement with the Bank of Italy as subsequently supplemented and amended.

- “Operating Rules”: the “Operating rules of the Settlement Services (Express II) and related activities”, approved by the Bank of Italy by agreement with Consob, as subsequently supplemented and amended.



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- “Remote Participant”: a participant in the Settlement Services (Express II) that uses the services of a “Collateral Agent” to access the collateralisation functionalities offered by the Service.

- “Application for Services”: a contractual offer signed by the Client and containing an application for the provision of one or more Services.

- “RNI”: Rete Nazionale Interbancaria – the Italian interbank network. - “Bilateral Balance”: in the context of the Net Settlement Service, the bilateral

balance represents, for the same stock code, the algebraic sum (amount of securities and cash) of trades concluded between two participants.

- “Multilateral Balance”: in the context of the Net Settlement Service, the multilateral balance represents the algebraic sum (amount of securities and cash) of a single participant compared to all other participants.

- “Service(s)”: (also called “System”): one or more services, as the case may be, indicated in the Application for Services and provided to a Client by the Service Provider Company.

- “CPA Service”: a service that enables the sending of reporting flows regarding attendance at shareholders’ meetings.

- “EPAG Service”: a service provided by Monte Titoli to Paying Entities that, through specific information functionalities, enables the management of payment mandates from Clients of the Centralised Administration Service.

- “FIS Service”: a service that enables the sending of reporting flows regarding the registration details of shareholders.

- “X-TRM Service”: the services that enables the acquisition, matching and routing and forwarding of transactions to Italian and non-Italian Settlement Services.

- “Cross-Border Settlement Service”: Indicates the service that enables settlement, in accounts opened by Monte Titoli with other settlement systems, of transactions between a participant in the Monte Titoli system and a participant in another non-Italian settlement service with financial instruments managed by Monte Titoli through cross-border deposit systems, by the methods and according to the rules of the cross-border settlement system.

- “Centralised Administration Service”: the service for issuers and intermediaries that enables centralised administration of financial instruments through accounts opened in the name of the issuers and intermediaries themselves.

- “Settlement Services”: the net settlement service that enables settlement of balances arising from the netting on a multilateral basis of transactions in non-derivative financial instruments, together with the gross settlement system, which enables settlement of transactions in individual non-derivative financial instruments.

- “RCC Service”: the service for intermediaries and issuers that enables the calculation and settlement of considerations due to the issuers and intermediaries for their activities in relation to company transactions in financial instruments centralised and managed by the centralised administration service.



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- “ATIE Service”: the accessory service to the Centralised Administration Service that enables the exchange of reports on financial instruments lost, stolen, reported or affected by a distress warrant and reports relating to extractions for premiums and reimbursements made by issuers on government securities and bonds.

- “Securities Lending Service”: the service that facilitates securities lending operations with guarantee, in the capacity of lender or borrower.

- “Service Provider Company”: the company that provides a Service that is forwarded an Application for Services.

- “SWIFT”: Society for Worldwide Interbank Financial Telecommunication. - “TARGET”: Trans-European Automated Real-Time Gross settlement Express.

This is the system for the transfer of interbank funds of the European System of Central Banks (SEBC).

2 DESCRIPTION OF THE SERVICE Net settlement is designed with a modular structure that enables interaction with other systems due to its adoption of an open architecture and international standards. The service offers clearing and settlement functionalities on a net basis, integrates with clearing and settlement on a gross basis and provides for the adoption of further mechanisms for containing settlement risks. The Service combines the benefits of netting mechanisms with the typical benefits of a gross-based settlement system. It can also guarantee optimal management of the clearing and settlement process thanks to its totally automated interaction with securities and cash settlement systems. The net settlement system is capable of capturing individual trades, bilateral netting balances and balances netted with the intervention of a central counterparty from the matching and routing Service (X-TRM). It is also compatible with the various communication methods. In the rest of this document, “transactions to be settled” is understood to refer to individual trades, bilateral balances and netted balances without distinction. Net settlement involves three phases: • pre-settlement • net settlement and overnight settlement (hereinafter the ‘overnight cycle’) • net settlement and daytime settlement (hereinafter the ‘daytime cycle’) In order to maximise the number settled transactions, the Service provides for: securities lending facilities and, exclusively for the overnight phase, automatic collateralisation facilities for the purposes of increasing available securities and cash. Finally, in the event of a lack of securities/cash, the service uses continuous “securities roll-back” and “cash



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roll-back” processes to identify and remove the minimal subset of transactions that cannot be settled or to partially settle transactions guaranteed by a Central Counterparty. The pre-settlement phase enables participants to view, by means specific reports, the multilateral securities and cash balances with a next-day settlement date, allowing them to prepare the quantity of securities and cash necessary for the subsequent phases of settlement. The overnight phase makes it possible to settle transactions in the early hours of the morning (around 7:00) on the settlement day, with immediate availability of the securities and cash. The purpose of the daytime phase, which follows and supplements the overnight phase, is to eliminate or reduce fails in the overnight phase. During the daytime phase it is not possible acquire new transactions - it is only possible to process unsettled transactions originating from the overnight phase. Unsettled transactions from the daytime net settlement cycle (fails) are forwarded to gross settlement. Gross settlement takes place during daytime hours, operating according to the methods detailed in the “Instructions - Express II Gross Settlement Service”. Securities are settled by Monte Titoli in the accounts of participants in the system, while cash is settled in Central Bank money through a link with the trans-European automated real time gross settlement express transfer system, hereinafter referred to as Target2. Thanks to the X-TRM service which supports it, Express II guarantees constant and comprehensive reporting to participants during all its phases. 3 CHARACTERISTICS OF THE SERVICE 3.1 FINANCIAL INSTRUMENTS ADMITTED All financial instruments centralised with Monte Titoli may be admitted to the Service1. 3.2 AVAILABILITY OF THE SERVICE Service availability follows the Target calendar. Activation times are indicated in the document entitled “Service Communications pursuant to Article 10, paragraph 1 of the Operating Rules” published on the Monti Titoli website. 3.2.1 Pre-settlement

1 Financial instruments that subject to drawing (so-called “non-fungible” instruments) are settled in gross settlement only.



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This phase, active during the hours indicated in the preceding paragraph, enables participants to receive full and prompt communications on securities and cash transactions concerning trades and multilateral balances presented for settlement. Before the overnight phase commences, Service participants inform Monte Titoli which of their securities are to be used as guarantee for any concession of intraday credit by the Bank of Italy (firm collateral)2. 3.2.2 Net settlement and overnight settlement This process is completely automatic and does not require any intervention on the part of participants in the system. It is activated at the end of the pre-settlement phase, operating on the basis of accounts forwarded by the custody system and the payments service. The cash accounts are completed with the payments made on government securities (interest and redemption) and with the effects of any intraday advances granted on financial instruments to be transferred to the Bank of Italy as collateral. The service calculates the lack of securities and cash and, if necessary, activates the securities lending process. If uncovered positions persist, the service identifies the transactions which cannot be settled (partially or totally) by means of a roll-back function, the principles of which are defined in the Operating Rules. These transactions are then forwarded to the daytime net settlement phase. On the conclusion of this process, collateral requests are created and the multilateral securities and cash balances eligible for settlement are recalculated. These balances are then sent to the securities system and Target2. At the close of overnight settlement, the system sends participants an electronic summary report on the overnight cycle. 3.2.3 Net settlement and daytime settlement This process is completely automatic and does not require any intervention on the part of participants in the system. It is activated after the conclusion of the overnight settlement phase, during the hours indicated at Article 10 of the Operating Rules. Daytime settlement has a securities/caps coverage phase, during which participants may transfer financial instruments and/or increase the caps for indirect participants. Once the coverage phase has concluded, the service calculates the lack of securities and cash on the basis of allocations up to that point and, if necessary, activates the securities lending process. If uncovered positions persist, the service identifies the transactions which cannot be settled (partially or totally) by means of a roll-back function, the principles of which are defined in the Operating Rules. These transactions are then forwarded to the gross settlement phase.

2 In order to guarantee that settlement is successfully concluded, it is advisable that participants are always covered from the cash side by duly using collateral functionalities that are valid for the participant's securities.



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At the close of daytime settlement, the system sends participants an electronic summary report. 3.3 PARTICIPATION 3.3.1 Communications Monte Titoli promptly informs participants of suspensions and exclusions from the Service imposed pursuant to Article 4 of “Form 1” and all other information that is relevant to the efficient functioning of the Service. Monte Titoli sends communications to participants by the methods set out at Article 4 of the “General Conditions”. 3.3.2 Fees The fees charged by Monte Titoli for the Service are set out in annex 1C – “Fees” to Form – 1– Settlement services. 3.3.3 Access methods Members may access the Service by the methods described in the ‘Service Functionalities’ chapter. 4 SERVICE FUNCTIONALITIES

4.1 SERVICE OPERATIONS 4.1.1 Pre-settlement phase 4.1.1.1 Acquisition of trades to be settled The net settlement system acquires settlement instructions from the daily matching and routing (X-TRM) service in the form of: • individual trades • bilateral balances arising from netting processes external to the settlement system

forwarded to the matching and routing system • bilateral netting balances arising from the trade aggregation process concluded by

interposing a central counterparty, calculated automatically by the X-TRM Service.



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This process determines the net securities – cash exposure of each participant in relation to an entity acting as central counterparty and in relation any general clearing member3.

Each settlement instruction acquired, identified by a univocal progressive number, is matched by the Service with: • the reference number of the original transaction, assigned during acquisition in X-

TRM phase, relating to both the issuer and the counterparty, if the instruction derives from a single trade

• the reference number assigned by X-TRM, if the instruction derives from bilateral or netted balances.

The acquisition of the transactions to be settled takes place in batch mode in the event of trades already present in X-TRM, in the evening of the day before the settlement date (L-2), or in real time in the event of trades/transactions entered into X-TRM with a settlement date on the following day. Transactions with a settlement date on the following day may be entered into X-TRM up to a specific cut-off time, indicated in the document entitled “Service Communications pursuant to Article 10, paragraph 1 of the Operating Rules” published on the Monte Titoli website. . 4.1.1.2 Determination of payments on Government Securities At the start of the overnight cycle phase, after the accounting date change, the centralised administration service calculates the amounts arising from payments on Italian government securities maturing on the settlement date. These amounts contribute to the determination of the Purchasing Power of both the Paying Participant and the Indirect Participant, according to the methods described in paragraph 4.1.2.2. 4.1.2 Net settlement phase and overnight settlement cycle 4.1.2.1 Determination of available securities The overnight cycle operates on the basis of a reference accounting database, established immediately before the start of the said cycle, which makes reference to the positions of the accounts centralised with Monte Titoli after the execution of the procedures for the payment of coupons/redemption of capital, dividends and other transfers made for settlement purposes. The reference accounting database is stored in files which allow the overnight cycle procedure to access, verify and update the data quickly and directly. During this process, the Monte Titoli centralised administration service does not carry out any transaction which could alter the securities balances in the accounts of intermediaries.

3 The details are set out in the X-TRM Instructions.



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4.1.2.2 Determination of available cash Available cash or Purchasing Power (PrPw) is determined on two levels according to the participant's role: For Indirect Participants • firstly, a check is made of compliance with exposure limits (caps) established by the

respective agent banks, making reference to the “start of the day” values submitted to Monte Titoli by the agent banks using specific electronic messages. The exposure limit is increased automatically as a result of the payment of Government Securities maturing on the settlement day.

For Paying Participants • cash availability is checked, both for the paying participant's own transactions and for

those that it processes. In order to facilitate and accelerate the control phase, a database containing the total available cash, or Purchasing Power, of each Paying or Indirect Participant is created at the start of the overnight cycle and dynamically updated throughout the entire process. Purchasing Power is the sum of the following addends: For Indirect Participants

PagCapsPw +=Pr For Paying Participants

SColFColPagRisPw +++=Pr Where: Ris indicates the liquidity reserve allocated in Target2 and indicated by the Bank of Italy via the relevant data flow. Pag represents the payments made on Government Securities pertaining to the entity (interest and redemption) FCol represents the effects of collateralisation (see determination of firm collateralisation). SCol represents the effects of self-collateralisation see determination of self collateralisation). Determination of firm collateralisation On the basis of instructions received from settlement agents/payers regarding the administration of the collateral, a determination is made of the monetary countervalue that can be obtained from securities to be used as collateral, in the following manner: • collateralisable securities held in own accounts are considered, net of the multilateral

securities debit balances, previously calculated, up to the maximum limit indicated in the acquired profiles.



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• the nominal quantities available for collateralisation are valued using the official reference prices and the same algorithms used by the Bank of Italy for valuation of securities pledged as collateral.

The total firm collateralisation calculated as above becomes part of the Purchasing Power of the Payers. This is a maximum amount, as the automatic collateral activation mechanism will only use the quantity of securities strictly required to provide the cash necessary for the settlement process. Determination of self-collateralisation The automatic self-collateralisation procedure is activated by applying the same criteria used for firm collateralisation. The effective quantities (nominal value) of securities to be used as collateral are: • for own securities accounts, the credit multilateral balances of the collateralisable

securities, in this case also up to the maximum limit indicated in the acquired profiles. • For settlement agent accounts which are in a debit cash position, any multilateral

balances which are in credit with collateralisable securities. If the obtainable countervalue exceeds the debit cash balance of the settlement agent account considered, an amount equal to the debit balance itself is considered obtainable as collateral.

Thus, the amount of the self-collateralisation is derived, for each Payer, from the summation of the self-collateralisation amounts relating to its own account and its settlement agent accounts. 4.1.3 Verification of balances and activation of automatic securities lending The previously calculated multilateral securities balances are compared with the securities capacities of participants in the settlement process resulting from the reference accounting databases created. If the multilateral balance exceeds the capacity of the securities account, automatic securities lending is activated. The lending requirements constitute the input for the activation of the overnight cycle of the securities lending procedure. For details of this procedure, see the Instructions - Securities Lending. If securities collateralisable securities are involved, executed securities lending transactions could contribute to a dynamic change in the Purchasing Power of the lender (reducing the quantity of securities to be used for collateralisation). Determination of transactions which cannot be settled by roll-back At the end of automatic securities lending, the settlement service recalculates the debit multilateral securities and cash balances, including the securities lending transactions concluded, and verifies the presence of any other insufficiencies. If there are no insufficiencies in multilateral securities/cash balances, the settlement process is activated. If there are insufficiencies in multilateral securities/cash balances, the settlement service activates the securities/cash roll-back mechanisms. The operating algorithm of this mechanism, linked by the maximisation criteria detailed in the “Operating Rules”,



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identifies and removes operations that eliminate cases of securities/cash insufficiency4. The roll-back can lead to partial settlement of transactions subjected to “partial settlement”5. In such cases, each transaction is replaced by two derivative settlement instructions, one of which can be settled and one which cannot. The countervalues of these two instructions are calculated on the basis of the quantity of securities determined. Transactions extracted by the roll-back procedure and defined as “not capable of being settled” are sent to the subsequent daytime cycle. Transactions that can be settled are submitted to the next phase of the settlement process. 4.1.3.1 Determination of transfers as collateral The firm collateralisation and self-collateralisation processes of the own and third party securities accounts are activated only if the multilateral debit cash balance (SMC) is greater, in absolute value, than the sum of the liquidity reserve (Ris) blocked in Target2 and the payments on Government Securities (Pag) ( SMC > Ris + Pag). The collateralisation process is started according to a decreasing ranking of countervalues of collateralisable securities, derived from the sum, by individual security, of the firm collateralisation positions held in the own accounts and the self-collateralisation positions originating from the settlement process in the account itself. On this basis, the system first uses the firm collateralisation resources and then the self-collateralisation resources. If the liquidity originating from own securities transferred to collateral are insufficient, the self-collateralisation mechanism is activated. This uses securities originating from the settlement process of third party settlement agent accounts6. The collateralisable positions (Cont/F), already valued at the time of calculation of Purchasing Power, are used to the extent of the debit multilateral cash balance net of the reserve and payments on the Government Securities (Cont/F = SMC – ( Ris + Pag ). In order to calculate the exact nominal quantity of securities to be transferred as collateral, the valuation algorithm used to obtain the limits of firm collateralisation is applied in an inverse manner. If the collateralisable position, held in the own account, is insufficient to cover the cash debit position, the self-collateralisation process is activated on the securities balances originating from the settlement on the own securities accounts and third party settlement agent accounts. In this case also, the quantity on which the self-collateralisation (Cont/S) is performed is calculated on the basis of the coverage requirements for the remaining debit multilateral cash balance (Cont/S = SMC – ( Ris + Pag + FCol )).

4 For Indirect Participants, account is taken of the exposure limits (caps) established by the respective agent

banks. 5 Operations that are “partialisable” are related to the net bilateral balances with a central counterparty and to

the net balances between a general clearing member and a non-clearing member. 6 The mechanism is activated only for third party settlement agent accounts for which an application for participation in the services has been made, and for the debit cash accounts of thereof.



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The self-collateralisation process provides that: • if the self-collateralisation is carried out on the own account, netting transactions

between the own account and the technical clearing account for collateral are automatically entered into the basket of transactions to be settled during the overnight cycle

• if the self-collateralisation is carried out on third party settlement agent accounts, netting transactions from the third party settlement agent account to the own account and between the own account and the technical clearing account for collateral are automatically entered into the basket of transactions to be settled during the overnight cycle

• if the self-collateralisation is carried out on third party settlement agent accounts of an entity that participates in the system as a “Remote Participant”, delivery versus payment netting transactions from the third party settlement agent account to the own account of the “Collateral Agent” designated by the “Remote Participant” are automatically entered into the basket of transactions to be settled during the overnight cycle.

Since the securities which may be used as self collateral may also be obtained from the credit securities balances intended for one or more settlement accounts of a certain payer, random selection mechanisms will be used during the overnight cycle to select the settlement agent cash debit accounts from which to extract the securities. Transfers of securities as collateral to accounts in the name of the Bank of Italy will always be made for multiples of the minimum denomination, if necessary rounding up the nominal quantity calculated. As a result of the automatic netting transactions described above, the collateralisation process always refers to the own securities of the payer. 4.1.3.2 Settlement of debit multilateral securities balances At the end of the verification phase of any cases of insufficient securities and cash, during which the securities/cash roll-back process is activated only where necessary and following the collateral transfers determination phase, the final multilateral securities/cash balances are calculated. The securities accounts of settlement agents delivering securities are reduced by the amount of the debit multilateral securities balances. These nominal quantities of securities are temporarily credited to the technical clearing accounts opened in the Monte Titoli system. Furthermore, the exposure limits (caps) of Indirect Participants are updated (reduced) on the basis of the relevant multilateral debit cash balances.

4.1.3.3 Notification of collateral and cash settlement transactions Early in the morning of the settlement day, just before the start of Target2 operations, the service sends to that system: • notification of the transfers as collateral into the Bank of Italy accounts of the

nominal quantities of securities to be used in the collateralisation transactions for the purposes of increasing the overdraft on the accounts of the parties concerned



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• payment instructions for interest and redemptions on government securities • debit multilateral cash balances • credit multilateral cash balances. The Bank of Italy, after carrying out all the relevant checks and controls, executes the relevant processing. Once these instructions have been processed, the Bank of Italy notifies the service of their outcome, releases the unused liquidity reserve and informs the participants concerned, by the technical methods established for the Target2 procedure, of the transactions that have been concluded in their management accounts. 4.1.3.4 Settlement of credit multilateral securities balances Once confirmation of the successful outcome of the transactions has been received from Target2, Monte Titoli transfers the credit multilateral securities balances to the securities accounts of the participants withdrawing the securities, debiting the technical securities settlement accounts that had previously been credited. This step concludes the settlement of the transactions and formally closes the overnight cycle. Monte Titoli informs the intermediaries concerned of the transactions made on the securities accounts by the methods provided for the centralised administration system. 4.1.4 Net settlement and daytime settlement phase

4.1.4.1 Calculation of cash/securities multilateral balances and verification of insufficient securities/caps

The daytime cycle commences after the opening of Target2. The first activities are the calculation of multilateral securities/cash arising from transactions that were not settled during the overnight cycle. The debit multilateral securities balances of each settlement agent are compared with the capacity of the relevant securities accounts, while the multilateral cash balances of Indirect Participants are compared with the cash availability (caps) that the participants have with their Agent Bank. In there is capacity, including partial capacity: • the securities account of the settlement agent is debited with the quantity necessary for

coverage, with a balancing entry crediting a technical securities settlement account • the cash availability of the Indirect Participants with regard to their Agent Bank is

revised downward. Finally, a report on the management of subsequent securities coverage activities is produced and sent to participants automatically and the cash availability of the Indirect Participants is updated. 4.1.4.2 Securities/caps coverage phase This phase, activated on a cyclical basis for a defined period of time, enables participants to perform coverage activities for securities caps/balances.



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During this phase, the system checks the formation of new balances at set intervals, operating by the same methods as described in the preceding section. In order to facilitate the coverage activities, the system makes a specific report available to members on request. Shortly before the cut-off time of the securities/caps coverage phase, the automatic securities lending procedure, intended to further reduce the residual shortages, is activated. 4.1.4.3 Automatic securities lending The characteristics of the securities lending procedure, supporting the daytime cycle, are detailed in the Instructions – Form 3 – Lending Service. Following the activation of the securities lending procedure and the consequent securities coverage, any remaining securities insufficiencies are calculated for the purpose of assessing possible activation of the securities/caps roll-back phase. 4.1.4.4 Securities/caps roll-back phase In order to eliminate the residual insufficiency of securities, the securities/caps roll-back identified and removes or paralyses the minimal subset of transactions that cannot be settled. This roll-back phase takes account of the “caps” of the Indirect Participants, but does not carry out any verification of the cash availability of the Payers. The criteria used to identify the transactions to be extracted are defined in the Operating Rules. The roll-back algorithm does not consider the available securities which may be created on securities accounts during its operation. Before activating the roll-back algorithm, the Service: • blocks the securities account of the settlement agents which have at least one delivery

transaction, for a quantity equal to the difference between the sum of the securities delivery transactions and the quantity that may have already been debited during the coverage phase

• decreases the cash availability of the Indirect Participants that have at least one transactions for which funds are due, for a quantity equal to the difference between the sum of the cash delivery transactions and the quantity of cash that may have been set aside during the previous coverage phase

• unblocks the quantities set aside before the roll-back process.

On conclusion of the activities described above, the roll-back process commences. This process: • identifies and removes or ‘partialises’ the set of transactions that cannot be settled due

to the lack of securities/caps



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• calculates the multilateral securities balance of the transactions which can be settled and compares it the debits already made in the previous securities/caps coverage phase

• if a quantity of securities greater than the recalculated multilateral balance has been debited, credits the securities account of the debtor settlement agent with the excess quantity of securities, as a balancing entry to the technical securities account for clearing

• calculates the multilateral cash balance with the unsettled transactions removed and compares it with the availability provisions set aside during the previous securities/caps coverage phase. If the set-aside is greater than the multilateral balance calculated, the excess is reinstated to the caps availability of the Indirect Participant.

The securities roll-back may lead to the partial settlement of transactions eligible for “partial settlement”7. In such cases, each transaction is replaced by two derivative settlement transactions, one of which can be settled and one which is not settled. The countervalues of these two instructions are calculated in proportion to the quantity of securities determined. Transactions for which the securities/caps part can be settled are forwarded to the following cash verification phase. Unsettled transactions are forwarded to the gross settlement system. 4.1.4.5 Determination of cash requirements Multilateral cash balances are recalculated for securities/caps transactions which can be settled. The service automatically sends the report necessary for cash coverage to participants. For Payers with a debit cash balance, the service sends debit instructions to Target2 in favour of the technical cash settlement account opened in the Target2 system. 4.1.4.6 Cash coverage phase In this phase, Payers participating in Target2 proceed to raise the cash necessary to settle the relevant debit instructions that have been sent. Target2 executes the instructions for which complete coverage has been verified, debiting the account of the parties as a balancing entry to the technical cash clearing account and sending a report to Monte Titoli and to the participants concerned. The cash cut-off time may be deferred, by agreement with the Bank of Italy and Monte Titoli when deemed advisable to facilitate the complete coverage of the cash. 4.1.4.7 Cash roll-back phase In the event that, at the cut-off time established for cash coverage, one or more participants have insufficient availability, the cash roll-back is activated, subject to cancellation of all cash settlement instructions still outstanding in Target2. 7 Exclusively for transactions deriving from balances netted with the intervention of a central counterparty.



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The criteria used to identify the transactions to be extracted are defined in the Operating Rules. On conclusion of the roll-back phase, the multilateral securities and cash balances of the transactions that can be settled are recalculated. The multilateral securities and cash balances are compared with the debits made at the close of the previous securities/caps coverage phase. If there is a debit/set aside situation is greater than the multilateral balance calculated, the excess debit/set aside provision is re-credited. 4.1.4.8 Securities and cash settlement The service sends the instructions to Target2 for the transfer of the cash to the creditors, with a balancing debit entry in the technical cash settlement account, and performs the credit transfers to the securities accounts of creditor settlement agents, with a balancing debit entry in the technical securities clearing account. The settlement agents receive notification of movements in the securities accounts resulting from the settlement phase of the credit multilateral securities balances from Monte Titoli's centralised administration service. Payers receive a report on movements in their accounts with Target2. The participant processed in Target2 and the agent bank receive an electronic report from Monte Titoli regarding the updated state of the exposure limits (caps) resulting from the settlement process. 4.1.4.9 Forwarding of fail transactions to gross settlement On conclusion of the daytime cycle, “failed” transactions are immediately sent to the X-TRM Service for transmission to gross settlement. Before being sent to X-TRM, the transactions are subject to a splitting process according to the criteria indicated in the Service Communications document, indicated at Article 10, paragraph 1 of the "Operating Rules". 4.2 PARTICIPANTS’ OPERATIONS

4.2.1 Pre-settlement phase 4.2.1.1 Pre-settlement report Participants in the service must be prepared to receive and manage batch and ‘on request’ reports, through which securities and cash positions for settlement on the following day can be seen on the 'pre-settlement' day, in addition to any shortages in securities accounts, violations of exposure limits (caps) or cash deficiencies. Payers may request information on the Purchasing Power established up to that moment8.

8 In the event that daily prices are not available at the moment in which a request is made, the amounts

corresponding to the firm and self collateral are valued on the basis of the previous day’s prices.



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The request may be sent using the 3270 and MT-X terminals and with application flows in LU6.2 or RNI mode, setting appropriate selection parameters that enable the level of aggregation of the requested information to be selected. The report produced takes into account the role of the applicant (settlement agent, indirect participant in Target2, payer). For settlement agents, it includes: • a breakdown of the own transactions to be settled • a breakdown of transactions to be settled relating to their Indirect Participants'

securities • the cash and securities balances of each Indirect Participant • the multilateral balances taking into account the specific securities accounts to be

transferred (own account, third party account, settlement agent account) • the effective availability of the securities with Monte Titoli at that moment • any lack of securities • the multilateral cash balance by individual currency. If the settlement agent is processed in Target2, in addition to the report as settlement agent, it will receive: • the maximum total cash exposure (daily default) specified for each account • the amount of the credited interest and capital redemptions relating to Italian

government securities • any caps shortages with respect to the daily exposure limit assigned by the relevant

agent bank. For the payer in Target2 (which may be the settlement agent or another party) it includes: • any report sent to settlement agent • the cash balance of each Indirect Participant • the total multilateral cash (per individual currency) And only if already available or communicated: • the amount corresponding to the Liquidity Reserve communicated by the Bank of Italy • the amount of the credited interest and capital redemptions relating to Italian

government securities • the amount corresponding to firm collateralisation • the amount corresponding to self collateralisation • any cash shortage 4.2.1.2 Establishment of collateral limits Acquisition of limits for collateralisation In order to increase as much as possible the cash available for the overnight clearing and settlement process, Express II provides for the activation of automatic mechanisms for the transfer of the securities held in own accounts of payers to the Bank of Italy as collateral (firm collateralisation).



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To this end, settlement agents who also perform the role of payers and who use the Target2 settlement system directly, may send, during the pre-settlement phase, a flow containing instructions for managing the collateral limits in order to configure their own profile. This profile remains valid until further instruction. Where no such indications are given, the service considers the securities eligible for collateral belonging to settlement agents that has not provided any instructions, to be unavailable for firm collateralisation. With regard to the definition of profiles, a settlement agent that uses firm collateralisation may decide, exclusively in relation to their own account, to: • Indicate for possible transfer as collateral:

- all available securities - all securities with the exclusion of those expressly specified - only those securities specified and for which the nominal maximum quantity

(nominal value) to be used for the purpose has been indicated • to exclude all securities from collateralisation. Only securities indicated by Monte Titoli from among those accepted as collateral by the Bank of Italy may be used as collateral9. Amounts deriving from collateralisation activities contribute to the determination of the Purchasing Power of payers. Change/cancellation of limits for firm collateralisation Settlement agents that intend to change the profile of the securities eligible for collateral may do so by sending a flow containing instructions that fully replace the previous instructions. It is not possible to include or exclude a single security from the original list; it is necessary to declare the list in its entirety. The changed profile becomes valid on the following day’s settlement if sent by the established deadline. Cancellations are also made by replacing the original profile with a new flow of instructions. 4.2.1.3 Self-collateralisation management Self-collateralisation makes it possible to use securities originating from the settlement process as collateral in favour of the Bank of Italy for the purposes of obtaining liquidity using intraday advance facilities, or in favour of a designated Collateral Agent for the purposes of obtaining liquidity using the same criteria as applied by the Bank of Italy for the calculation of the intraday advance. The mechanism for activation of self-collateralisation takes account of the profiles sent by payers at the time the collateral limits were set. 4.2.1.4 Management of exposure limits

9 The Italian securities indicated in the “tier 1 and 2” lists of the ECB and foreign securities included in the aforementioned lists which are administered by Monte Titoli via a direct link with their Central Depositary Issuer. The complete and updated list of securities admissible for collateralisation operations is published in the News section of the Monte Titoli website.



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Payers that function as an agent bank must manage the definition, update and consultation of exposure limits (caps) of Indirect Participants by the same operating methods used for gross settlement, which are documented in the user ‘standard’ entitled “Management of exposure limits of participants that use the services of an agent bank" (MT-RNI-CAPS). The exposure limits are valid for the entire settlement day and contribute to the determination of the cash availability of Indirect participants in the payment system (Indirect Participants). 4.2.1.5 Liquidity reserve communication The intermediaries establish the quantity of cash to be reserved for the overnight cycle and forward this information to Target2 by the methods and rules established by the Bank of Italy, indicating the maximum amount to be set aside as reserve (this can be a default value or can be specified from time to time). Participants send this instruction directly to Target2 when they join, and may change it subsequently. 4.2.1.6 Technical procedures for access to pre-settlement functions The table below shows the technical methods for obtaining each pre-settlement function.

technical method of use RNI SWIFT Pre-settlement function

3270 M.S. F.T.

LU6.2 Fin and/or InterAct FileAct

Print (Beta93)

MT-X

Request for pre-settlement information X X X X

X

Pre-settlement report X X X X X

Acquisition/change/cancellation of collateral limits X X X X X

Request for report on collateral limits X X X On-screen collateral profiles X X X 4.2.2 Net settlement and overnight settlement phase 4.2.2.1 Overnight post-settlement reporting At the end of the overnight cycle, participants receive a post-settlement report. The post-settlement report is addressed to settlement agents and payers, due to the roles that they play. The report, the product of batch processing, is made available in the morning, on conclusion of the settlement process of the overnight phase, in the form of reports and/or processable flows containing all information on the outcome of the overnight cycle and at the same time provides evidence of unsettled transactions which will be submitted to the daytime cycle.



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The technical methods used are: LU6.2, RNI, SWIFT, for sending processable flows, BETA93 for printouts and MT-X for on-screen viewing of the information using a web interface. The settlement agent receives indications concerning: • Balances settled with:

- a breakdown of all own transactions settled - a breakdown of all settled transactions involving its indirect participants for the

securities leg - the multilateral securities and cash balances of the securities of each participant

processed for securities, broken down by settled transactions - the multilateral securities and settled cash balances taking into account the specific

securities accounts to be transferred (own account, third party account, settlement agent account).

Settled transactions include those arising from partial settlement and those relating to the opening of securities lending contracts generated automatically during the overnight cycle and to self-collateralisation operations. • Unsettled balance or "fail” with:

- a breakdown of all own transactions not settled - a breakdown of all unsettled transactions involving the securities of its indirect

participants for the securities leg - the multilateral securities and cash balances of the unsettled transactions of each

Indirect Participant - the multilateral securities and settled cash balances of unsettled transactions taking

into account the specific securities accounts to be transferred (own account, third party account, settlement agent account).

Unsettled transactions include the unsettled portion of partial settlements. It should be noted that only unsettled transactions in the overnight cycle are sent to the daytime cycle. Thus these indications already identify the coverage requirements for that cycle. • Balances partially settled with:

- a breakdown of own partially settled transactions - a breakdown of partially settled transactions involving the securities of its indirect

participants for the securities leg Original transactions which have been partially settled are automatically cancelled by the service and replaced by a settled and an unsettled transaction, each representing the relevant portion of both securities and cash. The two derivative transactions carry a reference to the original trade. • Securities lending trades with:

- a breakdown of securities lending transactions generated by the automatic overnight cycle procedure It also contains complete information on the transaction, the opening of the loan and its redemption. The redemption transaction will be settled in the net settlement of the following day, while the loan activation is



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automatically settled in the overnight cycle. Both the transactions created are automatically entered into the X-TRM Service.

• Netting for self-collateralisation transactions with:

- a breakdown of securities netting transactions generated by the automatic procedure of the overnight cycle and information on the transaction that is automatically entered into the X-TRM Service.

• Securities account transfers for settlement with:

- if the settlement agents undertake the role of payer in Target2 (and therefore can avail themselves of the collateral mechanisms): Own account

- the balance in the securities account before the settlement process - the multilateral securities balance including the securities lending and

collateral transactions - evidence of the quantity of securities transferred to the Bank of Italy as a

result of the collateral transactions - the balance in the securities account after the settlement process.

Third party accounts, settlement agent accounts - the balance in the securities account before the settlement process - the multilateral securities balance including the securities lending and

collateral transactions - the balance in the securities account after the settlement process.

- if the settlement agents do not undertake the role of payer in Target2 (and

therefore can avail themselves of the collateral mechanisms): - the balance in the securities account before the settlement process - the multilateral securities balance subject to settlement (corresponding to

the multilateral securities balance shown in the “settled balance” section) - the balance in the securities account after the settlement process.

In addition to the specified report, settlement agents will receive from Monte Titoli's centralised administration service notification of the transfers to securities accounts as a result of the accounting of settled transactions. The payer in Target2 receives indications concerning: • Balances settled with:

- the cash balance of each indirect participant for the cash leg relating to settled trades

- The total settled multilateral cash balance (by individual currency). • Balances unsettled with:

- the cash balance of each indirect participant for the cash leg relating to the respective unsettled trades

- The total unsettled multilateral cash balance (by individual currency).



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The Payer will receive a report from Target2 on movements in their accounts with Target2. If the payer and the settlement agent are the same, it will also receive all the reports provided to the latter. The participant processed in Target2 and the relevant agent bank receive a report indicating the updated exposure limits (caps) after the settlement process.

4.2.3 Net settlement and daytime settlement 4.2.3.1 Securities and caps settlement reports The settlement report is addressed to settlement agents and payers, due to the roles that they play. The report, the product of batch processing, is made available automatically at the end of the first coverage cycle and is provided, on the request of participants, during the whole entire period in which the securities/caps coverage phase is open. It contains complete information on coverage requirements still outstanding at the time of request. The technical methods used are: 3270, LU6.2, RNI, SWIFT and MT-X for sending processable flows, BETA93 for printouts. If the report is requested during the securities/caps coverage phase or is sent automatically by the service, the settlement agent receives indications regarding: • multilateral securities balances to be settled • multilateral securities balances covered • multilateral securities yet to be covered In addition to the specified report, settlement agents will receive from Monte Titoli's centralised administration service a report of movements in their securities accounts for the purposes of covering debit securities balances. The Indirect Participant in Target2 receives indications concerning: • multilateral cash balances to be settled • multilateral cash balances that exceed current exposure limits. The participant processed in Target2 and the relevant agent bank receive an electronic report from Monte Titoli regarding the updated state of the exposure limits (caps) resulting from the coverage process. The payer in Target2 receives indications concerning: • The multilateral cash balance of each Indirect Participant • multilateral cash balances that exceed the available exposure of each Indirect

Participant • total multilateral cash balances If the payer and the settlement agent are the same, it will also receive the information provided to the latter.



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4.2.3.2 Cash settlement reporting At the conclusion of the securities and caps settlement phase, the service automatically sends participants the report necessary for the purposes of cash coverage and the detail of transactions that are unsettled/eligible for settlement identified by the securities/caps roll-back.10 During the entire subsequent cash coverage phase, the payers may request the service to send them a status report on their cash coverage process. The payer in Target2 receives indications concerning: • multilateral cash balances to be settled in Target2 • the status report of settlement in Target2. It is possible to request this report, which is

relevant to payers, after the phase in which debit balances are sent to Target2. The technical methods used are: 3270, LU6.2, RNI, SWIFT and MT-X for sending processable flows. 4.2.3.3 Post-settlement reporting The post-settlement report is addressed to settlement agents and payers, due to the roles that they play. The report, the product of batch processing, is made available at the conclusion of the settlement process, in the form of reports and/or processable flows. The technical methods used are: LU6.2, RNI, SWIFT and MT-X for sending processable flows, BETA93 for printouts. The settlement agent receives indications concerning: • Balances settled containing:

- a breakdown of all own transactions settled - a breakdown of all settled transactions involving the securities of its indirect participants for the securities leg - the multilateral securities and cash balances of the securities of each participant

processed for securities, broken down by settled transactions - the multilateral securities and settled cash balances taking into account the specific

securities accounts to be transferred (own account, third party account, settlement agent account).

Settled transactions include those deriving from partial settlement. • Unsettled balance or "fail” containing:

- a breakdown of all own transactions not settled

10 The detailed report of transactions that are unsettled/eligible for settlement is optional on the request of the

participant.



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- a breakdown of all unsettled transactions involving the securities of its indirect participants for the securities leg

- the multilateral securities and cash balances of the securities of each participant processed for securities, broken down by unsettled transactions

- the multilateral securities and unsettled cash balances taking into account the specific securities accounts to be transferred (own account, third party account, settlement agent account).

Unsettled transactions include the unsettled portion of partial settlements. • Partially settled balances containing:

- a breakdown of own partially settled transactions - a breakdown of partially settled transactions involving the securities of its Indirect Participants

Transactions which have been partially settled are automatically cancelled by the service and replaced by a settled and an unsettled transaction, each representing the relevant portion of both securities and cash. The two derivative transactions carry a reference to the original trade. In addition to the report specified above, settlement agents will receive from Monte Titoli's centralised administration service standard messages indicating updates made to securities accounts as a result of settlement phase. The payer in Target2 will receive indications concerning: • Settled balances contain:

- the cash balance of each Indirect Participant relating to settled trades - The total settled multilateral cash balance (by individual currency).

• Unsettled balances settled containing:

- the cash balance of each Indirect Participant relating to unsettled trades - The total unsettled multilateral cash balance (by individual currency).

In addition to the report specified above, the payer will receive the standard report from Target2 on movements in its account. If the payer and the settlement agent are the same, it will also receive all the reports provided to the latter. The participant processed in Target2 and the relevant agent bank will receive an electronic report indicating the updated exposure limits (caps). 4.2.3.4 Technical access methods The table below shows the technical methods for obtaining each clearing and settlement function.



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technical method of use RNI SWIFT Settlement function

3270 M.S. F.T.

LU6.2 Fin and/or InterAct FileAct

Print (Beta93)

MT-X

Overnight cycle post-settlement reporting X X X X X

Request for daytime cycle settlement reporting X X X X X

Reporting flow on request for daytime cycle settlement X X X X X

Daytime cycle post-settlement reporting X X X

Documents

3 420536v-eng-lf-Istruzioni Express II - Servizio di ... · Net Settlement Instructions 07_12_2010 Date of entry into force: 01/01/2011 6-“Remote Participant”: a participant in