INSTRUCTIONS SECURITIES LENDING SERVICE · of the loan extinction; financial instruments for which corporate events, coupon or dividend payments are underway with a maturity date

INSTRUCTIONS – SECURITIES LENDING SERVICE

4th

June 2007

C O N T E N T S

1 INTRODUCTION .................................................................................................................. 5

2 DESCRIPTION OF THE SERVICE.................................................................................... 5

3 FEATURES OF THE SERVICE .......................................................................................... 5 3.1 ELIGIBLE PARTICIPANTS .................................................................................................. 5

3.2 ELIGIBLE FINANCIAL INSTRUMENTS ................................................................................. 5

3.3 AVAILABILITY OF THE SERVICE ....................................................................................... 6

3.3.1 Overnight securities lending ............................................................................ 6

3.3.2 Daytime securities lending .............................................................................. 6

3.4 PARTICIPATION ................................................................................................................ 7

3.4.1 Participation formalities ................................................................................. 7

3.4.2 Changes of the data indicated ......................................................................... 7

3.5 COMMUNICATION ............................................................................................................ 7

3.6 COLLATERAL AND AFFORDING PROCEDURES ................................................................... 7

3.7 PRICING ........................................................................................................................... 8

3.8 ACCESS PROCEDURES ...................................................................................................... 8

4 SERVICE FUNCTIONS ........................................................................................................ 8 4.1 LENDER ACTIVITIES ......................................................................................................... 8

4.1.1 Offer profile ..................................................................................................... 8

4.1.2 Anonymous list of loan requests ...................................................................... 9

4.2 BORROWER ACTIVITIES.................................................................................................... 9

4.2.1 Loan request .................................................................................................... 9

4.3 COMMON ACTIVITIES OF THE LENDER AND THE BORROWER .......................................... 10

4.3.1 White List ....................................................................................................... 10

4.3.2 Enquiry functions .......................................................................................... 11

5 LOAN CONTRACT ............................................................................................................ 11 5.1 THE LOAN CONTRACT: FEATURES .................................................................................. 11

5.2 THE LOAN CONTRACT: ESSENTIAL TERMS OF THE CONTRACT ........................................ 14

5.3 THE LOAN CONTRACT: DEFAULT AND SUSPENSION OF THE PARTICIPANT ....................... 14

5.4 OVERNIGHT SECURITIES LENDING.................................................................................. 15

5.4.1 Automatic generation of loan requests .......................................................... 15

5.4.2 Matching requests and loan offers ................................................................ 15

5.4.3 Generation of loan contract attivation transactions ...................................... 16

5.5 DAYTIME SECURITIRES LENDING ................................................................................... 17

5.5.1 Automatic generation of loan requests .......................................................... 17

5.5.2 Matching requests and loan offers ................................................................ 17

5.5.3 Generation of loan contract activation transactions ..................................... 18

5.6 SETTLEMENT OF LOAN CONTRACT ACTIVATION TRANSACTIONS .................................... 18

5.7 GENERATION OF LOAN CONTRACT EXTINCTION TRANSACTIONS .................................... 18

5.8 SETTLEMENT OF LOAN CONTRACT EXTINCTION TRANSACTIONS .................................... 19

6 APPENDIX: CALCULATION METHODS ...................................................................... 19 6.1 COUNTERVALUE OF LOAN ACTIVATION TRANSACTION .................................................. 19

6.2 COUNTERVALUE OF THE EXTINCTION TRANSACTION ..................................................... 19

6.3 PRICE OF THE EXTINCTION TRANSACTION ...................................................................... 20

6.4 UNIT ACCRUED INTEREST .............................................................................................. 21

6.5 ACCRUED INTEREST VALUE ........................................................................................... 23

6.6 CONSIDERATION FOR THE LENDER AND COMPENSATION ............................................... 24

6.7 HAIR-CUT ...................................................................................................................... 25

6.8 COLLATERAL OF THE EXTINCTION TRANSACTION .......................................................... 25

1 INTRODUCTION

These Instructions, together with the “Centralised Administration Services Terms and

Conditions” (hereinafter “Services Terms and Conditions”), describe the operation of the

Securities Lending Service (hereinafter “Service”) provided by Monte Titoli to support

the Settlement Systems.

2 DESCRIPTION OF THE SERVICE The Service is a tool both for the reduction of settlement risks and for the diversification

of portfolio management.

Monte Titoli operates the Service as an agent, on the basis of a dual mandate to contract

in the name of and on behalf of the counterparties (borrowers and lenders).

The service is highly customer-oriented, easy to use, with a wide range of functions

available, and offers to participants the possibility to operate as lender, automatic

borrower and/or voluntary borrower, for the overnight and daytime cycles of net

settlement.

The loan contract is the combination of two transactions with opposite signs for the

delivery of securities against payment: one of activation and one of extinction.

Each extinction transaction, from a technical viewpoint, is made of two extinction

instructions: “intraday extinction” that is sent to the gross settlement system and can be

settled only at the activation leg’s settlement date and “extinction following days” that is

sent for settlement in the overnight cycle of the day after the opening of the loan. If the

“intraday extinction” instruction is settled, the transaction “extinction following days” is

cancelled and the loan is terminated. Otherwise, if the loan is not closed intraday, the

“intraday extinction” transaction is not recycled the following days because expired and

to close the loan the parties have to settle the “extinction following days” transaction.

Any fails relating to these transactions are routed to the daytime net cycle and, if

unsettled, to the gross settlement.

3 FEATURES OF THE SERVICE

3.1 ELIGIBLE PARTICIPANTS

The parties who may use the Service, in possession of the related participation

requirements, are specified in the Services Terms and Conditions attached to Form 3 –

Securities Lending Service.

3.2 ELIGIBLE FINANCIAL INSTRUMENTS

All the financial instruments centralised in Monte Titoli are admitted to the Service, with

the exclusion of:

financial instruments for which it is not possible to obtain an evaluation price in

Euro;

rights;

inflation linked Government bonds;

no fungible bonds;

bonds involving total redemption with a maturity date before or coinciding with that

of the loan extinction;

financial instruments for which corporate events, coupon or dividend payments are

underway with a maturity date coinciding with that of the loan extinction;

financial instruments for which conversion transactions are underway with a maturity

date coinciding with that of the loan extinction.

3.3 AVAILABILITY OF THE SERVICE

The Service follows the settlement timetable and is divided into two cycles: overnight

and daytime.

The Service times are the following:

TABLE 1

Cycle Phases Time Overnight securities

lending

Opening of the Service Within the overnight settlement cycle

Closure of the Service At the closure of the overnight settlement

cycle

Daytime securities

lending

Opening of the Service At the beginning of the daytime

settlement cycle

Matching closing 3.00 pm (CET)

Closure of the Service ore 7:30 pm (CET)

3.3.1 Overnight securities lending

This process is activated at the end of the phase which identifies securities short

positions, should there be any. It is a totally automatic process: the participants in the

Service do not need to perform any operating steps.

3.3.2 Daytime securities lending

It is activated at the same time as the start of the daytime net cycle.

Starting from the activation and until the closure of the matching it is possible to generate

securities lending contracts. From this point on, the matching facility is closed and,

therefore, it is no longer possible to generate securities lending contracts. However, until

closure, all the other functions provided by the Service continue to be enabled, and it is

possible to input loan requests and/or offer profiles valid for the following day’s

overnight net cycle.

3.4 PARTICIPATION

3.4.1 Participation formalities

Participants in the Service may operate with one (or more) of the following roles:

lender;

automatic overnight borrower;

automatic daytime borrower;

voluntary borrower.

For this purpose, the applicant submits to Monte Titoli, at the same time as Form 3 –

Securities Lending Service, the attachment 3E) “Information Form” signed by the legal

representative or by another duly authorised person, indicating the securities accounts

from which it intends to operate, for each specific role.

Monte Titoli informs the applicant of the operational start date for the roles indicated

upon stipulation of the contract.

3.4.2 Changes of the data indicated

Changes in the data previously submitted to Monte Titoli must be communicated by

forwarding a new “Information form”, cancelling and replacing the previous ones, and

will become effective at the latest from the fifth business day after the receipt.

3.5 COMMUNICATION

Monte Titoli informs participants on a timely basis of the suspensions and exclusions

from the Service disciplined in accordance with Article 4 of Form 3 – Securities Lending

Service, and of all other significant facts for the satisfactory functioning of the Service.

Communications to the participants are sent by Monte Titoli using the methods referred

to in Article 4 of the “MT850 –General Terms and Conditions”.

3.6 COLLATERAL AND AFFORDING PROCEDURES

The collateral is represented by cash and is made available at the time of the loan

activation transaction, according to a DVP transfer:

of the financial instruments transferred from the securities account of the lender to the

securities account of the borrower within Monte Titoli’s centralised administration

system;

of the cash (representing the collateral) from the cash account of the borrower (or the

related agent bank) to the cash account of the lender (or the related agent bank) as

part of the BI-REL payment system.

The cash collateral is calculated by adding to the tel-quel countervalue in Euro of the loan

activation transaction an hair-cut that is calculated as shown in the Appendix, to which

reference should be made.

In consideration of the duration of the loan transactions, the Service does not supply any

collateral adjustment mechanisms. For the duration of the contract, reference should be

made to section 5.1.

3.7 PRICING

Fees and charges in favour of Monte Titoli are specified in the attachment 3D “Pricing”

to Form 3 – Securities Lending Service.

For each intraday loan the borrower shall pay to the lender a flat fee.

For each individual loan contract with maturity of at least one business day the borrower

shall pay to the lender the consideration for the lender and the lender shall rebate to the

borrower the compensation.

The payment due to the borrower is set off against the payment due to the lender and the

resulting amount is included in the settlement countervalue of the extinction transaction

of the loan.

3.8 ACCESS PROCEDURES

Participants can access the Service in accordance with the methods described in the

document “Securities Lending Service – Reference guide for the use of the Service

functions (Operating Manual)” available on Monte Titoli’s website at the following

address: www.montetitoli.it.

4 SERVICE FUNCTIONS

4.1 LENDER ACTIVITIES

4.1.1 Offer profile

Participants to the Service can insert separate offer profiles for the overnight and daytime

settlement cycles.

Lenders declare their availability to lend financial instruments inserting offer profiles

which may be of a permanent nature, with a time-related validity established by the

lender, or temporary, i.e. with a time-related validity limited to the period of activation of

the Service for the related settlement cycles.

The offer profiles must be entered separately for each securities account (own securities

account, third party securities account, segregated settlement accounts) from which the

lender is willing to lend and can be changed or cancelled:

by the closing time of the securities lending daytime cycle, if referring to the net

settlement overnight phase;

at any time during the operation of the daytime securities lending functionalities.

The variation or cancellation of a profile does not have any retroactive effect and

therefore the loan contracts concluded before the variation or cancellation maintain their

validity.

Permanent offer profile

The permanent offer profile may be generic or specific.

The generic permanent profile represents the availability to lend financial instruments by

category (shares, bonds, convertible bonds, Government securities or warrants) and by

denomination currency.

The maximum amount of financial instruments which can be lent corresponds to the

current availability in the lender’s securities account.

The specific permanent profile represents the availability to lend a specific financial

instrument up to a set amount.

By amount we mean the quantity for shares and warrants and the nominal value for bonds

and similar financial instruments.

Temporary offer profile

The temporary profile represents the availability to lend a specific financial instrument up

to a set amount, within the limits of the Service activation period, for the relevant

settlement phase.

By amount we mean the quantity for shares and warrants and the nominal value for bonds

and related financial instruments .

The temporary profile replaces any permanent profile input by the lender availing of the

same securities account and the same financial instrument. At the end of the settlement

cycle to which the temporary profile refers, the latter is cancelled and the permanent

profile, if any, is automatically reinstated.

It is possible to set up the temporary profile also by using the function “anonymous list of

loan requests”.

4.1.2 Anonymous list of loan requests

This is the function which allows all the intermediaries participating in the role of lender

to consult the anonymous list of the daytime and overnight loan requests, both automatic

and voluntary, which have not yet been satisfied. The list shows the status of the positions

to be covered up-dated at the time the request is made; it does not show the information

of the party applying for the loan and is filtered, for each lender, on the basis of the

related White List, so as to display only the short positions pertaining to the parties

present on the list itself who, in turn, include the lender in their White List.

4.2 BORROWER ACTIVITIES

4.2.1 Loan request

Depending on the operating role covered, the loan requests may be: automatic overnight,

automatic daytime or voluntary.

All the requests generated are assigned a consecutive number by the Service.

On conclusion of the respective securities lending cycle, all the unmatched requests are

automatically cancelled.

Automatic loan request

During the overnight or daytime cycles of net settlement, the loan requests relating to the

still uncovered positions of the automatic borrowers are automatically generated.

Voluntary loan request

The voluntary borrower may introduce loan requests during the entire Service’s opening

period; for each request inserted, it is necessary to specify the phase and the date of

settlement to which the request refers.

The system prevents the introduction of a voluntary request pertaining to a concluded

settlement cycle or, if daytime, pertaining to the current settlement cycle after the closing

of the daytime matching function. In order to safeguard the intermediary from possible

input errors, confirmation is requested before making the input of the voluntary request

effective .

The borrowers are allowed, by means of specific functions, to change or cancel the

overnight or daytime loan requests pertaining to them:

by the Service’s closing time on the evening preceding the settlement day, for the

requests relating to the overnight cycle;

if still not matched, for the requests relating to the daytime cycle.

4.3 COMMON ACTIVITIES OF THE LENDER AND THE BORROWER

4.3.1 White List

This is the function which permits the lender and the borrower to insert, change and

cancel the parties to/from whom they are willing, respectively, to grant or receive loans.

The management of the White List is single for each party, irrespective of the fact that the

financial instruments refer to the own account, to the third party account or to any

segregated settlement accounts and is divided by settlement cycle.

If the borrower inserts a non-resident lender into the White List, the same is responsible

for all the tax fulfilments required by current legislation. The Service issues a warning

message in the event that a non-resident lender is inserted.

The function also allows the borrower and the lender to manage the “credit limits”, i.e.

the amount, expressed in Euro, which represents the daily credit limit assigned to each

party present on the White List by the holder of the same.

It is possible for the holder of the White List to change the credit limit by raising or

lowering/cancelling it, even in the presence of possible exposures. This change triggers

the matching of the offers and of the requests.

Each party present on the White List is also matched with a second amount, which can be

viewed but not changed, which represents the current value of the cash exposure of the

White List’s holder with regard to that specific borrower/lender. This "exposure quantity"

increases at the time of the creation of a loan contract and is cancelled on conclusion of

every settlement overnight or daytime phase. Each cycle only influences the respective

exposure limit.

The creation of the loan contract is prevented if the tel-quel countervalue of the activation

transaction exceeds the difference between the credit limit and the exposure present in the

lender’s White List, or the difference between the same two amounts present in the

borrower’s White List. Partial coverage of the request is not permitted.

4.3.2 Enquiry functions

These functions enable the lender to check, at any given moment, by specific request, its

own profiles, permanent or temporary, the list of the borrowers included within its White

List and the related cash exposure, the securities exposure for each security lent, the

securities temporarily excluded from the Service and the parameters of the same.

Moreover, enquiry functions enable the borrower to check the loan requests with the

related matched quantities, the list of the lenders included within its White List, the cash

exposure with regard to each lender, the securities temporarily excluded from the Service

and the parameters of the same.

5 LOAN CONTRACT

5.1 THE LOAN CONTRACT: FEATURES



The loan contract may be intraday (maturity shorter than one business day) or may have a

maturity of one business day. For the definition of “Business Day” reference should be

made to the Master Agreement , attachment 3C) to Form 3 –Securities Lending Service.

If the extinction transaction is not settled according to essential terms of the contract

stated in the third and sixth bullets of the paragraph 5.2, the end validity date is

postponed of one business day. This activity is performed each day, at maximum for

30 business day, if the transaction remain unsettled. Anyway, the lender may

require to Monte Titoli by 3.30 pm (CET) to not extend the end validity date and,

consequently, call the borrower in default according to the rules stated in the Master

Agreement.

The securities lending contract, concluded at the time of the matching of demand and

supply of securities, is executed at the time of the effective securities’ transfer from the

lender to the borrower and the collateral from the borrower to the lender in the APT

activation transaction and vice versa in the EPT extinction transaction.

The tax handling is delegated to the contracting parties (lender or borrower); therefore all

the accounting values gross of the withholding taxes are considered for the determination

of the collateral’s countervalue.

The APT loan activation transaction is characterised by the following elements:

The APT loan activation transaction is characterised by the following elements:

source: overnight securities lending/daytime securities lending

type of transaction: securities lending activation (APT)

type of loan: automatic/voluntary (it is determined by the type of

request)

lender the party who lends the securities

borrower: the party who borrows the securities

security: the security subject to lending

trade date: it is the current settlement date

APT settlement date: it is the current settlement date

APT validity end date: it is the current settlement date

APT time out: in overnight securities lending: it is the end of the net

settlement overnight cycle (no value given);

in daytime securities lending: it coincides with the time

out of the transactions unsettled at the end of the daytime

cycle and rolled into the gross cycle

APT price: it is the valuation price of the security on the previous

day

APT quantity: it is the quantity which the lender deliveries to the

borrower

APT countervalue: it is calculated by the system on the basis of the price, the

quantity and the type of security

sign: expresses the sale of the lender with regard to the

borrower

APT accrued interest

countervalue: it is the amount which the borrower pays the lender for

the period running between the last coupon payment and

the settlement date of the loan activation transaction

hair-cut: it is the collateral margin calculated, according to a

percentage indicated by Monte Titoli per individual

security or per category of security, on the tel-quel

countervalue

APT collateral: it is the algebraic sum of the loan activation countervalue,

the loan activation accrued interest countervalue and the

hair-cut.

The extinction transaction of the intraday loan is characterised by the following elements:

source: ‘DTE’

market: ‘PTA’

type of transaction: ‘CTC’

lender: the party who lends the securities

borrower: the party who lends the securities



settlement date: it is the current settlement date

end validity date: it is the current settlement date

time-out: it coincides with the time out of the transactions unsettled

at the end of the daytime cycle and rolled into the gross

cycle

quantity: it is the quantity which the borrower returns to the lender.

countervalue (collateral): it is equal to the APT collateral

sign: expresses the sale of the borrower with regard to the

lender

consideration for the lender

for the intraday loan: it is the flat fee indicated in the document “Securities

lending service – Applied rates” The “extinction following days” transaction is characterised by the following elements:

source: overnight securities lending/daytime securities lending

type of transaction: securities lending extinction (EPT)

type of loan: automatic/voluntary (it is determined by the type of

request)

lender: the party who receives the securities lent

borrower: the party who returns the securities borrowed



settlement date: it is the APT settlement date + 1 Target calendar day

validity end date: it is the settlement date of the “extinction following

days” transaction

time out: both for the overnight securities lending and the daytime

securities lending: it coincides with the removal of the net

settlement fail contracts still unsettled in gross settlement

as of the APT settlement date +1

price: it is calculated by the system as APT price plus the

accrued interest as of the APT date less the accrued

interest as of the date of the “extinction following days”

transaction

quantity: it is the quantity which the borrower returns to the lender.

In the event of partial reimbursement taking place

between the APT settlement date and the “extinction

following days” transaction’s settlement date, the

quantity to be returned is decreased by the quantity

reimbursed

countervalue: it is calculated by the system on the basis of the price, the

quantity and the type of security

sign: expresses the sale of the borrower with regard to the

lender

accrued interest

countervalue: it is the amount which the lender pays the borrower for

the period running between the last coupon payment and

the settlement date of the “extinction following days”

transaction

hair-cut: it is the hair-cut of the APT transaction

collateral: it is given by the sum of the countervalue of the

“extinction following days” transaction, the accrued

interest countervalue of the “extinction following days”

transaction, the consideration for the lender and the hair-

cut minus the compensation

Consideration for the Lender: it is paid by the borrower to the lender; it is calculated

calculated on the APT collateral on the basis of the rate

detailed in the document “Securities lending service –

Applied rates”;

Compensation: it is the interest earned by the lender on the APT

collateral. The lender itself shall rebate this amount to the

borrower

5.2 THE LOAN CONTRACT: ESSENTIAL TERMS OF THE CONTRACT

With reference to the execution of the securities loan contract concluded during the

overnight cycle, the following are defined:

essential term for the fulfilment of the lender and the borrower in the APT transaction:

the APT time-out (as defined above for the overnight cycle);

essential term for the fulfilment of the lender and the borrower in the “intraday

extinction” transaction connected with the afore-mentioned APT transaction: it is

equal to the time-out of the transaction unsettled at the end of the daytime batch cycle

and rolled into the gross settlement cycle of the day in which the loan is booked.

essential term for the fulfilment of the lender and the borrower in the “extinction

following days” transaction connected with the afore-mentioned APT transaction: it is


and rolled into the gross settlement cycle of the day after the opening of the loan.

With reference to the execution of the securities loan contract concluded during the

daytime cycle, the following are defined:

essential term for the fulfilment of the lender and the borrower in the APT transaction:

the APT time-out (as defined above for the daytime cycle);

essential term for the fulfilment of the lender and the borrower in the “intraday

extinction” transaction connected with the afore-mentioned APT transaction: it is


and rolled into the gross settlement cycle of the day in which the loan is booked.

essential term for the fulfilment of the lender and the borrower in the “extinction

following days” transaction connected with the afore-mentioned APT transaction: it is


and rolled into the gross settlement cycle of the day after the opening of the loan.

. 5.3 THE LOAN CONTRACT: DEFAULT AND SUSPENSION OF THE PARTICIPANT

Default

In the event of contractual default by either one of the two parties (lender or borrower),

the price due by the defaulting party will correspond to the price as of the previous

market day (i.e. the APT day). As a result of the default, both in the loan activation

transaction (APT) and in the extinction one and with reference to both the overnight

securities lending and the daytime securities lending, reference should be made to the

Master Agreement, attachment 3C) to Form 3 –Securities Lending Service.

Suspension

The suspension of the Service by either one of the two parties (lender or borrower), may

be activated even if loan requests and/or loan offers are present in the system.

The loan contracts concluded before the activation of the suspension must be considered

as valid.

5.4 OVERNIGHT SECURITIES LENDING

5.4.1 Automatic generation of loan requests

Following the determination of the uncovered securities balances, the system

automatically generates loan requests for all the participants acting as automatic overnight

borrowers who are not covered. Since the introduction of voluntary requests by the

participants during the previous pre-settlement phase is permitted, it is possible that loan

requests are already present in the system for the net settlement overnight cycle . In this

event, the shortages are compared with the voluntary requests which may be already

present and:

if a voluntary request exists identical to the shortage, the automatic request is not

generated and the request type of the one already present is updated as “automatic”;

if a voluntary request exists for the same account/security but with a different quantity

from the shortage, the system considers as a valid requested quantity the lower

between the shortage and the quantity specified in the voluntary request; in this case,

the request already present is updated with an “automatic” request type and, if

necessary, the quantity is likewise adjusted;

if a voluntary request corresponding to the same account/security does not exist, an

automatic request is generated for a quantity equal to the shortage .

Loan requests concerning securities having the exclusion characteristics specified in the

section “Financial instruments accepted” are not generated.

5.4.2 Matching requests and loan offers

The matching has the purpose of identifying, for each automatic and voluntary overnight

loan request, the lender willing to satisfy the quantity requested and generate the loan

contract.

The procedures for carrying out the matching are shown below.

The requests are processed using the following order of priority:

- automatic requests and within this category, from the lower amount to the higher

amount;

- voluntary requests according to the time of input

The offers are processed using the following order of priority:

- overnight offers relating to securities accounts from which loans have less

recently been made.

The temporary overnight offer profiles, since they have to replace the equivalent

permanent ones in the overnight cycle, are considered as having the same priority which

would have been assigned to the permanent profiles.

The offer profiles for which the securities account of the lender coincides with the

securities account of the borrower, are not taken into account.

For the purpose of permitting the creation of loan contracts only with the desired

intermediaries, the matching process considers, for each request processed, only the

offers of parties present in the borrower’s overnight White List; the latter must in turn be

included in the lender’s overnight White List.

It also evaluates if there are the conditions for the creation of a loan contract with

reference to what specified in section 4.3.1.

Once the quantity which can be lent has been identified, the system checks the

availability in the specific securities account, taking into account the possible effects

generated by net settlement. The control of the availability is carried out in the following

manner: the quantity available in the securities account is algebraically added to the

related multilateral securities balance and then decreased by the quantity, if any, which

has already been lent and registered in the records as the exposure quantity.

In this way, the system considers as unavailable the quantity of securities which, in the

event of a negative multilateral balance, would be debited in the accounts of the lender at

the end of the clearing process and considers as available the quantity of securities which,

in the event of a positive multilateral balance, would be credited to the accounts of the

lender at the end of the clearing process.

5.4.3 Generation of loan contract attivation transactions

Once the lender and the quantity which can be lent have been established, the system:

creates the loan activation transaction which is added to the basket of transactions to

be settled during the overnight cycle and therefore changes the multilateral securities

and cash balances of the two parties;

updates the total exposure quantity on the lender’s profile ;

updates the current value of the cash exposure both in the lender’s and in the

borrower’s White List;

updates the quantity executed with the quantity of the request;

updates with the current date the last loan date of the account concerned. The last loan

date is single for each account irrespective of the settlement cycle.

The system, after the overnight securities lending, recalculates the multilateral balances,

the Purchasing Power and re-checks the securities/cash availability. In the presence of

lack of securities and/or cash, an optimisation facility is activated (roll-back) whose

outcome could involve the extraction, among others, of securities lending transactions.

It is therefore only at the end of the securities/cash roll-back process that the outcome of

the settlement of the loan activation transaction is known.

If the loan activation transaction can be settled, the system:

calculates the X-TRM identification reference in order to assign it to the loan

activation transaction and to the related settlement instruction;

creates and registers in a specific database the extinction transaction with maturity of

at least one business day;

sends to the X-TRM system the activation and extinction transactions, at the opening

of the same. The activation transaction does not produce any effect since it has

expired. For the handling of the extinction transaction, reference should be made to

the specific section.

The day after in the morning, enters in the X-TRM service and sends to the gross

settlement cycle the extinction transaction of the intraday loan

If the loan activation transaction cannot be settled, the system:

cancels the settlement instruction since it represents a fail;

adjusts the exposure quantity and the matched quantity of the loan request which

originated the contract, identifiable by a progressive number assigned by the system; it

also adjusts the current value of the cash exposure of both the borrower and the lender

in the respective White Lists.

5.5 DAYTIME SECURITIRES LENDING

5.5.1 Automatic generation of loan requests

The system automatically generates the loan requests only for participants who use the

Service in their role of automatic daytime borrower. These requests are generated on the

basis of any short positions outstanding at an established time period before the securities

cut-off.

5.5.2 Matching requests and loan offers

The matching has the aim of identifying the lender willing to satisfy the quantity

requested and generate the loan transaction for each loan request relating to the daytime

cycle. The matching is carried out in accordance with the following procedures:

The requests are processed using the following order of priority:

- automatic requests and within this category, from the lower amount to the higher

amount;

- voluntary requests according to the time of input.

The offers are processed using the following order of priority:

- daytime offers relating to securities accounts from which loans have been less

recently made.

The temporary daytime offer profiles, since they have to replace the equivalent permanent

ones in the daytime cycle, are considered as having the same priority which would have

been assigned to the permanent profiles.

The offer profiles for which the securities account of the lender coincides with the

securities account of the borrower are not taken into account.

For the purpose of permitting the creation of loan contracts only with the desired

intermediaries, the matching process considers, for each request processed, only the

offers of parties included in the borrower’s daytime White List; the latter must in turn be

included in the lender’s White List.

It also evaluates if there are the conditions for the creation of a loan contract, with

reference to what specified in section 4.3.1.

5.5.3 Generation of loan contract activation transactions

Once the lender and the quantity which can be lent have been established, the system:

blocks the quantity in the lender’s securities account;

creates the transaction for the activation of the loan to be input into the X-TRM;

updates the total exposure quantity on the lender’s profile;

updates the current value of the cash exposure both in the lender’s and borrower’s

White List;

updates the quantity executed with the quantity requested;

updates with the current date the last loan date of the account concerned. The last loan

date is single for each account irrespective of the settlement cycle.

The entire matching process can be activated until the cut-off of the net settlement fail

contracts not settled in gross settlement, as set forth in the timetable referred to in section

3.3.

5.6 SETTLEMENT OF LOAN CONTRACT ACTIVATION TRANSACTIONS

The securities loan activation transaction is routed to the X-TRM service where it is

validated, completed with the default values, where missing, and subject to duplication

(automatic matching); immediately after the match, it is sent to the gross settlement

system.

Once the gross settlement system returns the contract as settled, the Securities Lending

System creates the related extinction transaction in order to allow the closure of the loan

the days after its opening and routes it to the net settlement system. In addition, a

settlement instruction is entered in X-TRM and sent to the gross settlement cycle in order

to allow the closure of the loan intraday.

The cancellation of the loan activation transaction due to lack of securities cannot take

place since the quantity has already been blocked at the time of contract definition

(matching). In case of unavailability of :

cash, the contract remains in the BIREL queues until a cut-off point (timeout), after

which it is cancelled and returned to the X-TRM as unsettled;

caps, the contract remains in Monte Titoli’s queues until a cut-off point (timeout),

after which it is cancelled and returned to the X-TRM as unsettled.

In this event, lending service adjusts the exposure quantity and the matched quantity of

the loan request which originated the contract, identifiable by a progressive number

assigned by the system; it also adjusts the current value of the cash exposure of both the

borrower and the lender in the respective White Lists.

5.7 GENERATION OF LOAN CONTRACT EXTINCTION TRANSACTIONS



Each extinction transaction, from a technical viewpoint, is made of two extinction

instructions: “intraday extinction” that is sent to the gross settlement system and can be

settled only at the activation leg’s settlement date and “extinction following days” that is

sent for settlement in the overnight cycle of the day after the opening of the loan. If the

“intraday extinction” instruction is settled, the transaction “extinction following days” is

cancelled and the loan is terminated. Otherwise, if the loan is not closed intraday, the

“intraday extinction” transaction is not recycled the following days because expired and

to close the loan the parties have to settle the “extinction following days” transaction.

5.8 SETTLEMENT OF LOAN CONTRACT EXTINCTION TRANSACTIONS

The “intraday extinction” can be settled in the gross settlement cycle. The transaction

“extinction following days” follows the normal operating procedure of the other

transactions present in the X-TRM which have been forwarded to the net settlement

system. The settlement of the transaction takes place during the net settlement overnight

cycle or, if a fail, during the net settlement daytime cycle and, if still not settled, during

gross settlement.

6 APPENDIX: CALCULATION METHODS

6.1 COUNTERVALUE OF LOAN ACTIVATION TRANSACTION

The countervalue of the loan activation transactions is automatically calculated

multiplying the amount of the contract’s securities by the price; if the securities are fixed

income instruments, the product is divided by 100. For securities expressed in a currency

other than the Euro, the countervalue calculated is divided by the exchange rate to obtain

the same amount in Euro.

For securities negotiated in a regulated market, the price to be considered is the reference

price (for shares, convertible bonds and warrants) or the official price (for non-

convertible bonds and government bonds). For securities negotiated in an unregulated

market, the price to be considered is the average price, as defined by the market itself.

Those prices are referred to the day before the loan activation transaction

6.2 COUNTERVALUE OF THE EXTINCTION TRANSACTION

The countervalue of extinction transaction of the loan with maturity of at least one

business day is automatically calculated multiplying the amount of the contract’s

securities by the price of the loan extinction transaction. If the security is a fixed income

one the result obtained is to be divided by 100. For securities expressed in a currency

other than the Euro, the calculated countervalue is divided by the conversion rate in order

to obtain the same amount in Euro.

The amount of the loan extinction transaction may be lower than that of the loan

activation transaction, in the event the financial security is subject to partial redemption at

the day of extinction.

TABLE 2

TRANSACTION

ABRREVIATION

DESCRIPTION

APT

EPT

COUNTERVALUE:

SHARES:

teExchangeRa

Price*QuantityueCounterval

BONDS:

teExchangeRa

100

Price*uantityQ

ueCounterval

Countervalue is rounded to the last decimal digit foreseen for the currency. For

transactions in Euro countervalue is rounded to the hundredth digit

- Signs: in case of purchases = ‘-’

in case of sales = ‘+’

For intraday loan the countervalue of the extinction transaction is equal to the APT

collateral.

TABLE 3

TRANSACTION

ABBREVIATION

DESCRIPTION

CTC

COUNTERVALUE:

APTollateralCueCounterval





6.3 PRICE OF THE EXTINCTION TRANSACTION

The price of the extinction transaction of loan with maturity of at least one business day is

automatically calculated adding the accrued interest of the activation transaction to the

price of the loan activation transaction and subtracting the extinction accrued interest.

TABLE 4

TRANSACTION

ABBREVIATION

DESCRIPTION

EPT

tinctionUnitAccrExtivationUnitAccrAcationPriceActivtionPriceExtin

6.4 UNIT ACCRUED INTEREST

The calculation of the unit accrued interest is applied to loan contracts concerning

corporate bonds, government bonds and convertible bonds.

The X-TRM service calculates the accrued interest according to two methods depending

on the type of security:

on the basis of the interest days and net of the withholding tax pertaining to the

security

on the basis of the interest days.

The interest days are calculated as the difference between the settlement date of the loan

activation or extinction transaction and the last day of entitlement (coupon payment) of

the financial instrument; the days of entitlement are calculated as the difference between

the last and the next coupon payment date with respect to the settlement date of the

transaction. The calculations are made in conformity with the specific agreement of the

financial instrument itself.

1. ACT/ACT method

The interest days and the days of entitlement are calculated as the number of actual

days (calendar days) between the two dates taken into consideration.

The rate to be considered is the coupon one

2. ACT/ACT ISMA method The interest days are calculated from the number of the actual days (calendar days),

included between the two dates taken into consideration; the days of entitlement are

the effective days in a year: in order to decide whether it is a year made of 365 or 366

days, it is necessary to calculate how many days there are between the payment date

of the current coupon and the one of the year before.

The rate to be considered is the annual one.

3. ACT/360 ISMA method

The interest days are calculated as the number of actual days (solar days) between the

two dates taken into consideration; the days of entitlement are 360.

The rate to be considered is the annual one

4. 30E/360 EUROPEAN ISMA method

The interest days are calculated according to the commercial year, that is the number

of days, included between the two dates taken into consideration, is obtained basing

the calculation on a year made of 12 months of 30 days each with the following

“forcing”:

if the day is the 31st of any month, the value to be forced is: day = 30;

the system changes in number of days the two dates taken into consideration; if

we call A1 M1 and G1 the figures of date1 and A2 M2 and G2 the figures of

date2, the following formula is used

(A2–A1) * 360 + (M2–M1) * 30 + (G2-G1)

The gross rate is that of the current coupon

5. ACT/365

The interest days are the result of the actual difference between the settlement date

and the last date of entitlement of the security.

The annual base to be considered is of 365 days.

The gross rate is that of the current annual coupon.

In case of contracts having settlement date after the coupon payment date, for which the

annual rate is not known (certain), the system will calculate the unit accrued interest using

the last certain coupon rate.

TABLE 5

TRANSACTION

ABBREVIATION

DESCRIPTION

APT

EPT

After having calculated the accrued and the base days according to one of the above

mentioned method, the system calculate the accrued interest using the following

formula:

Method ‘A’

AnuualBase

DGTLRL

100

RFRLRRF

RRFRLRL

Method ‘B’

AnnualBase

DGTLRL

RN = Net unit accrued interest

RL = Gross unit accrued interest

DG = Difference of days

TL = Gross rate

RF = Withholding tax

RRF = Accrued withholding tax

The number of decimal figures to be considered and the application of the rounding

or of the cutting of the last decimal figure depends on the type of security. Currently

the maximum number of decimal figures to be considered is 5.

6.5 ACCRUED INTEREST VALUE

The accrued interest value, applicable for the same contracts in which the unit accrued

interest is calculated, is made of the product of the unit accrued interest by the nominal

value divided by 100. As regards financial instruments in a currency other than the Euro,

the accrued interest value is divided by the exchange rate in order to obtain the same

amount in Euro.

TABLE 6

TRANSACTION

ABBREVIATION

DESCRIPTION

APT

EPT

ACCRUED VALUE CALCULATION

teExchangeRa

100

QuantitydUnitAccrue

erestAccruedInt





6.6 CONSIDERATION FOR THE LENDER AND COMPENSATION

For the intraday loans the lender shall pay to the borrower a flat fee. The amount of the

fee for the intraday loan is indicated in the document “Securities lending service –

Applied rates”. For loan with maturity of at least one business day the APT collateral

bears interest, thus the lender is required to pay to the borrower the compensation

determined according to the ECB rate. The method used for counting the accrued days is

ACT/360.

The borrower is required to pay a compensation to the lender on each loan contract. The

payment due to the borrower is off-set against the payment due to the lender with the

resulting amount equal to the Borrower rebate.

Percentage values of the ECB rate, of the consideration for the lender and of the borrower

rebate are detailed in the document “Securities lending service – Applied rate”.

If the loan contract lasts more than one day, collateral of the extinction transaction remain

unchanged.

TABLE 7

TRANSACTION

ABBREVIATION

DESCRIPTION

EPT

COMPENSATION

36.000

ECBrate*gg*APTCollateralonCompensati

gg = intended settlement date of the extinction – settlement date of the activation.





CONSIDERATION FOR THE LENDER

RebateorrowerBonCompensatiConsLender

The borrower rebate is calculated as follow:

36.000

bateRateBorrowerRe*gg*APTCollateralbateBorrowerRe

gg = intended settlement date of the extinction – settlement date activation.

6.7 HAIR-CUT

The hair-cut is calculated on the tel-quel countervalue of the securities of the loan

activation transaction, according to a percentage specified for the loaned security or, if

this percentage is not indicated, according to the one specific for the type of security.

The hair-cut calculated is valued both in the loan activation transaction and in the loan

extinction transaction.

Hair-cuts percentages may be consulted using the enquiry tool of the Service and

downloading the document “Securities lending service – Applied rates”.

TABLE 8

TRANSACTION

ABBREVIATION

DESCRIPTION

APT

EPT

HAIR-CUT CALCULATION:

100

eHairCutRat*PTntervalueATelQuelCouHairCut





6.8 COLLATERAL OF THE EXTINCTION TRANSACTION

Cash collateral of the extinction transaction of the intraday loan is equal to the

countervalue of the extinction transaction.

Collateral of the extinction transaction of the loan with maturity of at least one business

day is calculated according to the formula detailed in the following table.

TABLE 9

TRANSACTION

ABBREVIATION

DESCRIPTION

EPT

COLLATERAL EPT:

HairCutonCompensatiConsLenderCntvEPTTelQuelEPTCollateral

where:

TelQuelCntv EPT: countervalue of the extinction

ConsLender: consideration for the lender

Compensation: compensation that the lender is required to pay to the borrower

Collateral EPT is rounded to the last decimal digit foreseen for the currency. For

transactions in Euro collateral EPT is rounded to the hundredth digit



Documents

INSTRUCTIONS SECURITIES LENDING SERVICE · of the loan extinction; financial instruments for which corporate events, coupon or dividend payments are underway with a maturity date