Crest Slb&Repo Settlements

Securities lendingand collateraltransfers in CREST

W H I T E B O O K

p a r t o f E u r o c l e a r

Securities lending and collateral transfers in CREST

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Title Securities lending and collateral transfers in CREST

White book

Version number 2

Date of publication December 2004


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Table of contents

INTRODUCTION .............................................................................................................. 5 Structure of this document ............................................................................................ 5 Enquiries..................................................................................................................... 5

CHAPTER 1: STOCK LOANS............................................................................................... 7 Stock loan input ........................................................................................................... 7 Application of initial margin............................................................................................ 8 Settlement .................................................................................................................. 9 Automatic stock loan returns.......................................................................................... 9 Mark-to-market revaluations.........................................................................................10 Settlement discipline....................................................................................................12

CHAPTER 2: DELIVERIES BY VALUE ..................................................................................13 DBV input ..................................................................................................................13 Allocation of margin.....................................................................................................13 Security categories and DBV classes...............................................................................14 Security concentration limits .........................................................................................15 Settlement .................................................................................................................17 DBV Stock Valuation enquiry.........................................................................................18 DBV returns................................................................................................................19 Settlement discipline....................................................................................................20

CHAPTER 3: REPO FUNCTIONALITY...................................................................................21 Repo input .................................................................................................................21 Settlement .................................................................................................................22 Repo return transaction................................................................................................22 Interest accrual...........................................................................................................23 Rollover .....................................................................................................................23 Early returns ..............................................................................................................24 Substitution................................................................................................................24 Settlement discipline....................................................................................................25

CHAPTER 4: CENTRAL MARK-TO-MARKET AND EXPOSURE CALCULATION ...............................27 Exposure enquiries ......................................................................................................27

CHAPTER 5: UK STAMP DUTY AND TRANSACTION REPORTING..............................................29 UK stamp duty and stamp duty reserve tax (SDRT)..........................................................29 Transaction reporting...................................................................................................29

CHAPTER 6: CORPORATE ACTIONS ...................................................................................31 Claims Processing Unit .................................................................................................31

CHAPTER 7: AUTOMATIC TRANSFORMATIONS ....................................................................33


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Security ! security ..................................................................................................... 33 Security ! security A and security B.............................................................................. 33 Security ! security and cash ........................................................................................ 34 Option elections.......................................................................................................... 34 Skipping transformations ............................................................................................. 34 Call payments ............................................................................................................ 35

CHAPTER 8: MARKET PRACTICE ....................................................................................... 37 ANNEX: LIST OF SECURITY CATEGORIES .......................................................................... 39


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INTRODUCTION

CREST currently provides securities lending and collateral transfer functionality through three

transaction types: • the stock loan;

• the delivery by value; and

• the repo.

CREST�s securities lending and collateral transfer functionality allows two parties to transact with

each other as principal or agent. CRESTCo itself is not a counterparty to the loan or repo

transaction, as opposed to several international central securities depositories offering automatic

securities borrowing programmes, which act as principal to the loan by being the central

counterparty.

This document outlines briefly how the CREST functionality works and describes the ways in which

CREST members can use this service to accommodate their securities lending/borrowing and

general collateral delivery commitments.

Structure of this document

This document is structured as follows: • chapters 1, 2 and 3 describe the stock loan, delivery by value and repo functionality

respectively;

• chapter 4 details how to calculate exposures;

• chapter 5 explains the impact on stamp duty and transaction reporting;

• chapters 6 and 7 describe the impact on corporate actions and automatic transformations;

and

• chapter 8 outlines market practice guidelines.

The security categories that apply to all securities eligible for settlement in CREST are defined in

annex.

Enquiries

If you have any questions relating to the securities lending and collateral transfer functionality,

please contact your Relationship Manager.


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CHAPTER 1: STOCK LOANS

CREST securities lending functionality enables members to borrow and lend securities using the

stock loan (SLO) transaction type. The functionality is consistent with the principles of the Global

Master Securities Lending Agreement (2000) and its precursors; however, CRESTCo does not

monitor or enforce compliance with it or any other agreement. An essential feature of the

agreement, and thus the SLO transaction, is that title to all securities and collateral passes from

one party to the other outright. The party acquiring title is obliged to redeliver equivalent rather

than identical securities. Although the transaction designation SLO suggests that it may only be

used for securities loan and borrowing purposes, its use can actually result from lending, repo or

sale and buy-back arrangements (though there are transaction types and related functionality

specifically available to support settlement under repo agreements).

An SLO transaction in CREST results in a movement of securities between the accounts of two

members using the functionality described in this section. Where a loan is intermediated, CREST

regards this as being two distinct loans (i.e. two separate movements of securities, first from the

lender to the intermediary and then from the intermediary to the borrower). These settle

independently and CREST does not link them in any respect.

Stock loan input

Stock loans require the independent input of instructions by both the borrower and lender. These

instructions must match in the CREST system, before they can be processed for settlement1.

For an SLO transaction, the following fields must be matched: • Trade Date;

• Intended Settlement Date;

• Trade System Of Origin;

• Stock Loan Margin2;

• Debit Party Stock ID;

• Credit Party Stock ID;

• ISIN;

• Quantity;

1 In some cases, fields are able to contain values within a centrally-set tolerance level of each other. For more information on tolerance matching, please refer to chapter 4 of the CREST Reference Manual.

2 Negative margins may be input, thus providing a cash lender with an excess of securities collateral.


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• Consideration3; and

• Suppress Revaluations4.

SLO instructions can be input for same-day or forward-dated settlement.

Application of initial margin

The Consideration field should be completed with the cash consideration of the securities being

lent, without taking into account any initial margin. Market practice is to use the prevailing

reference offer price held in CREST, i.e. the previous day�s closing offer price (PDCO).

SLO consideration = price (PDCO) x quantity

Example:

Number of ABC plc 25p ordinary shares with trade date 23 June 2004: 1,000,000.00

Offer price in CREST at close of business 22 June 2004: GBP 9.00

SLO Consideration = GBP 9.00 x 1,000,000

The input SLO consideration in this example should be GBP 9,000,000.00.

The members undertaking the stock loan may specify and match an initial margin to be applied

on settlement in order to provide the securities lender with an excess of cash collateral. On

matching (i.e. before settlement), the SLO consideration is overwritten by CREST to reflect the

�gross� value (i.e. including initial margin).

The default margin within CREST is 0%. Members may override this and input any margin agreed

with their counterparty, but the margin input must be matched. The margin is intended to cover

the cost of having to buy back the securities lent in the case of borrower default, including the

likely impact on price of an increase in demand for the security and any brokerage fees. Usual

market practice is to apply a margin of 5% for equities and 0% for gilts. On matching of the two

counterparties� stock loan instructions, this cash payment will become the new stock loan

consideration.

3 SLOs may be done against a nil consideration (i.e. free of payment). This may be the case where, for instance, the loan is effected within CREST but the collateral is passed outside CREST (e.g. in the form of eurobonds). Alternatively, the loan may have been delivered outside CREST and the SLO transaction is being used to pass collateral within CREST.

4 This allows counterparties to opt out of the daily revaluations process. Where counterparties agree this, CREST will not create a revaluation transaction (SLD) for the particular SLO, so that there will be no subsequent increase in or erosion of the initial margin. This is also the case for SLOs that settle on a free of payment basis; the loan returns are automatically excluded from the ongoing revaluation process.


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The cash payment is calculated as:

Cash payment = SLO consideration x margin

Example:

Consideration: GBP 9,000,000.00

Margin: 5%

Cash payment = GBP 9,000,000.00 x 1.05

The cash payment to cover the stock loan and margin will be GBP 9,450,000.00. On matching

of the two counterparties� instructions this will become the new stock loan consideration.

Settlement

Once the independently input instructions have matched and the designated margin has been

applied to the consideration, the transaction proceeds to settlement. SLOs are subject to the

normal pre-settlement checks for credit and securities availability and to queue management. At

the point of settlement, securities are transferred against creation of a payment obligation. Stock

loans settle according to the standard settlement algorithm. Common market practice is for

settlement on either trade date (T+0) or the following day (T+1).

Automatic stock loan returns

Upon settlement of the stock loan, the system automatically creates a pre-matched stock loan

return instruction (SLR). To allow easy identification, the transaction reference for the SLR is that

for the original SLO transaction suffixed by 01. The intended settlement date created is the next

business day and the instruction is created with a zero settlement priority on the borrower�s side.

The priority therefore needs to be lifted by the borrower in order to enable settlement of the SLR.

The earliest settlement date of the SLR is one business day after the loan settled, reflecting

market preference rather than system limitations.

The initial consideration of the SLR is calculated as follows:

SLR consideration = SLO cash payment


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Mark-to-market revaluations

Immediately after settlement of the loan, CREST marks to market the resulting transaction by

reference to the previous business day�s closing offer price. This is the only time a revaluation

occurs intra-day. Thereafter, CREST marks to market outstanding loans using the same process

as part of an overnight batch process. Where necessary, variation margin is transferred as a stock

loan revaluation transaction (SLD), and the consideration of the SLR adjusted accordingly.

Aside from the initial revaluation, which acts as a check that no mistakes have been made and

market practice has been followed, the purpose of the daily revaluation process is to protect

erosion of the loan margin due to price changes in the period since the loan was arranged. The

revaluation takes into account the agreed initial margin, and is created with a CREST-generated

priority of 91, which cannot be changed by either party. SLDs settle during standard settlement,

generally during the first settlement cycles of the morning.

The SLD consideration is calculated as follows:

SLD consideration = [price (PDCO) x quantity x margin] - existing SLR consideration

At the same time as the SLD is created, the consideration of the SLR changes equivalently:

New SLR consideration = existing SLR consideration +/- SLD consideration

This process is repeated each night using the offer price at close of business on the previous

business day. The loan margin is protected against market price changes, since the SLR

consideration always equals the market value of the securities (plus margin).

Example:

A stock loan was created as follows:

Number of ABC plc 25p ordinary shares with trade date 23 June 2004 for next day settlement:

1,000,000.00

Offer price in CREST at close of business 22 June 2004: GBP 9.00.

Stock loan settled on 24 June 2004 (T+1)

Stock loan return created for: GBP 9,450,000.00

Loan margin: 5%

Offer price in CREST at close of business 23 June 2004: GBP 9.50

SLD consideration = [GBP 9.00 x 1,000,000.00 x 1.05] = GBP 9,450,000.00

SLD consideration = [GBP 0.50 x 1,000,000.00 x 1.05] = GBP 525,000.00


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Since the borrower of the securities is now holding a more valuable asset, the result of the

revaluation is the creation of an SLD (a cash payment) for GBP 525,000.00 from the securities

borrower to the securities lender.

The SLR consideration is increased to take into account the additional cash payment received by

the securities lender.

New SLR consideration = GBP 9,450,000.00 + GBP 525,000.00

Therefore the new SLR consideration is GBP 9,975,000.00.

Stock loan considerations may be denominated in a different currency to that in which a security

is priced (e.g. an Irish security is lent, but the stock loan consideration may be denominated in

GBP). In such cases, the mark-to-market each night takes into account both the movement in the

exchange rate as well as the market price, and may result in the generation of an SLR even when

the underlying market price of a security is unchanged.

SLDs are always created in the same currency as the original stock loan consideration.

Splitting of SLRs to allow partial return of securities

An SLR will only settle after the securities borrower has raised the priority of the return from zero,

subject to normal queue management and pre-settlement checks for credit and security

availability. The return settles according to the standard settlement process with the securities

lender receiving the securities back and the securities borrower receiving the current SLR

consideration, i.e. the market value of the securities plus any margin. When a loan is fully closed

out, the net effect of all securities and cash movements is zero.

If the borrower wishes to sub-divide an SLR to allow part of the borrowed securities to return to

the lender, this is possible by splitting the return. Either party can split an SLR at any time prior

to settlement.

The transaction that has been split is known as the �parent� transaction; the new transactions

created are its �siblings�. Once a transaction has been split, CREST treats each of the siblings as

independent transactions which may settle, or fail to settle, independently and which may be

assigned different priorities or re-split.

CREST imposes a number of limitations on the splitting of transactions: • the instruction to split may contain no more than 60 shapes for the sibling transactions; and

• the quantity of securities in the siblings must always total that of the parent.


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CREST pro-rates the consideration across the siblings, maintaining the same unit price. No action

is required of the counterparty during, or subsequent to, the splitting process.

Remove Cash Freeze diary event

At a set time each day prior to the close of normal settlement, CREST unfreezes the cash priority

of certain transactions which are due for settlement but whose priority has been set to zero on

the cash side. SLRs are not subject to this process.

Settlement discipline

Matching and settlement rules apply to SLO transactions, but not to SLRs and SLDs5.

5 For information on CRESTCo�s settlement discipline regime, please refer to the white book Settlement Discipline: Overview of rules and common questions, available on the CRESTCo website.


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CHAPTER 2: DELIVERIES BY VALUE

CREST delivery by value (DBV) functionality enables members to give and receive packages of

securities as collateral, usually against the creation of a CREST payment in GBP, EUR or USD, or

free of payment.

A DBV is an instruction from a member to the CREST system, requesting it to assemble a package

of securities of a nominated value from a specified member account, to pass to another member

as collateral either for borrowing cash or securities overnight. DBV collateral is issued at end of

day and returned the next morning. The securities will be registered into the name of the

recipient providing the holder with full legal title to that collateral. On settlement of a DBV

composed of USD certificates of deposit, the recipient will gain a statutory equitable interest in

the securities.

DBV input

DBVs require the bilateral input of instructions by the giver and taker. In addition to the relevant

counterparty and payment details, members must also specify, for each DBV, details of the

quantity and nature of securities to be transferred and the consideration. It should be noted,

however, that there is no connection within the system between stock loans by one member to

another and DBVs given as collateral in return. Each occurs independently of the other.

Allocation of margin

Members must specify both the consideration of the DBV and the value of securities sought in

return. The market norm for DBV input is to specify the exact value sought (pre-margin) and the

margin to be applied to ensure that the lender is over-collateralised. As with an SLO transaction,

where a margin is specified, it will be applied to the DBV transaction once it has matched, but

prior to it going forward to settlement. For a DBV transaction, the margin is applied to the value

of the security sought and not the consideration (for an SLO transaction, the margin is applied to

the consideration and not the value of the security lent).

In most cases, the DBV value sought (excluding margin) will equal the consideration, but it will be

possible for the value to: • exceed the consideration, e.g. where an equity DBV is collateralising a cash or securities loan

external to CREST);

• be less than the consideration, where alternative collateral may be issued external to CREST;

or

• pass a DBV for zero consideration, where consideration is being paid outside CREST.


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Security categories and DBV classes

In addition to specifying a value of securities sought, members must also agree and specify which

category of securities will be delivered. Securities that have been admitted for settlement in

CREST are assigned to one of various security categories for the purpose of the assembly of DBVs

and for collateralised caps. A list of security categories is available in annex.

The security categories, which are mutually exclusive, are included within various DBV classes

that are used to determine the type of securities that may be exchanged within a DBV. Some DBV

classes include securities from more than one category; for instance, the DBV class UKE (UK

equities) covers securities from the all three categories of UK equities (F10, F25 and OTH).

Description DBV class

F 1 0

F 25

O T H

U B G

S B G

N B G

E 30

E G S

O I S

U S S

U T S

T S Y

B B

L A B

O M M

CD 1

CD 2

CD 3

CD 4

CP 1

CP2

CP3

CP4

ISS flag

FTSE 100 F10 ! N

FTSE 250 F25 ! N

Other equities OTH ! ! N

FTSE 350 F35 ! ! N

All UK equities UKE ! ! ! N

Unstripped British government securities

UBG ! ! N

All British government securities

BGS ! ! ! N

Unstripped British and non-British government securities

UBN ! ! N

All gilts GIL ! ! ! ! N

Eurotop 300 E30 ! N

ECB-qualifying Tier 1 collateral issued outside of UK/Ireland

EGS ! N

Other international OIS ! N

All international INT ! ! ! N

US securities USS ! N

Treasury bills TSY ! N

OMO-eligible securities ELG ! ! ! ! ! N

Eligible bank bills BB ! N

Other bills OMM ! N

Certificates of deposit band 1

CD1 ! N


CD2 ! N


CD3 ! N


CD4 ! N

Commercial paper band 1 CP1 ! N




All certificates of deposit CD ! ! ! ! Y

All commercial paper CP ! ! ! ! Y

All certificates of deposit and all commercial paper

ISS ! ! ! ! ! ! ! ! Y

Exhibit 1: Interrelationship between security categories and DBV classes


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Changes to the individual components of the categories are made in line with the quarterly FTSE

International re-banding exercise, and the types of security category and DBV class are subject to

periodic scrutiny and review.

Security concentration limits

Members may set a concentration limit on a DBV transaction. This limits any individual line of

securities to 10% of the aggregate value of the DBV in order to achieve a spread of collateral. The

concentration limit effectively ensures that each DBV, where it is applied, consists of at least 10

lines of securities (a maximum of 99 lines can be included in any one DBV transaction), drawn

from the giver�s 10 (or more) highest value positions.

If members choose not to use the concentration limit, the selection algorithm will draw securities

from the giver�s highest value positions first and the DBV could conceivably consist of only one

security. Setting the DBV concentration limit is a matching criterion and, by default, the

concentration limit will apply.

The DBV allocation algorithm

The following examples are based on a member seeking to deliver DBVs to the value specified

from a security account that contains the following securities:

Securities Value per security (GBP) Total value (GBP)

A, B, C 10,000,000 30,000,000

D, E, F, G 8,000,000 32,000,000

H, I 6,000,000 12,000,000

J, K, L 2,000,000 6,000,000

Total value: 80,000,000

0 1 2 3 4 5 6 7 8 9

10

A B C D E F G H I J K L

Millio

ns (G

BP)

Exhibit 2: Value of securities in account


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Example: GBP 40,000,000 DBV without concentration limit applied

The algorithm selects the highest-value security first and allocates all its value to the DBV then

the second largest security, etc. The securities allocated will be:

Securities Value used per security (GBP) Total value (GBP)

A, B, C 10,000,000 30,000,000

D 8,000,000 8,000,000

E 2,000,000 2,000,000


Since GBP 40,000,000 has successfully been allocated, the DBV will settle and these securities are

delivered.

0 1 2 3 4 5 6 7 8 9

10


Million

s (GBP)

Exhibit 3: DBV securities issued

Example: GBP 30,000,000 DBV with concentration limit applied

The algorithm will not allocate more than GBP 3,000,000 value of any one security to the DBV. It

selects the largest security first and allocates up to GBP 3,000,000 of that security, and then the

second largest security, etc. The securities allocated will be:

Securities Value used per security (GBP) Total value (GBP)

A, B, C 3,000,000 9,000,000

D, E, F, G 3,000,000 12,000,000

H, I 3,000,000 6,000,000

J 2,000,000 2,000,000

K 1,000,000 1,000,000


Since GBP 30,000,000 has successfully been allocated and the concentration limited has not been

breached, the DBV will settle and these securities will be delivered.


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0

0.5

1

1.5

2

2.5

3


Millio

ns (G

BP)

Exhibit 4: DBV securities issued

Settlement

DBV instructions may not be forward-dated and therefore need to be created each day. They may

be input and matched from the system opening at 04:00 (00:00 on Mondays) but remain

dormant until the close of standard settlement. All DBVs that have been input for that day are

then processed in a discrete window. The current CREST daily timetable permits DBV settlement

for gilts, equities, and money market instruments (MMIs) from 15:00 to 15:40 for EUR and USD,

and from 15:00 to 16:10 for GBP and free of payment transactions each day.

During the DBV settlement period, CREST will attempt to settle each matched DBV instruction

individually. Each instruction is processed in turn in a manner which makes efficient use of all the

available securities held within the giver�s specified member account (within the member�s

available balance - securities in escrow or within stock deposit link accounts are not available for

transfer within a DBV). The selection algorithm allocates the giver�s securities to the taker until

the total value sought (including margin) for each DBV has been satisfied. Securities are valued

using the closing bid price of the previous business day.

Where DBV instructions are unsettled because of resource unavailability, members are able to

input a replacement DBV instruction for immediate settlement. For matched instructions that are

failing to settle within the DBV settlement window, CREST produces a DBV Delay Reason Code at

transaction level which indicates the reason for failure (e.g. insufficient cash or securities,

concentration limits would be breached, transaction requires more than 99 securities).

DBV takers may ask CRESTCo to permanently exclude particular securities from inclusion in their

DBVs where there are legal restrictions on their holding and/or owning a particular security, or

where operation of a pooled nominee is incompatible with receipt of securities which have

nationality declaration requirements. For the DBV giver, all available securities within the

specified member account may be used as collateral; it is not possible for the giver to exclude use

of any securities (except by moving them to a separate member account).


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Once allocation is achieved, CREST will create a single pre-matched instruction delivering all the

individual lines of securities making up the DBV against a payment between each of the members

involved. For example, a DBV (with concentration limit applied) for a value sought pre-margin of

GBP 10,000,000 against a consideration of GBP 10,000,000 and with a margin of 5% would result

in a transaction with at least 10 securities movements (each having a value no greater than

GBP 1,050,000). These would settle simultaneously against a payment obligation of GBP 10,000,000.

The counterparties may subsequently ascertain the make-up of the package of securities taken or

received via enquiry on this transaction.

DBV Stock Valuation enquiry

Efficient DBV issuance requires accurate calculation of the value of positions available for use

within DBVs. In some instances, this can be difficult as the calculation can be complicated. As well

as identifying the quantities of securities in available balances within the target member account,

the user needs to take account of: • securities that are not available for DBV issuance (either permanently or temporarily);

• for corporate securities, those which are regularly traded on the exchange on which the DBV

will be issued; and

• the constraints of the DBV allocation process itself (e.g. no more than 99 securities

movements and the optional 10% concentration limit).

Such complications are compounded by the fact that the calculation is often time-critical, because

of the relatively short period between the close of normal delivery versus payment (DVP)

settlement (when positions in securities available for inclusion in DBVs are finalised) and the end

of the discrete DBV settlement window. Furthermore, these transactions are often agreed in such

large sizes that failure to settle on due date could result in significant losses for one of the

counterparties.

In order to assist with this process, CRESTCo introduced a DBV Stock Valuation enquiry which is

available both by file transfer and interactively via the CREST GUI to all members who regularly

issue DBVs.

The enquiry requires users to specify the member account from which securities are to be drawn

and the currency of the DBV. The enquiry can optionally be further refined to take into account

the counterparty to the DBV, the trade system on which the DBV will be undertaken and the

security category of the DBV. CREST will then calculate three valuations of securities available for

DBV issuance: • the total value of securities available for use in DBVs;


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• the total value of securities that can be delivered in one concentrated DBV (maximum of 99

lines); and

• the total value of securities that can be delivered in one unconcentrated DBV (maximum of 99

lines, none of which represents more than 10% of the value).

The valuations returned are the valuations used by CREST when assessing whether or not a DBV

can be settled. The following rules apply: • if no security category is specified, all settling categories will be returned;

• if no trade system of origin is specified, CREST will not take any lending reliefs into account;

and

• if the taker of the securities is not specified, the valuation will not take into account any DBV

stock exclusions applicable to that taker.

The member is able to enquire in more detail on the securities eligible for issuance in any one

DBV. The data are presented in the order CREST would allocate securities to a DBV (i.e. highest

value first), and reason codes will identify securities that are ineligible for issuance. This screen

has a �Save� button, to allow the reason codes to be saved for further analysis.

CREST runs DBV Stock Valuation as a batch process at 12:00, 13:00, 14:00, and 14:56

(immediately prior to the start of DBV settlement). During the DBV settlement window, members

may make real-time valuation enquiries at any time.

DBV returns

On settlement of the DBV, the system automatically creates pre-matched DBV return instructions

(DBRs) for both members. The return date created is the next business day and the instruction is

created with a high priority (91), which members cannot alter.

The returns are created at the level of individual security movements against the creation of

individual pro-rated payment rather than, as is the case with outward DBVs, a single instruction

to move multiple securities. DBRs settle independently of each other through the standard

settlement mechanism in the morning of the next business day. They may be split in a similar

manner to SLRs if the taker of the DBV has insufficient securities to satisfy the DBR when it is due

to return, because they have on-transferred some of the securities they received the previous

business day.

CREST also supports the automatic creation of DBV interest payments (DBIs) following settlement

of a DBV where the parties concerned have specified a rate of interest to be paid on the cash that

is being lent. This facility is available for GBP, EUR and USD settlement and will reflect the


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different day count conventions for each currency. For example, if the DBV consideration is

GBP 10,000,000 and the interest rate specified is 5%, a pre-matched cash-only DBI transaction

to the value of GBP 1,369.85 will be created in favour of the lender. This value is calculated by

multiplying the agreed interest rate (5/100) by the term in days using the sterling convention of

actual/365 (1/365) by the consideration (GBP 10,000,000). As with the DBR, this transaction will

be allocated a priority of 91 and an intended settlement date of the next business day.


DBV, DBR, and DBI transactions are not subject to the settlement discipline regime.


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CHAPTER 3: REPO FUNCTIONALITY

CREST repo functionality enables members (but not CSD participants or issuing and paying

agents) to give and receive packages of securities as collateral within CREST, usually against the

creation of a CREST payment. There is no connection in the CREST system between stock loan

and DBV transactions used for collateral purposes, as each transaction type is independent of the

other. Repo transactions settle during the normal CREST settlement periods and so cannot settle

during DBV processing.

The repo functionality permits between one and ten lines of security to be delivered as collateral,

either as a �term� repo (where a return date is specified) or as an �open� repo (where no return

date is specified). Additionally, it permits interest to be accrued, lines of collateral to be

substituted in and out of the repo and the early return or roll-over of a term repo.

The repo functionality is dynamic, even after settlement of the outward leg of the repo. The initial

repo instruction is used as the basis for all actions performed on the overall repo arrangement,

such as returning an open repo, substituting lines of securities, early returning a term repo or

rolling-over a term repo.

Repo input

Repo (RPO) transactions require bilateral input of instructions by the borrower and the lender.

These instructions must be matched in the CREST system before they can be processed for

settlement.

For an RPO transaction, the following fields must be matched: • Trade Date;

• Intended Settlement Date;

• Trade System of Origin;

• Debit Party Stock ID;

• Credit Party Stock ID;

• ISIN;

• Quantity;

• Consideration;

• Repo Return Date;

• Repo Margin;

• Repo Interest Rate; and

• Buy Sell Back Indicator.


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RPO transactions can be input for same-day or forward-dated settlement. The Repo Return Date

can be specified up to 520 days in the future. There must be a minimum of one line of securities

specified � cash-only RPOs are not possible.

Members can input RPOs free of payment or against payment. For RPOs against payment, there

should be one cash movement consisting of the total payment to be transferred.

RPO transactions cannot be split.

Settlement

Once the intended settlement date has been reached, CREST will apply its normal settlement

checks to ensure the transaction is able to settle. An RPO transaction input against payment will

be available for settlement until the end of DVP settlement for the particular security involved.

Securities-only RPO instructions, however, will be available for settlement up to the end of the

relevant free of payment deadlines but not during the DBV settlement window.

Settlement of RPO and repo return transactions is supported by the self-collateralising repo

mechanism, where the securities in the repo are eligible for self-collateralising repo.

Repo return transaction

Upon settlement of the RPO transaction, a repo return (RPR) transaction is created for each line

of securities within the original RPO transaction. If the original RPO had a Repo Return Date

specified, the relevant RPRs will have an intended settlement date equal to that Repo Return Date

and will have a priority of 50.

The returns are created at the level of individual security movements against the creation of

individual pro-rated payment rather than, as is the case with outward RPOs, being a single

instruction to move multiple securities. RPRs settle independently of each other through the

standard settlement mechanism in the morning of the Repo Return Date. RPRs can be split or

deleted, but any subsequent actions on the repo arrangement will cause CREST to collateralise

the repo to its original value.

Optional non-matching fields can be amended on the RPRs as per any other CREST transaction

with the exception of the Account ID. The Account IDs on the associated RPRs will be the same as

the Account ID of the initial RPO and cannot be amended, even when an RPR is split.

If no Repo Return Date was specified in the original RPO transaction, the RPRs will be generated

with an intended settlement date equal to that of the original RPO transaction (to permit same-

day repo), but with a priority of zero. RPRs are not subject to the Remove Cash Freeze diary


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event. To settle the RPRs, both parties must raise the priority on the original RPO transaction,

which will cause CREST to raise the priorities on all associated RPRs automatically.

Interest accrual

If an interest rate was specified on the original RPO transaction, CREST will calculate interest on a

daily basis using the day count convention as determined by the currency of the consideration.

For GBP repos this is actual/365; for EUR and USD this is actual/360. Interest will be added to the

consideration of the RPR transaction overnight.

The repo will accrue interest from its intended settlement date. If the repo does not settle on

intended settlement date, interest will still accrue and be added to the RPR transactions when

they are created upon settlement of the repo.

For open repos, CREST will accrue interest on a daily basis until both parties have raised the

priority on the RPRs. Once the priorities have been raised, CREST will assume that the repo is to

be terminated. No further interest is calculated, even if the priority of the returns is set back to

zero by both parties.

For term repos, CREST will accrue interest until the intended settlement date of the RPR is

reached. CREST will stop accruing interest at that point, regardless of whether the returns have

settled.

Rollover

If the counterparties to a repo arrangement agree, it is possible to �rollover� a term repo

arrangement. Both members must amend the original RPO transaction with a new Repo Return

Date and, optionally, a new Repo Interest Rate. Once these amendments are in place, CREST will

automatically delete the original RPRs and recreate them with the new Repo Return Date, and, if

applicable, the new Repo Interest Rate. The interest accrued to that point is added to the

consideration of the original repo arrangement, and the new interest is calculated on the new

consideration (i.e. interest will be compounded for rolled-over repos). It is possible to forward-

date rollovers.

A rollover of a repo can only occur if the original RPO transaction has settled. Prior to settlement,

members should delete and re-input the repo with the new Repo Return Date and, if required, a

new Repo Interest Rate. If a rollover is attempted prior to settlement of the repo, CREST will

reject the input.


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Early returns

If the counterparties to a repo arrangement agree, it is possible to �early return� a term repo

arrangement. Both members must amend the original RPO transaction with a new Repo Return

Date. Unlike rollover, entering a Repo Return Date earlier than the original date will not permit

the member to specify a new Repo Interest Rate. Once these amendments are actioned, CREST

will automatically delete the original RPRs and recreate them with the new Repo Return Date.

Interest will only be accrued up to the intended settlement date of the new RPRs. Once intended

settlement date has been reached and providing neither side has frozen the transaction, CREST

will apply its normal settlement checks and attempt to settle the RPRs. The RPRs can settle

independently of each other.

Substitution

CREST provides the facility to manage the individual lines of collateral within a repo arrangement.

It is possible for members to: • exchange one line of collateral for another;

• remove an entire line of collateral;

• insert a line of collateral; and

• insert or remove partial lines of collateral.

A substitution must be agreed by both counterparties to a repo arrangement. Each side must

input a repo substitution (RPS) transaction with the details of the securities to be added, removed

or exchanged. The RPS transaction is a delivery versus delivery transaction. Members must either

specify the quantity of securities to be transferred or, if they wish, allow CREST to calculate the

quantity of securities required to �balance� the repo. CREST works out the quantity of securities to

be transferred in each case by looking at the current consideration of the repo and working out

the current value of securities held as collateral based upon the reference price held in the system

on the day the RPS was input.

RPS instructions can be forward-dated.

Once a substitution instruction is matched and has reached its settlement date, it will be assessed

using the normal CREST settlement check for security availability. Assuming enough securities are

available, the instruction will settle. Settlement of the RPS instruction will cause CREST to delete

and recreate the relevant RPR(s) using the relevant security. The total cash consideration across

the repo arrangement will be maintained, along with any accrued interest.


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The Account ID specified on the RPS need not be the same as on the initial RPO. However, when

the corresponding RPRs are generated, these are created using the original Account ID from the

RPO.

It is possible to substitute extra lines of securities into a repo. This will result in the creation of

new RPRs for each line of securities. These extra returns will be free of payment, as the total cash

consideration will be maintained on the original RPRs. There will be circumstances in which a

partial substitution of an original line of securities with a new line (where CREST calculated the

quantity to be substituted in) results in a quantity of zero being transferred in.

Substitutions cannot be performed on term repos once the Repo Return Date has been reached

(or passed), nor can they be performed on open repos once the priority has been raised by both

sides.


RPO, RPR and RPS transactions are not subject to the settlement discipline regime.


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CHAPTER 4: CENTRAL MARK-TO-MARKET AND EXPOSURE CALCULATION

Throughout the life of a securities lending/collateral transfer transaction, the value of securities

held within it may change and as a result exposures may be created between counterparties. To

aid members in determining whether or not such an exposure exists, CREST has a central

mechanism that calculates the value of securities held within all outstanding SLR, DBR and RPR

transactions between two counterparties and provides this data to the member in response to an

enquiry.

CREST will identify all the open return legs that exist between a pair of counterparties and re-

calculate the value of securities held within them. This calculation will be based on the CREST

reference price: • for equities, the bid price is used for repos and DBVs. The offer price is used for stock loans;

• for gilts, the UK Debt Management Office (DMO) reference prices are used; and

• for MMIs, the CREST reference price is used.

Exposure enquiries

CREST enables members to receive the results of this central mark-to-market calculation via the

use of two exposure enquiries: • Exposure Summary; and

• Exposure Details.

These enquiries will take into account outstanding SLR, DBR and RPR transactions.

The Exposure field shows exposure relative to the type of transaction, i.e. for stock loans the

exposure is on the participant giving securities. Therefore, an exposure will exist when the value

of securities given exceeds the cash consideration. For DBV and repo transactions, the exposure

is on the cash giver. Therefore, an exposure will exist when the value of the cash exceeds the

value of the securities.

For example, if an exposure arises on an RPO transaction between participants A and B (with A as

the cash giver), the Exposure field will show a negative value for participant A and a positive

value for participant B. Participant A may wish to call for extra margin (in the form of additional

collateral).

The Exposure Summary view will provide an aggregate value for transactions with the same

counterparty and where the transaction is in the same direction. For example, if participants A


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and B have two open repos and one reverse repo, the exposure will aggregate the first two

transactions. The reverse repo will be shown separately.

The enquiry does not display exposures across transaction types, i.e. exposures are shown for

RPRs, SLRs and DBRs separately and these are not aggregated together.


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CHAPTER 5: UK STAMP DUTY AND TRANSACTION REPORTING

UK stamp duty and stamp duty reserve tax (SDRT)

Stock loans, DBVs and repos are charged SDRT at a 0% rate provided the following Inland

Revenue requirements for relief are met: • the transaction is undertaken �on exchange� and is reported to that exchange;

• the security being lent is �regularly traded� on that exchange (generally, this encompasses all

listed and Alternative Investment Market (AIM) securities); and

• at least one counterparty is a member of the exchange to which the loan is reported.

Consequently, it is important for counterparties to specify the Trade Date and Trade System of

Origin when inputting instructions in order for CREST to assess correctly the available reliefs.

Transaction reporting

London Stock Exchange (LSE) member firms are required to report their loan and repo

transactions (including DBVs and DBRs) in all exchange-traded securities other than gilts.

Lending, repo and collateral transactions in gilts are off-exchange transactions so do not require

reporting.

CREST automatically generates transaction reports for all SLOs, DBVs and RPOs (including loans

in residual securities) from the settlement information provided at transaction level, and forwards

these on to the exchange specified by the user. Transaction reports for SLRs, DBRs and RPRs are

also automatically forwarded to the exchange where the originating transaction was reported as

being on-exchange6.

Loan, repo and collateral transactions are currently not reported to the Financial Services

Authority.

6 For full information on the LSE�s reporting mechanisms in respect of lending, repo and collateral transactions, see the LSE�s Guide to Transaction reporting through CREST.


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CHAPTER 6: CORPORATE ACTIONS

Claims Processing Unit

For SLRs, DBRs and RPRs, transactions may be outstanding when a security passes through a

record date. This may result in a number of the benefits not being distributed to the correct party.

To mitigate the effect of incorrect distributions, CREST�s Claims Processing Unit will automatically

raise a claim (CLA) transaction to re-distribute the benefit from most corporate actions from the

recipient to the giver of the SLO, DBV or RPO for all relevant securities. CLAs are created

automatically by CREST, but need to be released by the payer.

The Claims Processing Unit operates for all equity securities. At the request of the market, gilt

transactions are excluded from the Claims Processing Unit.

As a result of the high value of gilt coupon payments, CRESTCo and the Bank of England

Registrar�s Department have developed a model that permits the registrar to strike a �payments

balance� intra-day which is used for gilt benefit distribution. This balance is struck after the close

of standard settlement each day, but before the issuance of DBVs and any free of payment

transfers. As a result, takers of gilt DBV collateral will not appear on the register over record date,

thus reducing the need for manual benefit re-distribution.

RPO transactions that have the Buy/Sell Back flag set to Yes will result in the RPR transaction

being excluded from the claims assessment.


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CHAPTER 7: AUTOMATIC TRANSFORMATIONS

Where corporate actions result in either security transformations or the issuance of new

securities, CREST automatically transforms SLOs, SLRs and DBRs in these securities, deleting the

unsettled transaction in the old security and replacing it with a new transaction in the outturn

security.

Security ! security

Where the outturn is a single line of securities, the transaction will transform. The original

transaction will be given a transformed status and will be centrally deleted. A new outturn

transaction will be created in the new security. The intended settlement date of the new

transaction will remain the same as the deleted return transaction and will have the same Original

Transaction ID.

Depending upon whether the value of the new security is higher or lower than the original line,

the value of collateral in the transaction will change. This change will be reflected in the exposure

enquiry and the counterparties may wish to agree a substitution.

Security ! security A and security B

Where the outturn has more than one line of securities, the transaction will transform into the

appropriate number of outturns. The original transaction will be given a transformed status and

will be centrally deleted. The new outturn transaction will be created in the new lines of securities.

The intended settlement date of the new transactions will remain the same as that of the deleted

return transaction and will have the same Original Transaction ID.

The quantity of securities in each of the new transactions will be determined according to the

benefit ratio of the corporate action. The consideration and accrued interest of the transaction will

be split accordingly based on the benefit package.

In this way, it is possible for the number of lines of securities in the original transaction to

increase beyond the 10-line input limit.

Depending upon whether the value of the new lines of securities is higher or lower than the

original line, the value of collateral in the transaction will change. This change will be reflected in

the exposure enquiry and the counterparties may wish to agree a substitution.

Interest will continue to be accrued at the same rate.


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Security ! security and cash

Where the outturn has both securities and cash elements, the return transaction will transform as

follows.

Securities

The original transaction will be given a status of transformed and will be centrally deleted. A

new outturn transaction will be created in the new line of securities. The new transaction will have

the same intended settlement date and Original Transaction ID as that of the deleted return

transaction. The amount of securities in the new transaction will be based upon the benefit ratio

indicated in the corporate action details. Depending on whether the value of the new lines of

securities is higher or lower than the original line, the value of the collateral will change. This

change will be reflected in the exposure enquiry and the counterparties may wish to agree a

substitution.


Cash

The cash element of the outturn will be created as a separate cash-only delivery transaction. This

transaction will be linked to the original transaction via origin fields and will reference the

Transaction ID of the original return transaction in the Transform Transaction ID field.

The value of the cash element will be based upon the benefit ratio indicated on the corporate

action details. The intended settlement date of the cash-only delivery will be the same as the

deleted return transaction.

Option elections

Members can elect on transformations on original transactions using the Transaction CA Option

Input (ACON) functionality.

Skipping transformations

Members can opt to skip transformations. However, if the transformation is skipped and the

security is subsequently expired, the return transaction will be centrally deleted, the value of

collateral will decrease and any interest accrued will be deleted.


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Call payments

If a transaction involves nil-paid rights (or any other subscription securities), and a cash element

is paid by the lender to the issuer, this is added to the consideration of the return transaction

(provided that the payments are in the same currency). If the payment is in another currency, a

separate cash-only delivery will be created. The cash-only delivery will reference the return

transaction in the Transform Transaction ID field.



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CHAPTER 8: MARKET PRACTICE

CRESTCo provides its members with a sophisticated tool for the movement of collateral, but it

cannot and does not attempt to provide all the functionality members require to manage their

overall collateral position. In order to make effective use of their collateral, members must

actively manage their positions both within and outside CREST. This may involve transactions

being co-ordinated with those effected across both other settlement systems offering collateral

management functionality, such as Euroclear Bank and Clearstream Banking Luxembourg, and

payment systems for moving cash, such as CHAPS.

Securities lenders will, therefore, use CREST to lend their securities against either cash or

securities. The arrangements made will be different with each counterparty, depending on various

factors such as regulatory requirements7, risk preferences, the availability of collateral and

prevailing market conditions, but are likely to be one of the following four scenarios:

• stock loan against cash: the securities �lender� is seeking to raise funds using their securities

as collateral, and will therefore pay the securities �borrower� a rate on the cash collateral

received;

• stock loan against cash, cash returned against collateralisation by DBV: the securities are lent

to the borrower in return for cash received through CREST. This cash is then returned to the

borrower through a DBV delivery which collateralises the original loan;

• stock loan against cash, cash returned against collateralisation outside CREST: the securities

are lent to the borrower in return for cash received through CREST. This cash is then returned

to the borrower outside CREST via another settlement or payment system against collateral

delivered by these systems, e.g. cash collateral via CHAPS; or

• stock loan free of payment: securities are lent to the borrower free of payment through

CREST. Cash or collateral against this loan is then delivered outside CREST. There is

significant settlement risk for one of the counterparties to the loan in this scenario.

Members must actively monitor their outstanding CREST positions and ensure that they input the

necessary instructions to fulfil commitments to deliver collateral. For example, the CREST system

does not automatically generate a DBV following the settlement of each SLO transaction.

Consequently, a member wishing to deliver a DBV to collateralise an outstanding securities

7 For example the DTI Asset Diversification Rules for UK insurance companies.


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borrowing position must agree on the value and consideration of the DBV with their counterparty

and then input the resulting DBV independently of the previously settled SLO transactions.

This reflects the fact that collateral movements within CREST are not all effected to collateralise

other outstanding CREST positions. Equity and gilt collateral can be used solely for funding

purposes, and therefore delivered through CREST against cash only, without a reciprocal DBV

delivery, or free of payment with cash moving outside the system, e.g. via CHAPS. In such

circumstances, the borrower is not only expected to pay a rate to obtain the cash, but also pay

interest on the sum borrowed during the period the loan is open (usually the overnight interest

rate). The DBI functionality assists members utilising DBVs for funding purposes.

Equity and gilt collateral can also be moved in exchange for collateral that is not held in the

CREST system, for example eurobonds. In such cases, movement of collateral through CREST

must be coordinated with movement of collateral through, for instance, Euroclear Bank or

Clearstream Banking Luxembourg. Additionally, it is possible that a single deal may involve a

combination of co-ordinated collateral and cash movements through the different payment and

settlement tools available.

Members may wish to consult the CREST blue book Market Practice for Stock Loans, Equity Repo

and Deliveries by Value in CREST for further information.


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ANNEX: LIST OF SECURITY CATEGORIES

Security categories apply to all securities eligible for settlement in CREST and are defined in the

below table.

Security category Definition

F10 (FTSE 100) Ordinary shares and convertible shares issued by companies

included in the FTSE 100 index and certain securities issued by

companies incorporated outside the United Kingdom of equivalent

market capitalisation

F25 (FTSE 250) Ordinary shares and convertible shares issued by companies

included in the FTSE 250 index and certain securities issued by

companies incorporated outside the United Kingdom of equivalent

market capitalisation

OTH All UK and Irish securities eligible for settlement in CREST (including

Jersey, Guernsey and Isle of Man securities) which are not in either

F10 or F25

UBG All unstripped British government securities

SBG All stripped British government securities

NBG All non-British government securities (i.e. those non-British

government securities that were previously settleable in the Central

Gilts Office)

E30 All Eurotop 300 securities, excluding UK and Irish securities

EGS ECB-qualifying Tier 1 collateral issued outside of the UK and Ireland

USS All S & P 500 and NASDAQ 100 securities

OIS All other international securities not included in any other categories,

including ECB-qualifying Tier 2 collateral issued outside of the UK

and Ireland

UTS All unit trust and Open-Ended Investment Company (OEIC) funds

TSY All treasury bills

BB All eligible bank bills

LAB All local authority bills


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OMM All other bills including ineligible bank bills

CD1 All certificates of deposit rated in CREST credit band 1




CP1 All commercial paper in CREST credit band 1




CRESTCo Ltd

33 Cannon Street

London EC4M 5SB

Tel: +44 (0)20 7849 0000

Fax: +44 (0)20 7849 0130

E-mail: [email protected]

www.crestco.co.uk

Euroclear Bank SA/NV

1 Boulevard du Roi Albert II

B-1210 Brussels, Belgium

Tel: +32 (0)2 224 12 11

www.euroclear.com

p a r t o f E u r o c l e a r

Euroclear is the marketing

name for the Euroclear System,

Euroclear plc, Euroclear Bank

and their affiliates.

© 2004 CRESTCo Ltd

Crest Slb&Repo Settlements

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