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Summary

  1. Introduction…………………………………………………………………….1
  2. Cyprus Stock Exchange Participation in T2S and Governance………………..2
  3. The current post - trading model in Cyprus of the Cyprus CSD ………………3
  4. Architecture - Adaptation Process……………………………………………4-7
    Adaptation Models……………………………………………………………..4
    Use of Multilateral Settlement Model………………………………………….4
    CSE Technical Accounts……………………………………………………….5
    Settlement Instructions…………………………………………………………5
    Securities and Cash Fails……………………………………………………….5
    CSEs preferred scenario for participation in T2S - “Layered” Model …………6
    CSEs trade settlement timeline for stock exchange trades……………………..7
  5. Things to be done……………………………………………………………….8
  6. Economic impact of the T2S in the CSE……………………………………….9
  7. Related projects with T2S for CSE……………………………………………10
  8. T2S project planning in CSE………………………………………………….11




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       1. Introduction
               The Eurosystem developed Target 2 Securities - T2S, a single technical
               platform, in order to support CSDs to provide core, borderless and neutral
               settlement services.

               CSDs joining T2S will be able to offer their clients cross - border settlement in
               Central Bank Money.

               The Cyprus Stock Exchange (CSE), on the 16th of July 2009 has signed the
               Memorandum of Understanding (MOU) with the Eurosystem – the European
               Central Bank (ECB) and the National Central Banks of the Eurozone, regarding
               the T2S initiative. The aim of the project is to harmonize procedures and to
               reduce the cost of cross border transactions.

               Referring to article 4.2.2 of the MOU, the CSE drafted this document in order
               to provide the Eurosystem with CSE’s impact assessment and give a
               description of the adaptation process.

               This document is based on the CSE’s current system and processes, on the User
               Requirement Document (URD) and on other documentation provided by the
               Eurosystem related to the T2S project.




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       2. Cyprus Stock Exchange participation in T2S and Governance
               The CSE’s participation and governance in the project of T2S is as follows:

                                                                           CSE Council


                                                                        T2S Project Sponsor


                                                                         Project Manager


                                                                         Management Team:
                                                                         Operational Experts
                                                                         Legal Experts
                                                                         IT Experts
                                                                         Finance Experts




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       3. The current post - trading model in Cyprus of the Cyprus CSD:
                 General characteristics of the Cyprus CSD
                        The Cyprus Central Securities Depository is operated by the Cyprus
                         Stock Exchange.
                        All securities traded at CSE are fully dematerialized.
                        Direct Holding System with the exception of Government Bonds and
                         Treasury Bills.
                        Supports issuers for the corporate action events.
                        Provides a full range of services to investors.
                        Provides information to the Cyprus Securities and Exchange
                         Commission (Supervisory Authority).
                  Clearing and settlement characteristics
                        T+3.
                        Delivery Vs Payment.
                        Multilateral Settlement.
                                    -         Securities are transferred at the investor level (no netting)
                                    -         Cash is netted at the Operator’s level ( Broker/Custodian)
                        Bilateral Settlement for negotiated trades, Spot trades and for OTC
                         trades
                                    -         Settlement T+1 - T+3
                        Operators are on- line connected to the Settlement Bank (Commercial
                         Bank).
                        The CSE and the Operators of the CSE use a software system developed
                         by the Commercial Bank.
                        Settlement Finality (Directive 98/26) – Irrevocable and Final Settlement.
                        Same Day Funds.
                        All cash movements on T+3 pass through the CSE intermediary Account
                         in the Commercial Bank.
                        Members maintain another cash account for their contribution to the
                         Joint Guarantee Fund.
                         The multilateral settlement is performed in cycles – Bank of
                          International Settlement (BIS) 2 model.

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               4. Architecture - Adaptation Process
                       As a general introduction, this chapter gives a general description of the
                       envisaged adaptation process by which Cyprus Central Securities
                       Depository and its community would joint the T2S.

                       Adaptation Models
                       Due to the fact that the Cyprus CSD is a Direct Holding CSD, there are two
                       main alternative ways in which a Direct Holding CSD- like Cyprus CSD,
                       may use T2S:
                        Direct connection with all end-investors accounts mapped in T2S,
                        Direct connection with “layered” participant’s technical omnibus
                         securities accounts opened in T2S and the end-investor accounts in the
                         local CSD system.
                       Therefore, in the case of direct connectivity with T2S, the second option
                       with the “layered” model seems to be more preferable for the Cyprus CSD.
                       Settlement Finality will apply at T2S settlement level.


                       Use of Multilateral Settlement Model
                       The CSE uses a multilateral settlement model for the settlement of
                       securities. The T2S will not provide a specific functionality for multilateral
                       systems. As a consequence, multilateral instructions should be treated as
                       bilateral.
                       According to URD, T2S shall be able to support multilateral settlements in
                       two ways:
                       i. CSDs may send Stock Exchange instructions to T2S after they have been
                          “split” and allocated or
                       ii. CSDs may send Stock Exchange instructions prior to “splitting” to T2S
                           for later amendment by cancelling and reinstructing new instructions
                           (depending on the information to be amended).

                         For the CSE, option (i) seems to be more preferable.




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                       CSE Technical Accounts
                       In order to settle the transactions, it will be necessary for the CSE to
                       introduce a Technical Account in T2S and the CSE would act as a
                       technical counterparty for the stock exchange transactions.
                       The instructions will be sent to T2S through a “CSD technical account” on
                       a hold and release basis as follows:
                       -              Sales: CSDs will release instructions to T2S once CSDs have
                                      validated and accepted the receipt of stock to tender the sale.
                       -              Purchases: CSDs will release instructions after performing necessary
                                      checks.
                       Furthermore, the settlement will be routed via intermediate technical
                       accounts on the securities and cash side. The CSD will instruct T2S to open
                       securities and cash accounts, as many as the CSD may require. These
                       accounts will be maintained by the CSD in T2S and will act as counterparty
                       between the purchases and the sales. Therefore, the CSD would have full
                       control over these accounts and will treat them in the same manner as any
                       other securities and cash accounts.


                       Settlement Instructions
                       Referring to the settlement instructions, the CSE will send the instructions
                       to T2S allocated and after they have been enriched.


                       Securities and Cash Fails
                       At present, in case of securities failure or lack of cash, the CSE uses funds
                       from the Guarantee Fund which is provided by the CSE Members. The
                       treatment of failed trades is an issue that has to be considered before joining
                       T2S.




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               CSEs preferred scenario for participation in T2S – “Layered” model

               CSE will open technical accounts in T2S which will be used for the settlement
               of securities and cash. Settlement in T2S will be done through these technical
               accounts.

               CSEs Participants will also open technical accounts in T2S.

               Stock Exchange transactions executed in the Trading System will be
               electronically transferred to the SSS.

               The clearing and enrichment of the settlement instructions will remain at the
               SSS as it is done today.

               Transactions will be grouped per ISIN and per Participants technical account
               (like CCP netting).

               Transactions will be settled in T2S during night-time and daytime settlement
               with the use of CSEs and Participants Technical Accounts. Cash will be
               transferred from a Target 2 RTGS accounts to Participants T2S dedicated cash
               accounts. Each payment will be routed via CSEs technical account.

               After the completion of settlement, the T2S will inform CSE (through
               messages) and CSE will proceed with the distribution of securities in the SSS at
               end-client level.

               Corporate Actions will be done in two levels: in SSS and in T2S.

               Services to Issuers and Investors will be based on SSS data/ accounts.




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               CSEs trade settlement timeline for stock exchange trades


             Transactions executed during the trading day (T) will be                 T
             transferred from the trading system to the SSS.

               During      T+1      and     by    the     end     of    T+2,       During
               transactions clearing, enrichment and netting will be done in     T+1 and T+2
               the SSS.

               Stock Exchange transactions will be send to T2S.                  By the end of
                                                                                     T+2
               Settlement will take place in T2S (night and day settlement).         T+3
               In case of a fail trade then the CSE will use the developed
               procedures in order to cover the lack of cash or securities.




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       5. Things to be done by CSE
               In addition to the above mentioned general description of the adaptation
               process, the CSE in order to have an effective communication with the T2S, has
               to consider the following:
                To deploy a new software and new process between the current system of
                 CSE and T2S.
                To set up new processes and modules for sending and receiving XML
                 messages between CSE and T2S.
                To set up new mechanism for sending and receiving settlement instructions
                 and for updating mirror accounts.
                To set up communication between CSE and T2S.
                The CSE needs to communicate with the CSE Custodians, Members,
                 Issuers, Operators and other participants in order to inform and explain the
                 adaptation process, the system changes, and the development of the new
                 service.
                To proceed to any changes in the existing rules and regulations of the CSE
                To proceed to a further cost/benefit analysis for CSE and its Members in
                 order to clarify in detail the costs and any further benefits or costs that will
                 result from the connection with T2S.
                To review the mechanism for handling the failed trades in T2S.




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       6. Economic impact of the T2S in the CSE
               In case the CSE will develop and implement the T2S project then it will face
               the following additional costs:
                Fixed contribution fee of T2S.
                Cost per transaction.
                Infrastructure investment costs for the adaptation of its computer systems
                 with the systems of T2S.
                Consultation costs.
                Legal costs.
                Leased lines costs.




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       7. Related projects with T2S for CSE

               The CSE in the effort to harmonize its services in the new European post –
               trading landscape it is involved in various projects. More specifically:

                        The CSE will connect very soon to Link Up Markets (LUM). CSE with its
                         participation in LUM expects to facilitate cross border trades and existing
                         European initiatives such as MiFID, Target 2 Securities and Code of
                         Conduct for Access and Interoperability.
                        The CSE will develop a new Clearing Model with the introduction of
                         General Clearing Members (GCMs) and Direct Clearing Members
                         (DCMs).
                        The CSE has already started the procedure to unbound its “Clearing and
                         Settlement” Services.
                        The CSE will introduce ISO15022 messages for settlement and corporate
                         actions.
                        The CSE will introduce OTC transactions. Therefore there is a need to
                         clarify with T2S the settlement mechanism of OTC trades.
                        The CSE is also reviewing Members’ contribution to the Guarantee Fund.




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       8. T2S project planning in CSE

                  CSEs project planning is scheduled as follows:

                              Initial Model Description (Already started and will end by the end of Q1
                               of 2010)
                              Model Adjustment (Q4 2009 – Q2 2010)
                              Business Impact Analysis (Q1 – Q2 2010)
                              Development & Implementation (Q1 2011 – Q4 2012)
                              Testing (Q1 2012 – Q1 2013)
                              Migration (Q3 – Q4 2013)




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