T+2 shortened settlement cycle February 2016

Shortened settlement (T+2) overview

• There are parallel industry initiatives in the US and Canadian markets to shorten the time frame between trade execution and settlement from three days (T+3) to two days (T+2). • This initiative covers all Depository Trust Company (DTC) settling products (equities, corporate bonds, municipal bonds and unit investment trusts) and products traded on the Canadian exchanges (e.g., the Toronto Stock Exchange). It is expected to have a significant impact on the middle- and back-office operations and technology supporting the trade life cycle. • The Industry Steering Committee (ISC), composed of the DTCC, the Association of Global Custodians (AGC), the Association of Institutional Investors (AII), the Investment Company Institute (ICI), the Securities Transfer Association (STA), and the Securities Industry and Financial Markets Association (SIFMA) released a white paper in June 2015 proposing a target migration to a T+2 settlement cycle in Q3 2017. • The Canadian Depository for Securities (CDS) released a white paper in September 2015 calling for Canada to go live with T+2 on the same date as the US. • Individual organizations need to make the necessary changes by Q1 2017 in order to be ready for industry-wide testing, which is planned for Q2 2017. • Industry-level requirements need to be understood and translated into impact for individual firms. • Organizations need to plan, build and iterate while the regulations are being drafted and published. • Adequate preparation for industry-level testing will be critical for each organization.

US settlement cycle for DTCC-settling securities

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Proposed industry implementation timeline The ISC white paper outlines a proposed industry timeline to meet the Q3 2017 target implementation date that includes significant industry-wide testing that firms will need to prepare for and participate in. 2015 Q1–Q2

Discovery and analysis

2016 Q3–Q4

Q1–Q2

2017 Q3–Q4

Q1–Q2

Q3

Feb: Completed DTCC Working Group Meetings Q4: SIFMA, CDS Clearing and Depository Services, Inc. (CDS), and DTCC Testing Industry Meetings June: ISC publication of “Shortening the Settlement Cycle: The Move to T+2” white paper

Communication

Sep: CDS publication of “CDS Move to T+2” white paper Dec: SIFMA publication of Implementation Playbook

• Adequate preparation for industry-level testing will be critical for each Q2: Canada Novation moves from T+3 to T+1 organization.

Sep: SEC chairman writes letter confirming SEC support for T+2

Industry planning

Internal build

Industry testing

Q1: Regulators publish proposed rule changes

• Industry-level requirements need to be understood and translated into impact for individual firms.

Q1: Firms begin internal builds Q4: Firms complete internal builds, including internal testing

• Organizations need to work closely with DTCC and the Canadian Capital Markets Association (CCMA) to plan and prepare for industry-wide testing.

T+2 shortened settlement cycle

Q3: Complete industry testing

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How EY can help in the journey

EY can support organizations impacted by T+2 settlement across the multiple phases of the journey plan, leveraging tools, accelerators, leading practices and experienced practitioners.

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Illustrative impact heat map

Securities operations and technology functions will be impacted by the move to T+2 in varying degrees. The following are examples of key changes that may be required across functions:

Trade support

Middle office

Asset servicing

Trader reconciliations

Affirmations/ confirmations

Allocations

Clearing

Settlement

Mark-to-market

Recalls and buy-ins

Announcement creation

Election/ instruction

Streetside reconciliation

Syndicate operations

Trade affirmations

Prospectus fulfillment

Fails management

Physical securities

Inventory management

Billing

Entitlement capture

Payments

Update the notification triggers and modify controls to identify and escalate aged breaks earlier in settlement cycle

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Potential for system process changes depending on existing automation (e.g., batch timing and break aging logic)

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Negotiate arrangements with counterparties for providing allocations on Trade Date (TD)

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Enable TD matching and affirmation and maximize affirmation/settlement rates

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Client onboarding

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Securities lending

Trade capture

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Settlement

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Proactive matching and inventory management to reduce/manage fails and enable compliance with the US Securities and Exchange Commission’s Rule 204 (SEC 204)

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Increase focus on processing of dual listed securities, American depository receipts, exchange-traded funds, “when issued,” and 144a/ Reg S products

Frequent communication with clients

Collateral management

Account opening

Agreements documentation

Margin calculation

Firm funding and financing

Projections from financing

Anti-money laundering (AML)/know your customer (KYC)

Settlement instruction management

Segregation

Margin calls

Cash management

Foreign exchange (FX)

Update the notification triggers for new subaccounts received over Oasys or other automated allocation platforms to reduce lag time

Expedite recall process to take place on TD in order to minimize settlement risk

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Improve coordination with upstream teams prior to key event dates to reduce risk of unintended elections

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Revise and test billing calculations to maintain accuracy within the shortened settlement cycle

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Eliminate manual activities impeding efficient inventory management

Update corporate action and dividend processing systems for ex-dates and cover/protect expiration dates

Funding and treasury

Document management

Negotiate service-level arrangements with counterparties regarding the timeline for providing settlement instructions for new or existing accounts

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Tax/regulatory reporting

Enterprise functions

Tax reporting

Trade and position reporting

Position keeping

Operational management reporting

Financial reporting

Reference data

Books and records

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Updates to systems supporting the margin calculation and processing of margin calls

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Potential change in projection process to incorporate activities completed on TD

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Update triggers and aging logic to enable accurate reporting for management of settlement risk

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Updates to security reference data to reflect settlement calendar correctly

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Increased resources may be required to handle the documentation changes to support the move to T+2

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Updates to systems used to generate projections in order to produce earlier estimates

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Updates to stock record and accounting systems to reflect change in settlement date

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FX deadlines for cross-border activity

Counterparty credit exposure reports may need to be updated and tested to enable accuracy within the shortened settlement cycle

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Leverage electronic fund transfers vs. physical checks

Thorough end-to-end testing of all reference data will be required to make sure all updates are captured correctly

Impact key:

T+2 shortened settlement cycle

High impact

Medium impact

Low impact

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Key considerations

When implementing an accelerated settlement cycle, firms should consider several factors across the program life cycle. Each step should take into account impacts to people, process and technology, as well as the capacity to manage a complex change initiative.

Key considerations • Program management

Readiness assessment

Design and development

Testing

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Systematic identification of all key in-scope systems, processes and reference data that will be impacted by accelerated settlement

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Need to consider implications on both process and technology change while developing business requirements

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Testing strategy decisions (e.g., dedicated T+2 environments vs. use of existing environments) on how the changes will be implemented and need to be finalized early Prioritization and sequencing of testing based on risks and complexity to minimize regression-testing impacts End-to-end testing to cover from pre-execution to settlement, including all corporate actions

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Go-live/postimplementation

All relevant stakeholders identified with clear ownership, responsibility and engagement Lessons from European changes are understood and applied effectively

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Contingency planning must be developed for the migration weekend to make sure technology platforms are up and running and support is on hand.

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Alignment with industry, including clients, counterparties, vendors and utilities

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Analysis and prioritization of risk areas that hinder acceleration of settlement across technology (e.g., batch updates), processes (e.g., manual processes to conduct reconciliations) and external parties (e.g., clients with highest risk of non-compliance) In-flight and planned strategic and tactical changes incorporated as part of the overall plan

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Balance the opportunity to enhance operational efficiency across the trade life cycle with the need to make expeditious changes to comply with accelerated settlement

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Management decisions are required on the extent and degree of industry testing (e.g., trading venues for participation, criteria for certification of readiness, specific areas where industry testing may be omitted vs required). Banks are required to sign-off or certify readiness for T+2 posttesting. Environments would need to be set up and synchronized with copy of production data.

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Management of the double-settlement date will be critical for a smooth transition

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Why EY?

EY is highly qualified to assist sell-side firms, buy-side firms and custodians with the T+2 shortened settlement cycle initiative, bringing a dedicated Capital Markets practice, a deep pool of advisors with extensive operations experience, a strong record of working on industry initiatives, and world-class program management accelerators and tools. EY differentiators and experience •

Dedicated Capital Markets practice

Deep pool of advisors with extensive operations experience

Strong track record of working on industry initiatives

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World-class PMO accelerators and tools

EY has a dedicated Capital Markets practice with a deep pool of over 500 advisors across the globe. We are currently assisting over 15 global systemically important banks (G-SIBS) with a range of operations and technology initiatives related to the trade life cycle. EY has a deep pool of knowledgeable advisors with decades of industry experience leading front-, middle- and back-office trade processing operations. We have respected technologists with proven architecture, infrastructure, integration and data management skills.

EY has extensive experience running complex global program management offices (PMO). These programs touched on all components of the trade life cycle and leveraged world-class accelerators and tools.

EY was selected as program management office for various industry groups and consortia to help clients with: • Implementation of the final margin policy framework for over-the-counter derivatives • Drafting of recovery and resolution planning playbooks for banks with financial market utilities

Value proposition

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EY has a depth of advisory experience in process, technology and operational risk management allows our clients to optimize their operating capabilities.

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EY has deep experience in securities operations processing, including client onboarding, trade support, settlements and asset servicing. EY has leveraged these capabilities to help clients identify areas of improvement and implement large-scale global transformational initiatives.

Leverage a deep bench of subject-matter resources to support seamless execution of all phases of the initiative

EY has served as a key partner to global trading firms in developing operations and technology strategies, including large-scale transformations with industry organizations. EY as a firm and its individuals have held key roles in industry consortiums and utilities.

Increase confidence that deliverables will be met and deliver value with proven track record on complex engagements

EY has a program management team with capital markets knowledge and the seniority and relevant experience to coordinate, govern and report on this complex initiative.

Provide end-to-end PMO support for all phases of the initiative across operations and technology

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T+2 shortened settlement cycle

Accelerate results by leveraging EY understanding of securities operations and sharing industry leading practices

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Key Ernst & Young LLP contacts Roy Choudhury

Principal, Ernst & Young LLP Office: +1 212 773 9299 [email protected]

Nagaraj Swaminathan Executive Director, Ernst & Young LLP Office: +1 212 773 8710 [email protected]

Matthew Fischer Senior Manager Office: +1 212 773 9899 [email protected]

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2016 Ernst & Young LLP. All Rights Reserved. SCORE No. CK1050 1602-1822183 NY T+2 shortened settlement cycle

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