The Euroclear Single Platform Project

The Euroclear Single Platform Project S&II – Operations Forum Michael Kempe Director May 4, 2006

Agenda • General overview of the aims of the project • Governance Structure • How does this overlap with the Giovannini process • Examples of progress - Custody achievements • Questions

Why has harmonisation become important? • Globalisation of investment strategies has intensified awareness of market fragmentation in recent years: • Multiple systems • Widely differing functions & market practices • Europe is (rightly) seen as a complicated place to do business • Increased focus by the authorities and market constituencies on overcoming the inefficiencies which result: • Giovannini Group • G30 • ECB-CESR • SMPGs etc

Delivering a domestic market for EuropeWhy are we involved in harmonisation? Systems Consolidating cross-border settlement “internal book-entry settlement” Delivering a domestic market for Europe Creating a single platform for Europe’s domestic settlement Harmonisation Consolidating domestic settlement & custody

Why are we involved? -Harmonisation • “Markets are defined by their post-trade infrastructure” – Alberto Giovannini • Harmonisation and infrastructure change go hand in hand • We can represent and achieve neutrality between • all segments of market players • all types of market structure … and therefore provide leadership to the market • We have key relationships with all the key non-customer stakeholders, eg • Regulators & government bodies • Issuer agents • Lawyers • Stock Exchanges & Clearing Houses • Pressure from European Commission • If we do not harmonise ourselves then the Commission will do it to us !

Why are we involved? -Systems • Harmonisation is inherent in platform consolidation post merger • … we don’t want to build a new system that performs the same function in five different ways • Doing the right thing • Classic role of the market infrastructure provider • Contribute to creating a genuinely Single Market • Transforming cross-border settlements into book entry settlements • “Delivering a domestic market for Europe” is now the Mission Statement

Agent Customer Full Integration Common User Interface CREST Euroclear France Euroclear Nederland Euroclear Belgium Euroclear Bank Domestic Service Full Service Full integration of legacy systems and functionality Single Settlement Engine

The Business Model, recognising the different market/user needs, is based on choice • Choice of service levels, between • Domestic Service packages, typical CSD service • Full Service package, typical Euroclear Bank service • Choice of access to services (direct account) • directly • through agent bank • through Euroclear Bank • Choice of payment mechanism for settlement between • Central bank money • Commercial bank money • Open questions about where these payment services are delivered

What harmonisation isn’t • Signs of customer concerns in early 2004: • Paris opinion was that harmonisation is an evil Anglo-Saxon conspiracy • London opinion was that harmonisation is an evil French conspiracy • We had no preconceived notions about specific outcomes at the start • Not an exercise in picking components from each location to ensure a balanced distribution of pain • Compromise is inevitable from time to time • … but it is not a goal • High risk that politically driven process results in compromise solutions based around sub-optimal and inconsistent design • Crucial to minimise that risk if we want a stable and coherent system capable of lasting several years

30 months HarmonisationMigration towards a single platform • Ambitious timetable • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 SSE Market by market TARGET2 ESES Market by market SP Phase IGradual rollout for custody Market by market SP Phase II - Gradual rollout for settlement Market by market CCI & Standards Earlyharmonisation ESES SingleGatewayLegacy & SAP Custody Settlement

Management Committee Euroclear plc Board Market Steering Committee Dutch DACSI Other industry bodies French Harmo. Group Belgian MEC Business Model and Harmonisation Project delivery divisions Domestic MACs Delivering a domestic market for Europe Cross-border Market Advisory Committee Custody Settlement Payment Legal Communication Tax Cross-border Harmonisation WGs Euroclear divisions Local Harmonisation Groups / initiatives governance involvement

Harmonisation Consultation process Harmonisation Consultation process Harmonisation proposal by Working Group Consultation process Service descriptions Detailed Service descriptions Implementation

Where are we in this process?

Working in a European context • Consciously working in a framework which is broader than Euroclear group • Neither right nor in our interests to develop a “Euroclear standard” which is incompatible with the rest of Europe • Close collaboration with other initiatives: • ECSDA • FBE • ESF • SWIFT • (in future) Nordic CSD (VPC + APK) • Proving to be highly effective • What does this mean for Euroclear?

Euroclear - Objectives for custody • To provide a single, harmonised platform for corporate actions in Belgium, France, Ireland, The Netherlands and The United Kingdom • That the solution be in line with Giovannini initiatives (ECSDA, FBE) and with other harmonisation efforts (ESF, SMPG) • However, timing is different • To provide harmonisation for all parties without removing choice for issuers • Harmonisation of all corporate actions processes that affect both holdings and transactions including data and its provision, timing, election processing, resources, payment mechanisms and transaction management • Reduce cost and risk through harmonisation and removal of paper processes • Harmonisation of processes on both the operational side of corporate actions processing and the governance aspects embedded in them e.g. shareholder rights • Allow for a harmonised process for issuers to gain transparency of their shareholders throughout the security’s lifecycle

Types of events • Distributions • Reorganisations Meetings - Which type of event a corporate action is will be announced to clients for processing reasons. Considered by clients as a large cost saving.

Announcements Issuer / Agent Investor / Agent Euroclear • Made as soon as information is public • Objective is that the issuer (agent) will input formatted details directly to CSD • Single database within SP • Sent to all holders in real time • Sent to all new holders or those with open transactions in real time • Changes sent to all previous recipients in real time • If no holding? Client

Entitlements Issuer / Agent Investor / Agent Euroclear • Sent on close of business on record date • Only actual holdings taken into account in domestic service • No reminders or alarm bells in domestic service • Entitlements only for mandatory events Client

Elections Issuer / Agent Investor / Agent Euroclear • Elections without paper • Cash and stock moving in the system • Investor inputs MT565 but message to issuer agent unclear (MT 508?) • MT567 used for technical validation • ‘Acceptance’ message unclear • One issuer agent rather than many • Co Domiciles will continue to exist Client

Proceeds and confirmations • Way of distribution depends on type of event • Messages to be used by issuer agent unclear • MT566 for debit and credit Issuer / Agent Investor / Agent Euroclear Client

Euroclear Business Model • Progress is being made • It is recognised that there are barriers to implementation • Although primarily a European / Euroclear process it will affect the template for all markets • All markets are being asked to change to bring benefits to all • All markets have been willing to change so far and momentum is high • Harmonisation will occur… Delivering a Domestic Market for Europe

Typical Euroclear Bank services Higher valued added services (eg in custody) Access to 35 markets on a DvP basis (bridging complexity and diversity gaps) Banking and credit services Automated Lending and Borrowing and Triparty Collateral Management For group and non-group securities Securities holding under a single legal regime (Belgian law) Active customer support Commercial Bank Money Settlement Competitively prices Appendix 1 - Domestic and Full Service Domestic Service Full Service • Harmonised CSD services, based on harmonised market practices but with local specifics where needed • STP and standardised custody and settlement services • For group securities • Securities holding under security Home asset protection law • Standardised customer support • Very low risk, CSD-type liability • Priced on cost+ basis (not bundled with higher cost services) Central bank money settlement and cross-quality payments

The Euroclear Single Platform Project