FAQ – Delivery and settlement of Turquoise Derivatives physical deliveries through the EquityClear service

LCH.Clearnet is in the process of aligning the delivery and settlement processes of all Turquoise equity derivative contracts with its cash equity business within the EquityClear service.  As from 30th January 2012 all physically delivered underlyings resulting from Turquoise Derivatives contracts will be cleared through the EquityClear service and become EquityClear contracts under the LCH.Clearnet Ltd (LCH.Clearnet) Rules and Regulations. 

This change will support existing and future product initiatives on Turquoise Derivatives, with the initial benefits being the provision of margin offsets and optional cross trade source settlement netting to members.  It is being implemented as part of a harmonisation and consolidation process so that straight through processing (STP) can be achieved through the delivery settlement process.

All existing business for cash settled contracts including Index products will continue to settle in the current manner.

Q – When will this change take place?
A – Physically delivered contracts that are due for settlement on or before Wednesday 1st February 2012 will be processed in line with the existing processes.
Physical delivered contracts that are due for settlement as from Thursday 2nd February will be subject to the EquityClear Rules and Regulations.

LCH.Clearnet will also be changing its standard settlement information (SSIs) for Norwegian deliveries.

All Norwegian physical delivered contracts with an intended settlement date of 2nd February onwards should contain the following settlement instruction details at Den Norske Bank.

Q – How will it work?
A – From the close of business on exercise/expiry date until settlement, all Turquoise Derivatives physically delivered underlyings will become EquityClear contracts under the LCH.Clearnet Rules and Regulations. 
As a result, all Turquoise Derivatives Clearing members who are not members of EquityClear will need to become a member of the EquityClear service or use the services of an EquityClear GCM.

Q – What are the benefits for members?
A – Margin offsets and optional cross trade source netting will be available to clearing members as a result of this change. 
Please note that due to the interoperability arrangements in place for Turquoise Derivatives Norwegian contracts cross trade source netting will not be available for these contracts at this time.

Buyer elections on all physical delivered contracts, excluding the Turquoise Derivatives Norwegian contracts, will be allowed under the Equityclear Service. Members will have the ability to choose an option or combination of options, in a participating Corporate Action giving more control over their investments, as opposed to the current default option process.

Q – How do I realise the benefits?
A - Turquoise Derivatives members that use their EquityClear clearing member account (mnemonic/sub account) to clear their Turquoise Derivatives physical deliveries will automatically benefit from margin offsets and are able to choose to net settlements across EquityClear trade sources.

Q – What does this mean for Turquoise Derivatives Clearing members that are not currently EquityClear members?
A – Turquoise Derivatives Clearing members will have two options if they are not already EquityClear members:
1. Clear their Turquoise Derivatives Business through an EquityClear GCM 
2. Become a direct EquityClear member (ICM or GCM).  This would require a minimum EquityClear default fund contribution of £1m.   

Q – Will there be any changes to margining?
A – Turquoise Derivatives contracts will continue to be margined (initial margin and contingent variation margin) under the existing margining process, using SPAN, on the day of and prior to the day of exercise/expiry. 

The delivery positions will be margined the morning following exercise/expiry using Equity Risk Analysis (ERA) as currently used by EquityClear. 

Q – Will there be any changes for the settlement of the Russian IOB contracts
A – Both sides of the settlement in Euroclear bank will be instructed by LCH.Clearnet under Power of Attorney (POA). Those members that have not returned a signed POA for settlement should do so.

Q – Will there be any change to fees charged to Turquoise Derivatives Clearing members as a result of deliveries being processed through the EquityClear service?
A – The EquityClear charges will apply to all physical settlements.

Further information on EquityClear fees can be found on the LCH.Clearnet website at http://www.lchclearnet.com/fees/ltd/transactions/equityclear.asp

LCH.Clearnet passes, at cost, all settlement related fees to members resulting from the EquityClear service.

Q – Will there be changes to penalty fines for late settlement of IOB DR contracts?
A – Turquoise Rule 4.1.16.4 relating to “Settlement and Delivery of IOB DR Contracts” will cease to exist and no penalty fines for late settlement of IOB DR contracts will be applied by Turquoise.  The LCH.Clearnet EquityClear Rules and Regulations, Section 2D.12 “Failed Settlements” will apply.
Of particular note Rule 2D.12.2.3 “Buying In: Depository Receipts”, in which a “Buying Member trading Depository Receipts cannot initiate a buy-in. The Clearing House will automatically instigate a buy-in on ISD+30 under these procedures”.

Q – Where will members access LCH.Clearnet reports for their Turquoise Derivatives business?
A – Banking and Span margin reports for positions pre exercise/expiry will be shown under the Turquoise Derivatives mnemonic in the Turquoise Derivatives section of the LCH.Clearnet Member Reporting website.
Turquoise Derivatives delivery positions will be shown within the EquityClear reports and made available under the EquityClear folder within Member Reporting.

Q - Can I identify the trade source if I use the same EquityClear clearing member account?
A – Report EREP0006 shows for each trade the originating trade source and at the end of day each trade is marked with a reference of the net settlement.

Full documentation of the EquityClear service and reports available can be found on our website at http://www.lchclearnet.com/cash_equities/equityclear.asp

Q – What do I need to do now?
A – All Turquoise Derivatives clearing members will need to complete and return the EquityClear Static data forms to link the deliveries to the appropriate EquityClear account by Friday 20th January 2012. 

For further information and to request the required forms please contact Karen Swift.
Karen.swift@lchclearnet.com
Tel: 0207 426 7562