Central Counterparty for Equities Guidance Note Jan 2001, 09/01

Central Counterparty for Equities

Guidance Note

January 2001 09/01

UK Equity Collateral in the CCP

1 Introduction

The purpose of this guidance note is to clarify within the context of the Central Counterparty for Equities service the acceptance of equities by LCH, particularly UK equities as collateral to meet the margin liabilities of members.

The note covers the following areas:

· General

· Acceptable Equities

· Valuations

· Lodging Procedures

· Release Procedures

· Corporate Events.

In addition to the UK equity collateral detailed below, LCH also accepts other non-cash collateral as security for margin obligations - details of which can be found on LCH’s web-site at www.lch.com.

Lodgement procedures for these collateral types are detailed in LCH’s General Regulations, Default Rules and Procedures.

2 General

LCH maintains a facility with Merrill Lynch International for the acceptance of Eligible Equity Collateral. To utilise this facility, members are required to enter into a Custody Agreement with Merrill Lynch International. The member will be responsible for maintaining this relationship, and all costs associated with operating the account are for the members’ accounts. As a consequence of this, Merrill Lynch International will hold the collateral in the account of the member but to the order of LCH. Members should use the following contact details at Merrill Lynch International if they wish to use this service:

Merrill Lynch International Max Hayden 020 7906 2466

Members should be aware that in the event of their default, part or all of the collateral charged to LCH might be sold for such value, as LCH is able to obtain.

3 Acceptable Equities

Members may lodge the following equities with LCH as collateral:

i) equities that are a constituent of the FTSE 100 index, and

ii) equities on which there exists a Traded Option contract on LIFFE.

LCH may refuse to accept such equities if:

i) the shares are issued by the member or a subsidiary of the member, or

ii) it is already holding equity shares in that company equal to 1.00% of the issued share capital of that company, or if accepting collateral offered by the member would cause LCH to breach such limit.

In the event that equity held by LCH as collateral cease to be eligible as collateral, the member will be contacted and requested to provide an Equity Collateral Release Form (see Release Procedures below and Appendix 5).

LCH will allocate 80% of the daily value of the collateral held as cover against the member’s margin liabilities. This percentage applies only to UK equities used as collateral. Other percentages are used for other types of collateral as detailed on LCH’s web site.

4 Valuations

Eligible equities are marked to market each day. The prices used and collateral values given can be obtained from the banking reports $EQU and CLM respectively.

5 Lodging Procedures

In order to lodge Acceptable Collateral, clearing members must complete the following documentation:

a) Form of Charge

A Form of Charge must be completed before a member places non-cash collateral with LCH. They need only be completed once and cover all subsequent lodgements of collateral. A member can provide them to LCH anytime prior to placing collateral. An example of the form is available on request from LCH. Members may also be required to provide LCH with legal opinions regarding their capacity to enter into the charge, details of which can be obtained from LCH on request.

b) Equity Collateral Lodgement Form

A completed lodgement form must accompany each lodgement of equity. It must be completed and signed ahead of the lodgement by the member, LCH and the chosen depository. An example of the form can be obtained from LCH on request.

c) Client Consent Form

A Client Consent Form must be completed if the member does not beneficially own the collateral to be charged. An example of the form can be obtained from LCH on request.

Once the necessary documentation has been provided, a member may proceed to deliver the stock to Merrill Lynch International. Members should use the contact information given in section two above to agree delivery dates and details.

Providing that documentation has been properly completed and returned, collateral can be accepted as soon as the depository has confirmed receipt.

6 Release Procedures

Members requiring the return of collateral held by LCH should complete an Equity Collateral Release Form. Collateral lodgements may be partially released. The release should specify the number of shares required. An example of the form can be obtained from LCH on request. This form will be authorised by LCH, providing that the collateral requested is not required as cover for open positions, and passed to Merrill Lynch International for release. Release of available collateral will normally be effected within forty-eight hours, but often sooner.

7 Corporate Events

These are handled by the chosen Depository as agreed in the Custody Agreement with the member.

8 Stamp Duty

It is our belief that there are no Stamp Duty implications for members in pledging collateral to LCH. Members are placing equities with a custodian who is acting on their behalf and there is no change of beneficial owner. However, members are advised to take their own professional advice in this regard.

9 LCH Charges

LCH charges 5 basis points per annum for utilisation of equity collateral. This is accrued daily and charged on a monthly basis to the member’s PPS account.

List of guidance notes

The project has published a number of guidance notes. The others published to date, or in production, are listed below, please contact the project for any later guidance notes.

01/00 Disclosure of shareholdings

02/00 UK Stamp Duty Reserve Tax

03/00 Agency and riskless principal trading

04/00 Balance sheet reporting

05/00 Impact of late settlement

06/00 Adjustment to LCH’s Default Fund to Cover Clearing of London Stock Exchange Business

07/00 Tripartite NCM-GCM-LCH Agreement

08/00 Irish Stamp Duty

09/01 UK equity collateral in the CCP

10/01 Residual settlement of non-CREST outturns

11/01 Corporate events in CREST in the CCP

Contact points

The CCP for Equities project can be contacted on 020 7849 0510 or via email at . Members of the Exchange, LCH or CRESTCo can also make use of their usual contacts in these organisations.

Information about the service is also available on the following websites: