The Creation of a Market : the Western European markets experience Maria Ivanova / Andrea S. Tranquillini Presentation to the 2nd AECSD Conference Moscow, 5 October 2005

Summary Our Company Conditions for an efficient market infrastructure The scenario Suggestions and Conclusions

Organisational Structure Clearstream Banking S.A. Luxembourg CBL (ICSD) Clearstream Banking AG Frankfurt CBF (CSD) Name of presenter / Unit

Our company Global market coverage 41 markets European coverage Austria Belgium Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Italy Luxembourg Netherlands Norway Russia (Jan.2006) - Poland - Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom South Korea Canada China USA Japan Hong Kong Mexico Thailand Singapore Argentina Malaysia Uruguay Indonesia New Zealand South Africa Australia

Our company The size of our core activities Clearstream: Offers Settlement and Custody services to more than 2,500 customers world- wide (only regulated financial institutions, including 28 Central Banks), covering over 200,000 domestic and internationally-traded bonds and equities Has securities on deposit worth EUR 8.3 trillion as at 30 June 2005 Settles transactions involving securities that are traded within Germany and internationally via a total of 17 platforms* Settles more than 160,000 transactions daily across 41 domestic markets Has been top rated as the industry provider for Tripartite Repo business Reached sales revenues of EUR 578,8 Mio in 2004 Some core figures to show the importance of our role As an intermediary, we process 120 million transactions per year In Safe Custody, we take care of over 7 trillion Euros of our customers assets In Banking, we offer extra services such as securities lending and have just been rated as No 1 rated industry service provider by the respected Global Custodian Magazine Other roles include LuxClear for BCL * Including Xetra, floor trading at FWB, regional German stock exchanges, US BrokerTec and MTS Group Name of presenter / Unit

Our Company Our Objectives Our objective is to improve the efficiency of securities services for global markets. We deliver integrated securities services for financial institutions worldwide by creating competitive and innovative solutions to: Remove market inefficiencies of today Build business opportunities for market players Deliver cost-efficiencies to the securities industry We are committed to reducing costs for Market Participants

Conditions for an efficient market infrastructure Best Practice and regulatory bodies International Best Practice Organisations CPSS/IOSCO Hague Convention European Union European Commission (Lamfalussy and Giovannini reports, WG Internal Market) European Parliament European Central Bank National Regulators and Central Banks Market Associations The Group of 30 ECSDA ICMA / ISSA

Conditions for an efficient market infrastructure The drivers - 1 1) CPSS IOSCO – Hague Convention Formulates broad supervisory standards, gives guidelines, recommends statements of best practice Hague Convention promotes harmonisation of financial market’s legislation 2) European Union – Lamfalussy Report - Giovannini Committee Focus on harmonization of cross-border post-trade practises. The reports have identified the existing barriers prevent the efficient delivery of C&S services. Consensus that the EU post-trade landscape could be significantly improved. Convergence initiatives The removal of barriers related to taxation and legal certainty is clearly the responsibility of the public sector. European Commission  Aims to propose legislation for the financial sector (FSAP, etc) 3) ECSDA Represents the interest of its CSD and ICSD members and represents them at international level on technical, financial, legal & regulatory discussion. Streamlines initiatives among its members to achieve harmonisation, increase efficiency and reduce risk in post-trade across Europe for the benefit of issuers, investors and market participants.

Conditions for an efficient market infrastructure The drivers - 2 4) “G30 Group” 20 Recommendations Interoperability  Focus on creation of a single Financial market by creating cross border market links for both securities and cash, CCPs, Securities Lending, reference data, messaging and communications. Risk management  Business Continuity and Disaster Recovery plans to avoid large-scale market disruption and minimize Operational risk. Governance  Need of experienced and appropriate Board membership. Development of remote membership. Need of clear regulatory framework in each country. 5) ISSA – International Securities Services Association Need of collecting and disseminating information on the developments in the rapidly changing international securities markets, Need to offer securities operations professionals a forum to exchange ideas and issues of common interest. 100 member institutions world-wide and 2000 subscribers to its publications all over the world. Out of the 44 Asian countries only 7 are members of the ISSA (Pakistan, China-HK, Japan, Korea, Malaysia,Taiwan, Thailand)

1) CPSS IOSCO (IOSCO) - International Organization of Securities Commissions has developed in 1998 the Objectives and Principles of Securities Regulation (CPSS) - Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries has produced in 2001 the final version of the Core Principles for Systemically Important Payment Systems.  Building on the previous work, the CPSS and IOSCO have worked to contribute further to this process by jointly developing recommendations for securities settlement systems, to improve the safety and efficiency of these systems. Hague Convention’s objectives Law on cross border securities transfer or cross-border creation of interests iin securities held with an intermediary Protection of market participants from legal and systemic risk Protection of intl. Capital markets by « harmonisation of « conflict of law ». Improvement of efficiency of capital markets Cost reduction in cross border securities settlement and collateralisation.

2) EUROPEAN UNION The Giovannini committee Identification of inefficiencies in EU financial markets. Definition of Barriers preventing market integration. Three main groups: National differences in technical requirements and market practice; National differences in tax procedures; Issues relating to legal certainty. Proposal of practical solutions to improve market integration. DBAG endorses the results of the two Giovannini reports and, as a top priority, supports a quick and comprehensive removal of the barriers identified. Despite the non-enforceability of the second report, Deutsche Börse Group has been willing to make sizeable efforts to remove those barriers individually and together with other market participants. Deutsche Börse Group is actively participating with market associations, such as ECSDA, to develop viable solutions to barriers 4, 7 and 3, and has already implemented and comply with barrier 1 (implementation of ISO15002).

The 15 Giovannini Barriers (2nd Report) Implementation schedule Barriers by deadline Barrier 7 Harmonise operating hours Barrier 1 Harmonise communication infrastructure Barrier 4 Guarantee intra-day settlement Barrier 6 Harmonise settlement periods Barrier 3 Harmonise corporate actions rules Barrier 8 Harmonise securities issuance Barrier 11 Open tax withholding services Barrier 12 Remove local tax collection Barriers 13, 14, 15 Ownership of securities Barrier 2 and 9 Openness of C&S services Barrier 5 Remote access to C&S Barrier 10 Remove primary dealers restrictions 2 years 2 y. & 3 m. Within 3 years 2 years & 3 m. NOTE: Due to the non-enforceability of the 2nd Giovannini Report, deadlines are only indicative and fixc expected completion date since start.

3) ECSDA Working Groups Barrier 7  Harmonisation of Operating Hours and Settlement Deadlines Barrier 4  Intra-day settlement finality Action: Addressed by ECSDA Working Group 5 through development of an inventory and a set of 10 harmonisation standards agreed that all 17 member CSDs have committed to acheive by April 2005. Status: Targets reached at 75%. Considerable change expected over the next 6 month. Barrier 3  Corporate Actions harmonisation Action: Also assigned to ECSDA’s Working Group 5, which is currently finalising a solution for cash distribution suitable to all 17 member CSDs and in close collaboration with the European Banking Federation (EBF) and the the European Securities Forum /ESF)

4) G30 Recommendations on C&S Monitoring organisation 1 Eliminate paper and automate communication, data capture and enrichment North American committee, European Monitor Committee, Asia/Pacific Regional Committee 2 Harmonise messaging standards and communication protocols ISSA, SWIFT 3 Develop and implement reference data standards (ISIN numbering) 4 Synchronise timing between C&S systems and payment FX systems North American committee, European Monitor Committee, Asia/Pacific Regional Committee Association Global Custodians 5 Automate ans standardsize institutional trade matching 6 Expand the use of Central counterparts ISSA 7 Permit securities lending and borrowing to expedite settlement 8 Automate and standardise assets servicing processes, inclusing CA, Tax relief and restriction to foreign ownership 9 Ensure financial integrity of providers of C&S services PriceWaterhouseCoopers 10 Reinforce risk mgmt practices of users of C&S services 11 Ensure final simultaneous transfer and availability of assets. European Monitor Committee, Asia/Pacific Regional Committee 12 Ensure effective business continuity and disaster recovery planning 13 Address the possible failure of a systematically important institution 14 Stengthen assessment of the enforceability of contracts Legal Subcommittee – ISDA, EFMLG, CPSS/IOSCO 15 Advance letgal certainty over rights to securities, cash, or collateral Legal Subcommittee, UNIDROIT, Hague Conference, CPSS/IOSCO, ISDA, EUPFL 16 Recognise and support improved valuation and closeout netting arrangements Legal Subcommittee, ISDA, EFMLG, EUPFL 17 Ensure appointment of appropriately experienced and senior board members Regional co-chairs 18 Promote fair access to securities C&S networks 19 Ensure equitable and effective attantion to stakeholders interests 20 Encourage consistent regulation and oversight of C&S service providers

5) ISSA (International Securities Services Association) Barriers 6,7,8  Expand the use of Central counterparts, Facilitate Securities lending and borrowing, Automate and standardize assets servicing processes, including CA, Tax relief and restriction to foreign ownership. Action: Within the framework of the Group of 30 recommendations, ISSA has received a mandate to assist with finding solutions for recommendations 6, 7, 8. ISSA has requested its members to join in a new project to address the subjects covered in these recommendations, by trying to assemble a useful source of information that is globally consolidated, yet provides details on an individual market level. Status: Questionnaire to members in progress Barrier 2,3  Harmonize messaging standards and communication protocols, develop and implement reference data standards (ISIN numbering). Action: ISSA is supporting SWIFT presently in charge of the Barrier’s removal. Status: SWIFT has established a Independent Advisory Group to solve Giovannini Barrier 1

Conditions for an efficient market infrastructure Preliminary steps Central Securities Registry (alternative: the German option) Certainty of ownership. Official entitlement compensation rules, Record date, Ex date, Pay date. Legal enforcment Centralised source of Corporate Action information CSD Third party account recognition (Nominee, Omnibus) Single numbering Agency Real Time settlement (both cash and securities) Primary market / New issues regulation (eg. IPOs)

The « G8 » markets experience compared to Russia   Russia USA Germany France United Kingdom Japan Canada Italy Official Ent.Comp. rules NO YES Record date Ex date Pay Date Legal enforcment Central Securities registry Centralised source for CA NO  Central Securities Depository 2 1 Nominee account omnibus-third party account Single numbering Agency New Issues regulation

The example of the German Market Ministry of Finance BAFIN Bundesbank Deutsche Börse AG Stock Exchanges Stock Exchanges Stock Exchanges Stock Exchanges Berlin Bremen Düssel- dorf Frank- furt Xetra Eurex Hamburg Hannover Munich Stuttgart EUWAX Clearstream Banking Frankfurt (CBF) National Numbering Agency Centralised source of CA information CBF as a router and intermediary of market info towards the Registrars. No Central Securities Registry Registrars WM

…and of the Russian Market (2007?) Ministry of Finance FSFM Central Bank of Russian Federation MICEX Group Stock Exchanges Stock Exchanges Stock Exchanges Stock Exchanges The Rostov Currency and Stock Exchange The Siberian Interbank Currency Exchange The Ural Regional Currency Exchange Russian Trading System The St. Petersburg Stock Exchange The Asian Pacific Interbank Currency Exchange The Nizhny Novgorod Stock and Currency Exchange The Samara Currency Interbank Exchange MICEX Stock Exchange MICEX Settlement House National Mercantile Exchange National Depository & Clearing Centre National Numbering Agency Centralised source of CA information CSD as a router and intermediary of market info towards the Registrars. No Central Securities Registry Registrars ?

Our approach and Conclusion We seek efficiency through existing models. We target market growth within a regulated environment (infrastructure and legislation). We participate to international forums, associations, committees. Clearstream and Deutsche Börse Group are supportive for the creation of new securities market infrastructure and available to provide the necessary knowledge.

Contacts Maria Ivanova Andrea S. Tranquillini Customer Relations Management Network Relationship Management Northern and Eastern Europe Central and Eastern European Countries E-mail: mivanova.cb@clearstream.com E-mail: atranquillini.cb@clearstream.com Tel: +352.243.36381 Tel: +352.243.32477 Fax: +352.243.636381 Fax: +352.243.632477 Mobile: +352.021.295239 Mobile: +352.021.214619