disclosure framework for securities settlement … · valnu iela 1 riga, lv-1050 latvia the time...

DISCLOSURE FRAMEWORK FOR SECURITIES SETTLEMENT

SYSTEMS

April 2013

LATVIAN CENTRAL DEPOSITORY

Valnu Street 1, Riga, LV 1050, Latvia Phone: 371-67212431, Fax: 371-67229411

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I. BASIC INFORMATION

A. What is the name of securities settlement system (SSS)?

DENOS - operated by Latvian Central Depository

B. Where and in which time zone is the SSS located? Latvian Central Depository (short name - LCD) Valnu iela 1 Riga, LV-1050 LATVIA

The time zone is GMT + 2 hours standard.

C. What functions does the SSS perform?

LCD performs the following functions:

1. Registration of publicly issued securities.

All publicly issued securities have to be registered with LCD. LCD may also register the so-called closed

securities issues. Since LCD is a member of ANNA (Association of National Numbering Agencies) and,

consequently, the National Numbering Agency in Latvia, LCD assigns ISIN codes for registered securities

issues. LCD assigns also CFI codes (Classification of Financial Instruments).

2. Safe-custody of securities.

LCD provides safe-custody of securities for financial intermediaries - banks and investment brokerage

companies. All securities are kept in book-entry form.

3. Clearing and settlement for securities.

LCD organises clearing and settlement for transactions concluded either on the stock exchange or on OTC.

Since LCD participants have corresponding securities accounts with LCD, LCD settles securities positions. The

BoLV according to the instructions of LCD clears cash positions. LCD is authorised by its participants to

debit/credit their corresponding cash accounts with the BoLV for settlement of securities trades to provide DVP.

4. Maintenance of shareholders’ registers.

LCD keeps lists of shareholders of privatised enterprises (Initial Register) to ensure the registration of title to

securities until the securities owner opens securities account with a participant of LCD. The Register created by

LCD keeps these temporary lists of shareholders.

As an optional service LCD also provides shareholder registrar service for private companies.

5. Management of Corporate Actions.

The most common corporate actions and related services provided by the LCD are:

compilation of shareholder lists;

dividend payments;

payments of interest and principal;

redemption of share minority (Take over);

merger.

6. Dissemination of information on corporate actions to participants and the securities market.

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1. Does the SSS serve as a securities depository and/or provide securities settlement services?

LCD serves as the central securities depository of Latvia and also provides securities settlement services to the

NASDAQ OMX Riga and OTC market.

(a) What types of instrument are eligible for deposit at the SSS (e.g. debt, equities, warrants, etc.)?

The following instruments are eligible for deposit at LCD:

equities;

bonds (government, corporate and mortgage bonds);

T-bills;

commercial papers;

deposit certificates;

investment fund units etc.

(b) What types of instruments are eligible for transfer within the SSS ?

All securities eligible for deposit can be transferred within LCD.

(c) Please describe whether eligible securities are dematerialised, immobilised or transferred physically?

Currently all eligible securities are dematerialised. However, LCD can offer its services for immobilised

securities.

(d) Does the SSS provide safekeeping for physical certificates?

No, it does not. Please refer to I.C.1.(c)

2. Does the SSS provide cash accounts and/or provide funds transfer in conjunction with securities

transfers? If so, in what currencies?

The SSS has a link to the Payment System of the BoLV. The LCD participants authorise LCD to debit/credit

their cash accounts with the BoLV in conjunction with securities transfers and corporate actions.

The cash accounts are in LVL.

Settlement for stock exchange trades in foreign currencies in conjunction with securities transfers is done via

Deutsche Bank AG in EUR and Deutsche Bank Trust Company Americas in USD. Settlement for OTC trades in

foreign currencies in conjunction with securities transfers is done via Deutsche Bank AG in EUR, Deutsche

Bank Trust Company Americas in USD and Rietumu Banka AS in RUB.

3. Does the SSS provide a trade matching service? Do others provide such services for securities

settled at the SSS?

LCD provides a trade matching service for trades concluded on OTC market. LCD settles trades concluded at

stock exchange after receiving matched trades from the NASDAQ OMX Riga.

4. Does the SSS provide a trade netting service (as distinct from undertaking the settlement of

securities transfers on a net basis)? Do others provide such services for securities settled at the SSS?

In either case, what type of netting (bilateral or multilateral), if any, are performed?

LCD does not provide a trade netting service on its own.

5. Does the SSS offer a securities lending or borrowing program?

LCD does not offer a securities lending or borrowing program.

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6. Does the SSS provide custodial and/or related services such as the collection of interest, dividends,

principal or withholding tax reclamations? Which type of service are provided?

LCD is a custodian for its participants - banks and investment brokerage companies. LCD also provides

collection and distribution of interest and dividend payments, as well as distributes cash related to redemption

of bonds. All proceeds received from the issuers are transferred to participants’ accounts for further distribution

to individual accounts.

7. Does the SSS act as a central counterpart or principal to transactions with its participants?

LCD is not a counterpart to any transaction.

8. Other? Please specify.

None.

D. What type of organisation is the SSS?

1. Please indicate whether the SSS is a public sector or private sector entity.

LCD is a private sector entity.

2. Please indicate whether the SSS is organised on a for-profit or a non-profit basis.

LCD is a for-profit company.

3. What is the legal basis for the establishment of the SSS and for securities transfers made trough it?

LCD operates under “Law on the Financial Instruments Market”, and DENOS (SSS) operates under the

"Description of DENOS".

The LCD Regulations govern securities transfers made through LCD according to “Law on the Financial

Instruments Market”.

E. Please describe and provide a diagram outlining the organisational and

ownership structure of the SSS.

The SSS together with the NASDAQ OMX Riga form a part of the NASDAQ OMX Riga Group. The Group is

92.98% owned by NASDAQ OMX Group, the remaining 7.02% is owned by Rietumu banka AS. LCD and the

NASDAQ OMX Riga are separate legal entities; however, they share an organisational structure that is based

on functions and client groups.

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MANAGEMENT BOARD

MANAGEMENT BOARD

MEMBER (1)

CHAIRMAN OF THE MANAGEMENT BOARD

MANAGEMENT BOARD

MEMBER (2)

CLEARING AND SETTLEMENT DEPARTMENT

HEAD

SPECIALIST, CLEARING AND SETTLEMENT



LEGAL DEPARTMENT

HEAD

IT DEPARTMENT

HEAD

FINANCE

DEPARTMENT

MARKETING AND COMMUNICATIONS

DEPARTMENT

BALTIC MARKET DEVELOPMENT DEPARTMENT

HEAD

SERVICE

FUNCTIONS

IT PROJECT

MANAGER

SPECIALIST,

IT

ACCOUNTANT

SPECIALIST, CORPORATE

COMMUNICATION

SPECIALIST, CORPORATE

COMMUNICATION

CHIEF ACCOUNTANT

ASSISTANT

SPECIALIST, FACILITY

PROJECT

MANAGER

PROJECT

MANAGER

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1. Who are the owners of the SSS?

LCD is a private sector entity, 100% owned by the NASDAQ OMX Riga.

2. What entity or entities operate the SSS? Which functions of the SSS, if any, are outsourced to third

parties?

Only LCD operates the SSS. However, the IT support functions of SSS are outsourced to local IT company.

3. Does the SSS have a Board of Directors?

LCD has a Board of Directors: Supervisory Board.

(a) What is its composition?

The Supervisory Board currently consists of 4 members, representing the shareholders of the group as well as market

participants. The Supervisory Board has a Chairman plus three board members. General Meeting of shareholders

elects the Supervisory Board.

(b) What are its responsibilities?

The Supervisory Board is responsible for strategic decisions as well as for monitoring the Management Board

performance. Assuring the day-to-day operations is exclusively the responsibility of Management Board.

F. Please describe the financial resources of the SSS

1. Amount of paid-in capital and retained earnings?

As of the 1st of January 2013:

Equity capital - LVL 1 638 646

Paid-in capital - LVL 185 000

Retained earnings - LVL 1 453 646

For information - official LVL/EUR exchange rate is 0.702804.

2. Guarantees, insurance coverage or other similar arrangements?

LCD has Bankers Blanket Bond Insurance, Insurance against electronic and computer crime and Insurance covering

professional indemnity from AIG Europe. LCD activities have been insured also according to NASDAQ OMX group

Global Insurance policy (the scope of insurance covers: Directors&Officers Liability, Errors&Omissions, Fidelity Bond

Program, Employment Practices liability, General Liability).

3. Credit lines or letters of credit?

None.

4. Powers to assess participants or equity holders?

Not applicable.

G. Please describe whether the SSS or its operator is subject to authorisation,

supervision or oversight by an external authority.

Financial and Capital Market Commission supervises LCD. LCD Regulations according to the “Law on the Financial

Instruments Market” require the authorisation of the Financial and Capital Market Commission.

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II. RULES AND PROCEDURES OF THE SSS

A. Does the SSS maintain a complete list of the rules and procedures governing the

rights and obligations of participants and the duties of the SSS?

1. How can participants obtain a copy of the rules and procedures?

Full text of the Regulations is available on the LCD's web page http://www.nasdaqomxbaltic.com/en/csds/latvian-

csd/lcd-rules/.

2. Does other documentation provided to participants (e.g. user guides) have the same status as the rules

and procedures?

No.

3. Describe the process for changing rules and procedures, including any need for regulatory approval.

(a) What authority is required, and how does this differ depending on the type of change involved?

All amendments to the LCD Regulations of LCD are initiated by Management Board.

LCD Regulations:

No 1 “On LCD Participants”

No 2 “On Book-entry of Financial Instruments and Execution of Corporate Actions”

No 3 “On Financial Instruments Accounting”

No 4 “On Financial Instruments Transfer”

No 5 "On DVP Settlement for OTC Transactions”

No 6 “On Settlement of Transactions Executed or Registered at the Stock Exchange”

No 7 "On Identification of Owners of Financial Instruments”

No 8 “On payment of dividends, coupons, principal and other cash proceeds”

No 9 “Pledging of Financial Instruments”

No 10 “On Deregistration of Financial Instruments”

No 11 “On Data Exchange”

No 13 „On Financial Operations with Latvian Government Securities”

No 14 “On Fees for Services Provided by the LCD”

No 15 “On DVP settlement in foreign currencies”

are subject to approval by Management Board after they have been agreed with the Financial and Capital Market

Commission.

(b) How are participants notified of changes in rules and procedures?

LCD informs its participants about any changes in the Regulations with a registered letter as well on LCD website.

(c) Is there a procedure for participants or others to comment on proposed rule changes?

Participants and other relevant organisations are involved and consulted while developing the amendments to LCD

Regulations.

B. Are the rules and procedures binding on the SSS as well as its participants? Under

what conditions and on whose authority can written rules and procedures be waived

or suspended by the SSS?

The Regulations are binding both on LCD and its participants. The Regulations cannot be waived or suspended by

LCD.

http://www.rfb.lv/docs/rules/LCD_Eng/LCD_Nr_1_JaunDiz.pdf




http://www.rfb.lv/docs/rules/LCD_Eng/LCD_6_Settlement_ENG.pdf






http://www.rfb.lv/docs/rules/LCD_Eng/LCD_13_LatvGovernSecur_a.pdf

http://www.rfb.lv/docs/rules/LCD_Eng/LCD_14_Fees_ENG_200505.pdf


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III. RELATIONSHIPS WITH PARTICIPANTS

A. Please describe the types of membership offered by the SSS.

1. How do the types differ?

There are the following types of LCD Participants:

1. Custodians - banks and investment brokerage companies located in the EEA member states as well as foreign

banks and investment brokerage companies. When the bank or investment brokerage company applies for

participation, LCD checks the professional capacity of the applicant and takes a decision about the participation. To

become a custodian, at least two employees of the bank or investment brokerage company have to pass the LCD

exam for securities accounting and other back-office procedures.

2. Issuers - an issuer becomes a LCD participant automatically after LCD registers its securities issues. According to

the “Law on the Financial Instruments Market” LCD shall register all publicly issued securities. LCD may also register

non-public issues.

3. Other organisations - the NASDAQ OMX Riga, the Central Securities Depository of Lithuania, the Estonian

Central Securities Depository, the BoLV, the Treasury, an EU member country, and municipalities of the two latter.

2. Within each membership category, are all participants subject to the same rules and procedures? Please

describe important exceptions, including both differences in rules across participants and the rationale for

these differences.

All participants within each participation category are subject to the same rules and procedures. Special relationships

are established only with issuers for issue registration.

B. Can participants establish accounts for their customers’ assets that are segregated

from their own asset accounts at the SSS?

According to the “Law on the Financial Instruments Market”, customers’ assets must be segregated from participant’s

own assets.

1. If so, is this accomplished through a single omnibus customer account or through a multiplicity of

accounts and/or sub-accounts ?

This is accomplished through a single omnibus customer account.

2. Is the segregation optional or compulsory?

The segregation is compulsory.

3. Does the fact that a sub-account at the SSS bears the name of a third party give any rights to that third

party as a participant under the rules of the system?

Not applicable.

C. Please describe participant requirements for each type of membership.

1. Are participant required to be domiciled or resident in a particular jurisdiction?

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Issuers can be either residents or non-residents. There are no specific requirements or classifications as to

jurisdictions.

2. Are participant required to be subject to a supervisory regime? If so, please describe.

All participants of LCD (except the BoLV and non-residents) are supervised by Financial and Capital Market

Commission.

3. Are participants required to hold an equity stake in the SSS?

No, they are not. The NASDAQ OMX Riga is the sole owner of the LCD.

4. Are there financial, economic, personal or other requirements (e.g. minimum capital requirements, ‘’fit and

proper’’ tests)? If so, please describe.

There are no requirements to the LCD participants other than stipulated by the “Law on the Financial Instruments

Market”.

D. Does the SSS engage in oversight of its participants to ensure that their actions

are in accordance with its rules and procedures? If so, please describe.

LCD is a self-regulatory organisation and has a right to monitor the actions of its participants at any time. If after such

an examination LCD establishes the fact that its participants acted in breach of the LCD Regulations, it specifies time

period for correcting its procedures. If the appropriate actions are not taken by the specified date, LCD has a right to

suspend this participant’s activity.

E. Under what conditions can participants terminate their membership in the SSS ?

Does this mark the end of all liabilities of the participant? If not, please describe what

liabilities could remain.

A participant can terminate its membership if:

1) it informs LCD about this decision at least 6 months before planned termination date;

2) it does not agree with proposed changes of LCD Regulations.

The termination of membership does not mean cancellation of the liabilities of the participant (existing liabilities that

have not executed till the moment of termination remains).

F. Under what conditions can the SSS terminate a participant’s membership in the

SSS?

LCD can terminate a participant’s membership if:

1) the participant does not act in compliance with the LCD Regulations;

2) the participant violates conditions of the participation agreement;

3) the Financial and Capital Market Commission takes a decision to revoke or suspend the participant’s licence.

G. Please describe the scope of the SSS’s liability to participants, including the

standard of liability (negligence, gross negligence, wilful misconduct, strict liability or

other), the force majeure standard, and any limitation to the scope of liability of the

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SSS (e.g. indirect or consequential damages). Where are these liabilities and their

limitations set out (e.g. in statute or contract)?

Pursuant to the provisions of the Civil Law LCD shall be liable according to general principles of loss recovery.

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IV. RELATIONSHIPS WITH OTHER SSS AND COMMERCIAL INTERMEDIARIES

A. Does the SSS maintain linkages (including sub-custodian or cash correspondent

relationships) or other relationships with other SSSs ?

1. Please identify each of the other SSSs used and the type of securities transferred via the linkages.

(a) What is the name of the other SSS ? Where is it located ?

1. The Estonian Central Securities Depository (located in the Republic of Estonia) - bilateral corresponding

relationship for safe-custody and settlement of securities transactions.

2. The Central Securities Depository of Lithuania (located in the Republic of Lithuania) - bilateral corresponding

relationship for safe-custody and settlement of securities transactions.

3. Clearstream Banking Luxembourg (located in the Luxembourg).

4. Polish National Depository for Securities (Krajowy Depozyt Papierów Wartościowych S.A.- KDPW) (located in the

Republic of Poland).

(b) What securities are eligible for transfer via the linkage to the other SSS ?

1. The Estonian Central Securities Depository - all types of eligible securities deposited with the Estonian Central

Securities Depository.

2. The Central Securities Depository of Lithuania - all types of eligible securities deposited with the Central Securities

Depository of Lithuania.

3. Clearstream Banking Luxembourg - all types of eligible securities accepted by Clearstream.

4. Polish National Depository for Securities - only those securities registered with LCD that have been entered into

the list of link-eligible securities.

(c) Are transfers of securities made via the linkage to the other SSS limited to only those that are free of payment or

are transfers against payment also made via the linkage to the other SSS? If against payment, please describe the

timing of the transfers and the corresponding payments.

Cross-border deals concluded in the Baltic stock exchanges (NASDAQ OMX Tallinn, NASDAQ OMX Riga and

NASDAQ OMX Vilnius) are settled against payment. Usual settlement cycle is T+3. All remaining transfers (OTC

transactions) via the linkage to other SSS are free of payment settlements or against payment.

Link with the Clearstream Banking Luxembourg is used for OTC FOP and DVP transactions whereas the link with the

Polish National Depository for Securities is used only for FOP cross-border deliveries of Latvian securities.

(d) Does the other SSS provide custody services to the SSS and, if so, who bears any credit or custody risks?

The Estonian Central Securities Depository provides such services for Estonia-registered securities to LCD and LCD

bears the risks; similarly, The Central Securities Depository of Lithuania provides such services for Lithuania-

registered securities.

B. Does the SSS use securities custodians (other than the other SSSs addressed in

previous question) and/ or commercial cash correspondents? Please identify the

custodians or cash correspondents used and the duties that each performs.

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To provide cash for cross-border deals concluded in the NASDAQ OMX Riga by participants located in Estonia and

Lithuania, cash settlement agents are used. Final settlement is provided by the BoLV.

To provide cash settlement in foreign currencies, Deutsche Bank AG, Deutsche Bank Trust Company Americas and

Rietumu Banka AS are used.

C. Please describe the standards used in approving or reviewing relationships with

other SSSs, custodians or cash correspondent, including any financial or operational

requirements or the presence of insurance or public supervision.

The corresponding relationships are established on a case-by-case basis. The terms of co-operation are developed

according to the specific details of relationship with effort to minimise risks and maximise efficiency.

D. Does the SSS advance funds or securities to or on behalf of other intermediaries

such as issuing or paying agents? If so, please identify the circumstances in which

such exposure could arise.

In the case of dividend, income or redemption payments LCD receives the aggregate amount from the issuer and

distributes the amounts between the custodians, for further distribution to their clients.

In the case of IPO, LCD collects payments for securities and transfers funds to the issuer.

E. Please describe measures in place to protect the SSS and its members against the

failure of other SSSs or commercial intermediaries to meet obligations to the SSS,

including risk controls, collateral or alternative sources of funds and securities.

There are no such measures.

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V. SECURITIES TRANSFERS, FUNDS TRANSFERS AND LINKAGES BETWEEN TRANSFERS

A. Please discuss whether and how settlement instructions are matched between

participants prior to processing by the SSS.

1. Is matching required for all transactions without exception?

Matching is done by the NASDAQ OMX Riga for all trades concluded at stock exchange.

LCD itself provides matching of settlement instructions for OTC transactions.

2. What procedure is used when instructions do not match?

Participants are notified immediately that their instructions do not match.

3. Are matched settlement instructions binding on participants?

Matched instructions for trades concluded on the stock exchange are binding for participants.

As to the OTC transactions matched instructions become binding only if both counterparts have sufficient

securities/cash balance. If counterparts have no sufficient securities/cash balance on the settlement day the

instructions are not considered to be binding, therefore there are no penalties in case of default.

(a) If so, please describe the consequences of failure by participants to meet obligations (e.g. forced settlement,

penalties, short positions).

In case of a participant’s default in stock exchange trade, it will fall under the provisions of the NASDAQ OMX Riga

Rules on Cash and Financial Instrument Settlement. NASDAQ OMX Riga runs a Guarantee Fund owned by the

trading members that will be enacted in case of cash default. The member will also be subject to penalty.

With respect to stock exchange block trades and OTC transactions there are no penalties for failure, because in this

case matched instructions are not binding. In this case the failure is registered and added to the participant’s records.

(b) Please describe whether this is a feature of the SSS’s rules and procedures or of national law or regulations.

It is a feature of Rules of the NASDAQ OMX Riga and the LCD Regulations.

(c) Please provide a time line indicating the points at which matched instructions become binding, as well as any pre-

matching process that takes place.

Instructions matched by stock exchange become binding immediately after the registration of trade.

OTC instructions become binding if counterparts have sufficient securities/cash balance.

B. Are securities transferred within the SSS registered?

There is no registrar in Latvia. The proof of title of ownership is entry in the securities account that the owner has

opened with a custodian.

Therefore questions 1 - 6 are not applicable.

1. Who is the registrar?

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2. Is it normal practice to register the securities in the name of the SSS (or its nominee) or in the name of the

beneficial owner? Are there instances in which securities housed within the SSS are registered to neither the

SSS (or its nominee) nor the beneficial owner?

3. If the SSS offers custodial services, will it hold securities registered in the name of the beneficial owner?

4. Under what circumstances does the SSS initiate registration of securities in the buyer’s name?

5. How long does the registration process typically take? Are participants notified when registration is

complete?

6. Can securities be transferred within the SSS before registration in the buyer’s name is complete? If so, do

the rules and procedures of the SSS provide for an unwind or reversal of such transfers in case of

bankruptcy or other events which result in the buyer’s name not being entered on the register?

C. Please describe how securities transfers are processed within the SSS.

1. Please indicate whether the transfers are processed as debits and credits to members’ accounts or via

some other method.

Securities transfers are processed as debits and credits to participants’ accounts.

2. On a continuous (real-time) basis, or in one or more batches?

All transfers except stock exchange trades are processed on a real-time basis.

3. If continuous, during what hours does the processing occur? If in batches, at what time or times is the

processing initiated and completed?

All transfers except stock exchange trades are processed on continuous (real - time) basis from 9:00 till 18:00; for

stock exchange batch transfers are processed on the settlement day at 13:00.

4. Do securities settlements occur daily? Please identify securities for which settlement occurs only on

specific days of the week or month.

Securities settlements occur daily (on business days) for all securities.

D. Please describe whether final funds transfers in conjunction with the SSS are made

as debits and credits to balances held at the SSS, at one or more commercial banks,

at the central bank, or via some other method.

Final funds transfers in conjunction with LCD are made as debits and credits to balances held at the central bank.

1. Does the SSS maintain cash accounts for its participants? Are these accounts equivalent to deposit

accounts at a commercial or central bank or do they serve only as ‘’cash memorandum’’ accounts?

LCD does not maintain cash accounts for its participants. Participants open cash accounts with the BoLV.

2. On what entity (SSS or other) does the participant bear cash deposit risk?

On the BoLV.

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3. Under what circumstances does the SSS provide credit extensions or advance of funds to its participants

and thereby expose itself to credit risk?

LCD does not provide credit extensions. Therefore, there is no exposure.

4. How long can such credit extensions last? How long do they typically last?

Not applicable.

E. Is the SSS a DVP? If so, please describe the DVP model used according to the

models outlined in the DVP Report (see the Introduction). Please also provide a

diagram indicating the timing of events in the processing of securities and funds

transfers in the SSS. Where the SSS provides more than one alternative for settlement

processing, please provide a response for each alternative and indicate the relative

importance of each alternative.

There are two models of settlement used by LCD:

1) net simultaneous settlement of securities and cash (DVP) (model 3)

2) gross simultaneous settlement of securities and cash (DVP) (model 1)

Net simultaneous settlement of securities and cash (DVP) is used to settle trades that are concluded on the NASDAQ

OMX Riga.

Trades are concluded on the NASDAQ OMX Riga on the day T (trade day). On the same day the stock exchange

sends results of trading session to LCD. On the day S (settlement day) 11:15 o’clock LCD checks whether all trade

confirmations have been received from custodians and calculates net positions for securities and cash. If securities

positions are sufficient for settlement, LCD submits an instruction to the BoLV to transfer the cash according to the

calculated net positions. If cash positions are sufficient in the cash accounts of LCD participants, the BoLV executes

cash settlements and sends a confirmation on the execution of cash settlements to the LCD. The LCD after the

receipt of the confirmation on the execution of cash settlements transfers the blocked financial instruments in

accordance with the calculated net positions and sends the confirmations on settlement execution to the LCD

participants.

Gross simultaneous settlement of securities and cash (DVP) is used to settle other transactions.

To settle a transaction LCD participants send Deliver Against Payment/Receive Against Payment messages (and

confirmations if necessary) to LCD. LCD matches these instructions and, if the appropriate messages have been

received, LCD checks whether there is a sufficient amount of securities in the seller’s account. If yes, LCD blocks

securities and sends instruction to transfer cash to the BoLV. If cash positions are sufficient for settlement, the BoLV

transfers cash and LCD transfers securities.

LCD participants can choose settlement day from T + 0 ( real time basis) till T + 360.

1. Are funds transfers and securities transfers processed within the same system or in different systems? If

different, how are they linked?

Securities transfers are processed in LCD, but funds transfers in the BoLV.

LCD uses SWIFT as a communication mean between LCD and the BoLV.

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(a) Please describe whether each securities transfer is linked to a specific funds transfer on a trade-by-trade basis or

on a net basis or via some other method.

For OTC transactions each securities transfer is linked to fund transfer on a trade-by-trade basis.

For stock exchange trades - transfers are not linked as they are processed according to calculated net positions.

(b) Does the SSS ‘’split’’ large transactions into multiple transactions or require participants to do so?

No.

2. When do securities transfers and funds transfers become final?

Transfers become final once entries are made to the securities/cash accounts.

(a) At what time do securities transfers become final? After what event or events?

Securities transfers become final once LCD makes entries to the securities accounts.

(b) At what time do funds transfers become final? After what event or events? Does this timing allow for same-day

retransfer of funds received in exchange for securities?

Funds transfers become final once entries are made to the cash accounts by the BoLV. Participants can retransfer

the funds at the same day on real time basis.

(c) If final delivery of securities precedes the final transfer of funds, can participants dispose freely of such securities

prior to funds finality? If so, what actions will be taken if funds are not received?

Final securities and fund transfers are processed simultaneously.

(d) If final delivery of funds precedes the final transfer of securities, can participants dispose freely of such funds prior

to securities finality? If so, what actions will be taken if securities are not received?

Final securities and fund transfers are processed simultaneously.

(e) Does the timing of finality differ depending on the type of security transferred or the currency in which payment is

to be made? Please describe.

The timing of finality does not differ depending on the type of security. If LCD will accept payment in currencies other

than LVL the timing of finality will differ depending on the currency of payment.

3. Please discuss whether participants are notified of securities or funds transfers while they are still

provisional, only when they are final, or both.

Participants are notified when transfers are final.

F. Does the SSS itself ’’guarantee’’ funds or securities transfers?

1. Under what circumstances and at what point are transfers guaranteed by the SSS?

LCD itself does not guarantee funds or securities transfers.

Transfers for stock exchange trades are guaranteed by the Guaranty Fund of the NASDAQ OMX Riga in the case of

securities or funds default at the moment of settlement.

2. What actions does the guarantee obligate the SSS to take ?

Not applicable.

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3. Please indicate whether the guarantee is a feature of the SSS’s rules and procedures or of national law or

regulations.

It is a feature of the NASDAQ OMX Riga Rules.

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VI. DEFAULT PROCEDURES A. Please discuss the events or circumstances that would constitute default of a

participant under the rules and procedures of the SSS or that would lead the SSS to

make use of exceptional settlement arrangements or unwind procedures.

1. Failure by a participant to meet a test of its solvency under the applicable laws of its jurisdiction?

In the case of insolvency of a participant the Financial and Capital Market Commission would decide what activities of

participants must be monitored or suspended (for example lien on its securities or freezing of securities etc). By the

"Law on the Financial Instruments Market" clients’ securities will not be affected by fact of failure of LCD participant.

2. Failure to make payments or deliveries of securities within the time specified?

In the case of stock exchange this failure will be treated as ‘’default’’ in accordance with LCD Regulations and

NASDAQ OMX Riga Rules and Regulations.

In the case of OTC transactions - it will cause failure of settlement.

3. To the extent that the rules and procedures grant discretion in the determination of the use of default or

other exceptional procedures, please discuss where the authority to exercise such discretion resides and the

circumstances in which this authority would be used.

LCD Regulations are fairly detailed about the procedures in the case of default.

The authority which can exercise such discretion could be LCD or the Financial and Capital Market Commission.

B. What procedures are followed by the SSS once it has determined that a default

event has occurred or that exceptional settlement arrangements are to be employed?

1. How and at what point are participants notified that this has occurred?

For stock exchange trades - on S LCD checks whether there is sufficient securities/funds amount in the accounts of

its participants. If it is not sufficient, LCD immediately informs participants and gives them a time limit to deliver

necessary amount to their account.

For OTC transactions - LCD will not register the trade if there is no sufficient securities/funds amount in the accounts

of participants.

2. Would the SSS be expected to continue to meet all its obligations to participants under these

circumstances? Please discuss the resources in place to ensure that this would occur (e.g. collateral,

participants’ fund, insurance, loss-sharing arrangements, etc.).

Not applicable.

3. Please describe and provide a time line indicating the order in which these resources would be used as

well as the timing of participant notifications and important deadlines (e.g. when the SSS’s obligations to

participants would be met, when participants would need to cover their loss-sharing obligations).

In the case of stock exchange transactions the NASDAQ OMX Riga decides about the use of the Guaranty Fund after

it receives information from LCD about the failure on S day. Participants may be given a time to deliver

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securities/cash or the Guaranty Fund could be involved in settlement at once - the procedure depends on the decision

of NASDAQ OMX Riga.

4. Please describe all conditions under which provisional transfers of securities or funds could be unwound

by the SSS.

There are no provisional transfers of securities or cash in LCD. Therefore the unwind procedure of provisional

transfers is not available. In the case of participant’s failure to settle stock exchange transaction net positions of

participants may be recalculated. The decision of recalculation of net positions is made by LCD and NASDAQ OMX

Riga.

Therefore questions (a) - (e) are not applicable.

(a) How and on what authority would a decision to unwind securities or funds transfers be made by the SSS?

(b) When and how would participants be notified of a decision to unwind provisional securities or funds transfers?

(c) How long would participants have to cover any debit positions in their own securities or funds accounts resulting

from an unwind?

(d) In the event of an unwind, would all transfers be unwound or would only a subset of transfers (e.g. only securities

purchases or only those of a subset of participants) be unwound?

(e) If only a subset of transfers, what procedure would be followed to determine which transfers and in what order?

5. Can bankruptcy or insolvency be declared retrospectively in the SSS’s jurisdiction (e.g. under a ’’zero-

hour’’ rule), and could this cause provisional securities or funds transfers to be unwound?

Bankruptcy or insolvency can be declared only by the Court. But the Financial and Capital Market Commission has a

right to suspend the activity of the participant before the final decision of the court. This will not cause unwinding of

provisional transfers since they are not available in LCD. “Zero-hour” rule is not applicable in Latvia.

6. Please describe any circumstances in which transfers of securities or funds that were defined as final in

response o question V. E. 2 above would ever be unwound.

The final transfers may not be unwound.

C. Has a participant in the SSS ever been declared in default or become insolvent?

During the operational activity of LCD no loss has occurred either to LCD or its participants due to default or

insolvency procedures.

At the very end of 2011 one of LCD`s participant became insolvent. Nonetheless, as insolvency proceeding is in

progress questions 1-2 are not currently applicable.

1. Have loss-sharing procedures been invoked?

2. Please describe whether any of these defaults or insolvencies resulted in losses for the SSS or its

participants and how they were absorbed.

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VII. SECURITIES OVERDRAFTS, SECURITIES LENDING AND BACK-TO-BACK TRANSACTIONS

A. Is it possible for debit positions (overdrafts) in securities accounts at the SSS to

arise?

Debit positions (overdrafts) in securities accounts are not allowed.

1. Under what conditions could such debit positions occur?

(a) Do these conditions always result in debit positions in securities accounts rather than failed transactions? If not,

please explain the basis for differential treatment by the SSS.

Not applicable.

(b) Are these situations covered explicitly by the rules and procedures of the SSS?

Not applicable.

2. How long can such debit position last? How long do they typically last?

Not applicable.

3. How are debit positions in securities accounts prevented, rectified or managed?

As debit positions (overdrafts) in securities accounts are not allowed, LCD processing system monitors each debit

entry.

4. What procedures would be followed by the SSS in case the debit cannot be rectified (e.g. failure by a

participant with a debit balance in a securities account or unavailability of the securities in the market) ?

Not applicable.

(a) Application of loss-sharing provisions allocating the loss to participants?

(b) Absorption of the loss by the SSS?

(c) Other? Please specify.

B. Under what circumstances does the SSS provide for the lending of securities to

ensure settlements?

LCD does not lend securities to ensure settlement. Therefore, questions 1-4 are not applicable.

1. Is the process for lending securities automatic? If not, please describe the procedures used by the SSS to

determine whether a securities loan will be made.

2. At what point are participants notified that securities are being lent to them in order to complete their

settlements?

3. Which securities on deposit at the SSS are eligible for lending? Do participants have the option to make

securities available for lending or is it mandatory?

4. Are lent securities identified by the SSS with specific participants as lenders or only with a common pool

of securities available for lending? Does the participant whose securities are lent become a principal to the

transaction?

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C. How does the SSS back-to-back transactions?

No true back-to-back transactions are possible in LCD. However, it is possible to redeliver securities that were

received on same-day.

1. Under what conditions are delivery instructions by participants receiving and redelivering securities on the

same day under back-to-back transactions settled for same day value?

It is possible to redeliver securities that were received on same-day only as OTC transfer (DVP transfer or Free of

Payment transfer) and only if the securities balance is sufficient for delivery.

(a) Only if the participant has securities on deposit with the SSS that have been received pursuant to a final securities

transfer?

Yes.

(b) If the participant has securities on deposit with the SSS that have been received pursuant to a provisional

securities transfer?

Not applicable.

(c) Before securities have been received either provisionally or finally, but when a matched receipt instruction exists

for the same or greater value? Is such a practice limited to markets where matching is binding?

Not applicable.

(d) Before securities have been received either provisionally or finally, but when a third party has promised to deliver

to the SSS securities of the same or greater value? Must the provider of the guarantee have itself received the

securities through a final transfer? Please describe how the SSS evaluates such promises, and whether they are

addressed by the written rules and procedures of the SSS.

Not applicable.

(e) Other? Please specify.

Not applicable.

2. Please describe limits or controls in place with respect to any of the above arrangements for the settlement

of back-to-back transactions, including limits on amounts involved or related to the liquidity of the underlying

securities.

There are no limits or controls related to the above arrangements, because only finally received securities are

considered to be available and each instruction is settled separately.

3. Under what conditions are payment instructions by participants in the SSS under back-to-back

transactions settled for same day value? Can participants use the proceeds of an on-delivery of securities

without the need for an extension of credit ?

The expected payment from an on-delivery cannot be used to settle the initial buy transaction. But funds are available

for redelivering right after settlement for previous transaction is executed.

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VIII. RISK CONTROL MEASURES

A. Please describe the roles and responsibilities of those areas of the SSS

responsible for risk management and control.

1. Please describe the process for the internal review of risk management policies and procedures.

LCD Management Board is responsible for reviewing of risk management policies and procedures. On the request of

the Board the heads of different LCD departments report about risk issues related to activity of their departments. The

Management Board monitors the execution of its decisions about risk management and control.

2. Is there a risk management policy that addresses the review and approval of new products and services

offered by the SSS ? At what level of the organization is risk management approval given for a new product

or service ?

The new services are developed by specialists of the respective LCD department. The evaluation of risk issues

related to launching a new service is a mandatory phase in new services development. After the reporting by the said

department the Management Board decides about the approval of new service.

3. Does the SSS have a risk management function with clear independence from and authority over

operational or marketing functions?

There is no separate risk management department at LCD. Management Board is responsible for risk control. The

departments report to Management Board on risk related issues and Management Board takes the necessary

measures to control risk.

4. Does the Board of Directors review risk management policies and procedures? Does the Board have a risk

management or audit committee?

The Management Board continuously reviews risk management policies and procedures and acts as a risk control

provider. There is no risk management or audit committee established at LCD.

B. Please describe any internal or external audits or supervisory/regulatory

examinations that are performed with respect to the SSS. For each such audit or

examination, please address the following questions.

1. Who performs the audit or examination?

According to the “Law on the Financial Instruments Market’’ the Financial and Capital Market Commission has the

right to inspect LCD at any time. It can examine any documentation of LCD, and for the purpose of examination

representatives of the one of the mandatory stages of new services’ development is Financial and Capital Market

Commission may participate in meetings of LCD Supervisory Board and Shareholders Meeting. The Financial and

Capital Market Commission monitors whether LCD acts in compliance with legislation and its own Regulations. The

inspection may be organized at any time according to the decision of the Financial and Capital Market Commission.

In addition, the LCD as a group company is subject to internal audits by the parent company. The last audit was

carried out in the year 2011. The report is non-public and not available to participants. Finally, according to the law

’’On Annual Reports’’ the financial and organizational activity of LCD as a joint stock company shall be audited by an

international audit firm once in a year.

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2. What is the scope of the audit or examination?

(a) Please indicate whether and how it addresses the sufficiency of and compliance with internal controls.

Yes, the audit addresses the sufficiency of and compliance with internal controls. The audit identifies the existence of

documents describing the accountability of management bodies and compliance with them. The main focus is on

assuring the continuity of operations, including the disaster recovery plan.

(b) Please indicate whether and how it addresses the SSS’s compliance with its own rules and procedures.

Yes, the audit addresses SSS’s compliance with its own rules and procedures. It analyses the compliance of the rules

with the “Law on the Financial Instruments Market”, the compliance of the internal procedures, internal audit and

outsourcing of services.

3. What is the frequency of the audit or examination?

Internal auditor performs an audit twice a year. The last LCD business audit was conducted in the middle of the year

2011.

The report of the audits are for restricted internal use only and not available to participants.

4. Are audit or examination reports available for review by participants?

The reports of this audit may remain non-public, therefore are not available to participants.

C. Please discuss whether the SSS has the capacity to value (i.e. mark to market) the securities that it holds.

LCD does not value the securities that it holds, thereby the questions 1 - 3 are not applicable.

1. Please describe how these valuations are used by risk control systems at the SSS.

2. How frequently are securities revalued?

3. What are the sources for securities valuations?

(a) What outside price or data sources are used?

(b) If pricing models are used, please describe how the models are chosen and how the model inputs are obtained.

D. Please discuss whether the SSS has a lien on the securities held in or transferred

through it.

LCD has no lien on the securities held in or transferred through it. Therefore questions 1 -2 are not applicable.

1. Does the lien apply only to the securities owned by the participants themselves or does it extend to the

securities beneficially owned by customers of participants?

2. Under what circumstances and in what manner would such a lien allow the SSS to use the securities?

E. Please discuss the circumstances in which the SSS requires collateral to limit or

mitigate risks.

There are no such circumstances, thereby the questions 1 - 7 are not applicable.

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1. Does the SSS manage its own collateral system?

2. Does the SSS share a collateral system with another SSS or payment system?

3. Can collateral at the SSS be posted and returned on the same day?

4. What types of transaction at the SSS involve the use of collateral?

5. What are the policies with regard to the type of collateral used or haircuts required?

6. How are collateral valuation methodologies developed and reviewed?

7. To what extent are collateral policies described in the written rules and procedures of the SSS?

F. Please describe the SSS’s use of limits on exposures to monitor or control risks.

LCD does not use such limits, thereby the questions 1 - 7 are not applicable.

1. Please explain the types of limit used and the exposures to which they apply.

2. Do the limits apply to all participants and/or to other SSSs with which the SSS is linked? What are the

exceptions to the limits ?

3. Do limits apply to participants individually or in the aggregate or both?

4. Do limits apply to implicit as well as explicit extensions of credit or securities (e.g. when on-deliveries of

securities are permitted pursuant to provisional but not final delivery of securities)?

5. Does the SSS automatically reject transactions that exceed limits or is compliance determined ex post ?

6. How are limit policies developed and reviewed?

7. To what extent are limit policies described in the written rules and procedures of the SSS ? Where does

additional authority to set or amend limit policies reside?

G. Please describe other controls to mitigate or reduce risks at the SSS.

1. Does the SSS or its participants have the capacity to monitor participants’ accounts continuously during

processing?

LCD can monitor participants’ accounts continuously during processing. Currently participants cannot monitor their

accounts, but this possibility is being planned (on-line access for participants).

2. Is there a special risk control regime that the SSS would apply to participant known to be experiencing

financial difficulties?

There is no a special risk control regime at LCD.

3. Does the SSS maintain or administer loss-sharing arrangements other than those applicable to events of

default and addressed in Section VI above? Are these loss-sharing pools pre-funded by participants?

Not applicable.

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IX. OPERATIONAL RISKS

A. Please provide assessments of the operational reliability of the computer and other

systems used by the SSS, including any criteria that the SSS uses internally for this

purpose?

1. What is the percentage uptime of the systems used by the SSS?

(a) Whole system overall?

99.99 %.

(b) Broken down by major components (e.g. communications network, central processing facility)?

Communications – 99.99 %, central processing – 99.99 %.

(c) During critical processing periods?

99.99%.

2. Has the SSS experienced major operational problems during the past two years?

(a) Have settlements been delayed, been disrupted or otherwise failed because of operational problems during this

period?

No.

(b) Please describe the nature of any such problems.

Not applicable.

B. Please describe contingency or disaster recovery planning at the SSS.

1. Does the SSS have a formal plan for business continuity in place?

Yes.

2. Is this plan available for review by participants?

No, this plan is not available for review by participants.

3. How often is this plan tested? Does this involve participants in the SSS?

The plan has been tested and once implemented in real-life situation. The testing frequency is once a year and it

involves participants.

4. What are the major elements of the business continuity plan?

The key element of the business recovery plan is the pre-described actions for restoring the business activities under

a number of scenarios. The recovery of LCD core business is based on a remote back-up site.

5. How long would it take the SSS to resume operations if primary systems become unusable?

2 hours (securities accounting, clearing and settlement) and 1 day for other core functions.

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C. What are the key features of the internal controls covering operations and security

at the SSS (e.g. change controls or those covering remote access) ?

1. Please describe controls or security procedures in place to ensure that the SSS acts only on authentic

settlement instructions from valid participants.

If the message file is transferred, it is signed and encrypted using asymmetric public/private key cryptography.

Therefore the identification of a sender and the correctness of the data is achieved.

The exchange of message files between LCD and its participants is a mutual process. After LCD has processed a file

received from the participant, it prepares and sends the affirmation file, which contains information about

accomplished operations, statement of account and other relevant information. This file is signed, then encrypted and

sent in the same manner as the participant's file.

2. Are internal operational and security controls included in the internal and/or external audits of the SSS?

No.

3. Are internal operational and security controls covered by regulatory requirements applicable to the SSS?

No.

D. Does the SSS impose minimum operational or performance standards on third

parties (e.g. communications providers)?

Yes, minimum problem acnowledgement time and minimum closure time for solution is defined for the support and

maintenance services provided by the service provider with respect to platform-based IBM WebSphere Message

Broker securing file exchange with CSD participants; minimum operational and performance standards are also set

with datacenter, connectivity and internet service provider.

On exceptional cases when a LCD participant, under objective circumstances, is not able to dispatch messages using

a specialized IBM MQ-based technology JMS (Java Message Service) (MessageHub), the LCD participant may use

the following data exchange channels after giving a prior notice to the LCD (listed according to priority in usage):

1) FTP (File Transfer Protocol) servers;

2) SWIFT (Society of Worldwide Interbank Financial Telecommunication) terminal;

3) electronic mail (e-mail);

4) external data carriers (CD or DVD, USB flashcard).

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