None

1
Central Depository and Development of the
Financial Market Infrastructure Presentation of
Stage 1 Report 16 June 2006
PwC
2
Agenda

• Introduction
• Recommended Future State
• Suggested Transition Plan
• Critical Factors
• Unresolved Issues

3
Introduction

• This presentation supports the PwC Lawfort Report
  delivered to CCMD on 24 May 2006
• It is not a summary of the report but focuses on
  certain key issues
• The Recommended Future State
• The Suggested Transition Plan
• Critical factors and unresolved issues

4
Recommended Future State Illustrative Scenario
Recommended Future State
Mutual funds CIS
Off exchange trading
Issuer Own registrar
RTS
MICEX
St Petersburg
Registration on settlement
Individual Private Clients
Books close registration via nominee account
Registrar
Central Securities Depository
Troika
FRSD
Troika and ING are Direct Participants in the CSD
FRSD remains a Special Depository
Out of scope
ING
Professional market flows
Indirect participants and beneficial owners
Private client flows
5
Major Functional Recommendations (i)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

6
1 A Single CSD and optional CCP
Recommended Future State

• To meet the functional requirements it will be
  necessary to combine the operations of the
  settlement chambers and the clearing houses
  (except where these perform genuine CCP
  activities).
• Without the settlement chambers the single CSD
  cannot control the DVP process.
• Until the RTGS system is available, the single
  CSD should appoint a commercial settlement
  bank(s). This would effectively replace the
  settlement chambers which currently perform this
  role.

7
A Single CSD and optional CCP Interposition of a
CCP
Recommended Future State
Previous trade
TMF Trading Member Firm CMF Clearing Member
Firm
Clearing with CCP
Multilateral Netting
Bilateral relationships
Multilateral netting
Sells 150
Source Clearnet
8
1 A Single CSD and optional CCP The role of a
CCP
Recommended Future State
Concentrate and manage counterparty risk Provide
operational efficiencies via netting and becoming
the single settlement party Settlement
anonymity Settlement guarantees and capital
offsets A CCP is not a necessary component of
the Russian cash market infrastructure. Its
merits should be carefully studied before one is
created. (It is however a necessary component of
a derivatives market) A CCP would have limited
operational impact on the CSD but would reduce
its revenues since it would only settle net, not
gross, transactions The single Russian CSD as
described does not require a CCP.
9
Major Functional Recommendations (ii)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. CSD Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

10
2 Clearing Model (i)
Recommended Future State
Clearing Timeline
Central Matching Utility
Trade agreed

• Trade matching
• For OTC transactions.
• For transactions not supplied by the exchange to
  the CSD

• Confirmation/Affirmation
• Give-ups, Give-ins
• Average pricing
• Splits and allocations

• Settlement Preparation
• Netting calculation
• Optimisation algorithm
• SSI database
• Blocking or reserving of cash and securities

Trade matching is not required for transactions
supplied directly by the exchange to the CSD.
Otherwise known as locked in trades.
DVP settlement
end of T0
end of T1
end of T2
Settlement Day T3
Clearing

• The clearing process can be complicated if there
  are many participants and substantial
  cross-border flows from different time zones.
• The final settlement should be straightforward if
  all the clearing has been properly carried out.

11
2 Clearing Model (ii)
Recommended Future State
Central Matching Utility

• Without a central matching utility, each investor
  needs to maintain a link with every broker they
  use and every custodian. Similarly each broker
  needs to maintain a link with every investor and
  custodian. This requires multiple bespoke links.
• With a Central Matching Utility (CMU), each
  investor maintains only 1 standard link,
  preferably to the CSD.
• All the matching functions can be performed in
  the CMU.
• There is no CCP in this scenario.

12
2 Clearing Model (iii) Value chain
Recommended Future State
GCM General Clearing Member
Similar functionsbut commercial, thereforein
competitionwith CCP
Exchanges(cashmarkets)
Exchanges(derivativesmarkets)
Off-exchangerepos, swaps,
Trading

• Access to central bank money
• On behalf instructions
• Feedback
• Collateral Management

CCP Clearing
CCP
CSD Clearing
Centralsecurities depositories
International central securities depositories
CentralBank
Similar functionsin competitionwith CSD
Settle-ment

• CCP Clearing reduction number of processes and
  cash flows through netting and risk evaluation
  and management in order to reduce probability of
  failure
• CSD clearing (VMU) validating and matching of
  delivery instructions, the result of which is
  forwarded to settlement
• CCP clearing takes place prior to CSD clearing

13
Major Functional Recommendations (iii)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

14
3 Wholesale Model
Recommended Future State
Single CSD
Intermediary
Intermediary
Legal Beneficial owner
Intermediary
Intermediary
Legal Beneficial owner
Legal Beneficial owner
Foreign nominee

• No restriction on the number of levels
• Recognition of foreign intermediaries and nominee
  structures is required under Unidroit.
• Legal Beneficial owner is the one at the bottom
  of the chain in accordance with Russian law
• PRIMA applicable (Place of the Relevant
  Intermediary Account)
• Intermediaries are licensed depositories that act
  via nominee accounts. These are omnibus
  accounts, under designated segregation, that
  allow efficient settlement
• Also known as the Indirect Holding model
• Typically only several hundred accounts at the
  CSD

15
3 Limited levels (i) Problems with foreign
intermediaries
Recommended Future State
Registrar
Nominee account
CSD
Depository
Depository
Depository
Russian Depository
Investor
Depository
Investor
Foreign Intermediary
Foreign Intermediary
Foreign Intermediary
Custodian
Custodian
Custodian

• Limitation only achievable domestically, if
  foreign intermediaries/ nominees are not
  recognised
• Limited tiers might be interpreted as sub
  registers (direct holding system instead of
  indirect holding system)
• Limited tiers are suggested in order to ensure
  transfer of information on beneficial ownership
  to the CSD and the registrar. This is an
  operational problem, which should be solved by
  imposing technical requirements on CSD
  participants and/or specific license requirements
  for intermediaries opening securities accounts
  for their clients. A limitation of levels will
  not solve the problem.
• Limited tiers should only be envisaged to the
  extent required for the for limitation of custody
  risk

16
3 Limited levels (ii) Problems with foreign CSDs
Recommended Future State
Registrar
Nominee account
CSD
Depository
Depository
Depository
Depository
Depository
inv
Inv
inv
Foreign CSD
Foreign CSD

• Assumptions Foreign CSD has direct account with
  single Russian CSD. The regulators have an MOU in
  place. Russian CSD relies on foreign CSD
  conducting surveillance and know your customer
  tests.
• Issues - The foreign CSD will operate nominee
  accounts and will not know the identify of the
  final beneficial owners.
• - The foreign CSD will only open an omnibus
  account with the Russian CSD and a lot of the
  transactions will be internalised.
• - Links between CSDs are complex and carry very
  little traffic (the exception is DTCC/CDS)
• - If this route were mandatory for foreign
  investors it would be unacceptably expensive (to
  use the services of a foreign CSD that is not
  geared up to provide the level of customer
  service demanded by global custodians).
• Conclusion This is not a feasible alternative

17
Major Functional Recommendations (iv)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar. Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

18
Payment Mechanisms
Recommended Future State
Current State
Future State
Interim State
Exchange
Exchange
Exchange
CCP (Ex -Clearing House)
CCP (Ex -Clearing House)
Clearing House Netting
Settlement Chamber Cash
Single CSD
Single CSD
CSD Securities
Link to large value payment system at CBR
Link to commercial settlement banks
Link to RTGS payments mechanism

• Commercial settlement banks replace the
  settlement chambers in the interim. This provides
  a banking source with a recognized credit rating
  that would be acceptable to foreign investors.
  This is necessary since it is not possible to
  avoid daylight risk on the settlement banks in
  the absence of an RTGS system.
• A settlement chamber could apply to be a
  settlement bank if it obtained the requited
  credit rating.
• The CSD does not need a banking licence under
  these arrangements. It controls the DVP by
  instructing the cash movement.

19
Major Functional Recommendations (v)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar. Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

20
Fails Management
Recommended Future State

• A key role of the CSD is to ensure settlement.
  This does not necessarily involve a guarantee
  mechanism, but even with a guarantee arrangement,
  the fails management procedures should be used
  before triggering the guarantee.
• There are three main types of fails management
  procedures
• Stock lending/borrowing
• Buy-ins
• Penalties
• There is little incentive for a buyer to force a
  buy-in if they believe there is no counterparty
  risk. Buy-ins would be a mechanism used by a CCP
  if there were one in the value chain.
• Penalties can be treated by some participants as
  a cost of doing business. The fine or penalty
  does not provide compensation to the innocent
  party but merely generates revenue for the CSD.
• Stock lending/borrowing operated by the CSD is
  the optimal mechanism to force settlement without
  recourse to a guarantee fund (a last resort).

21
Stock Lending/Borrowing
Recommended Future State

1. The advantage of a single CSD is that it has
   access to the majority of securities in the
   market. It can operate a stock lending pool
   whereby holders of securities can make all or
   part of their holding available for lending to
   sellers who do not have the securities available
   for settlement.
2. The stock lending pool can be used to support
   administrative fails, where a seller does not
   have the securities due to operational reasons
   (e.g. they were expecting to receive the
   securities from a purchase, which itself is
   failing). It could also be used to support
   settlement of short sales where the seller does
   not have the securities at the time of trade.
   Differential pricing could be used to distinguish
   between the reasons behind the borrowing
   requirement.
3. It is recommended that the CSD operate the stock
   lending pool on an agency basis and not as a
   principal, while nevertheless maintaining
   anonymity.
4. The CSD would need to compensate the lenders and
   charge the borrowers for the service.
5. Stock borrowing should be mandatory for short
   sellers and optional for failing settlements due
   to administrative reasons.

22
Major Functional Recommendations (vi)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar. Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

23
Central Information Source
Recommended Future State

1. Participants of the CSD are at risk if they fail
   to action a corporate event in the market. One of
   the major risks is lack of information or simply
   being unaware that an event is taking place. It
   is unacceptable to expect participants to gather
   the necessary information from newspapers or
   other sources.
2. Typically the exchange would be provided with the
   necessary information as part of the listing
   requirements, as an obligation placed on the
   issuer. The exchange would then make this
   information available to all interested parties
   (possibly at a price).
3. In the absence of a single exchange in Russia, it
   is not a solution to use the exchanges as a
   single source of information. The recommendation
   is therefore to use the single CSD. The
   obligation to supply the information (correctly,
   in a timely manner) is still on the issuer, even
   though there is no contractual arrangement
   between the issuer and the CSD. The contractual
   arrangement is between the exchange and the
   issuer. The exchange is then required to supply
   the information to the CSD (again, correctly and
   in a timely manner).
4. The exchange has to provide the information to
   the CSD before it supplies the information to any
   other parties. The information is then made
   available to all participants on an equal basis.

• The central information source carries details
  about corporate events as supplied by issuers. It
  has nothing to do with ownership. The only
  central source of information about ownership is
  the CSD.
• Since the information derives from the exchange
  it only relates to listed securities.

24
Major Functional Recommendations (vi)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar. Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

25
Rationalisation of Registrars
Recommended Future State

• There is no proposed mechanism to encourage
  consolidation amongst registrars as there is for
  the CSDs.
• Rationalisation is expected to follow from two
  requirements of the CSD
• Only the single CSD can maintain a nominee
  account at the registrar
• The registrar will need to connect with the CSD
  electronically, meeting information requirements
  in a timely manner complying with STP standards.
• The first requirement will restrict the revenue
  opportunities of the registrars they will no
  longer be able to charge for settlement (except
  in the private client market, outside the scope
  of the CSD). This is likely to encourage
  rationalisation for commercial reasons.
• The need to adopt electronic messaging and STP
  standards will require registrars to invest in
  their business. The business case for such an
  investment will not be justified where the
  registrar only acts for a single (or a few)
  issuer(s). Again, this is likely to encourage
  rationalisation.

26
Major Functional Recommendations (vi)
Recommended Future State

1. A single CSD via consolidation of settlement
   depositories, settlement chambers and part of the
   clearing houses adoption of the Standard Model
2. Clearing via a central matching utility
3. Wholesale model with unlimited levels not the
   three tier approach. The retail model is not
   possible under Russian legislation
4. Mandatory CSD for securities with independent
   registrars, with exclusive right to a nominee
   account at the registrar. Mandatory electronic
   links with registrars
5. Combined net and gross settlement
6. RTGS settlement in central bank funds. Interim
   measure in commercial bank funds. The CSD
   should not be a (full service) bank
7. Fails management supported by stock lending at
   the CSD
8. Central information source to support asset
   servicing
9. Rationalisation of Registrars
10. Information on beneficial owners

27
Information on Beneficial Owners
Recommended Future State

1. It is recommended that all intermediaries
   (irrespective of whether they are a direct CSD
   participant or not) are required, as part of
   their licence obligations, to conduct the
   necessary Know Your Customer checks when setting
   up an account.
2. All licensed intermediaries should be required to
   provide details of beneficial ownership at the
   request of their client (the intermediary
   immediately above them in the chain). Such a
   requirement should be part of the contractual
   arrangements between the parties.
3. Similarly, the intermediary who holds securities
   for a customer (down the chain, as opposed to a
   client up the chain) should also have contractual
   arrangements that allows them to request
   information on beneficial ownership of their
   customers.

• The types of intermediary, their relationships
  and other stake holders, is shown on the next
  slide

28
Stakeholders
Recommended Future State
Issuer
Issuer
Issuer
Registrar
Registrar
Registrar
Commercial banks
Exchanges
Single CSD
Central Bank
Regulator
Direct Participant
Indirect Participant
Direct Participant
Intermediary
Intermediary
Intermediary
Intermediary

• Employees are also stakeholders, but with no
  access rights
• Participants inside the box have access to the
  CSD.

29
Functional Benefits of the Proposed Solution
Recommended Future State

• Provide a major component to an efficient capital
  market for Russia. This will facilitate lower
  borrowing costs on government debt and higher
  prices for IPOs, greatly benefiting the Russian
  economy.
• Cost effective solution
• Removes legal uncertainty. Requires only
  recognition of a foreign nominee/intermediary
  under Unidroit
• Reduces risk, full control of DVP process with
  flexible settlement cycles
• Meets international standards such as G30,
  CPSS/IOSCO
• Attractive to international investors, SEC 17f7
• Functional structure combined with message
  standards will facilitate STP

30
Impact of Functional Recommendations
Recommended Future State

• Impact on Intermediaries
• Monopoly provider and access to CSD is only via
  Direct participants
• No longer able to operate nominee accounts at
  register
• Impact on Investors
• Instils trust in infrastructure
• Encourages on-shore settlement via SFI DVP. Could
  be mandatory between domestic participants
• Impact on Registrars
• Only the CSD is allowed to operate a nominee
  account for securities at independent registrars
• Will only be able to charge for settlement if
  there is a transaction with a private investor
  who holds a direct account at the registrar.
• Will be required to meet strict technological
  standards to communicate with CSD

31
Two options
Suggested Transition Plan

• Preferred solution
• Based on the Spanish model a voluntary
  approach. Requires consensus but not unanimity
• Holding company that acquires settlement
  depositories in return for ownership
• Employs a valuation approach
• Creates common commercial interest with
  continuity of operations
• Allows integration of individual settlement
  depositories at a later stage
• Fall back solution
• Only applicable if consensus via Consultative
  Council fails
• Tender imposed by Regulator (no precedent)
• Selects one settlement depositories as the CSD
• Potential to cause disruption in the market

32
Transition Plan Evolution not Revolution
Suggested Transition Plan

• Equitable solution encompasses all participants
• Incorporates a Consultative Council which ensures
  public debate and drives consensus
• Encourages Private/Public Partnership (PPP) via
  initial involvement of the government but with an
  exit route.
• Allows wider involvement through ownership via
  private placement route
• Participant owned through periodic reshuffling of
  shareholding

33
Transition to a Single CSDFirst Step Creation
of a Consultative Council and Creation of Holding
Company
Suggested Transition Plan
Single CSD Ltd
Clearing House
Clearing House
Clearing House
Settlement Chamber
Settlement Chamber
Settlement Chamber
Settlement Chamber
Settlement Chamber
Settlement Depository
Settlement Depository
Settlement Depository
Settlement Depository
Settlement Depository

• A holding company is created which will
  eventually become the single CSD
• The holding company will acquire all the relevant
  legal vehicles it needs to create the single CSD.
  This will include the settlement depositories,
  the settlement chambers (which will be replaced
  by commercial banks and eventually the RTGS
  system) and part of the clearing houses
  (necessary to perform the CSD clearing operations
  described in slides 9 - 12)
• The Clearing Chamber of MICEX (now set up as NCC)
  would also have to be included. This requires the
  exchanges giving up business lines as well as the
  Settlement Depositories.

34
Transition to a Single CSDSecond Step Share
Swap
Suggested Transition Plan
Troika
ING
CBR
MICEX Owners
RTS Owners
Non-participant owner
Etc
Existing owners of Settlement Chambers, Clearing
Houses and Settlement Depositories
Single CSD Ltd
Minority Shareholder

• The entities that contributed to the holding
  company receive shares in proportion to their
  contribution (based on a valuation method)
• On the basis that the single CSD will be
  participant owned and that the exchanges are NOT
  participants, then ownership in the holding
  company should not go to the exchanges directly,
  but to the exchanges owners.
• No cash moves during this stage.
• The advantage of this step is that all owners now
  have a common interest, instead of the previous
  conflicting interest.
• In case a SD does not participate, then a tender
  might have to be organised to select the CSD.
• Since some minority shareholders may not agree to
  participate, the CSD must have a 55 share in the
  entities acquired.

35
Transition to a Single CSDSecond Step
Valuation and swap mechanism
Suggested Transition Plan
BEFORE
AFTER
170
120
290
Single CSD
MICEX Group
MICEX Group
50
120
30
50
MICEX Clearing House
120
MICEX Settlement Chamber
MICEX Stock Exchange
MICEX Settlement Chamber
30
MICEX Stock Exchange
MICEX Clearing House
90
90
NDC
NDC

• The existing owners of MICEX Group currently own
  a group of companies worth RUB 290 (say).
• In this example the new single CSD would wish to
  acquire the MICEX Settlement Chamber, the
  Clearing House and NDC.
• Before the share swap, the owners held assets
  worth RUB 290. After the share swap the (same)
  owners hold assets worth RUB 290.
• The same process is applied to RTS and other
  owners of assets to be consolidated under the new
  single CSD.

36
Transition to a Single CSDThird Step Private
Placement or IPO
Suggested Transition Plan
Troika
ING
CBR
MICEX Owners
RTS Owners
Eligible owners subscribe to a private placement
Etc
(IBERCLEAR)
Single CSD Ltd
CADE (ex central bank depository)
SCLV (ex broker/dealer depository)

• Eligible owners are invited to take part in a
  private placement. This takes the form of either
  a rights issue or a direct subscription
• Existing owners (from Step 2) can subscribe for
  additional shares if they so wish and new owners
  (who previously did not have any participation)
  can acquire shares.
• The private placement raises cash to be used to
  appoint the management team of the single CSD,
  acquire systems (if necessary) and merge the
  acquired Settlement Chambers, Clearing Houses and
  Settlement Depositories.

37
Transition to a Single CSDFourth Step - Merger
of infrastructure
Suggested Transition Plan
Troika
ING
CBR
MICEX Owners
RTS Owners
New owners
Etc
Single CSD Ltd
Equity system
Fixed income system

• All contracts are transferred from acquired
  entities to single CSD.
• The merger process is the decision of the single
  CSD as the owner of all these activities.
• The merger can be effected by selecting the best
  of breed currently available in the Russian
  market or by issuing an RFP for a new system
  provided the Single CSD has sufficient funds
  raised from the private placement or IPO. (The
  Single CSD could choose not to merge its
  operations it was a long time after the share
  swap that created IBERCLEAR before CADE and SCLV
  were merged)
• If not all CDs are acquired, then a tender will
  have to be organised to select the single CSD.
  Non-selelcted CDs would have to cease activities
  after the transition period

38
Transition Plan Timeline
Suggested Transition Plan

• Detailed Transition Plan included in the Phase 1
  Report
• In terms of elapsed time the Consultative Council
  is on the critical path
• Commence Consultative Council in July 2006. Full
  public debate January 2007. Final agreement March
  2007.
• The legal creation of the single CSD and transfer
  of contracts should be possible by mid-2007
• Consolidation of systems is not a necessary
  feature of the transition plan and is therefore
  not time critical

Agree to adopt transition plan
Consultative Council
Valuations
Public debate
Create CSD
Jun 2007
Jan 2007
Jun 2006
39
Critical Factors

• Critical Success Factors
• Acceptance of functional design
• Consultation process to promote transition
• Valuation method to ensure equality of treatment
• Critical Risk Factors
• Inconsistency between settlement law and exchange
  law
• Inadequate interaction with other related
  projects e.g. the availability of RTGS system
• System solution that meets functional
  requirements, which is not too expensive for
  users
• Exchange solution (see next slide)

40
Unresolved Issues

• The exchanges
• MICEX may not be willing to provide its
  settlement platform to RTS
• This could prevent a merger of NDC and DCC
• Merger of MICEX and RTS resolves the CSD issue
• Allows move from horizontal to vertical silo model

Current situation
Unacceptable situation
Ideal situation
MICEX
RTS
NDC
DCC
A single CSD would effectively provide RTS with
access to NDCs settlement capability, thus a
single CSD on its own might not be a consensus
decision. If the exchanges were merged at the
same time, then there might be consensus on the
single CSD. There is a benefit to RTS from
merging the settlement depositories as soon as
possible. There is a benefit to MICEX from
merging the exchanges as soon as possible.
41
Thank you!