CDS Clearing and Depository Services Inc. Principles For

CDS Clearing and Depository Services Inc.

Principles for Financial Market Infrastructures (“PFMI”) Disclosure

The information provided in this disclosure is accurate as of December 31, 2017. This disclosure is accessible online at www.cds.ca

Although all reasonable care has been taken in the preparation of this document, no representation or warranty, expressed or implied, is made or given by or on behalf of the Canadian Depository for Securities, CDS Clearing and Depository Services or the TMX Group, its affiliates, directors or any other person as to the accuracy, completeness or fairness of the information or opinions contained therein and no responsibility or liability is accepted for any such information or opinions. This document has been prepared for information and discussion purposes only and the opinions expressed therein are those of CDS solely.

Table of Contents

I. Executive summary ...... 7 II. General Background of FMI ...... 7 a. Eligible Securities ...... 8 b. Types of Participants ...... 8 c. Statistical Information ...... 9 d. General organization of the FMI ...... 9 e. Legal and regulatory framework ...... 12 f. System Design and Operations ...... 14 g. Primary risks ...... 18 i. Credit risk ...... 18 ii. Market risk ...... 23 iii. Liquidity risk ...... 24 III. Principle-by-principle summary narrative disclosure ...... 25 a. Principle 1: Legal basis...... 25 b. Principle 2: Governance ...... 30 c. Principle 3: Framework for the comprehensive management of risks ...... 35 c. Principle 4: Credit risk ...... 38 d. Principle 5: Collateral ...... 46 e. Principle 6: Margin ...... 50 f. Principle 7: Liquidity risk ...... 55 g. Principle 8: Settlement finality ...... 60 h. Principle 9: Money settlements ...... 61 i. Principle 10: Physical deliveries ...... 65 j. Principle 11: Central securities depositories ...... 66 k. Principle 12: Exchange-of-value settlement systems ...... 71 l. Principle 13: Participant-default rules and procedures ...... 72 m. Principle 14: Segregation and portability ...... 74 n. Principle 15: General business risk ...... 75 p. Principle 16: Custody and investment risks ...... 78 q. Principle 17: Operational risk ...... 81 r. Principle 18: Access and participation requirements ...... 84 s. Principle 19: Tiered participation arrangements ...... 88 3 t. Principle 20: FMI links ...... 91 u. Principle 21: Efficiency and effectiveness ...... 95 v. Principle 22: Communication procedures and standards ...... 96 w. Principle 23: Disclosure of rules, key procedures, and market data ...... 97 x. Principle 24: Disclosure of market data by trade repositories ...... 99 IV. List of publicly available resources ...... 100

Responding institution: CDS Clearing and Depository Services (“CDS Clearing”)

Jurisdiction(s) in which the FMI operates: Canada

This disclosure can also be found at: www.cds.ca

For further information, please contact: George Kormas Chief Risk Officer The Canadian Depository for Securities Limited [email protected] Office: (514) 871‐7881

The date of this disclosure: January 1, 2018

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I. Executive summary

The disclosure document constitutes the summary narrative of CDS Clearing and Depository Services Inc. (“CDS Clearing” or “CDS”) observance of the CPMI‐ IOSCO Principles for Financial Market Infrastructures (the PFMIs or the Principles) and is intended to provide relevant disclosure to CDS’s stakeholders on the key services CDS provides and the methods it uses to manage the risk, to itself and others, of providing these services.

This disclosure document has been prepared in accordance with the internationally recognized “Principles for Financial Market Infrastructures: Disclosure framework and Assessment methodology” published December 2012 by CPMI‐ IOSCO.

CDS Clearing operates three distinct financial market infrastructures: a central securities depository (“CSD”), a securities settlement system (“SSS”) and a central counterparty (“CCP”).

II. General Background of FMI

The Canadian Depository for Securities Limited (“CDS”), a wholly owned subsidiary of TMX Group Limited (“TMX Group”), is a valued partner to securities market participants, providing reliable, cost‐ effective depository, clearing, regulatory & information services. CDS provides these services through CDS Clearing and Depository Services Inc. (“CDS Clearing”)1, which operates automated facilities for the clearing and settlement of securities transactions and custody of securities, and depository-related services to issuers and their agents to facilitate securities issuance reporting of registered positions, and CDS Innovations Inc. (“CDS Innovations”), which markets data and data dissemination products.

CDS processes transactions from the following market places  Toronto Stock Exchange (“TSX”)  TSX Venture Exchange (“TSXV”)  Canadian Derivatives Clearing Corporation (“CDCC”)  Canadian National Stock Exchange (“CNQ”)  Pure Trading (“PURE”)  TriAct Canada Marketplace (“TCM”)  Nasdaq CXC Limited (“CHIX”)  OMEGA ATS (“OMEG”)

1 CDS Clearing as the provider of the financial market infrastructure services is the responding institution.

 Alpha Trading Systems (“AATS”)  Instinet Canada Cross Limited (“ICXS”)  Sigma X Canada (“SGMC”)  TMX Select (“TMXS”)  Nasdaq CX2 Limited (“CX2”)  Nasdaq CXD (“CXD”)  LYNX  Aequitas NEO  Over‐ the‐ counter fixed income and money markets

a. Eligible Securities

Equities – CNS Eligible Yes ● Common ● Preferred Corporate Debt Yes Government Securities Yes Money Market instruments Yes Other CNS Eligible Securities Trust Units (“ETFs”) Warrants Limited Partnerships Installment Receipts

b. Types of Participants

Group Number Banks 11 Trust Companies 6 Investment Dealers 44 Transfer Agent (TA) Limited Participants 16 Account Transfer On‐Line Notification Service (ATON) Participants 9 Automated Confirmation Transaction (ACT) Participants 3 Other Participating Organizations 8 TOTAL 97

c. Statistical Information

A. Economic and Market Statistics Year 2016 2015 2014 2013 Gross Domestic Product – 1,678,247 1,656,117 1,641,305 1,599,575 millions of chained dollars (2007)1

Population (thousands)2 36,265 35,832 35,535 35,152 Markets Capitalization3 – Listed per Market (billions CAD): TSX 2,735.5 2,299.8 2,511.2 2,321.8 TSX Venture 38.1 23.2 26.6 33.1

1. Source: Statistics Canada [http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ41-eng.htm] 2. Source: Statistics Canada [http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/demo02a-eng.htm] 3. Source: TMX [https://www.tsx.com/listings/current-market-statistics/mig-archives]

d. General organization of the FMI

CDS Clearing and Depository Services Inc. As Canada's national securities depository, clearing and settlement hub, CDS Clearing and Depository Services Inc. (“CDS Clearing”) supports Canada's equity, fixed income, and money markets.

CDS Clearing is regulated by the Ontario, Quebec and British Columbia securities commissions and the Bank of Canada, and is exempted from regulation by the Alberta Securities Commission. CDS maintains working and reporting relationships with the Canadian Securities Administrators (“CSA”), other provincial and territorial securities authorities, and the Office of the Superintendent of Financial Institutions.

Systemic Importance of CDS Clearing and Depository Services Inc. to Canada's capital markets CDS Clearing is pivotal to the integrity and smooth functioning of Canada's capital markets. As a result, CDS Clearing has been designated as a securities and derivatives clearing house under the federal Payment Clearing and Settlement Act and is overseen by the Bank of Canada through its regulation of designated systemically important systems, including CDS Clearing’s CDSX®.

Federal protection‐ of‐ securities regulations allow CDS Clearing to act as a custodian of securities for federally incorporated institutions such as banks, trust and loan companies, insurance companies and pension funds.

Information and support services CDS Clearing is considered the authoritative source of information on Canadian entitlements and corporate actions and offers a range of value‐ added information services that help increase the efficiency and competitiveness of the Canadian financial marketplace.

International services CDS Clearing provides a secure, efficient North American gateway between Canada and the U.S. to meet the increasing demand for cross‐ border clearing and settlement. CDS Clearing also has custodial relationships with other depositories which facilitate the movement of securities between countries.

Securities depository, custodial and entitlement services As Canada's central depository for securities, CDS Clearing is accountable for the safe custody and movement of depository‐ eligible domestic and international securities, accurate record‐ keeping, processing post‐ trade transactions, and collecting and distributing entitlements arising from securities deposited by customers.

Trade clearing and settlement CDS Clearing manages the clearing and settlement of trades in both domestic and cross‐ border depository‐ eligible securities through the automated CDSX clearing and settlement system. CDS Clearing is Canada's recognized securities depository, clearing, and settlement hub for cash equity and fixed income securities2. In 2014, CDS Clearing cleared 430 million domestic exchange and OTC trades compared to 352 million trades in 2013, an increase of 78 million trades or 22%.

2 Under the federal Payment, Clearing and Settlement Act (Canada).

CDS Clearing also achieved a new all‐ time record in exchange trades cleared in a single day at 3.2 million trades on October 15, 2014.

CDS Clearing also provides a Registrar and Paying Agent (“RPA”) service, a Holders of Record Report and a Confirmation of Registered Holdings, is the national numbering agency for International Security Identification Numbers (“ISINs”), and is a Registration Agent for the GMEI Utility in the latter’s provision of Legal Entity Identifier (“LEI”) registration and maintenance.

CDS was designated by the Bank of Canada and certain provincial commissions’ securities regulators as a Qualifying Central Counterparty (“QCCP”) in July, 2014, pursuant to the standards developed by the Basel Committee on Banking Supervision and adopted by the Office of the Superintendent of Financial Institutions (“OSFI”). This QCCP status reflects on the fact that CDS’s central counterparty (“CCP”) service is “based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the PFMIs.”3

e. Legal and regulatory framework

Authorities regulating, supervising or overseeing the FMI

CDS is regulated by the following: ● The Autorité des marchés financiers (“AMF”) ● The Bank of Canada ● The British Columbia Securities Commission (“BCSC”) ● The Ontario Securities Commission (“OSC”)

Corporate Status CDS is a corporation incorporated under the federal Canada Business Corporations Act. CDS operates in four Canadian provinces: Québec, Ontario, Alberta, and British Columbia, and is registered as such in each of the foregoing jurisdictions.

Legal Documents CDS’s Participant Agreement, Participant Rules, and Participant Procedures (collectively, the “Legal Documents”), provide the process and the contractual framework through which a Financial Market Intermediary (“FMI”) becomes a Participant of CDS. The Legal Documents are governed by the laws in force in the Province of Ontario and the Federal Laws of Canada applicable therein.

Federal Regulatory Oversight CDSX (CDS’s clearing and settlement system) is a designated clearing system pursuant to subsection 4(1) of the Payment Clearing and Settlement Act (Canada) (the “PCSA”). CDSX is

3 Retrieved from http://www.bankofcanada.ca/2014/07/qualifying-central-counterparties 12 subject to Part I of the PCSA and, consequently, is subject to oversight by the Bank of Canada. The Regulatory Oversight Agreement between the Bank of Canada and CDS formalizes the details of the Bank’s oversight of those aspects of CDS and CDSX pertaining to systemic risk.

Provincial Regulatory Oversight As noted above, CDS is a provincially‐ recognized clearing agency and is regulated by provincial securities commissions as follows: in Québec, by the Autorité des marchés financiers (“AMF”) under the Securities Act (Québec) (“QSA”); in Ontario, by the Ontario Securities Commission (“OSC”) under the Ontario Securities Act (“OSA”); and in British Columbia, by the British Columbia Securities Commission (“BCSC”) under the British Columbia Securities Act (“BCSA”). CDS is exempt from regulatory oversight by order of the Alberta Securities Commission.

Novation The sections of the CDS Legal Documents concerned with Novation are governed by the laws in force in the province of Ontario and are subject to Ontario Court jurisdiction as novation takes place in Ontario.

Netting The sections of the CDS Legal Documents concerned with netting are governed by the laws in force of the province of Ontario, the laws of other Canadian provinces, and the federal laws of Canada applicable in each of the foregoing, as follows:

● in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of an Ontario corporation, by the laws of the Province of Ontario; ● in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of a corporation incorporated in another province, by the laws of that province; and, ● in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of a federally incorporated corporation, by the provisions of the Companies’ Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), subject to any limitations imposed on same by the Payment Clearing and Settlement Act (Canada) (“PCSA”).

Notwithstanding the choice of law contained in the Legal Documents, authority over the proceedings of a bankruptcy, insolvency, liquidation, etc., vests in the court of the location of the head office of the company making the particular filing.

Scope of Regulatory Obligations Regulations, Instruments, and specific orders existing in, and made by, Canadian provinces and territories may also apply (e.g., in the case of a cease‐ trade order issued by the securities commission or regulatory authority of a province or territory which is not a principal regulator of CDS.) CDS may also be subject, indirectly, to rulings of foreign courts or foreign regulatory 13 authorities, provided that such courts or authorities obtain appropriate letters enforcing such rulings domestically; CDS is not directly subject to US civil court judgments or Securities and Exchange Commission orders, for example – such judgments or orders must obtain domestic court authority.

CCP’s rights over collateral CDS’s Legal Documents4 specify Ontario as the choice of jurisdiction of the Parties5. This choice of law includes the registration of security interests in financial assets credited to CDS Participants’ accounts. Under conflict of laws rules for all Canadian provinces (except for Nova Scotia, New Brunswick and Prince‐ Edward Island), the validity and priority of CDS’s security interests in the collateral is subject to Ontario law; the same is true for the perfection of such security interests.

Default Management Procedures CDS’s default management procedures, while governed contractually by the CDS Legal Documents, are subject to Canadian provincial and federal law (and the application thereof by Canadian Courts. In the event that a particular default involves, or is related to, a foreign Participant, the laws of the foreign jurisdiction may have an impact on CDS’s default procedures, but only in the event, as noted above, that orders of a foreign court or jurisdiction were lawfully enforced in Canada.

Settlement Finality Settlement finality in CDSX is governed by the CDS Participant Agreement, the CDS Participant Rules, and the CDS Participant Procedures, in that order, subject to any paramount – and applicable – Provincial or Federal law, including the PCSA. (See also CDS’s responses to PFMI 8 – Settlement Finality).

f. System Design and Operations

Settlement Services in CDSX CDS offers two types of trade settlement, trade‐ for‐ trade (“TFT”) settlement and central counterparty (“CCP”) settlement6. TFT settlement is offered for debt and equity transactions. TFT settlement does not provide risk protection or novation prior to settlement. As a result, each of the original counterparties to a TFT trade is exposed to risk resulting from the default of the

4 “Legal Documents” are as defined in section III c) Legal and regulatory framework.

5 Parties consist of CDS Clearing and Depository Services Inc. and the respective participant having signed the application for participation.

6 Participants eligible for fixed income clearing (FIC) at CDCC have been provided a gateway to CDCC through CDSX whereby they can direct eligible fixed income transactions for novation, netting and settlement using CDCC’s fixed income central counterparty service.

14 counterparty prior to settlement. CCP settlement is offered through CDS’ Continuous Net Settlement (“CNS”) service. In CNS service, CDS substitutes itself as the counterparty for each trade through a netting and novation process. CNS nets eligible exchange‐ traded equity transactions.

CDSX has three distinct trade settlement processes: (i) overnight batch settlement (“CNS/BNS”); (ii) real time trade‐ for‐ trade settlement (“real time TFT”); and (iii) real time CNS settlement. Trades in CNS are settled in either the CNS/BNS process or the real time CNS process. TFT trades are settled in either the CNS/BNS process or the real time TFT process. A trade is considered “available for settlement” if it has reached value date and is confirmed. Trades available for settlement by the time that the CNS/BNS process is initiated are processed through the batch CNS/BNS. Trades and CNS outstanding positions that do not settle in the CNS/BNS process and trades that become available for settlement after the CNS/BNS process starts, are processed through the real time TFT or CNS settlement processes.

Overnight Batch Settlement (CNS/BNS) The CNS/BNS process is a batch net settlement process that increases settlement efficiency by combining the settlement of trades targeted to settle by CNS and TFT. The CNS component processes the CNS trades and the BNS component processes the TFT trades. The goal of the combined process is to allow CNS and TFT activities to net against each other and to reduce a participant’s requirements for security positions, funds, cap, credit and collateral while still satisfying the appropriate risk controls as described later in this paper. The CNS/BNS process occurs once per day after the overnight period around 4:00 a.m. EST. The combined CNS/BNS uses the following steps:

1. The system extracts all of the trades available for settlement that are targeted to settle in CNS as well as all of the trades that are targeted to settle TFT (“Batch Net Settlement”). 2. The system calculates a "mark‐ to‐ market" (see Mark‐ to‐ Market section 5) payment for each CNS outstanding and for each CNS trade. Once the individual marks are calculated, the price on each CNS trade and CNS outstanding position is changed to the mark price (i.e. the previous day’s closing price). Each participant’s net mark‐ to-market payment is debited or credited into the participant’s Funds Account. 3. For each participant, for each account and for each security, the system calculates a provisional net security position by adding together new CNS trades, previous CNS outstanding positions, TFT confirmed trades, and the participant’s ledger position in the security. 4. The system also nets together all of the funds amounts from the CNS and the TFT trades to arrive at a provisional net funds position. 5. The system finds all of the negative provisional security positions of the participant 15

and excludes (removes) transactions to eliminate the provisionally negative position. Then, the system creates a CNS outstanding position up to a maximum of the net of the starting CNS outstanding and the new CNS trades. If necessary, the system excludes TFT transactions until the provisional negative position is eliminated. 6. The system performs the same exclusion routine for any funds position that does not fall within the participant's cap/credit or collateral limits (see section 4). 7. The system executes all of the CNS trades as settled, executes the non‐ excluded TFT netted trades as settled, updates the excluded TFT trades as pending. 8. All of the pending TFT trades are re‐ considered for settlement in the real time TFT settlement process. All of the CNS outstanding positions are re‐ considered for settlement in the real time CNS settlement process.

Real Time Trade‐for‐Trade The real time TFT process runs continuously from approximately 12:30 a.m. Eastern Standard Time (“EST”) to about 4:00 a.m. EST, when it stops while the CNS/BNS process executes. The CNS/BNS process stops at 6:00 a.m. EST. The TFT process runs again from approximately 7:00 a.m. EST through to 7:30 p.m. EST.

Any trade in any security is eligible for TFT. When both parties to a transaction have agreed to the details and the transaction is available for settlement, the TFT process attempts to settle the transaction. If the transaction passes all of the risk edits described in Section 4, the TFT process settles the transaction. If any of the risk edits cannot be satisfied, CDSX puts the transaction into a pending status and re‐ attempts settlement later when a change occurs to the participant’s funds, securities or collateral positions.

Real Time CNS Settlement The CNS process allows CNS participants to settle some or all of a net amount of CNS trades. For example, if a participant sold 100 shares of security A and bought 80 shares of security A, the participant would have a net CNS‐ to‐ deliver for 20 shares of security A. If the participant did not have the 20 shares to complete the net delivery to CDS, the CNS process would create a “CNS outstanding‐ to‐ deliver” for 20 shares. This CNS outstanding for 20 shares is carried forward into the real time CNS settlement and/or CNS netting process, which may not occur until the next business day.

Unlike the CNS/BNS process, which processes trades targeted to settle by TFT and CNS together, the real time CNS process only processes trades targeted to settle by CNS. This real time process is scheduled to run from 7:00 a.m. EST until 4:00 p.m. EST. Only CNS outstanding positions from the early morning CNS/BNS process are eligible for settlement by the real time CNS settlement process.

Changes to a participant’s ledger positions could occur between the time the early morning 16

CNS/BNS is completed and when the real time CNS settlement process is executed. For example, a participant could receive securities from the settlement of a TFT purchase trade. The real time CNS settlement process compares a participant’s current ledger positions (both securities and funds) with their CNS outstanding positions and, where possible, settles the CNS outstanding positions either fully or partially. All of the payment risk edits (Funds and ACV edits) are applied during the real time CNS settlement process.

Risk Edits Applied in Trade Settlement As described previously, transactions can settle through the CNS/BNS, real time TFT or CNS settlement processes. In real time TFT settlement, the risk edits are applied to each individual trade. In CNS/BNS, real time CNS, payment risk edits are applied to the projected net amounts from a group of trades and positions. Although the risk edits for CNS/BNS settlements are performed on these projected net amounts, the actual settlement of each TFT transaction occurs individually, but simultaneously, at the end of the batch process. In order for a trade to settle, the following payment risk edits are applied to all CAD transactions:

● The seller must have sufficient securities in their securities account to complete the delivery, or a portion of the delivery (known as “partials”7). ● The buyer must have sufficient available funds, unused cap and/or unused lines of credit to cover their funds obligation after the settlement (the “Funds edit”). ● The buyer and the seller must have sufficient aggregate collateral value (“ACV”) after the settlement to cover the resulting funds obligation (the “ACV edit”).

In CDSX, lines of credit and ACV are denominated in CAD only. As a result, settlement of USD transactions is subject to the following payment risk edit process:

● The seller must have sufficient securities in their securities account to complete the delivery. ● The buyer must have sufficient available USD funds or unused USD cap to cover their funds obligation after the settlement. ● The seller must have sufficient ACV after settlement to continue to be able to collateralize its CAD obligation.

If all of these edits are satisfied, CDSX settles the trade by:

● Subtracting the securities from the seller’s account and adding them to the buyer’s account. ● Subtracting the funds from the buyer’s account and adding them to the seller’s account.

7 In CNS, trades are netted and the process settles as much of the resulting net position as possible.

● Updating both the buyer’s and the seller’s ACV.

g. Primary risks

CDS is exposed to a number of financial risks as a result of its operations, which are discussed below. CDS seeks to monitor and minimize adverse effects from these risks through its risk management policies and processes.

i. Credit risk

Credit risk is the risk of loss due to the failure of a borrower, counterparty or Participant to honour their financial obligations. It arises principally from the Company’s cash and cash equivalents, restricted cash and restricted cash equivalents, investments in marketable securities, trade receivables and clearing operations.

(i) Cash and cash equivalents: The Company manages its exposure to credit risk on its cash and cash equivalents by holding the majority of its cash and cash 18

equivalents with a major Canadian chartered bank or Government of Canada treasury bills. (ii) Marketable securities and restricted cash equivalents: The Company manages its exposure to credit risk arising from investments in marketable securities and restricted cash equivalents by holding high‐ grade individual fixed income securities with credit ratings of A/R1‐ low or better. In addition, when holding individual fixed income securities, the Company will limit its exposure to any nongovernment security. The investment policy of the Company will only allow excess cash to be invested in money market securities or fixed income securities.

(iii) Trade receivables: The Company’s exposure to credit risk resulting from uncollectable accounts is influenced by the individual characteristics of its customers, many of whom are banks and financial institutions. The Company invoices its customers on a regular basis and maintains a collections team to monitor customer accounts and minimize the amount of overdue receivables. There is no concentration of credit risk arising from trade receivables from a single customer. In addition, customers that fail to maintain their account in good standing risk loss of listing, trading, clearing and, data access privileges and other services.

(iv) Clearing, depository and related operations: The Company is exposed to the risk of loss due to the failure of a participant in CDS Clearing’s clearing and settlement services to honour its financial obligations. To a lesser extent, the Company is exposed to credit risk through the performance of services in advance of payment.

Through the clearing and settlement services operated by CDS Clearing, credit risk exposures are created. During the course of each business day, transaction settlements can result in a net payment obligation of a participant to CDS Clearing or the obligation of CDS Clearing to pay a participant. The potential failure of the participant to meet its payment obligation to CDS Clearing results in payment risk, a specific form of credit risk. Payment risk is a form of credit risk in securities settlement whereby a seller will deliver securities and not receive payment, or that a buyer will make payment and not receive the purchased securities. Payment risk is mitigated by delivery payment finality in CDSX, the Company’s multilateral clearing and settlement system, as set out in the Company's Participant Rules.

In the settlement services offered by CDS Clearing, payment risk is transferred entirely from CDS Clearing to Participants who accept this risk pursuant to the contractual rules for the settlement services. This transfer of payment risk occurs primarily by means of Participants acting as extenders of credit to other Participants through lines of credit managed within the settlement system or, alternatively, by means of risk‐ sharing arrangements whereby groups of Participants cross‐ guarantee the payment obligations of other members of the group. Should a participant be unable to meet its payment obligations to CDS Clearing, these surviving Participants are required 19 to make the payment. Payment risk is mitigated on behalf of Participants through the enforcement of limits on the magnitude of payment obligations of each participant and the requirement of each participant to collateralize their payment obligation. Both of these mitigants are enforced in real time in the settlement system.

Through New York Link (“NYL”) and DTC Direct Link (“DDL”), credit risk exposures are created. During the course of each business day, settlement transactions by the National Securities Clearing Corporation (“NSCC”)/Depository Trust Company (“DTC”) can result in a net payment obligation from NSCC/DTC to CDS Clearing or the obligation of CDS Clearing to make a payment to NSCC/DTC. As a corollary result, the Company has a legal right to receive the funds from sponsored Participants in a debit position or has an obligation to pay the funds to sponsored Participants in a credit position.

The potential failure of the participant to meet its payment obligation to CDS Clearing in the NYL or DDL services results in a payment risk. To mitigate the risk of default, CDS Clearing has in place default risk mitigation mechanisms to minimize losses to the surviving Participants as set out in the Company's Participant Rules. The process includes Participants posting collateral with CDS Clearing and NSCC/DTC.

The risk exposure of CDS Clearing in its central counterparty service is mitigated through a daily mark‐ to‐ market of each participant’s obligations as well as risk‐ based collateral requirements calculated daily and quarterly (i.e., the CNS Participant Fund and the CNS Default Fund). These mitigants (i.e., daily marking‐ to‐market and the CNS Participant Fund) are intended to cover the vast majority of market changes under normal market conditions and are tested against actual price changes on a regular basis. This testing is supplemented with analysis of the effects of extreme market conditions on a collateral valuation and market risk measurements – with the stress tests results used to size the CNS Default Fund on a mutualized basis. Should the collateral of a defaulter in a central counterparty service be insufficient, either because the value of the collateral has declined or the loss to be covered by the collateral exceeded the collateral requirement, CDS and the surviving Participants in the service are required to cover any residual losses according to the CNS waterfall.8 Cash collateral is held by CDS Clearing at the Bank of Canada and NSCC/DTC and non‐ cash collateral pledged by Participants under Participant Rules is held by the Company.

The Company may receive payment from securities issuers for entitlements, for example, maturity or interest payments, prior to the date of payment to the Participants holding those securities. In rare circumstances, due to the timing of receipt of these payments or due to market conditions,

8 Once the defaulter’s collateral requirement to the CNS service (i.e., the CNS Participant Fund and CNS Default Fund collateral requirement) has been exhausted, the CNS waterfall first calls for the application of CDS’s own Default Risk Capital to the CNS service (i.e., its skin‐ in‐ the‐ game) and the CNS Survivors’ CNS Default Fund collateral contributions.

22 these funds may be held with a major Canadian chartered bank. As a result, the Company could be exposed to the credit risk associated with the potential failure of the bank.

ii. Market risk

Market risk is the risk of loss due to changes in market prices and rates, such as foreign exchange rates, interest rates and equity prices.

(i) Foreign currency risk: The Company is exposed to foreign currency risk on cash and cash equivalents, trade receivables and trade payables denominated in foreign currencies, principally US dollars. It is also exposed to foreign currency risk on revenue and expenses where it invoices or procures in a foreign currency, again principally in US dollars.

The Company does not currently employ hedging strategies and therefore significant moves in exchange rates, specifically a strengthening of the Canadian dollar against the U.S. dollar can have an adverse effect on the value of our revenue or assets in Canadian dollars.

(ii) Interest rate risk: The Company is exposed to interest rate risk on its marketable securities.

(iii) Other market price risk: The Company is exposed to market risk as a result of its role as central counterparty in its continuous net settlement services. In these services, the Company is obligated to fulfill security delivery and receipt and payment obligations to participants who are members of those services. The potential for security prices to change between trade execution and settlement creates replacement cost risk, a form of market risk. Should a participant counterparty to a transaction be ultimately unable to meet its security receipt and payment obligation or security delivery, the surviving counterparty can be exposed to replacement cost risk by having to execute a replacement transaction at a less favourable price.

Replacement cost risk exposure of the Company in these central counterparty services is mitigated through a daily mark‐ to‐ market of each participant’s obligations as well as risk‐ based collateral requirements calculated daily and quarterly (i.e., the CNS Participant Fund and the CNS Default Fund). These mitigants (i.e., daily marking‐to‐market and the CNS Participant Fund) are intended to cover the vast majority of market changes under normal market conditions and are tested against actual price changes on a regular basis. This testing is supplemented with analysis of the effects of extreme market conditions on collateral valuation and market risk measurements – with the stress tests results used to size the CNS Default Fund on a mutualized basis as noted above. Should 23 the collateral of a defaulter in a central counterparty service be insufficient, either because the value of the collateral has declined or the loss to be covered by the collateral exceeded the collateral requirement, CDS and the surviving participants in the service are required to cover any residual losses according to the CNS waterfall.

Settlements in the clearing and settlement services occur in both Canadian and U.S. dollars. Foreign exchange risk is created when the currency of the payment obligation is different from the valuation currency of the collateral supporting that payment obligation. This risk is mitigated by discounting the collateral value of securities where these mismatches occur. iii. Liquidity risk

Liquidity risk is the risk of loss due to the inability of the Company to meet its, or of the Company's borrowers, counterparties, or Participants to meet their obligations in a timely manner or at reasonable prices. The liquidity risk to the Company arises principally from its clearing operations. The Company manages liquidity risk through the management of its cash and cash equivalents and marketable securities, all of which are held in short‐ term instruments, and credit and liquidity facilities.

(i) Balances with Participants: The margin deposits of the Company are held in liquid instruments. Cash collateral from the Company’s Participants, which is recognized on the consolidated balance sheet, is held by the Bank of Canada and NSCC/DTC. Non‐ cash collateral, which is not recognized on the consolidated balance sheet, pledged by Participants under Participant Rules is held by the Company in liquid government and fixed income securities.

The Company's NYL service (NSCC specifically) does not apply limits to a participant's end‐ of‐ day payment obligation, creating the potential for unlimited liquidity risk exposure if a user of the service were to default on its obligation. The Company manages this risk through active monitoring of payment obligations and a committed liquidity facility. Residual liquidity risk in excess of the Company’s liquidity facility is transferred to surviving Participant users of the New York Link service and as a result the Company’s liquidity risk exposure is limited to a maximum of its available liquidity facility.

Cash collateral from the Company’s Participants, which is recognized on the consolidated balance sheet, is held at the Bank of Canada and NSCC/DTC. Non‐ cash collateral, which is not recognized on the consolidated balance sheet, pledged by Participants under Participant Rules is held in liquid government and fixed income securities.

(ii) Credit and liquidity facilities: In response to the liquidity risk that the Company is exposed to through its clearing operations, it has arranged various credit and liquidity facilities.

(iii) Cash and cash equivalents and restricted cash and cash equivalents: Cash and cash equivalents and restricted cash and cash equivalents consist of cash and highly liquid investments.

III. Principle-by-principle summary narrative disclosure

a. Principle 1: Legal basis

Principle

An FMI should have a well‐founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Disclosure

Key consideration 1: The legal basis should provide a high degree of certainty for each material aspect of an FMI’s activities in all relevant jurisdictions.

CDS’s FMI activities rest on three principal foundations: first, the legislative basis for CDS as a corporate entity and as a designated and recognized clearing system and agency; second, the enforceability of its contractual relationships with both its participants and with systems in which CDS is a participant and the finality of transactions conducted thereunder; and third, CDS’s rights over the assets which it holds, transfers, and manages for its various stakeholders both in the normal course and in the event of Participant default. The combined authority of the foregoing provides a high degree of certainty for all material aspects of CDS’s activities in all relevant jurisdictions.

Legislative Basis

Federal Legislative and Regulatory Oversight: CDSX (CDS’s clearing and settlement system) has been designated by the Bank of Canada as a clearing and settlement system pursuant to subsections 13.1(3) and 4(1), respectively of the Payment Clearing and Settlement Act (Canada) (the “PCSA”).9 CDSX is subject to Part I of the PCSA and, consequently, is subject to continuous

9 Designation of an entity as a securities and derivatives clearing house is granted by the Minister of Finance of Canada, and designation of a clearing and settlement system is granted by the Governor of the Bank of Canada.

25 oversight by the Bank of Canada. The Regulatory Oversight Agreement, dated August 23rd, 2004, as subsequently assigned and amended, between the Bank of Canada and CDS formalizes the details of the Bank’s oversight of those aspects of CDS and CDSX pertaining to systemic risk.

Provincial Regulatory Oversight: CDS is a provincially‐ recognized clearing agency and is regulated by certain provincial securities commissions, each a member of the Canadian Securities Administrators (“CSA”), as follows: in Québec, by the Autorité des marchés financiers (“AMF”) under the Securities Act (Québec) (“QSA”); in Ontario, by the Ontario Securities Commission (“OSC”) under the Ontario Securities Act (“OSA”); and in British Columbia, by the British Columbia Securities Commission (“BCSC”) under the British Columbia Securities Act (“BCSA”). CDS is exempt from oversight by order of the Alberta Securities Commission (“ASC”). CDS is subject to the National Instrument 24-102 – Clearing Agency Requirements, which National Instrument is incorporated into CDS’s provincial regulatory oversight framework documents.

Scope of Regulatory Oversight: Regulations, Instruments, and specific orders existing in, and made by, regulatory authorities in Canadian provinces and territories may also apply (e.g., in the case of a cease‐ trade order issued by the securities commission or regulatory authority of a province or territory which is not a principal regulator of CDS.) CDS may also be subject, indirectly, to rulings of foreign courts or foreign regulatory authorities, provided that such courts or authorities obtain appropriate letters enforcing such rulings domestically; CDS is not directly subject to US civil court judgments or Securities and Exchange Commission orders, for example – such judgments or orders must obtain domestic court authority.

Corporate Status: CDS is a corporation incorporated under the federal Canada Business Corporations Act. CDS has a physical presence and operations in four Canadian provinces: Québec, Ontario, Alberta, and British Columbia. CDS is duly registered for such purpose in each of the foregoing jurisdictions.

Contractual Enforceability and Finality

Legal Documents: CDS’s Participant Agreement, Participant Rules, and Participant Procedures (“CDS Legal Documents”) provide the contractual framework under which a Financial Market Intermediary (“FMI”) applies to become, and operates as, a Participant of CDS. The Legal Documents are governed by the laws in force in the Province of Ontario and the Federal Laws of Canada applicable therein.

Finality: Broadly speaking, CDS exists to make entries in the Ledgers maintained for Participants and for CDS to record Transactions involving two Participants or CDS and a Participant. These entries include the deposit, withdrawal and delivery of Securities, the novation and netting of Transactions, and the making of payment. Such entries, and settlement of a payment obligation between CDS and a Participant, are final and irrevocable when made, and cannot be deleted, adjusted, reversed, repaid or set aside. (See also CDS’s responses to PFMI 8 – Settlement Finality) 26

Novation: The sections of the CDS Legal Documents concerned with Novation are governed by the laws in force in the province of Ontario and are subject to Ontario Court jurisdiction as novation takes place in Ontario.

Netting: The sections of the CDS Legal Documents concerned with netting are governed by the laws in force of the province of Ontario, the laws of other Canadian provinces, and the federal laws of Canada applicable in each of the foregoing, as follows:

a. in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of an Ontario corporation, by the laws of the Province of Ontario;

b. in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of a corporation incorporated in another province, by the laws of that province; and,

c. in the event of the insolvency, bankruptcy, liquidation, plan of arrangement, etc., of a federally incorporated corporation, by the provisions of the Companies’ Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), subject to any limitations imposed on same by the Payment Clearing and Settlement Act (Canada) (“PCSA”).

Notwithstanding the choice of law contained in the CDS Legal Documents, authority over the proceedings of a bankruptcy, insolvency, liquidation, etc., vests in the court of the location of the head office of the company making the particular filing.

Rights to Assets and Collateral

FMI’s rights over collateral: CDS’s Legal Documents specify Ontario as the choice of jurisdiction of the Parties. This choice of law includes the registration of security interests in certain financial assets, including collateral, credited to CDS Participants’ accounts. Under conflict of laws rules for all Canadian provinces (except for Nova Scotia, New Brunswick and Prince‐Edward Island), the validity and priority of CDS’s security interests in the collateral is subject to Ontario law; the same is true for the perfection of such security interests.

Default Management Procedures: CDS’s default management procedures, while governed contractually by the CDS Legal Documents, are subject to Canadian provincial and federal law (and the application thereof by Canadian Courts). In the event that a particular default involves, or is related to, a foreign Participant, the laws of the foreign jurisdiction may have an impact on CDS’s default procedures, but only in the event, as noted above, that orders of a foreign court or jurisdiction were lawfully enforceable in Canada.

Key consideration 2: An FMI should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations.

The CDS Legal Documents are the core documents governing the contractual relationship between CDS and each of its Participants. These documents are published on CDS’s website. CDS also publishes its Financial Risk Model on CDS’s website. CDS’s regulatory framework prescribes the process by which each of the foregoing documents is amended, a process that includes submission of changes to CDS’s regulatory authorities for prior approval, or non‐ disapproval, as the case may be. A significant component of the approval/non‐ disapproval process is the publication of any proposed amendments to the Legal Documents for public comment. Such publication occurs in at least two provincial jurisdictions, depending on the nature and materiality of the proposed amendments. CDS Participants are also given direct notice of any proposed amendments.

In addition to the CDS Legal Documents, CDS uses various standard form contracts and forms in the ordinary course of business. Legal counsel reviews these standard forms, and any changes to same, to ensure consistency with the CDS Rules, with the overall structure of CDS, and to ensure that standard forms comply with CDS’s legal and regulatory oversight framework.

Key consideration 3: An FMI should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants’ customers, in a clear and understandable way.

The legal basis for CDS’s activities is articulated, on an ongoing basis, via the public availability of CDS’s legislative framework, our Legal Documents, and via public. The CDS Rule and Procedure amendment protocol contained in CDS’s regulatory oversight framework requires that, with certain limited exceptions, proposed amendments to the CDS Legal Documents be accompanied by a detailed Notice and Request for Comments that, in most cases, provides the legal basis for the relevant new or amended provisions. The Notice is sent to all CDS Participants, posted on CDS’s website, and is sent to the Regulators for publication. CDS’s regulators, Participants and other market participants may make comments prior to Regulatory approval and prior to the implementation of the proposed amendments.

Regulatory Authorities:

CDS maintains an active and continuous dialogue with its principal regulators, including quarterly meetings and ad hoc communication in the context of proposed amendments to the CDS Legal Documents or in the event of any event or events which may have an impact on CDS, its Participants, or other marketplace stakeholders.

Participants:

As a matter of policy, CDS is transparent with its clearing Participants with respect to the legal 28 basis for CDS’s core Services. CDS cannot, and does not, however, provide legal advice to its Participants.

Participant Customers/Clients

CDS does not have any direct contractual relationship with CDS Participants’ customers or clients. In exercising any rights associated with securities, CDS requires instructions from the CDS Participant FMI, acting for the beneficial owner.

Key consideration 4: An FMI should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the FMI under such rules and procedures will not be voided, reversed, or subject to stays.

The PCSA, in particular Sections 8, 13 and 13.1 thereof, provides the legal foundation of material aspects of CDS’s activities. The PCSA ensures the enforceability of CDS’s settlement rules, and any actions taken in furtherance of same, “notwithstanding anything in any statute or other law of Canada or a province”. CDS has commissioned legal opinions from external counsel in support of the legal certainty of specific activities. CDS Rules, procedures and contracts are closely monitored by the regulatory authorities in Québec (AMF), British Columbia (BCSC), Ontario (OSC), and by the Bank of Canada under Recognition Orders and Regulatory Oversight Agreements. This oversight ensures that each of CDS’s principal regulators are also comfortable and certain that CDS’s legal rights are enforceable in all relevant jurisdictions.

Key consideration 5: An FMI conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions.

Conducting Business in Multiple Jurisdictions

For purposes of the operation of its central counterparty (CCP) service, CDS conducts business only in the provinces of Ontario, Quebec, and British Columbia.

Canada

Every Canadian province has established certain conflicts of law rules. Issues only arise when there is conflict between the law rules. CDS has yet to encounter a conflict between conflicts of law rules (in practice, primarily Ontario, Quebec, and British Columbia) which would give rise to a practical difficulty.

Other Jurisdictions

CDS is a member of the Depository Trust and & Clearing Corporation (DTCC) and its affiliate, the National Securities Clearing Corporation (NSCC) in the United States. CDS also has several 29 foreign Participants, including both depositories and financial institutions. Prior regulatory approval by each of CDS’s principal regulators, and the prerequisite legal and financial risk evaluations to such approval, is required in each case (both domestic and in international jurisdictions) where CDS makes a decision to enter into an agreement, memorandum of understanding or other similar arrangement with any governmental or regulatory body, self‐ regulatory organization, clearing agency, stock exchange, other marketplace or market.

Prior to CDS accepting an application for Participation from a foreign Participant, CDS, and the Bank of Canada as one of CDS’s principal regulators, require that such foreign applicant provide CDS and the Bank with a legal opinion examining, amongst other items, the enforceability of CDS’s rights in securities which it holds for such foreign Participants and the potential for conflicts of bankruptcy and insolvency laws. Only once the Bank of Canada and CDS are satisfied that CDS’s Rules and the enforceability of those rules and CDS’s rights are protected, may a foreign application for Participation be accepted. b. Principle 2: Governance

Principle

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

Disclosure

Key consideration 1: An FMI should have objectives that place a high priority on the safety and efficiency of the FMI and explicitly support financial stability and other relevant public interest considerations.

CDS establishes an annual scorecard and objectives designed to fulfill its strategic aims, with an emphasis on the delivery of essential clearing, settlement and depository services, continuous process improvements, effective risk management, financial stability, fulfilling CDS’s public interest mandate, and creating value for CDS’s clients and other stakeholders. CDS’s Regulatory framework also requires CDS to comply with prescribed financial viability standards (in the form of minimum liquidity, leverage and capital ratios), and to maintain industry best practice in financial risk management. These best practices include a bi-annual self‐ assessment against FMI principles, and a quadrennial independent assessment of CDS’s financial risk model. CDS’s primary capital management objectives, (defined as including the management of cash, marketable securities, share capital and various credit facilities) include maintaining:

● sufficient financial resources to ensure market confidence and to meet regulatory

requirements; ● sufficient capital and appropriate forms of liquidity to satisfy its commitments, obligations, and liabilities; and,

● sufficient financial resources to support its operations and to maintain business growth.

Key consideration 2: An FMI should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, relevant authorities, participants, and, at a more general level, the public.

CDS’s governance arrangements, at the Board of Directors’ level, at the level of CDS’s Participant Advisory Committees, and at the internal operating committee level, are well documented. These arrangements provide, inter alia, direct lines of responsibility and accountability between CDS personnel, management, and the CDS Board of Directors.

Board of Directors

The CDS Board of Directors meets the specific composition requirements enumerated in CDS’s regulatory framework. The structure is outlined in CDS’s annual report and is regularly reviewed. The primary responsibility of the CDS Board is to provide governance and stewardship to CDS. The Board oversees CDS’s systems of corporate governance and internal controls over financial reporting to ensure that CDS reports adequate and fair financial information and engages in ethical and legal corporate conduct. Individual directors have membership on the Governance Committee and the Risk Management and Audit Committee. Both committees have documented charters with specific accountabilities.

The Governance Committee provides the Board with recommendations on corporate governance matters and oversees compliance with applicable policies. The Risk Management and Audit Committee focuses on: the integrity of CDS’s financial statements, internal controls, the external audit process, the internal audit and assurance process, risk management, CDS’s compliance with financial, legal and regulatory requirements, the equitability of CDS’s pricing and fees, and the additional duties as set out in the committee’s charter or otherwise delegated to the committee by the CDS Board.

Internal Operating Committees

Senior Leadership Team

The Senior Management Team (SMT) is the senior decision‐making body of CDS management and acts on behalf of all the companies within the CDS group to run CDS’s day‐to‐day operations

31 and oversee and supervise the management of the business. The Senior Management Team develops corporate strategy and measures corporate performance against established objectives, including the management of CDS’s public interest responsibilities.

Operations Working Group The operations working group, which includes representatives from risk management, operations, information technology, legal, project management, and relationship management, amongst other areas, is responsible for monitoring CDS’s key services and systems and for ensuring that these services and systems are delivered in an efficient and cost‐ effective manner in accordance with quality standards that meet or exceed both the performance standards required of CDS by the Principal Regulators and the expectations of the service users.

The operations working group:

● Sets and approves standards for performance measurement and establishes operational policies required to support such standards ● Monitors operational performance ● Recommends and implements solutions to operational problems/weaknesses as such may be identified ● Reviews participant claims and makes recommendations on possible responses to the Senior Leadership Team.

Risk Management Committee The risk management committee (RMC) oversees and monitors the enterprise‐ wide operational, financial, legal, regulatory and strategic risks of the organization, its subsidiaries and users. It assesses whether appropriate and effective policies, standards, limits and controls are in place to manage risk within CDS’s defined risk tolerances.

The risk management committee:

● Determines that appropriate risk identification and assessment processes are in place for CDS’s key organizational exposures ● Determines that appropriate risk monitoring and reporting processes are in place, and effectively communicates relevant information regarding levels and sources of risks.

External Participant Advisory Committees

The following participant advisory committees (“PACs”) provide suggested areas of focus for, and feedback on, CDS’s operational and development initiatives:

Strategic Development Review Committee The strategic development review committee (SDRC) PAC:

● Advises CDS management and the Board of Directors on matters of service development ● Proposes, reviews and approves new and revised procedures/user guides for CDS services ● Arranges for the provision of industry data related to CDS’s services, such as operating volumes ● Facilitates the provision of expert industry resources for projects and arranges for the agreed‐ upon resources to be made available ● Assists CDS management in improving industry understanding of functions and benefits of CDS services.

The SDRC PAC has three standing subcommittees, each with its own membership, mandate and meeting schedule. Each subcommittee reports to the larger SDRC. The three subcommittees focus on issues relating to debt and equity, entitlements, and taxation. Other special purpose subcommittees may be formed on an ad hoc basis to address particular issues of concern or importance to the SDRC.

The chairperson of the SDRC is CDS’s Chief Commercial Officer, and the committee membership consists of members drawn from several distinct groups of CDS stakeholders, including banks, broker/dealers, settlement agents, the transfer agent community, [and the securities issuer community]. Per CDS’s regulatory framework, CDS’s principal regulators are entitled to attend all SDRC and subcommittee meetings in an Observer capacity. Attendance at meetings of the SDRC is open – meetings are not restricted to nominated members.

Risk Advisory Committee The risk advisory committee (RAC) is a PAC that reviews and recommends changes to the CDS Financial Risk Model, risk controls for the international services, and any related measures required to mitigate financial and operational risks to CDS and its participants. The RAC is also responsible for reviewing the adequacy of the model’s coverage of the risks related to CDSX and the relative costs of these risk measures to CDS and its participants. RAC recommendations for changes are reported to the risk management and audit committee of the CDS Board.

Membership on the committee is open to representatives from the following CDSX participant groups: extenders of credit, settlement agents and receivers of credit. Representatives of CDS’s regulators, as well as of IIROC may participate as observers. The chairperson is CDS’s chief risk officer.

Fee Committee 33

The fee committee PAC co‐ chaired by CDS’s Chief Commercial Officer and a participant representative unrelated to CDS or its affiliates. The committee reviews proposed adjustments to fees for the principal services provided by CDS as well as fees for all new products or principal services.

Membership on the committee, the nomination process for which CDS is responsible, is open to all CDS Participants, marketplaces, and securities issuers. In conducting such nomination process, CDS endeavours to ensure participation by a representative of an investment dealer with experience in the Canadian public venture market and a representative of non-Participant securities issuers.

Legal Drafting Group The Legal Drafting Group (“LDG”) is a PAC that includes members of participants’ legal and business groups. The LDG’s mandate is to advise CDS management and its Board of Directors on rule amendments and other legal matters relating to centralized securities depository, clearing and settlement services in order to ensure that they meet the needs of CDS, its participants and the securities industry. Each amendment to the CDS Participant Rules is reviewed by CDS’s legal drafting group (LDG).

Meetings of the LDG are held on an ad hoc, as-required, basis in order to provide stakeholders with the opportunity to review and comment on proposed amendments to the CDS Participant Rules. LDG meetings are open to CDS Participants, other stakeholders, and to CDS’s Principal Regulators, who may attend in an Observer capacity.

Committee Regulatory Communication and Reporting Requirements

Each PAC may on any matters that the committee deems appropriate, and shall if requested by CDS’s Principal Regulators, report directly to the Principal Regulators without first requiring CDS board approval or notification of such reporting.

The CDS Board of Directors is required, on at least an annual basis, to provide the Principal Regulators with a report containing the recommendations made by each PAC, whether, and why, such recommendations were rejected, and responses from each of the PACs specifying whether the PACs themselves agree or disagree with the Board of Directors’ report.

Key consideration 3: The roles and responsibilities of an FMI’s board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should review both its overall performance and the performance of its individual board members regularly.

The roles and responsibilities of the CDS Board of Directors and the Committees of the Board are clearly specified in their respective written charter documents. The Code of Conduct and Conflict of Interest Guidelines for Directors (the “Code”) requires each Director, in exercising his/her powers and discharging his/her duties, to act honestly and in good faith with a view to the best interests of CDS, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In determining the best interests of CDS, each Director is required to consider the need for a safe, fair and efficient central securities depository, clearing and settlement system in Canada, such consideration to expressly recognize CDS’s broader public interest role in the Canadian capital market. The Code also sets forth the expectations and responsibilities of Directors in situations in which there is, or may appear to be, potential conflict which could interfere with the Director’s judgment in making decisions in CDS’s best interest. Board members complete an annual Board Assessment Survey. The process involves surveys for Board and Committee activities/operations as well as Board member, Board Chair, and Committee Chair assessments. Following the compilation of results, the Board Chair meets personally with all Directors to review their respective results and the Governance Committee Chair meets with the Board Chair to discuss his/her results.

Key consideration 4: The board should contain suitable members with the appropriate skills and incentives to fulfill its multiple roles. This typically requires the inclusion of non‐executive board member(s).

The CDS Board contains suitable members with the appropriate skills to fulfill their roles, including non‐ executive Board members. The Governance Committee of the CDS Board assesses all nominees to the CDS Board to ensure that they possess the appropriate strengths, skills, expertise and experience to guide CDS’s strategies and business operations and to ensure that the composition of the CDS Board satisfies all legal and regulatory requirements. Under its regulatory regime, CDS is required to ensure that:

● at least 33% of its Directors are independent; ● at least 33% of its Directors are representatives of CDS participants, and representing a diversity of CDS participants, of which;

(i) one representative is nominated by the Investment Industry Regulatory Organization of Canada, (ii) one representative is nominated by TMX Group Limited from the five largest CDS participants, (iii) at least one representative nominated by TMX Group Limited is unrelated to original CDS shareholders; and (iv) at least two representatives are from CDS participants who are independent of a bank and have a significant amount of their dealer activity in trading,

clearing or settling securities listed on a venture exchange in Canada;

● one director is a representative of a marketplace unaffiliated with TMX Group Limited and nominated by the marketplaces unaffiliated with TMX Group Limited; and ● at least 50% of the directors have expertise in clearing and settlement.

Key consideration 5: The roles and responsibilities of management should be clearly specified. An FMI’s management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the FMI.

The roles and responsibilities of CDS management are clearly specified in position profiles, and as part of the CDS annual performance management process. The performance management process establishes specific responsibilities for CDS managers which are in line with CDS’s overall scorecard and objectives. Quantitative measures are established to track performance against those responsibilities.

Key consideration 6: The board should establish a clear, documented risk‐management framework that includes the FMI’s risk‐tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk‐management and internal control functions have sufficient authority, independence, resources, and access to the board.

The mandate of the Risk Management and Audit Committee of the CDS Board of Directors (“RMAC”) includes providing regular advice, recommendations, and reports to the CDS Board to assist the Board in fulfilling the Board’s risk management responsibilities. This advisory, recommendations, and reporting role includes, inter alia: an annual review and assessment of the adequacy of CDS’s risk management policies and procedures with regard to identification of the CDS’s principal risks; a review and update of these principal risks from the CDS chief risk officer, a review and assessment of the adequacy of the implementation of appropriate procedures to mitigate and manage the risks, and a review of CDS’s participation standards and collateral requirements.

RMAC also reviews the CDS risk management and insurance programs on an ongoing basis, and must satisfy itself that CDS management maintains appropriate systems of security, internal controls, business continuity (including disaster recovery plans), and risk containment in safeguarding CDS’s own assets and those of its participants. CDS’s chief risk officer reports functionally to RMAC and to CDS’s President.

CDS’s Board-approved risk appetite statement describes CDS’s willingness to take various types of risks. These risks are expressed in both qualitative and quantitative terms and are reviewed the 34 by the Board on an annual basis. CDS also prepares risk appetite statement in respect of aggregate participant risk exposures which is reviewed on an annual basis by the participant members of the RAC.

Key consideration 7: The board should ensure that the FMI’s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.

CDS’s design, rules, overall strategy, and major decisions reflect the legitimate interests of its participants and other relevant stakeholders. An essential element of the regulatory framework in which CDS operates requires that CDS conduct its business and operations in a manner consistent with the public interest, that CDS’s fees for services are fair and allocated equitably, that these fees do not create unreasonable barriers to access or discriminate between users, and that there is no pricing differentiation. Rules that govern, monitor and sanction participant activity are comprehensive and transparent. Any new or amended rule, operating procedure or fee change requires approval by CDS’s regulators. Input from PACs and RMAC are also required. Material rule changes and fee changes are published in regulatory bulletins, along with a comprehensive description, purpose and analysis of the change and its impact on participants, competition, capital markets, and the public interest. Publication is followed by a public comment period at the end of which CDS prepares a written response to all comments received. The regulators’ decision(s) on such major changes are documented in regulatory bulletins. c. Principle 3: Framework for the comprehensive management of risks

An FMI should have a sound risk‐management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

Disclosure

Key consideration 1: An FMI should have risk‐ management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the FMI. Risk‐ management frameworks should be subject to periodic review.

CDS has adopted an ERM framework for the purposes of enabling the comprehensive management of all of the risks to which it is exposed. As part of the broader TMX Group, the ERM framework is a shared framework across TMX entities and is sufficiently flexible to ensure that the specificities of the CDS risk management function are considered fundamental building block to the ERM program is the definition of CDS’s Risk Appetite Statement (RAS) that articulates the nature and amount of risk that CDS is willing to accept across risk types. The RAS, when coupled with the risk

management policies, form the core of the ERM framework with the latter being organized along the lines of the Key Enterprise Risks (KER) that CDS faces. CDS has devised risk management processes that define how each of the KERs, and the associated sub-risks, are identified, measured, monitored and reported. The KERs are broadly defined as credit risk, market risk, liquidity risk, operational risk, strategic risk, legal risk and reputational risk.

CDS employs various systems and measurement approaches to the quantification of its risks ranging from the annual risk assessment exercise performed by CDS management to the classification of risk events incidents according to its Risk-events-reporting framework. For all types of incidents and near misses, CDS aggregates the potential impact which allows it to provide a holistic indicator across all types of risks.

The RAS as well as the risk management policies are revised by the RMC, then approved by the CDS Board of Directors at least annually, or subsequent to a significant change to the risk profile of CDS.

Key consideration 2: An FMI should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMI.

Incentives (more accurately described as restrictions or risk‐ based quantifications of exposure) are applicable only to CDS’s direct participants. CDS does not have a direct contractual relationship with its participant’s customers. Some key examples of such ‘incentives’ are listed below:

● Risk based collateral management ● Service exposure caps o CCP caps o NY Link soft caps ● Suspension rights for non‐ compliance with Participant Rules

Key consideration 3: An FMI should regularly review the material risks it bears from and poses to other entities (such as other FMIs, settlement banks, liquidity providers, and service providers)

36 as a result of interdependencies and develop appropriate risk‐management tools to address these risks.

Payment, Clearing, and Settlement Systems (PCSSs) are critical to the Canadian and international financial systems and permit the exchange of large volume and value payments between the various financial institutions and the operators of essential banking infrastructure. PCSSs not only permit banks to exchange payments amongst themselves but also link Canada to the global capital markets. During the day, PCSSs allow financial institutions (and, indirectly, their clients) to exchange payments that are irrevocable and final, settle securities transactions, and finalize the transfer of funds involved in foreign exchange transactions. Networks that comprise the PCSS underpin much of the financial and economic activity in Canada, and failure of one or more of these systems would jeopardize the effective functioning of the Canadian banking system and potentially its connection to global financial markets.

The Bank of Canada’s Joint Operational Resilience Management (JORM) committee was formed to identify critical infrastructure and functions within the financial sector as they relate to PCSSs. JORM participants have identified interdependencies between financial sector critical infrastructure and critical infrastructure in other sectors, most notably energy and utilities, communications and IT, and transportation.

The JORM committee, chaired by the Bank of Canada, has identified critical time periods and dependencies which could prevent same‐ day settlement within CDSX, LVTS, and CLS, or which could prevent those systems from being in a state of readiness at the start of the next business day.

CDS participated in the JORM Large Scale Exercise conducted on September 26 and 27, 2017.

Key consideration 4: An FMI should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind‐down. An FMI should prepare appropriate plans for its recovery or orderly wind‐down based on the results of that assessment. Where applicable, an FMI should also provide relevant authorities with the information needed for purposes of resolution planning.

CDS has undertaken the process of recovery planning and has developed specific scenarios in this regard; including credit, liquidity as well as operational events which it expects to form the foundation for its recovery and orderly wind-down plans. In accordance with its regulatory requirements, CDS has established a comprehensive and effective Recovery Plan that is reviewed and approved annually by its Board of Directors. The plan ensures that CDS can continue to provide critical services and can replenish any financial resources that it may employ in implementing such plan.

CDS and CDCC conducted their first Recovery table-top exercise in December 2017 - primarily to demonstrate an example of the application of each FMI’s recovery process and, in particular, the use of each FMI’s Parental Support Agreement (PSA) to access operational risk capital (ORC).

c. Principle 4: Credit risk

Principle

An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions.

Disclosure

Key consideration 1: An FMI should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes. Credit exposure may arise from current exposures, potential future exposures, or both.

As noted, CDS has established, and maintains, a principles‐ based risk‐ management framework consisting of Tiers 1 through 3 policies. Specific principles and critical processes related to the management of market, credit and liquidity risks are described in the Tier 3 policies.

The CDS financial risk model is the foundation for the management of credit risk for the clearing, settlement and depository services. Key elements of CDS’s financial risk model represent the practical implementation of the credit ring management principles specified in the TMX Group Credit Risk Management Policy, particularly the finality of settlement in CDSX, the transfer of credit risk to participants, and loss allocation rules based on the premise of “defaulter‐ pay” under which participants collateralize their credit exposures, fully and simultaneously, with a high degree of confidence.

Key consideration 2: An FMI should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk‐management tools to control these risks.

Within CDSX, participants are categorized based on their roles and on their participation in certain collateralized credit rings. Extenders of credit, which are subject to additional standards and credit risk controls, for example, provide lines of credit to other participants. Non‐ extender participants, by contrast, are able to join other collateralized credit rings for the purpose of generating additional credit facilities. For each participant type, credit exposure is limited to its system operating cap (SOC).

Credit exposure to CDS, as a Securities Settlement System, is measured and mitigated on a real‐ time basis. The most important payment risk controls are automated through the application of the “funds edit” and the “aggregate collateral value (“ACV”) edit” within CDSX. The funds edit ensures that the payment obligation of any participant does not exceed pre‐ approved credit facilities provided by either an extender of credit or through a collateralized credit ring. The ACV edit ensures that, within an established confidence limit, the payment obligation of each participant is collateralized. Subject to these edits, delivery‐ versus‐ payment is achieved during trade settlement in CDSX through the simultaneous transfer of securities and associated funds.

CDS employs risk measurement methodologies that are relevant, effective and understandable while recognizing the limitations of these measures and continually considers the use of multiple, complementary, risk measurement approaches.

CDS participant credit assessments are primarily based on the fact that the primary regulator of a participant is best positioned to determine and enforce appropriate financial stability and capital standards. Whenever possible, therefore, CDS establishes formal information‐ sharing agreements with participant regulators in order to remain informed, on an ongoing basis, as to the financial status of participants.

Ongoing assessment of a participant’s adherence with minimum credit standards per the CDS Participant Rules is performed by the Risk Management division daily, weekly, monthly, quarterly and annually, as appropriate, for the participant’s type and category.

These ongoing assessment processes take into account the following requirements of CDS’s Participant Rules:

● Participants must maintain membership in good standing with or in an industry self‐ regulatory organization (“SRO”). Verification is accomplished via memoranda of understanding between CDS and a participant’s primary regulator or the regular provision of appropriate evidence of good standing.

Participants must comply with financial standards established by their primary regulator (“SRO”).

● Participants must meet established thresholds for external credit ratings applicable to their participation in a collateralized credit ring. ● Participants must satisfy minimum capital standards and/or provide an additional guarantee from a suitably rated parent company, and escalating collateral requirements, based on external assessments of creditworthiness (credit ratings or regulatory assessments).

Key consideration 3: A payment system or SSS should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (see Principle 5 on collateral). In the case of a DNS payment system or DNS SSS in which there is no settlement guarantee but where its participants face credit exposures arising from its payment, clearing, and settlement processes, such an FMI should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system.

Category credit ring members guarantee the payment obligations of all the other members of their category credit ring, and CDS’s category credit rings are designed such that each participant fully and simultaneously collateralizes its own payment obligations. CDS operates a “defaulter pay” model. In the event of participant default, however, the category credit ring is responsible for the payment obligation(s) created by the defaulter’s use of system operating cap provided by membership in the ring.

The process of ensuring that participant negative funds balances are collateralized at all times takes into consideration the fact that the value of the collateral may decline during the time it takes to liquidate these securities. To mitigate this risk, a haircut is applied to the securities in a participant’s risk account so as to ensure that current ACV (risk-adjusted aggregate collateral value) is at least as large as the negative funds balance the securities are intended to collateralize.

Haircut rates for equities are calculated based on a 99% confidence level and a holding period of between 2 and 10 days. Consequently, and on average, the haircut rate for such securities should be higher than subsequent price decreases over a 2 to 10‐ day period, 99 times out of 100.

For debt instruments, haircuts are based on the security class, an issuer’s credit rating, and the security’s term to maturity.

Key consideration 4: A CCP should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources (see Principle 5 on collateral and Principle 6 on margin). In addition, a CCP that is involved in activities with a more‐complex risk profile or that is systemically important in 40 multiple jurisdictions should maintain additional financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. In all cases, a CCP should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount of total financial resources it maintains.

CDS’s current exposure to its participants is measured as the change in price of an outstanding position from the security’s most recent mark‐ to‐ market; marking outstanding positions to the market addresses the potential loss from the original trade price to the current price.

In CDSX there are two measures of future exposure:

(i) the unpaid mark‐to‐market attributable to the change in price of a defaulting participant’s positions from the date they were last marked/priced; and,

(ii) the change in value of a defaulting participant’s positions from the price as at the date of default and the price at with the positions are subsequently closed‐ out. Both factors are considered in determining the collateral (CNS Participant Fund service collateral) required to mitigate a participant’s corresponding credit risk.

In calculating the required CNS Participant Fund service collateral, CDS determines, to a high degree of confidence, both the potential mark‐ to‐ market component at default, and the potential change in the price of the positions to be closed‐out between their price at default and when they are closed out.

CDSX applies haircuts to the CNS Participant Fund collateral taking into consideration the fact that the value of the collateral may decline during the time it takes to liquidate the securities providing collateral.

In addition to the CNS Participant Fund, CNS service members are also required to contribute to a CNS Default Fund. The CNS Default Fund is intended to cover the residual (i.e., net of the CNS Participant Fund coverage) potential losses under extreme but plausible market conditions. The calculation of CDS’s CNS Default Fund was changed to reflect a Two-Tier, Cover-1 methodology and implemented on October 2, 2017. The size of CDS’s CNS Default Fund (Tier 1) is determined each month by accumulating daily residual CNS stress test losses - i.e. net of stress test losses

covered by the CNS Participant Fund - over a look-back period of the last twelve months and identifying the largest residual stress test loss. The largest residual stress test loss over the preceding 12-month lookback period is the Tier 1 Default Fund size. The Tier 1 Default Fund size is allocated to all CNS participants pro-rata based on their cumulative CNS Participant Fund requirements over the same 12-month lookback period (excluding “Triple Witch” days10).

Intra-month monitoring of daily stress test losses is performed to identify if any new stress test losses exceed those used to size the CNS Default Fund at the beginning of each month and making collateral calls, if necessary, to maintain Cover-1 status at all times.

During Triple Witch months 11 , those CNS participants that are identified as triple-witch participants 12 (i.e., Tier 2 CNS participants) are required to make additional collateral contributions to the CNS Default Fund, in addition to their Tier 1 requirements, two days prior to the triple witch value date. The Tier 2 incremental amount is the difference between the highest residual stress test loss and the Tier 1 CNS Default Fund size for the same 12-month lookback period. The difference is allocated amongst the Tier 2 CNS participants pro-rata based on their cumulative CNS participant fund requirements on triple witch days only.

More details on the Two-Tier, Cover-1 CNS Default Fund requirements are provided in the CDS Financial Risk Model on CDS’s website-www.cds.ca.

Key consideration 5: A CCP should determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing. A CCP should have clear procedures to report the results of its stress tests to appropriate decision makers at the CCP and to use these results to evaluate the adequacy of and adjust its total financial resources. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a CCP should perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP’s required level of default protection in light of current and evolving market conditions. A CCP should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a CCP’s participants increases significantly. A full validation of a CCP’s risk‐ management model should be performed at least annually.

CDS measures the effectiveness of its risk controls through the use of techniques such as stress

10 Triple witch days refer to the settlement day (value date) and day before settlement day (valued date – 1) subsequent to equity trades executed on the third Friday in each of the months of March, June, September and December. 11 Triple witch months are the months of March, June, September and December of each calendar year. 12 Triple witch participants are those participants whose day-over-day CNS Participant Fund requirement increased by 100% or more on any triple-witch value date-1 or triple-witch value date in the last 12-month lookback period. 43 testing and back-testing, and makes the results of these tests publicly available.

CDS reviews back-testing results on a weekly, monthly and rolling 12‐ month basis. The weekly and monthly back‐ testing results are reviewed by the Financial Risk Management team and are a standing agenda item at Risk Management team meetings with the Chief Risk Officer. Back‐ testing results are shared with the Risk Management and Audit Committee of the CDS Board of Directors, with senior management, and with representatives of other key industry stakeholders including CDS’ primary regulators.

CDS conducts stress testing on a daily basis to assess the credit exposures that would result from the realization of extreme but plausible market price fluctuations due to historical and theoretical stress scenarios. To mitigate structural or inherent weakness in its risk management model, CDS’s Model Risk Management Policy requires that all new, modified, or new releases of business critical models must be vetted.

CDS’s Model Risk Management Policy also calls for business‐ critical models to be independently validated. Independent validation must be performed at least annually.

Key consideration 6: In conducting stress testing, a CCP should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters’ positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward‐looking stress scenarios in a variety of extreme but plausible market conditions.

CDS’s stress testing application applies three different types of market scenarios to the actual positions and obligations of our participants. The first scenario type is historical, where changes in risk factors are assigned based on observed changes in the marketplace (for example, the market crash in October, 1987). For historical scenarios, which are based on observed 3‐ day changes in risk factors, these changes were researched and are applied (interest rates and CAD/USD exchange rate changes, for example, are also included with the equity price changes). The second scenario type is theoretical; arbitrary but plausible changes in risk factors are applied in isolation or together with other factor changes. Examples include a 25% drop in equity prices, or a 100 basis point upward shift in the yield curve. The final scenario type is actual – where normal day‐ to‐ day price changes are applied. While not a stress event, this scenario type allows CDS to perform a back‐ test, in aggregate terms, based on what actually happened in the market each day. Aggregate back‐ testing essentially allows CDS to perform daily default simulations of each participant and supplements the current back‐ testing, which is focused on individual components of the CDSX risk model.

Stress scenarios are then applied to the risk exposures of each participant’s positions and collateral to determine the resulting gains and losses. 44

Key consideration 7: An FMI should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the FMI. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds an FMI may borrow from liquidity providers. These rules and procedures should also indicate the FMI’s process to replenish any financial resources that the FMI may employ during a stress event, so that the FMI can continue to operate in a safe and sound manner.

The CNS Participant Fund for the CCP CNS service is designed as a defaulter‐ pay fund and targets a 99% confidence level. This means that the defaulter’s own collateral contribution to the CNS Participant Fund should be sufficient to cover the resulting losses in 99% of potential default situations, on average, for CNS.

To further mitigate the credit risk associated with the CNS CCP service, CDS has established a stress‐ test‐ based default fund (the “CNS Default Fund”). The CNS Default Fund is designed to cover a residual portion of the CNS CCP service losses with CNS participants’ resources through a pooling‐ of‐ resources arrangement. The CNS Default Fund provides for resources sufficient to cover a wide range of potential stress scenarios that should include, but are not limited to, the default of a participant and its affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions.

In the event that the defaulting participant’s collateral is not sufficient to cover CNS losses arising from the close‐ out process, CDS has $1,000,000 of prefunded skin‐ in‐ the‐ game resources at risk. Any residual loss not covered by CDS’s prefunded skin‐ in‐ the‐ game resources, is allocated to the surviving CNS participants based on the proportionate share of the surviving participants’ collateral requirements.

d. Principle 5: Collateral

Principle

An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.

Disclosure

Key consideration 1: An FMI should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks.

The collateral pledged by a Participant as Specific Collateral, CCP Collateral, Fund Contributions and Collateral Pool Contributions shall be:

● Those types of Securities that are eligible as collateral under Bank of Canada's standing liquidity facility, as such eligible Securities are published by Bank of Canada from time to time13 ● Securities issued by the Government of the United States of America, including without limitation, bonds, treasury bills and notes, only for purposes of contributions to the Collateral Pool for RCP Receivers making US dollar Settlements and to the Participant Funds established for the New York Link Service ● Cash contributions denominated in Canadian dollars ● Cash contributions denominated in US dollars, only for purposes of contributions to the Collateral Pool for RCP Receivers making US dollar Settlements and to the Participant Funds established for the New York Link Service

Eligible Collateral for Collateral Pools and Participant Funds: CDSX only permits the most liquid assets as collateral and therefore, restricts the eligibility of securities that can be pledged as collateral contribution in category credit ring collateral pools and participant funds.

Key consideration 2: An FMI should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.

The haircut represents the amount that a security could decline in value from the time of default to the time that the collateral securities are liquidated. The size of the haircut, therefore, depends on the risk associated with the securities. Securities issued by participants themselves, or by a related entity, are given a haircut of 100% ‐ and as such are not given any collateral value.

13 https://www.bankofcanada.ca/2015/03/assets-eligible-collateral-under-bank-canadas-standing-liquidity-31-march- 2015/ 46

Haircut Rates for Equities

Haircut rates for equities are based on the risk of the individual equity security and are recalculated on a weekly basis. The Internal Risk Management System (IRMS) calculates the risk of each equity security through the use of the Value‐ at‐ Risk (VaR) risk measurement technique VaR is defined as the expected maximum loss for a given security or portfolio of securities with a given degree of confidence over a given period of time. Haircut rates for equities in IRMS are calculated based on a 99% confidence level and a holding period between 2 and 10 days. This means that, on average, the haircut rate should be higher than subsequent price decreases over a 2 to 10‐ day period 99 times out of 100. The holding period for a given security is determined by its liquidity, with less liquid securities being subject to a longer holding period and hence a higher haircut rate.

The calculation of VaR in IRMS is done by measuring the standard deviation of one‐ day price changes for each equity security over the most recent 20, 90, 260 and through the cycle day periods. The largest of these standard deviations is used along with the confidence level factor and holding period to calculate the haircut14.

A number of adjustments, as defined in CDS’s Risk Model, are made to the haircut rate for individual equity securities. These adjustments include a maximum haircut rate for any security of 100% and a maximum holding period of 10 days.

Haircut Rates for Debt

For debt instruments, haircuts are based on the security class, an issuer rating and the security’s term to maturity. The haircuts for debt instruments used in CDSX are consistent with those established by the Bank of Canada for its standing liquidity facility.

CDSX only permits the most liquid assets as collateral and therefore, restricts the eligibility of securities that can be pledged as collateral contribution in category credit ring collateral pools and participant funds (refer to Table 6 in CDS’s Financial Risk Model).

CDSX controls liquidity risk by applying haircuts to securities in participants’ risk accounts, restricting the amount of ACV that can be created by certain types of securities (sector limits), restricting the eligibility of collateral that can be used as collateral contributions in category credit ring collateral pools and participant funds, having back‐ up lines of credit with commercial banks, and performing stress tests regularly.

14 The maximum of the 20, 90, 260-day and through-the-cycle period standard deviations is multiplied by 2.33 to achieve a 99% confidence level and then multiplied by the square root of the holding period.

Key consideration 3: In order to reduce the need for procyclical adjustments, an FMI should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.

In order to mitigate the relative under‐ collection of margin during periods of low market volatility, CDS has implemented an additional through‐ the‐ cycle (“TTC”) period to calculate volatilities. The TTC period is approximately 5‐ years – the length of a typical economic cycle. The TTC period is designed to introduce a volatility “floor” during periods of low market volatility.

Key consideration 4: An FMI should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.

Largely due to systemic risk concerns that could result from an Extender of Credit or a Settlement Agent and their associated family members, these participants are subject to restrictions on the amount of ACV that can be created by certain types of securities. These restrictions are called sector limits.

Sector limits serve to limit the exposure to higher risk securities that can be used as ACV.

Sector Limits Applied to Calculation of ACV

Sector limit Description Government sector Calculated as 25% of the company cap and is made up of non‐federal‐ limit (GSL) government‐sector‐issued securities (provincial debt, federally guaranteed debt and provincially guaranteed debt). Private sector limit Calculated as 15% of the company cap and is made up of private‐ (PSL) sector‐ issued debt securities. Unrated debt limit Set at zero and is made up of unrated public sector bonds and (UDL) unrated municipal bonds. High yield debt $100 million or less, as elected by the participant, to be shared limit (HYL) between the participant and their family member(s) and is made up of BBB‐rated corporate debt (high yield bonds). Federal U.S. limit Set at zero and made up of U.S. Treasury securities. (FTL) Equity sector limit $100 million or less, as elected by the participant, to be shared between (ESL) the participant and their family member(s). This amount is deducted from the participant’s existing PSL.

There is no limit on the amount of ACV that can be made up of federal government securities

(i.e., those issued by the Government of Canada).

Key consideration 5: An FMI that accepts cross‐border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner.

Securities eligible for use as CDS collateral, either in the form of pledged securities for collateral pools and funds, or securities used for ACV purposes, are located domestically, with the exception of U.S. treasury securities, which are eligible only for pledging purposes. The risks associated with acceptance of U.S. Treasury securities were carefully examined prior to their being made eligible for use as CDS collateral, and these securities have never accounted for a material portion of securities used for collateral by CDS.

Key consideration 6: An FMI should use a collateral management system that is well‐designed and operationally flexible.

CDS’s participant rules constitute a security agreement which creates a security interest in favour of CDS, as the securities intermediary, in the securities and funds of each Participant that are financial assets, securities entitlements, or securities accounts,. The security interest attaches by control of the Securities and funds, and is perfected by both control of the Securities and funds and by registration of a financing statement. Accordingly, as provided by section 30.1(5) of the Personal Property Security Act of Ontario, the security interest has priority over a conflicting security interest held by another secured party.

CDS does not reuse collateral.

CDS offers a collateral management service to its participants for the purposes of pledging eligible securities to meet the requirements of the various collateral pools which the participant may be a member of. This service allows the participant to efficiently pledge securities and manage pledged collateral by substituting individual pledged securities if required. The service values the pledged collateral accounting for the applicable haircut and compares to collateral value to the requirement allowing the participant to determine if sufficient securities have been pledged.

49 e. Principle 6: Margin

Principle

A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk‐based and regularly reviewed.

Disclosure

Key consideration 1: A CCP should have a margin system that establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves.

CDS has established participant funds to cover the risk that CDS faces as a CCP. The collateral requirement for the CCP service participant funds is based on an estimation of the potential loss the default of an individual member of a CCP service could create. This loss can result from the failure of a defaulting CCP service participant to pay the remaining unpaid mark (the mark‐ to‐ market component of the participant fund), if any, and the potential cost to CDS to replace the defaulter’s security receipt and delivery obligations in the service (the outstanding position component of the participant fund).

Consistent with CDS’s risk management principle which requires participants to be responsible for the risk they create, the participant funds are primarily defaulter‐ pay. Practically, the potential losses of a participant default in a CCP service should be covered by the defaulter’s own collateral in the vast majority of potential cases. The CNS participant fund uses the VaR approach to estimate the potential future exposures (“PFE”) to CDS from a participant’s outstanding positions, and the PFE is designed to maintain a 99% confidence level where the defaulter’s own collateral should be sufficient to cover the resulting losses in 99% of potential default situations.

In addition, the losses generated by a default in a CCP service are contained within that service, as required by CDS’s risk management principle of avoiding spillover between settlement services; losses in excess of the collateral requirement from the defaulter are borne by the surviving participants in the service.

Mark‐ to‐ market component: The mark‐ to‐ market component (MTM component) is the potential risk that a participant that owes a mark‐ to‐ market payment to CDS will default and will not pay that amount.

The MTM component in CNS is calculated by using the largest unpaid mark paid by the participant in the last 50 business days. The use of 50 business days as the historical observation period for CNS provides approximately 99% confidence level for CNS.

The outstanding position component: The outstanding position component represents the risk which CDS would face if a participant defaulted with outstanding transactions in a CCP service. In this circumstance, CDS must either sell or buy securities to close‐ out the participant’s outstanding positions. The difference between what CDS pays and/or receives in the marketplace for these close‐ out transactions, and what CDS received and paid for the original positions, represents the loss (or gain) that CDS needs to cover through the participant fund. The calculation of each CCP service member’s outstanding position component collateral requirement is an estimate of these potential losses.

As with the calculation of haircut rates for ACV purposes for equity securities, CDS uses the VaR approach to estimate the risks to CDS from a participant’s outstanding positions. This application of VaR examines each of a participant’s individual outstanding positions, as well as the history of price movements for each of those positions, over the recent history. Based on these factors, VaR estimates how much the value of the portfolio of the participant’s outstanding positions might change over a given period of time. This period of time is based on the expected time required to execute the offsetting transactions to close‐ out a defaulter’s positions.

Key consideration 2: A CCP should have a reliable source of timely price data for its margin system. A CCP should also have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable.

CDS obtains price data from reputable third party price vendors and performs periodic reasonability validations of prices at the security level. Pricing is readily available for all those securities eligible for margin. Pricing for fixed income securities is provided by the Bank of Canada and an external vendor on a daily basis. Equity pricing is provided by external vendors.

As different feeds may contain a price for the same security for the same market, CDSX uses a prioritization methodology. As a result, priority is given to a specific market on a particular feed; if that price is not received, the price is obtained from a different market and/or feed based on the price priorities.

CDS has a model risk management framework designed to identify business critical models and to reduce the operational risk inherent in the business critical models being flawed. The model risk management framework is designed to ensure a business critical model is conceptually sound15, used as intended, executed in a substantially error‐ free manner and maintained on a go‐ forward basis.

15 This includes vetting the appropriateness of the business critical model, its underlying assumptions and data inputs given the portfolio of financial instruments/contracts whose risk is being measured and monitored.

Key consideration 3: A CCP should adopt initial margin models and parameters that are risk‐ based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Initial margin should meet an established single‐tailed confidence level of at least 99 percent with respect to the estimated distribution of future exposure. For a CCP that calculates margin at the portfolio level, this requirement applies to each portfolio’s distribution of future exposure. For a CCP that calculates margin at more‐ granular levels, such as at the sub‐portfolio level or by product, the requirement must be met for the corresponding distributions of future exposure. The model should (a) use a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the CCP (including in stressed market conditions), (b) have an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, and (c) to the extent practicable and prudent, limit the need for destabilising, procyclical changes.

CDS calculated collateral (margin) requirements for its future potential risk exposures as CCP in the CNS service at a 99% single‐ tailed confidence level.

The MTM component in CNS is calculated by using the participant’s largest unpaid mark in the previous 50 business days. The calculations address the risk that a default may occur prior to the participant delivering their required collateral contribution to CDS’s CNS CCP service. The use of 50 business days as the historical observation period for CNS provides approximately 99% confidence level for CNS.

The outstanding position component for diversification‐ eligible positions is calculated by estimating the risk of the positions through the daily changes in value of the portfolio of outstanding positions over the recent past. The risk of the outstanding positions is based on the largest of the 20, 90, 260-day and through-the-cycle period standard deviation of portfolio value changes. The outstanding position component for a CNS participant is calculated as the higher of the VaR on the participant’s outstanding positions or the average of the VaR over the most recent 20 business days, including the current day for which the calculation is being made.

For each outstanding position, the required liquidation period is calculated as the actual position size divided by the average daily trading volume (rounded to the nearest full day) plus one day.16 The required liquidation period is an estimate of the number of days required to replace the

16 The additional day is required given the potential timing of a default and the latest price at which positions had been marked‐to‐market. Assuming default at payment exchange, there is a full day of market risk at a minimum (the difference between the mark price of the close of the previous day and the closing market price on the day of default). Therefore, a 2‐day holding period would require CDS to execute offsetting trades on the business day immediately following a default.

outstanding position. If the required liquidation period is greater than the standard holding period, the required liquidation period is used to calculate the collateral requirement for the outstanding position (limited to a maximum holding period of 10 days). If the required liquidation period is less than the standard holding period, then the standard holding period is used to calculate the collateral requirements.

The portfolio of a participant’s outstanding positions is divided into two broad groups: those positions that are eligible for calculation of risk on a portfolio basis (diversification17 eligible) and those positions where the risk of the outstanding position is determined on a stand‐ alone basis (non‐ diversification eligible). The calculation of the outstanding position component for Non-diversification eligible is the sum of the gross market value of each non‐ diversification eligible position multiplied by the haircut applicable to that security.

The outstanding position component for diversification‐ eligible positions is calculated by estimating the risk of the positions through the daily changes in value of the portfolio of outstanding positions over the recent past. The risk of the outstanding positions is based on the largest of the 20, 90, 260-day and through-the-cycle standard deviation of portfolio value changes. Diversification effects are incorporated by allowing gains and losses to offset themselves on each of the days in the historical observation period.

Procyclical effects are mitigated by using volatility periods to calculate the portfolio and security‐ level volatilities and are designed to mitigate sharp, unsustainable changes in collateral requirements.

Key consideration 4: A CCP should mark participant positions to market and collect variation margin at least daily to limit the build‐up of current exposures. A CCP should have the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants.

All trades and outstanding positions in the CCP services are marked‐ to‐ market daily to cover the potential loss between the original trade price and the current price in the event of a participant default.

17 For the purposes of the CNS participant fund, diversification effects could result where there are multiple outstanding positions in different securities. These effects result where the risk of a portfolio of securities is less than the sum of the risk of the individual securities that make up the portfolio. For example, a participant may have outstanding long and short positions in two securities whose historical price changes are correlated (that is, their historical price changes tend to be in the same direction and magnitude). In this case, value increases in one position would tend to be offset by value decreases in the other. If risk were measured as the volatility of changes in value, then a portfolio of these two positions would represent less risk than the individual positions considered on their own. Diversification effects are not limited to risk offsets created by long and short positions, a portfolio of only long or short positions could also generate diversification effects to the extent that the securities in the portfolio are uncorrelated or negatively correlated.

Participants are required to contribute to the CCP funds to cover both the marked‐ to‐ market payment (which would owed by a participant in the event of default) and the potential replacement risk associated with the close‐ out of outstanding positions.

A cap is applied to the replacement cost risk arising from the outstanding positions that any participant can create in the CNS CCP service. Once this cap is reached, additional processes are activated within CDS, including informing the appropriate regulators of the event and the collection of additional collateral.

CDS’s Participant Rules provide CDS with the following authority (Rule 5.8.6: Additional Contributions): “In addition to its Contribution to a Fund . . . from time to time forthwith at the request of CDS, a Participant shall provide additional Contributions, the amount of such additional Contributions being the amount that CDS in its absolute discretion determines to be prudent to ensure the due discharge of the Participant's obligations to CDS in respect of the Function for which the Fund was established (taking into consideration the financial stability and regulatory status of the Participant, the amount of its obligations to CDS, the market volatility, liquidity, concentration or market float of any issue of Securities held by or to be delivered by or to the Participant, and any other factor that CDS considers relevant).”

Key consideration 5: In calculating margin requirements, a CCP may allow offsets or reductions in required margin across products that it clears or between products that it and another CCP clear, if the risk of one product is significantly and reliably correlated with the risk of the other product. Where two or more CCPs are authorised to offer cross‐margining, they must have appropriate safeguards and harmonised overall risk‐management systems.

CDS is a cash equities CCP and does not currently offer cross margining.

Key consideration 6: A CCP should analyse and monitor its model performance and overall margin coverage by conducting rigorous daily back‐testing – and at least monthly, and more‐ frequent where appropriate, sensitivity analysis. A CCP should regularly conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears. In conducting sensitivity analysis of the model’s coverage, a CCP should take into account a wide range of parameters and assumptions that reflect possible market conditions, including the most‐volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices.

In order to determine the effectiveness of the collateral requirement calculation, CDS performs back‐ testing on participant fund collateral requirements by comparing actual participant collateral requirements (based on actual positions) to historical changes in value of those positions. By assuming that a participant’s default occurs on each of the dates in a selected historical period, CDS can determine if the participant’s collateral requirement was sufficient to cover the resulting

53 loss on each date and, if not, by how much the loss exceeded the available collateral. Back‐testing effectively answers the question “if a participant defaulted today, would CDS have enough collateral to cover any resulting loss or would the surviving participants be required to cover some portion of the loss?”

The back‐ testing process for CNS is completed weekly (on participants’ daily activity) to determine if the participants’ collateral requirement computed during the previous netting cycle (CBD – 1 in case of CNS) was sufficient to cover the losses if the participant defaulted today. The reason for back‐ testing against the computed collateral requirement from the previous cycle (CBD – 1 in case of CNS) is the assumption that the participant would default before pledging the collateral requirement computed during the latest netting cycle (CBD in the case of CNS).

Back‐testing results are designed to assess whether CNS service members’ CNS Participant Fund collateral requirements on the day prior to default were sufficient to cover the loss associated with its portfolio as at the time of default. The back‐testing threshold for such assessments is a 99% success/pass rate over the preceding 250‐days.

Key consideration 7: A CCP should regularly review and validate its margin system.

As a business critical model, CDS’s margin system must comply with CDS’s Model Risk Management Policy.

CDS’s Model Risk Management Policy required that business critical models be vetted to ensure they are conceptually sound, consistent with the intended application and executed in a substantially error‐ free manner. On an on‐ going basis models are validated to confirm that the model as implemented continues to be appropriate for the purpose it is being used.

54 f. Principle 7: Liquidity risk

Principle

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same‐day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.

Disclosure

Key consideration 1: An FMI should have a robust framework to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities.

The requirement to fund the payment obligation of a defaulting participant falls to surviving participants through either: (i) an extender of credit being required to cover the payment obligation of a defaulting participant which used its line of credit; or (ii) a member of a category credit ring being required to cover a proportionate share of the payment obligation of a defaulting member of the credit ring (e.g., a member of either the Extenders of Credit, the Settlement Agents or the Receivers of Credit category credit rings); or (iii) a member of a service / fund being required to cover a proportionate share of the payment obligation of a defaulting user of the service (e.g., CNS, DTC Direct Link or New York Link). This liquidity risk is described in the Rules pertaining to the extension of credit and establishment of credit rings in the clearing, depository and settlement services. Participants are expected to establish the necessary liquidity arrangements and contingencies in order to fulfill their responsibilities as members of a credit ring of a defaulter.

CDS is finalizing an increase in the size of its credit facility to cover the New York Link, DTC Direct Link, USD Receivers of Credit and Canadian Receivers of Credit Category Credit Rings’ payment obligations. The credit line is arranged with a consortium of Canadian Banks and sized to sustain a default of a single lender at a 97% confidence level. The credit line will be dynamic and can be upsized on demand should the base amount be insufficient to fully cover the end‐of‐ day liquidity requirement.

For the CNS (CCP) service, CDS is negotiating a line of credit to cover the CNS outstanding position obligations on the day of a default. The CNS line will also be dynamic and up-sizable.

Key consideration 2: An FMI should have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis,

55 including its use of intraday liquidity.

All participants’ Funds Accounts have a limit on the size of negative funds balances (essentially a limit on the maximum debit balance that the participant can maintain in its Funds Account at any point in time). The size of this limit is based on two factors:

● Caps: Only participants that are members of a collateralized category credit ring receive a cap. The amount of the cap is determined by the rules and formulae of the participants’ collateral pools/credit. Extenders of Credit and Settlement Agents must be members of their respective collateral pool/credit rings. Receivers of Credit receive cap when they are members of the contributing Receivers’ Collateral Pool (RCP). ● ● Lines of Credit: In CDSX, credit granters (Extenders of Credit) provide lines of credit to other participants. Participants may receive multiple lines of credit from multiple credit granters.

Participants may have both a cap and a line of credit and, in that case, the effective limit on the participant’s negative funds balance is the sum of the cap and the line of credit. The system will always use a participant’s cap before drawing on a line of credit. The limit on each participant’s negative funds balance operationalizes CDS’s risk management principle of limiting the potential exposure created by a participant.

CDSX performs a Funds edit which ensures that negative funds balances in a participant’s Funds Account do not exceed the participant’s limit as calculated by the sum of its cap and line of credit. When the system applies the Funds edit to the buyer in a trade, it calculates the buyer’s projected Funds Account balance by subtracting the net settlement amount of the trade from the buyer’s current Funds Account balance. If this projected balance is positive or zero, the Funds edit is satisfied. If the projected Funds Account balance is negative, the Funds edit compares this projected negative amount to the participant’s limit (i.e. the sum of the participant’s cap and lines of credit). If the projected balance is within the limit, then the Funds edit is satisfied. If the projected balance is not within the limit the trade is not settled (the trade is placed in a pending or failed state and settlement is re‐ attempted later).

As part of monitoring and surveillance, Risk Management performs the following activities:

● Dynamically monitors and measures credit, market and liquidity risk exposures against defined limits and thresholds, identifying participants contributing excessive risks to the system; ● Manages the performance of the CDS financial risk model and associated controls; and

● Reports no less than monthly to senior management, the risk advisory committee and the audit/risk committee risk exposures, trends and any actions taken in applying risk controls.

Exposures are monitored against predefined limits which, if exceeded, result in a defined set of actions/consequences to the participant. The predefined limits are:

● Soft Cap for New York Link (NYL) Service: a cap is calculated quarterly as follows (in USD) and is intended to ensure that facilities are available to protect against liquidity risk.

Key consideration 3: A payment system or SSS, including one employing a DNS mechanism, should maintain sufficient liquid resources in all relevant currencies to effect same‐day settlement, and where appropriate intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.

The adequacy of CDS’s Credit Agreement in relation to potential risk is monitored on an ongoing, rolling, basis and reported to CDS’s senior management Risk Management Committee, CDS’s participant Risk Advisory Committee and the Risk Management and Audit Committee of CDS’s Board of Directors. This monitoring includes assessing the liquidity obligation that would result from the default of the participants that generate the largest liquidity obligation.

CDS measures the percentage of days, on a rolling 12‐ month basis, which would have been covered by its Credit Agreement. Liquidity events are defined as instances where the largest single participant liquidity obligation is greater than the available liquidity facility. The threshold for monitoring is a 97% confidence level.

Key consideration 4: A CCP should maintain sufficient liquid resources in all relevant currencies to settle securities‐related payments, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions. In addition, a CCP that is involved in activities with a more‐complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions.

For the CNS (CCP) service, CDS is negotiating a line of credit to cover the CNS outstanding position obligations on the day of a default. The CNS line will also be dynamic and up-sizable.

CDS is not a CCP that is involved in activities with a more‐ complex risk profile or that is systemically important in multiple jurisdictions and therefore does not maintain additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions.

Key consideration 5: For the purpose of meeting its minimum liquid resource requirement, an FMI’s qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If an FMI has access to routine credit at the central bank of issue, the FMI may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.

For the CNS (CCP) service, CDS is negotiating a line of credit to cover the CNS outstanding position obligations on the day of a default. The CNS line will also be dynamic and up-sizable.

Key consideration 6: An FMI may supplement its qualifying liquid resources with other forms of liquid resources. If the FMI does so, then these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if an FMI does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. An FMI should not assume the availability of emergency central bank credit as a part of its liquidity plan.

The collateral pledged by participants to those services whose liquidity risk is mitigated by CDS’s Credit Agreement consists of collateral accepted by the Bank of Canada under its Standing Liquidity Facility.

Key consideration 7: An FMI should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the FMI or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider’s performance reliability with respect to a particular currency, a liquidity provider’s potential access to credit from the central bank of issue may be taken into account. An FMI should regularly test its procedures for accessing its liquid resources at a liquidity provider.

CDS requires that its liquidity provider(s) abide by the legal agreement and the operational procedures which, together, detail the amount, term, conditions, acceptable collateral and the timing of the liquidity facility. That legal agreement is subject to annual review and renewal by each of the liquidity providers.

CDS conducts annual default simulation exercises to determine if the banks associated with CDS’s Credit Agreement have the ability to perform on their commitments.

CDS also accounts for the default of any single lender in sizing the credit facilities.

Key consideration 8: An FMI with access to central bank accounts, payment services, or securities services should use these services, where practical, to enhance its management of liquidity risk.

CDS has Canadian dollar bank accounts at the Bank of Canada for cash settlement and cash collateral purposes. CDS does not have access to U.S. dollar accounts at the U.S. Federal Reserve.

Key consideration 9: An FMI should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. An FMI should have clear procedures to report the results of its stress tests to appropriate decision makers at the FMI and to use these results to evaluate the adequacy of and adjust its liquidity risk‐management framework. In conducting stress testing, an FMI should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward‐looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the FMI, include all entities that might pose material liquidity risks to the FMI (such as settlement banks, nostro agents, custodian banks, liquidity providers, and linked FMIs), and where appropriate, cover a multiday period. In all cases, an FMI should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.

CDS monitors and reports on the maximum liquidity requirements associated with the potential default of a participant of the CNS CCP service under normal market conditions. CDS is in the process of sizing its credit facilities under stressed market conditions.

Key consideration 10: An FMI should establish explicit rules and procedures that enable the FMI to effect same‐day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same‐day settlement of payment obligations. These rules and procedures should also indicate the FMI’s process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

CDS has rules and procedures in place related to the default management process which cover the same day payment obligations for suspended participants.

For the CNS (CCP) service, CDS is negotiating a line of credit to cover the CNS outstanding position obligations on the day of a default. The CNS line will also be dynamic and up-sizable. g. Principle 8: Settlement finality

Principle

An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.

Disclosure

Key consideration 1: An FMI’s rules and procedures should clearly define the point at which settlement is final.

Section 7.5.7 of CDS’s Participant Rules explicitly identifies the point at which payment, transfer instructions or other obligations processed by CDS are irrevocable and unconditional:

“The making of entries in the Ledgers maintained by CDS to effect a delivery of Securities or a 60

payment effects final and irrevocable delivery or payment to and from the Participants in whose Ledgers such entries are made. If the entries are made to settle a Central Counterparty Obligation, such entries effect final and irrevocable delivery or payment between CDS and the Participant. The finality of the Settlement of a Central Counterparty Obligation does not affect the separate obligation to make payment on Payment Exchange between CDS and the Participant that is evidenced by any Funds Account balance in a Ledger of a Participant.”

For cross border services, the timing of settlement finality is subject to the provisions of DTC and NSCC’s participant rules.

Key consideration 2: An FMI should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. An LVPS or SSS should consider adopting RTGS or multiple‐batch processing during the settlement day.

CDS completes final settlement of transactions in real time. Pending trades or outstanding CCP obligations are considered for settlement on their Value Date.

Key consideration 3: An FMI should clearly define the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant.

As noted in the Rule 1.3.14 of CDS’s Participant Rules:

“Entries are made in the Ledgers maintained for Participants and for CDS to record Transactions involving two Participants or CDS and a Participant, including the deposit, withdrawal and delivery of Securities, the novation and netting of Transactions through the CNS Function, and the making of payment. Such entries are final and irrevocable when made. The settlement of a payment obligation between CDS and a Participant is final and irrevocable once made, and however made, including by payment to or from an account of CDS at Bank of Canada, by a payment message through Fedwire, by payment to or from an account of CDS at its banker for any Cross‐Border Service, or by payment to or from the Participant's Qualified Banker or Designated Payment Agent. Such final and irrevocable entries and payments cannot be deleted, adjusted, reversed, repaid or set aside.”

Finality of Settlement is defined in Rule 7.6.7.

h. Principle 9: Money settlements

Principle

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimize and strictly control the credit and liquidity risks arising from the use of commercial bank money. 61

Disclosure

Key consideration 1: An FMI should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

For CDS there are two distinct mechanisms to complete money settlements based on whether the settlement payment is denominated in CAD or USD. CAD payment must be made in Large Value Transfer System (LVTS) funds through CDS’s account at the Bank of Canada. By using the LVTS system CDS mitigates the credit and liquidity risks associated with commercial bank settlements.

USD payments are transferred via Fedwire to CDS’s USD commercial settlement bank.

Key consideration 2: If central bank money is not used, an FMI should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

To mitigate the risk associated with the operational bank accounts, CDS monitors the following credit risk metrics of the commercial bank:

● Rating Events o Ongoing monitoring of the bank’s credit ratings and credit watch status as assessed by a “major” credit rating agency (i.e., S&P, Moody’s and DBRS) o Bloomberg’s indicative credit rating as calculated using the Bloomberg (BBG) Credit Default Risk function (DRSK) ● Default probability – 1 year horizon o Using the BBG DRSK model ● Credit Default Swap (CDS) spreads o Using the BBG DRSK model ● CDS spread relative to peer group

To limit the risk associated with the use of commercial banks, CDS’s policy is to limit the amount of funds left in the respective bank accounts and to invest residual funds in high quality short term assets.

Key consideration 3: If an FMI settles in commercial bank money, it should monitor, manage, and limit its credit and liquidity risks arising from the commercial settlement banks. In particular, an FMI should establish and monitor adherence to strict criteria for its settlement banks that take account of, among other things, their regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability. An FMI should also monitor and manage the concentration of credit and liquidity exposures to its commercial settlement banks. 62

In selecting a settlement bank for its daily USD clearing and settlement related to securities trading operations, CDS considered the following criteria:

● Highly responsive and time sensitive support for the clearing of large payments in the Federal Reserve system ● Fedwire payments ● Account transfer facilities ● On‐ line transaction processing and reporting

To mitigate the risk associated with the operational bank accounts, CDS monitors the following credit risk metrics of the commercial bank:

In addition, CDS has established operational performance standards with its commercial settlement bank and regularly assesses the bank’s performance relative to those standards.

By directing designated bankers and paying agents to move all Canadian funds, both intraday entitlements payments and end of day settlement payments, directly to the Bank of Canada via LVTS, CDS’s intraday bank credit risk related to these funds has been minimized or eliminated.

CDS depends largely on the continued financial integrity of its USD clearing bank to protect its interests and the interests of its Participants. An examination of alternative pathways for funds movements revealed no alternatives that would improve the risk position of CDS and be operationally feasible. The conclusion of the review team was that accepting this intraday risk was an unavoidable aspect of conducting its US business.

Key consideration 4: If an FMI conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

Not applicable for CDS.

Key consideration 5: An FMI’s legal agreements with any settlement banks should state clearly when transfers on the books of individual settlement banks are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the FMI and its participants to manage credit and liquidity risks.

Fund transfers comply with the applicable law, regulations, and rules, including, where applicable, the rules of the National Automated Clearing House Association (“NACHA rules”) or other funds transfer system used in connection with funds transfers.

For US dollar cash transactions, the payment exchange process depends upon the facilities of CDS’s USD settlement bank. At end of day, after USD payment exchange (for both CDSX and New York Link/DTC Direct Link), funds are received at CDS’s USD settlement bank via Fedwire from DTC and/or from designated bankers/Participants owing funds and then paid out via Fedwire to the designated bankers/Participants and/or DTC who are net receivers of funds.

64 i. Principle 10: Physical deliveries

Principle

An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries.

Disclosure

Key consideration 1: An FMI’s rules should clearly state its obligations with respect to the delivery of physical instruments or commodities.

CDS does not accept physical delivery of any asset class and does not settle any transaction through the movement of physical securities positions.

Key consideration 2: An FMI should identify, monitor, and manage the risks and costs associated with the storage and delivery of physical instruments or commodities.

CDS is committed to protecting participants’ securities on deposit against loss, misappropriation and unauthorized use, with established security standards and guidelines for each regional office and its head office location.

CDS maintains systems of physical security, which include physical devices, electronic entry and monitoring equipment, and security guards. Employees and contract personnel are required to carry photo ID badges. Visitors to CDS premises must be sponsored by CDS personnel, logged in and out, and wear visitor badges throughout their visits. Physical access to sensitive areas is restricted and controlled; authorizations are re‐ evaluated periodically.

Physical securities held at CDS are housed in vaults that meet industry standards. Certificates and coupons in the custody of CDS are maintained in a secure environment at all times. This is accomplished through restricting and monitoring access to areas handling inventory, and inspection of the area to ensure that all certificates are vaulted overnight. Periodic security maintenance (e.g., semi‐ annual combination lock change) is performed in compliance with security policy.

Certificates for registered securities are held using CDS’s nominee name (except for non‐ transferable issues which are held in either CDS’s nominee or in street form) and in non‐ negotiable form.

j. Principle 11: Central securities depositories

Principle

A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilized or dematerialized form for their transfer by book entry.

Disclosure

Key consideration 1: A CSD should have appropriate rules, procedures, and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains.

The basis for the establishment of the rights of securities issues and holders of securities are provided in the CDS Rules, in particular sections 2.5 (Participant Roles With Respect to Securities), 4.3 (Debit Ring and Short Positions), and Rule 6 (particularly sections 6.1, 6.2, 6.3 and 6.4). In addition, the Rule referenced below specifically addresses the issue of security holder rights:

6.9.1 Rights of Security Holder Generally

Owners of Securities may wish to take steps, including the exercise of dissenters' rights, appraisal rights or other rights of a holder, bearer or owner of the Securities, or the pursuit of an action to enforce payment on or other rights under the Securities. CDS may require the Participant to withdraw Securities from the Depository Service and to be‐ come the registered holder or bearer of the Securities, so as to be able to take any such steps itself, if it is possible to transfer the Securities to the Participant. Alternatively, at the request of the Participant, CDS will take any such steps in its capacity as the registered holder or bearer of, or person otherwise entitled to, Securities held for a Participant. CDS shall not be obligated to take any such steps except pursuant to the reason‐ able instructions of the Participant for whom such Securities are held and only if CDS receives from the Participant an indemnity and assurance of payment satisfactory to CDS. CDS shall not be obligated in any event to determine the legal or other requirements to be followed in the pursuit of such rights or actions, or the desirability or necessity of taking any such steps.

CDS systems performs a daily reconciliation of positions reported to individual participants, against positions held within CDS, via its Securities Inventory Management System for certificated positions held in our vault. For non‐ certificated issues, CDS performs this three way reconciliation, through files received from the registrars. CDS’s systems prevent committed 66 positions (like a voluntary election commitment) to be available for use to also commit to a trade. There are three types of ledgers in CDSX – customer ledgers that contain both security and funds positions that represent their client holdings in CDSX, internal ledgers that contain both security and funds positions, and custodian ledgers that contain security positions only to reflect the inventory held on behalf of CDS. The Security Inventory Management System (SIMS) supports the Operations groups with the safekeeping and tracking of certificates.

Controls:

1. Participants manage their own accounts by initiating deposits and withdrawals; however, adjustments or transfers made to the securities and funds accounts can only be processed by CDS. Deposits and withdrawals are effective in CDSX upon confirmation by the custodian identified for that security. 2. Adjustment requests received from participants must be from an authorized individual of that participant. CDS Operations validates this based on an authorized signature database or letters of authorization from the individual participants. 3. If a transaction will create a short position, the adjustment is communicated to the participant before processing. Once entered, an email notification is automatically generated, and a short position notice is prepared and sent to the Collateral Management group for review. 4. The CDSX Report Management System (RMS) makes available to participants and CDS staff online reports containing information about current transaction activity and batch reports containing information about transaction activity at the completion of end‐ of‐ day procedures. As specified in the Rules, procedures and user guides, participants must verify the information provided by CDS. A participant is deemed to have accepted the accuracy of such information unless the participant informs CDS of a discrepancy within the time period specified for verification of information. 5. Automated processes are in place to perform reconciliation of ledgers to internal and external holdings and exception reports are produced when discrepancies exist. Discrepancies are investigated and resolved on a timely basis by participants and CDS Operations. Unresolved discrepancies are escalated to management for resolution.

Audit tests ensure that the total of CDS holdings for a particular security (either at CDS or with CDS custodians) are reconciled against the total of all participants holdings for that security. The result is that CDS position should be net neutral for that security. An audit is conducted annually into all aspects of operations. This includes an audit of all controls supporting the depository, withdrawal processes.

All custodian accounts are reconciled and confirmations of positions are obtained. Audit also

67 obtains direct confirmations from participants that their records of holdings with security are in agreement with CDS reports for such positions.

Key consideration 2: A CSD should prohibit overdrafts and debit balances in securities accounts. CDSX’s systemic risk edits do not allow a participant to create a transaction which results in a negative position and prevent participants from creating security position obligations for which they do not have sufficient positions.

Key consideration 3: A CSD should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Where appropriate, a CSD should provide incentives to immobilise or dematerialise securities.

Securities held in custody by CDS are either in a dematerialized or immobilized state (Non‐ Certificated Inventory and Book Entry Only securities, respectively). CDS does hold certificates in physical form for a limited scope of security issues. CDS collaborates with the issuers and their agents to reduce physical certificates and ensure that the Trust and Warrant Indentures allow for dematerialization. CDS’s fee schedule is also structured to dis-incent physical certificates.

Key consideration 4: A CSD should protect assets against custody risk through appropriate rules and procedures consistent with its legal framework.

In addition to segregation of duties within CDS’s operating departments, robust policies and procedures validation by both internal and external auditors mitigates custody risk.

CDS operates an automated inventory system which tracks securities movements and locations and produces reports required for processing and files for reconciliation purposes. All securities are accounted for when transferred from CDS’s vault for authorized business purposes, and incoming certificates are matched to the source document.

CDS conducts ongoing vault security maintenance (e.g., combination changes, time lock setting, assessments of compliance, etc.) and annual testing of security systems.

All inventory positions are reconciled with CDSX ledgers. Where CDS is the custodian, an internal file is prepared for that purpose. Conversely, where securities are held with an external custodian, such custodians provide CDS with an electronic reconciliation.

All of the foregoing policies and procedures are consistent with the terms and conditions of the CDS Participant Application, the CDS Participant Rules, and the CDS Participant Procedures.

Key consideration 5: A CSD should employ a robust system that ensures segregation between the CSD’s own assets and the securities of its participants and segregation among the securities of participants. Where supported by the legal framework, the CSD should also support operationally the segregation of securities belonging to a participant’s customers on the participant’s books and facilitate the transfer of customer holdings.

Participant assets are systematically segregated in individual ledgers, and CDS assets are maintained in separate ledgers dedicated for CDS use only. Systemic controls ensure that CDS ledgers are maintained separately from participant ledgers. Additional systemic controls ensure that the aggregate position of a specific security, across all ledgers (participant and CDS), does not exceed the quantity of securities represented by the custodial position for that security (the custodial position is evidenced either by certificates held by CDS or by reconciled positions held by custodians on behalf of CDS).

The CDSX Participant ledger structure maintains separate account types (i.e. General Accounts, Segregated Accounts) within which assets are maintained. Participant functionality enables the segregation of customers’ assets in segregated accounts, either on an aggregate basis for all participants’ clients or in specific segregated accounts for individual customers. Transfers of securities from a general trading account to the specific customer accounts are initiated either directly by the participant, using an inter‐ account movement, or are initiated by the CSD based on pre‐ defined overnight segregation parameters determined by the participant. Movement of assets from the Customer account to another participant is accomplished by the settlement of a trade between the participants. Subject to the transaction meeting all risk edits, such trades may settle either directly from the Customers specific account or from a general trading account.

Key consideration 6: A CSD should identify, measure, monitor, and manage its risks from other activities that it may perform; additional tools may be necessary in order to address these risks.

CDS’s other activities consist primarily of information services or ancillary services. While such services may use depository system, risk from the provision of such services does not affect CDS’s key clearing, settlement, and depository functions. These other activities do not involve, and do not permit, participants effecting any safekeeping positions or generating any settlement transactions that could present any credit or liquidity risks to the CSD. Where appropriate, ancillary services are provided directly to participants by an affiliate and /or subsidiary that is a separate legal entity from the CSD. When assessing the risk of offering ancillary services, CDS carefully considers the effect of those services on its FMI activities to ensure that it is able to continue offering the critical FMI services regardless of the risk posed to it by the ancillary services.

69 k. Principle 12: Exchange-of-value settlement systems

Principle

If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.

Disclosure

Key consideration 1: An FMI that is an exchange‐of‐value settlement system should eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the FMI settles on a gross or net basis and when finality occurs.

In CDSX, DVP is achieved through the simultaneous transfer of funds and securities at the time of settlement of transactions. The funds and securities transfers are final and irrevocable. In this regard, CDSX settles trades following BIS Model 118. Negative funds balances in participants’ Funds Accounts are fully collateralized (see section 4 for details on how negative funds balances are collateralized), while positive funds balances are redeemable at any time during the processing day. Participants’ final payment obligations are settled through their designated bankers and qualified bankers (LVTS participants) via the LVTS, occurring at the end‐ of‐ day batch cycle (Payment Exchange) between 4:00 p.m. and 5:00 p.m. EST. In this regard, CDSX follows BIS Model 2 to settle funds between the participants.

18 Bank of International Settlements (BIS) Settlement Models: Model 1: Systems that settle transfer instructions for both securities and funds on a trade‐ by‐ trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment). Model 2: Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle. Model 3: Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.

71 l. Principle 13: Participant-default rules and procedures

Principle

An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Disclosure

Key consideration 1: An FMI should have default rules and procedures that enable the FMI to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default.

o CDS’s Participant Rules (Rule 9.1) define the grounds for the suspension of a Participant:

Discretionary Suspension

CDS shall suspend a Participant if it determines, in good faith, on the evidence reasonably available to it, that the Participant is in such financial or operating condition that its continuation as a Participant would cause material disruption to the Services or would jeopardize the interests of CDS or other Participants. In exercising its discretion whether or not to suspend a Participant, CDS may consider any information it considers relevant, including the occurrence of any of the following events:

i. the Participant fails to make a required payment in full at CDSX Payment Exchange or Link Payment Exchange; ii. the Participant fails to provide Specific Collateral, CCP Collateral or Cross-Border Specific Collateral; iii. the Participant fails to make its required Contribution to a Fund, a Collateral Pool or a Link Fund; iv. the Participant fails to pay its obligation to CDS as a Surety pursuant to a Line of Credit; v. the Participant fails to pay its proportionate share, as a Member of a Fund Credit Ring, Category Credit Ring or Link Fund Credit Ring, of the obligation of another Member of that Credit Ring; o the Participant ceases to be eligible for participation in CDS or to satisfy the qualifications or standards set by the Rules; o the Participant commits a breach of the provisions of the Legal Documents that CDS in its discretion considers to be a material breach;

o the Participant fails to Settle a Central Counterparty Obligation as and when required; or vi. the registration or license of the Participant has been cancelled or suspended by a Regulatory Body, the membership of the Participant in a Regulatory Body that is a self- regulatory organization has been suspended or terminated, a Regulatory Body has taken steps to re structure the Participant, or a receiver or trustee has been appointed with respect to the Participant or its assets.

Where a Participant is subject to Resolution and the Participant continues to meet its obligations to CDS, to the satisfaction of CDS, CDS may permit the Participant to have continued access to some or all CDS Services, Functions and system functionality in accordance with applicable Rules, Procedures, User Guides and agreements.

CDS’s Default Management Plan and divisional procedures articulate the roles and responsibilities in the event of a participant default.

Key consideration 2: An FMI should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules.

See response to key consideration 4.

Key consideration 3: An FMI should publicly disclose key aspects of its default rules and procedures.

See response to key consideration 4.

Key consideration 4: An FMI should involve its participants and other stakeholders in the testing and review of the FMI’s default procedures, including any close‐out procedures. Such testing and review should be conducted at least annually or following material changes to the rules and procedures to ensure that they are practical and effective.

To ensure preparedness in the event of a participant default, and to review and ensure that default management procedures are sufficiently robust, CDS performs annual default management exercises. These simulated exercises engage key stakeholders including CDS’s regulators, participant SROs, participant groups, and CDS’s liquidity providers.

The key aspects of the FMI’s participant‐ default rules and procedures are made publicly available at cds.ca.

Participant Rules: https://www.cds.ca/cds-services/user-resources/cds-participant-rules Participant Procedures: https://www.cds.ca/cds-services/user-resources/user-documentation

m. Principle 14: Segregation and portability

Principle

A CCP should have rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the CCP with respect to those positions.

Disclosure

This is not applicable to CDS’s CNS service as a cash market CCP.

74 n. Principle 15: General business risk

Principle

An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind‐down of critical operations and services.

Disclosure

Key consideration 1: An FMI should have robust management and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses.

Risk management is a core competency at CDS and it is committed to providing its services in a secure and controlled environment with effective risk management processes in place for the protection of participants’ assets. To meet this commitment, and to ensure a structured and disciplined approach, risk management is conducted on an enterprise‐ wide basis.

In pursuing business objectives (which create risk), management and staff of CDS business units are responsible for ensuring that all significant risks are appropriately identified, assessed, measured, managed, monitored and reported. Business units must manage these risks and ensure effective and proper documentation in policies and procedures (including the role of staff). The business units manage risks resulting from these business processes by:

1. Identifying risks 2. Measuring risk 3. Mitigating to contain risks within established tolerance levels 4. Monitoring 5. Reporting

The following primary programs and guidelines are in place to identify and manage CDS’s strategic, financial, operational, legal and regulatory risks:

● Risk Appetite Statement (RAS); used as a parameter within which CDS manages its Residual Risks ● Risk and Control Self‐ Assessments(RCSA); executed within all CDS business areas ● Key Enterprise Risk (KER) reviews; executed at the Senior Leadership Team (SLT) level

● Risk assessments conducted on new products and services Various policies exist that provide further guidance on how the risks identified by these programs are to be managed.

Key consideration 2: An FMI should hold liquid net assets funded by equity (such as common stock, disclosed reserves, or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. The amount of liquid net assets funded by equity an FMI should hold should be determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind‐down, as appropriate, of its critical operations and services if such action is taken.

Pursuant to regulatory requirements and as a matter of corporate best‐ practice, CDS has set aside liquid net assets equal to at least 6 months of expenses and ensures maintenance of that capital level. These resources, designated to cover business risks, are segregated and distinct from the financial resources designated to cover participant defaults or other risks under the financial risk principles.

Key consideration 3: An FMI should maintain a viable recovery or orderly wind‐down plan and should hold sufficient liquid net assets funded by equity to implement this plan. At a minimum, an FMI should hold liquid net assets funded by equity equal to at least six months of current operating expenses. These assets are in addition to resources held to cover participant defaults or other risks covered under the financial resources principles. However, equity held under international risk‐based capital standards can be included where relevant and appropriate to avoid duplicate capital requirements.

CDS maintains liquid net assets funded by equity equal to 6‐ months of operating expenses (Operational Risk Capital).

In accordance with its regulatory requirements, CDS has established a comprehensive and effective Recovery Plan that is reviewed and approved annually by its Board of Directors. The plan ensures that CDS can continue to provide critical services and can replenish any financial resources that it may employ in implementing such plan. CDS’s Recovery Plan provides for tools such as insurance and a Parental Support Agreement (PSA) with TMX Group to replenish CDS's Operational Risk Capital.

Key consideration 4: Assets held to cover general business risk should be of high quality and sufficiently liquid in order to allow the FMI to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions.

Amounts held for risk management purposes. Represents amounts held to maintain compliance with various financial and regulatory ratio requirements that CDS is subject to and amounts held as collateral for margin and other purposes

Amounts held for non-risk management purposes. Represents working capital, and other non‐ risk management related amounts used to fund day‐ to‐ day operations of the business and other obligations, including capital expenditures and certain amounts held and managed on behalf of third parties. Target is to maintain 2‐ months of working capital and any current year net budgeted capital expenditures that are not funded by operating cash flows.

Excess cash. Represents any unencumbered cash after satisfying the requirements for amounts for risk management and non‐ risk management purposes. Represents amounts available for distribution via dividend or loan.

When investing the amounts held for operating expenses, CDS is unwilling to accept any risk exposure which, if realized, would result in regulatory or reputational damage that would call into question its ability to perform its systemically important activities.

The investment objectives, in order of precedence, are as follows:

Primary

● Preserve capital ● Maintain liquidity to ensure strategic and operational cash flow needs

Secondary

● Maximize return ● Minimize investment management fees

Key consideration 5: An FMI should maintain a viable plan for raising additional equity should its equity fall close to or below the amount needed. This plan should be approved by the board of directors and updated regularly.

Please refer to Key Consideration 3 above.

p. Principle 16: Custody and investment risks

Principle

An FMI should safeguard its own and its participants’ assets and minimize the risk of loss on and delay in access to these assets. An FMI’s investments should be in instruments with minimal credit, market, and liquidity risks.

Disclosure

Key consideration 1: An FMI should hold its own and its participants’ assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets.

While CDS is the custodian of record for the large majority of its participants’ assets, and may perform all or any of the activities of a custodian with respect to any issue of securities, pursuant to the CDS Participant Rules, CDS may also appoint sub‐ custodians if they meet the qualifications and standards (including with respect to regulatory oversight, information sharing, financial ability, personnel, facilities, equipment, procedures and other matters) for that role. A sub‐ custodian may be either Foreign or a Domestic Custodian.

Key consideration 2: An FMI should have prompt access to its assets and the assets provided by participants, when required.

Access to securities held by a domestic or foreign custodian is governed by the explicit terms and conditions of a ‘custodian’ or ‘custodial’ agreement which states that assets (securities) held by a custodian are held "on behalf of" CDS as the client.

All assets are recorded as being for the benefit of CDS and, furthermore, that those assets are segregated from any other assets, free and clear of any security interest, lien, etc.

The practical consequence of the above arrangement is that securities held by custodians are accessible in as little time as CDS takes to request the withdrawal of the securities.

Key consideration 3: An FMI should evaluate and understand its exposures to its custodian banks, taking into account the full scope of its relationships with each.

Risk Management performs an independent quarterly review of the money market securities it deems could be erroneous. The quarterly review by Risk Management is based on an exception report that would identify money market securities that match all of the following conditions:

● Third party money market securities held in the accounts of a single participant family group where the family code of the issuing agent is the same as the participant holding the securities. Securities that are held by multiple participant family groups in CDSX are deemed as valid as they are considered as traded between participants and therefore validated by participants. ● Money market securities in CDSX without a family code. A security in CDSX with a family code is not considered a risk as the security would not provide ACV to the issuer if it is a related security. ● The exception report only identifies the securities with par value greater than $10.0 million. The threshold of $10.0 million par value is based on the coverage provided by CDS’s Errors and Omissions (E&O) policy.

For securities identified in Risk Management’s exception report, Risk Management analyst would perform the following tasks:

● Email Customer Service the list of ISINs that require copies of the certificates ● Review copy of certificates ensuring that the copy received is the same security on the exception report. ● FRM Analyst documents the results of the review for sign‐ off and forwards to Manager. ● Any exceptions are escalated to the Manager and Managing Director, Risk Management.

Key consideration 4: An FMI’s investment strategy should be consistent with its overall risk‐ management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high‐quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

The investment policy is considered to be a part of CDS’s risk management framework and is consistent with the CDS risk appetite statements and any regulatory requirements on investments and custody risk.

The investment policy governs the management of cash and investing activities for working capital, early entitlement payments, amounts held for regulatory capital purposes and cash and investments managed on behalf of third parties.

CDS’s investment policy is reviewed annually by CDS’s Risk Management Committee and the Risk Management and Audit Committee of CDS’s Board of Directors to ensure consistency with CDS’s risk appetite. When investing the funds held to cover general business risks, CDS has specified that it is unwilling to accept any risk exposure which, if realized, would result in regulatory or reputational damage that would call into question its ability to perform its systemically important activities. 79 q. Principle 17: Operational risk

Principle

An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfillment of the FMI’s obligations, including in the event of a wide‐ scale or major disruption.

Disclosure

Key consideration 1: An FMI should establish a robust operational risk‐management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks.

CDS ensures that ORM is fully integrated with CDCC’s overall risk management program through a robust documented framework. This ensures that both internal and external sources of risk arising from its operational activities, strategic objectives and management decisions are identified, assessed, managed, monitored and reported.

The basis of the framework is the governance structure. The framework is driven by the Tier 1 ERM Policy, aligned with the ERM framework and supported by the Tier 2 ORM Policy and its set of Tier 3 policies. The policies provide a definition of operational risk and lay down the principles of how business processes, people (including succession planning, security screening and fraud prevention), information technology (including project risk and change management) and external risks (including Third-party risk management and information security management) are to be identified, assessed, managed, monitored and reported in a way that is consistent with CDS’s risk appetite statement. To ensure effective accountability for ORM, a “Three lines of defence” approach delineates objectives, roles and responsibilities for each key practices. The OWG supports the consistent roll-out of the program and its daily management across business units, by acting as a dynamic force between business units, the ERM team and the RMC.

The second (2nd) component of the framework is the identification and assessment of operational risk. The CDS risk universe delimits the scope of the ORM framework and is built on internal analysis through a Risk and Control Self-Assessment program and external benchmarking. A risk registry documents the key operational risks. An annual risk assessment exercise is conducted to update the risk profile and adjust CDS’s mitigating strategies. A Risk Evaluation Committee

(“REC”) ensures that before a new business initiative is introduced or undertaken, the inherent operational risk is subject to adequate assessment and/or mitigation procedures. The third (3rd) component of the framework includes core ORM processes. CDS relies on incident and business continuity/disaster recovery management processes to manage risk events arising from its day-to-day operations. Recognizing the significance of Third-Party in relation to their operational risks, CDS is rolling-out a Critical Service Provider (CSP) management program to ensure that the risks associated with the activities of CSPs are identified, assessed, managed, monitored and reported. As part of the ongoing process of improvement, CDS regularly revises the participation requirements, which pertains to the operational standards required from the Participants. CDS relies on a team of experts from the TMX Information Security Office to get its critical assets protected from external and internal threats through 24x7 security operations, security engineering to harden its systems, vendor security risk assessments, and ongoing training to keep staff vigilant.

The fourth (4th) component of the framework is formed by operational risk monitoring and reporting to management. CDS has implemented different processes to monitor its risk profile and keep track of its exposure to losses, e.g., monthly risk-event reports, monthly and quarterly ORM dashboards, and monthly operations statistics reports. CDS is developing additional operational risk metrics and forward-looking tools.

The fifth (5th) and last component of the framework plans for an independent internal audit. CDS ensures that the implementation of the approved ORM framework is deployed appropriately subjecting the latter to an effective and comprehensive internal audit. Internal audits are performed periodically, or if there is any significant changes in the ORM program, by the TMX Internal Audit function.

Key consideration 2: An FMI’s board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the FMI’s operational risk‐ management framework. Systems, operational policies, procedures, and controls should be reviewed, audited, and tested periodically and after significant changes.

The CDS Board of Directors endorses, at least annually, the ERM as well as the ORM frameworks and requires that the Chief Risk Officer (CRO) ensures that all risks are managed in line with the ERM policies and risk appetite statement (RAS) of the organization. Furthermore, the risk registry documents the ownership of day-to-day risk management directly with the front-line managers, thereby ensuring a cultural awareness of risk issues across the organization. Finally, the Board of Directors receives from the CRO a quarterly risk/incident report on all enterprise level risks, including the identified operational risks.

The ERM and ORM frameworks are structured along the lines of the three-lines-of-defense where the third line involves an independent audit function of critical business functions. Extensive audit

82 reviews are conducted annually on business process risks, IT risks, business continuity and disaster recovery.

Key consideration 3: An FMI should have clearly defined operational reliability objectives and should have policies in place that are designed to achieve those objectives.

CDS has defined its operational reliability objectives at a high level in its Risk Appetite Statement (RAS). Additional details on the Risk Appetite are provided in comments provided in Principle 3.

The standards of security and reliability are formalized in specific system controls and procedures as well as their associated manual processes. These are documented and managed using the CoBit standards and framework.

Key consideration 4: An FMI should ensure that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service‐level objectives.

Scalability and adequacy of capacity is viewed as two distinct issues at CDS. The first is that of the IT systems to cope with current volumes and future requirements and secondly, the capacity of the business divisions (including staff requirements) to cope with current volumes and future requirements. Since the vast majority of the Depository, Clearing and Settlement functions are automated, IT systems capacity is primarily related to this area. On the other hand, Corporate Actions processes still require significant manual interventions and consequently, business division capacities relate to this issue.

Both capacity risks are formally monitored at the Risk Management Committee (RMC) on a monthly basis in the form of Key Enterprise Risks and related Key Risk Indicators to ensure that these risks are fully understood and appropriately mitigated. Both areas are part of annual audit testing.

Annual capacity analyses and plans are prepared, but are subject to revision any time during the year if predefined thresholds are approached or triggered to ensure there is a safe buffer maintained at all times.

Key consideration 5: An FMI should have comprehensive physical and information security policies that address all potential vulnerabilities and threats.

The External Risk Management policy, governed by the ORM policy, describes the key principles that guide CDS in ensuring that the risk of loss due to injury to people, damage or loss of physical or intangible assets and disruption of business activity as a result of external events such as natural or man-made disaster, terrorist attack or widespread illness is adequately managed. CDS is supported in this endeavor by the corporate Physical Security team. 82

The Information Security Risk Policy, which is a sub-policy of the broader Operational Risk Policy, defines the key principles to ensure that CDS’s information and information assets are only accessed with appropriate authority, available when required; are not removed, corrupted, damaged or harmed; are in compliance with legal and regulatory requirements; and there is certainty concerning internal ownership and stewardship. CDS relies on support and know-how from the corporate Information Security Office.

Key consideration 6: An FMI should have a business continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide‐scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology (IT) systems can resume operations within two hours following disruptive events. The plan should be designed to enable the FMI to complete settlement by the end of the day of the disruption, even in case of extreme circumstances. The FMI should regularly test these arrangements.

CDS has a comprehensive and well‐ developed Business Resiliency (Continuity) program in place. The program focuses the following elements: business impact analysis, business continuity planning (BCP), disaster recovery (DR) planning and crisis management (CM) planning. The program also has well‐ defined roles and responsibilities for various management and executive levels.

To ensure business continuity plans contain consistent information and divisional testing remains consistently robust, BCP score cards are used to measure the completeness of each business unit’s plan. Monitoring of this score card allows for comparisons between business units’ performance and helps to identify areas where business units can make improvements. A customized weighting criteria matrix was created and all plans have been reassessed against this matrix. Upon completion of the BCP update cycle, plans are assessed to ensure any areas of deficiency have been addressed. The BCP score card results are presented to the Business Resiliency Management Committee (BRMC) and to the Risk Management Committee (RMC).

The BCP and DR plans are tested and updated annually. Those tests are designed to also increase staff awareness of the plans and to ensure that where staff has been assigned new responsibilities they are made aware of them and given opportunity to fully understand their role. Crisis Management (CM) team table‐ top exercises are also conducted on a periodic basis.

CDS is an active member of the federally‐ sponsored Joint Operational Resilience Management (JORM) working group, since it is a designated critical financial market infrastructure (FMI) provider for the Finance Sector. The JORM Working Group was mandated to enhance the operational resilience of designated payment, clearing and settlement systems among owners, operators and participants. 82

CDS also participates in the Ontario Critical Infrastructure Assurance Program (OCIAP) as part of the Financial Sector Working Group. The OCIAP initiative is led by the Emergency Management Ontario (EMO), which works jointly with the government ministry associated with each critical sector. For the financial sector the Ontario Ministry of Finance is the OCIAP sector lead.

Key consideration 7: An FMI should identify, monitor, and manage the risks that key participants, other FMIs, and service and utility providers might pose to its operations. In addition, an FMI should identify, monitor, and manage the risks its operations might pose to other FMIs.

In appropriate circumstances, CDS may need to retain service providers – both arms-length third parties and affiliated TMX Group entities (collectively “Service Providers”) – to help fulfill a number of business objectives. Recognizing the risks that such Service Providers may pose to the organization, a corporate policy documents the commitment, roles and responsibilities and management processes for their oversight in order to ensure that the corporation achieves its corporate objectives of providing secure, reliable and scalable clearing and settlement for the derivatives industry in Canada.

r. Principle 18: Access and participation requirements

Principle

An FMI should have objective, risk‐based, and publicly disclosed criteria for participation, which permit fair and open access.

Disclosure

Key consideration 1: An FMI should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk‐ related participation requirements.

Access to CDS’s services by prospective participants is prescribed by the regulatory framework established by CDS’s principal provincial regulators and, in the case of foreign participants in CDS, by CDS’s federal regulator. CDS may not unreasonably prohibit, condition or limit, directly or indirectly, access by a person or company to services offered by CDS. CDS is also required to allow any person or company, including other third party post-trade service providers, to interface or connect to any of CDS’s services or systems on a commercially reasonable basis, for the purposes of facilitating post-trade processing of securities transactions by CDS Participants. The foregoing category includes interfaces with and by exchanges, alternative trading systems, and third party clearing systems.

Once access to CDS’s systems is granted, and an interface established, with a marketplace, CDS must accept clearing of eligible securities on a non‐ discriminatory basis regardless of the marketplace of execution and at a consistent service level or performance standard. Finally, CDS’s regulatory framework prohibits participation categories, qualifications, and standards (as more fully described in Key Consideration 2, below) from unreasonably prohibiting, limiting or impeding the use of other third party post‐ trade service providers by participants.

Key consideration 2: An FMI’s participation requirements should be justified in terms of the safety and efficiency of the FMI and the markets it serves, be tailored to and commensurate with the FMI’s specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, an FMI should endeavour to set requirements that have the least‐restrictive impact on access that circumstances permit.

Market participants may be eligible for participation in CDS if they fall into one or more eligibility categories [Rule 2.2.4]. Subject to the foregoing, CDS has established minimum qualifications [Rule 2.2.5] and standards [Rule 2.2.7] for participants in its settlement services which vary

84 depending upon both the category of participant requesting eligibility and on the services and functionality requested. Amongst these, with certain specific exceptions, CDS requires: that participants be regulated for prudential and liquidity purposes (under Canadian law or in a foreign jurisdiction, as applicable); that participants be a member in good standing of an industry self‐ regulatory organization (SRO), if applicable; that participants be able, at all times, to demonstrate that they meet certain specific standards, including, amongst others, the financial ability to meet their obligations to CDS, and that they have in place sufficient personnel and operational capabilities to fulfill their obligations to CDS and other participants. The Board of Directors of CDS retains the ability to establish or modify these categories, qualifications, and standards, subject to CDS’s regulatory requirements in respect of making such changes.

CDS’s Participant Rules specify the category or categories of participation to which the range of access criteria apply. In addition to their description in the CDS Participant Rules, CDS’s External procedures and Risk Model provide expansive detail in respect of these criteria, and any restrictions on same.

An applicant for participation specifies the category into which it wishes to be classified. The categories are as follows:

1. Bank of Canada: The central bank of Canada formed under the Bank of Canada Act (Canada). 2. Extender of Credit: An Extender of Credit is a financial institution (as that term is defined in CDS’s participant rules) that is a direct clearer, or group clearer, member of the Canadian Payments Association (CPA) and, accordingly, has a settlement account for clearing purposes with the Bank of Canada, has capital (as that term is defined in CDS’s participant rules) of not less than CAD 1.0 billion, and is a direct participant in the Large Value Transfer System (LVTS). 3. Settlement Agent: A Settlement Agent is a financial institution that is a direct clearer, or group clearer, member of the CPA and, accordingly, has a settlement account for clearing purposes with the Bank of Canada, or is an indirect clearer member and has a clearing account with a direct clearer or a group clearer member, and has capital of not less than CAD 100 million. 4. Transfer Agent (TA) Participant: The TA participant category allows limited participation by Transfer Agents in CDSX, in which context TA’s are eligible to perform the depositary agent and/or entitlements processor roles in addition to their security validator role, and must satisfy the requirements as set out in the CDS Rules. A Limited Purpose TA participant is eligible to participate in CDSX as a TA participant if the TA participant is appointed as the Transfer Agent of a sufficient number of CDSX eligible securities and satisfies the standards established by CDS, from time to time, for such eligibility. 5. ATON Participant: An ATON (Account Transfer Online Notification Service)

participant is a limited purpose participant whose activities in CDSX are limited to receiving and delivering securities and making payments in connection with the transfer of client accounts as set out in the CDS Rules. 6. ACT Participant: An ACT (Automated Confirmation Transaction Service of NASD) participant is a limited purpose cross‐ border participant that uses the New York Link and is therefore also a limited purpose Link participant. 7. Receiver of Credit: A Receiver of Credit is a participant that does not satisfy the requirements of the previous categories, or does not choose to be classified as one of previous categories.

Once an application for participation is accepted, each participant (except Limited Purpose TA, ATON and ACT participants) becomes a member of the category credit ring for the category of participant into which it has been classified. The category credit rings are:

(i) Extenders of Credit (ii) Settlement Agents (iii) Contributing Receivers of Credit (CAD) (iv) Contributing Receivers of Credit (USD) (v) Non‐ contributing Receivers of Credit (CAD) (vi) Non‐ contributing Receivers of Credit (USD)

The members of each category credit ring guarantee the payment, to CDS, of the obligation of all the members of that category credit ring based on a formula, and risk controls, agreed upon by the members of the ring. With the exception of Receivers of Credit, each participant is a member of a single category credit ring.

Key consideration 3: An FMI should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

CDS monitors and assesses each participant’s adherence to required minimum standards on an ongoing basis, generally on a daily, weekly, monthly, quarterly and annually basis, as may be appropriate for the participant’s category and qualification.

Participants are contractually obligated (by the Participant Rules) to notify CDS of any developments that may affect their ability to satisfy the participation requirements and fulfil their obligations to CDS.

CDS maintains information-sharing memoranda of understanding with certain of its participants’ prudential and financial regulators. When a receiver of credit is encountering financial difficulties, for example, and is placed on early warning by their regulatory body, CDS is notified of that 86 change in status. CDS’s Participant Rules provide, in certain specific circumstances, for the sharing of information with regulators and other market infrastructure. This bilateral information- sharing is intended to anticipate capital shortages and/or liquidity problems and to encourage (or require, as the case may be) firms to build a capital cushion in respect of their operations. One such Memorandum of Understanding, between CDS and the Investment Industry Regulatory Organization of Canada (IIROC), provides that IIROC will advise CDS of any material regulatory changes or the application of early warning status to participant members.

CDS quantifies potential risks to CDS and its services by monitoring the transactions, settlement obligations, and activities which take place within its participant ecosystem. In order to mitigate these potential risks, CDS may, pursuant to the Participant Rules, take such necessary steps as protect the interests of the system, the interests of its participants, and the interests of CDS. In so doing, CDS considers any relevant information, including the financial stability or regulatory status of the Participant, the amount of its obligations to CDS, the market volatility, liquidity, concentration or market float of any issue of Securities held by or to be delivered by or to the Participant, and any other factor that CDS considers relevant.

The steps CDS may take include: ● Requiring the Participant to provide additional Contributions to any Fund or Link Fund of which the Participant is a Member, pursuant to Rules 5.8.2 or 10.6.4 ● Requiring the Participant to grant to CDS a security interest in Specific Collateral, CCP Collateral, or Cross‐ Border Specific Collateral pursuant to Rules 5.2.3, 5.14.3, or 10.5.3 ● Decreasing the Participant's System‐ Operating Cap pursuant to Rule 5.10.18 ● Restricting the Participant's right to use system functionality in any Function or Service pursuant to Rule 2.7.1 ● Giving information relating to the Participant's CCP Contributions Total in accordance with Rule 5.14.2 ● Taking any other feasible steps consistent with the Rules

The CDS Participant Rules, which are publicly available, describe the circumstances which may result in a Participant default and provide a full accounting of the actions which may be taken when a Participant does default.

CDS’s procedures for actively managing the suspension and orderly exit of a participant that breaches, or no longer meets, those requirements are described in CDS’s Default Management Plan and divisional default management procedures.

87 s. Principle 19: Tiered participation arrangements

Principle

An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.

Disclosure

Key consideration 1: An FMI should ensure that its rules, procedures, and agreements allow it to gather basic information about indirect participation in order to identify, monitor, and manage any material risks to the FMI arising from such tiered participation arrangements.

The legal basis for participation, and the operational relationship, exists between CDS and its direct participants, and is a fundamental aspect of Canada’s indirect securities holding regime. Clearing Arrangements pursuant to which a clearing broker provides services to a third party broker, are permitted under IIROC member rules. CDS has not, therefore, formalized tiered participation arrangements pursuant to which CDS recognizes, acknowledges, or maintains a contractual relationship with, the clients of our direct participants except for purposes of ensuring that beneficial security-holders are not deprived of the rights attached to such holdings.

However, CDS retains the ability to require declarations from CDS participants in respect of the securities which CDS holds on those participants’ behalf. In 2017, CDS presented a Tiered Participation Risk Management Framework and a CDS Tiered Participation Participant Survey to comply with Principle 19. The 2017 CDS Tiered Participation Participant Survey was voluntary, and was circulated to several targeted participants whose operations [were known to] include acting as a correspondent/clearing participant for non-participants. The results of the survey were collected, analyzed and presented at the end of 2017. CDS intends to expand the scope of this information gathering exercise in 2018 to include a larger focus on CDS’s Continuous Net Settlement and Cross-Border Services.

Key consideration 2: An FMI should identify material dependencies between direct and indirect participants that might affect the FMI.

The Tiered Participation Risk Management Framework and the results of the 2017 CDS Tiered Participation Participant Survey helped CDS to identify dependencies between direct participants and those of their customers who, for purposes of risk management may, or should, be deemed to be indirect participants. CDS intends to expand the scope of this information gathering exercise in 2018.

Key consideration 3: An FMI should identify indirect participants responsible for a significant proportion of transactions processed by the FMI and indirect participants whose transaction 88 volumes or values are large relative to the capacity of the direct participants through which they access the FMI in order to manage the risks arising from these transactions.

As noted above, CDS can identify broad categories of indirect participants that bring risk to CDS. CDS intends to expand the scope of this information gathering exercise in 2018.

Key consideration 4: An FMI should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

See above.

89 t. Principle 20: FMI links

Principle

An FMI that establishes a link with one or more FMIs should identify, monitor, and manage link‐ related risks.

Disclosure

Key consideration 1: Before entering into a link arrangement and on an ongoing basis once the link is established, an FMI should identify, monitor, and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that each FMI is able to observe the other principles in this report.

CDS’s regulatory framework requires CDS to provide prior notice to principal provincial and federal regulators in the event of a decision to enter into an arrangement with, amongst others, any clearing agency, stock exchange, or other marketplace or market. In the event that the arrangement requires the implementation of material new participant rules, or the material amendment of existing participant rules, prior regulatory approval is required.

When the foregoing notice (or request for approval, as the case may be) CDS carefully examines the proposed operation of any proposed linkage, at the business process level, in order to identify, quantify, and qualify any operational risks associated with the linkage. The examination includes a detailed review of the legal basis for the link (whether via participant agreement or other contractual arrangement) and a determination of potential liability or other legal exposure, including risks posed by the default of another member of the contracting FMI, other proximate intermediaries, or of the FMI itself.

CDS continuously monitors various risk criteria through weekly and monthly Monitoring and Surveillance reports, including risk measures for the link services.

CDS manages the risks associated with its links by analyzing the potential impact of those risks and developing mitigation strategies intended to transfer the risk to the parties participating in the services and from which, therefore, the risk(s) originate(s).

Key consideration 2: A link should have a well‐founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the FMIs involved in the link.

Changes to link arrangements can, like all risk exposures, result in liability, and other, risk(s) if such changes affect the legal basis for the link. In the event that changes to link arrangements are considered, or in response to regulatory or legislative changes in the relevant jurisdiction, CDS evaluates or re-evaluates this range of risks. CDS maintains relationships with the relevant FMIs 91 to ensure, to the fullest extent possible, communication of legal or regulatory changes in the relevant jurisdiction, and engages external legal counsel to review such changes, as appropriate.

Key consideration 3: Linked CSDs should measure, monitor, and manage the credit and liquidity risks arising from each other. Any credit extensions between CSDs should be covered fully with high‐quality collateral and be subject to limits.

CDS operates multiple control strategies intended to manage and mitigate risks arising from the links and generates risk monitoring dashboard reports (Monitoring and Surveillance reports) which are reviewed on a weekly and monthly basis. The monthly Monitoring and Surveillance reports are shared with CDS’s Board of Directors and external stakeholders.

More specifically, these controls currently consist of the following:

Monitoring New York Link (NYL) Soft Cap Breaches All NYL participants are required to manage their daily payment obligations to NSCC and DTC in such a manner that their combined individual net payment obligations to NSCC and DTC do not exceed the soft cap (For further discussion, see response to Key Considerations to Principle 7, above). In the event that a NYL participant’s obligations do exceed the soft cap, participants may be required to prefund their DTC or NSCC accounts. CDS Risk Management receives, and monitors, alerts which identify:

● On the day before settlement ‐ potential NYL soft cap breaches; and ● On the day of settlement ‐ potential NYL soft cap breaches; and ● On the day after settlement ‐ actual NYL soft cap breaches.

Communicating NYL Soft Cap Breaches to Participants In the event that a NYL participant breaches the soft cap, Risk Management notifies the participant and the participant’s primary regulator. If the participant has breached the soft cap five (5) or more times within the preceding 12‐ month period, Risk Management provides similar notice to the participant, to participant’s regulator and to all NYL participants.

All NYL soft cap breaches are reported in the monthly ‘Monitoring and Surveillance’ report.

Continuous Risk Management Processes CDS’s current liquidity facility accounts for the majority of the potential liquidity requirement resulting from the default of one of CDS’s participants, including participants who use the NYL service. Please refer to Principle 7 (Liquidity Risk) regarding the upcoming changes to CDS’s credit facilities.

NSCC payment obligations, in contrast to those in CDS, are not capped, and CDS has identified the risk that an individual NYL participant’s net payment obligations to DTCC (NSCC and DTC 92 combined) could exceed the lines of credit available to CDS to mitigate that risk. The CDS participant fund for NYL is designed to cover the default of the NYL participant with the largest net payment obligation to DTCC at any given time, and in most cases. CDS monitors NYL participant’s net payment obligations to DTCC to see if they exceed a pre‐defined threshold or soft cap.

NYL participants are required to monitor and manage their daily payment obligations to DTCC such that their individual net payment obligations to DTCC do not exceed the soft cap. Participants may need to pre‐ fund their settlements in DTCC to ensure that their end‐ of‐ day payment obligations do not exceed the soft cap. CDS imposes a fixed and variable fee in the event that an individual NYL participant’s end‐ of‐ day net payment obligation to DTCC exceeds the soft cap.

Fixed CDS imposes a fee of USD 1,000 per incident for up to 4 incidents in a rolling 12‐ month period. The fee is increased to USD 10,000 per incident for a participant breaching the soft cap more than 4 times during the rolling 12‐ month period.

Variable The variable fee is applied to every instance that a participant exceeds the soft cap This fee is calculated as follows: The amount that a participant has exceeded the soft cap by is multiplied by the overnight cost of borrowing and divided by 365. The daily variable fee is calculated based on the number of calendar days (e.g., breaches occurring over a normal weekend would be counted as two calendar days) of non‐ compliance.

As with domestic CCP cap breaches, CDS reports all soft cap breaches to the participant’s primary regulator. CDS also reports soft cap breaches to other New York Link service participants once a participant breaches the soft cap more than four times over a rolling 12 month period.

Risk Controls at DTC and NSCC For further information in respect of DTCC’s risk management controls, please refer to www.dtcc.com

CDCC/CDS Fixed Income Link

The CDCC/CDS Fixed Income linkage is a unilateral participation arrangement under which CDCC is a participant of CDS. As a receiver of credit, CDCC is required to meet any and all of the standard financial and operational risk controls established for its clearing, settlement, and depository activities in CDSX.

Key consideration 4: Provisional transfers of securities between linked CSDs should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.

Provisional transfers of securities are not allowed across the DTC Direct Link or New York Link. 93

Key consideration 5: An investor CSD should only establish a link with an issuer CSD if the arrangement provides a high level of protection for the rights of the investor CSD’s participants.

As a participant of DTC, CDS is afforded the same level of protection of its participants’ assets held at DTC as all other DTC participants. The DTC rules provide a high level of protection for its participants.

Key consideration 6: An investor CSD that uses an intermediary to operate a link with an issuer CSD should measure, monitor, and manage the additional risks (including custody, credit, legal, and operational risks) arising from the use of the intermediary.

Not applicable.

Key consideration 7: Before entering into a link with another CCP, a CCP should identify and manage the potential spill‐over effects from the default of the linked CCP. If a link has three or more CCPs, each CCP should identify, assess, and manage the risks of the collective link arrangement.

CDS does not operate a CCP to CCP link.

Key consideration 8: Each CCP in a CCP link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked CCP and its participants, if any, fully with a high degree of confidence without reducing the CCP’s ability to fulfil its obligations to its own participants at any time.

CDS does not operate a CCP to CCP link.

Key consideration 9: A TR should carefully assess the additional operational risks related to its links to ensure the scalability and reliability of IT and related resources.

Not applicable.

94 u. Principle 21: Efficiency and effectiveness

Principle

An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.

Disclosure

Key consideration 1: An FMI should be designed to meet the needs of its participants and the markets it serves, in particular, with regard to choice of a clearing and settlement arrangement; operating structure; scope of products cleared, settled, or recorded; and use of technology and procedures.

CDS’s narrative disclosure in respect of Principle 2 (Governance) and Principle 3 (Framework for the comprehensive management of risks) provide a description of the infrastructure and processes that are in place at CDS to ensure the effectiveness and efficiency of the organization.

Key consideration 2: An FMI should have clearly defined goals and objectives that are measurable and achievable, such as in the areas of minimum service levels, risk‐management expectations, and business priorities.

CDS has well defined business objectives and corporate scorecard against which CDS’s successful achievement of the business objectives is monitored and reported.

Services and risks are managed relative to well defined risk appetites and service levels.

Key consideration 3: An FMI should have established mechanisms for the regular review of its efficiency and effectiveness.

See above.

95 v. Principle 22: Communication procedures and standards

Principle

An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.

Disclosure

Key consideration 1: An FMI should use, or at a minimum accommodate, internationally accepted communication procedures and standards.

CDS provides for ISO15022 messaging capabilities in the Entitlements and Settlements areas. These capabilities are delivered over messaging standards/protocols delivered over MQ and SWIFT.

96 w. Principle 23: Disclosure of rules, key procedures, and market data

Principle

An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.

Disclosure

Key consideration 1: An FMI should adopt clear and comprehensive rules and procedures that are fully disclosed to participants. Relevant rules and key procedures should also be publicly disclosed.

The documents comprising CDS’s rules and procedures are publicly available to participants and other interested parties at http://www.cds.ca/.

Participant Rules: https://www.cds.ca/cds-services/user-resources/cds-participant-rules Participant Procedures: https://www.cds.ca/cds-services/user-resources/user-documentation

CDS develops changes to its rules and procedures through a process which provides for input from participants, regulators, and the general public. Examples of this process include the CDS Legal Drafting Group and procedure review and approval by the Strategic Development and Review Committee (SDRC). CDS’s rule and procedure drafting process considers the viewpoints not only of CDS but also the users and other readers of the rules and procedures in order to ensure that they are clear and comprehensive. For those participants not directly involved in the rule and procedure drafting process, material amendments to rules and procedures are published for a public comment period during which all participants are, and the general public is, able to review and provide feedback regarding such amendments.

Key consideration 2: An FMI should disclose clear descriptions of the system’s design and operations, as well as the FMI’s and participants’ rights and obligations, so that participants can assess the risks they would incur by participating in the FMI.

In addition to the rules and procedures referenced above (which represent the legal and operational description of participants rights, obligations and risks), CDS also publishes a Financial Risk Model document on its website (http://www.cds.ca/newsroom/publications) which is intended to provide additional information to assist participants and other stakeholders in understanding the risks that result from the use of CDS’s services.

CDS also operates a number of participant advisory committees (e.g., the Risk Advisory 97

Committee, the Legal Drafting Group and the Strategic Development Review Committee, and the Fee Advisory Committee) and workgroups which provide opportunities for participants to be involved in reviewing changes to CDS’s systems and associated risk controls.

Key consideration 3: An FMI should provide all necessary and appropriate documentation and training to facilitate participants’ understanding of the FMI’s rules and procedures and the risks they face from participating in the FMI.

CDS offers training for the staff of new participants and the new staff of existing participants to support the proper understanding and use of our systems. Training is also available to external parties. CDS has also provided presentations to, and meets with, industry stakeholders to publicize and describe the various risks to which they are exposed as a result of their use of the systems. CDS also publishes the CDS Financial Risk Model which describes the various risks and the controls and mitigants.

Key consideration 4: An FMI should publicly disclose its fees at the level of individual services it offers as well as its policies on any available discounts. The FMI should provide clear descriptions of priced services for comparability purposes.

Detailed documentation of CDS’s services and fees is available on its website at: http://www.cds.ca/.

CDS is required by its recognition orders to provide notice to participants and the public of any changes to its regulated services and fees. This occurs via participant notices and the public regulatory approval process.

Key consideration 5: An FMI should complete regularly and disclose publicly responses to the CPSS‐ IOSCO disclosure framework for financial market infrastructures. An FMI also should, at a minimum, disclose basic data on transaction volumes and values.

Basic data on transaction volumes and values is provided in Section II of this document.

98 x. Principle 24: Disclosure of market data by trade repositories

Principle

A TR should provide timely and accurate data to relevant authorities and the public in line with their respective needs.

Disclosure

Not applicable; CDS is not a trade repository.

IV. List of publicly available resources

Links to publicly available documents are provided in the body of the document.

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