Central Counterparty for Equities
Guidance Note
January 2001
10/01
Residual Settlement of Non-Crest Outturns
1 Introduction
This guidance note sets out the way in which LCH will process transactions created by Corporate Events
on CCP eligible securities where the outturn security is not eligible for settlement in CREST. In this
situation, LCH will settle directly with the nominated settlement participants for the underlying trades.
These will be identified using the static data provided by service participants. Often, this will mean that
LCH will be settling with organisations that are not LCH members. In all cases the relevant clearing
member remains responsible to LCH for the performance of the settlement participant and, in certain
circumstances of non-performance by the settlement participant, LCH may look to the clearing member for
settlement.
The Central Counterparty for Equities service has been designed to be a straight-through- process and the
introduction of paper flows to the process increases risk simply because the CCP is exposed to the volume
of the SETS market as a whole. It is apparent that there will always be some outturns to events that
cannot be dematerialised and outturns that the issuer chooses to keep in paper. Consequently, a method
has been created that allows it to process the potential volumes whilst minimising the processing risks.
Therefore, LCH has introduced the concept of settlement netting of all residual transactions raised by
CREST on a Central Counterparty for Equities transaction.
Whilst the concern in volume terms has been focussed on rights issues (where the number of days
between Record Date and Ex Date determine the number transactions effected), LCH has decided, in
order that one procedure can be used, to apply this procedure to all residual outturn transactions created
from Central Counterparty for Equities transactions, where possible.
2 Settlement Netting
Netting will only take place at settlement level. The original benefits or transformed contracts continue to
exist legally and no new transactions are being created. Netting will only take place at clearing member
level for transactions settling through the same CREST Participant. For example, this will allow nonclearing members (NCMs) to participate in the settlement of net transactions, but does not allow General
Clearing Members (GCMs) to net settlement across NCMs settling through different CREST participants.
It should be noted that this form of netting could apply across different intended settlement dates on the
underlying transactions.
Netting will also apply to any cash outturns in non-CREST eligible currencies i.e. not US Dollars, Euro or
Sterling.
This approach is completely independent of proposals – currently subject to industry consultation – to
introduce settlement netting for the underlying transactions.
LCH’s procedures for dealing with residual entitlements can be divided into the following sections:
Events with Record Date before Ex Date
LCH will determine and advise clearing members of their net position on Ex Date. The net position will be
calculated for each CREST Settlement Participant ID associated to the clearing member. Clearing
members will be advised of their net position by e-mail. The net position will include all transactions
unsettled on Record Date, plus all transactions traded after Record Date but before Ex-Date.
Events with Ex Date before Record Date
LCH will determine and advise clearing members of their net positions on Record Date plus one business
day. The net position will be calculated for each CREST Settlement Participant ID associated to the
clearing member. Clearing members will be advised of these net positions by e-mail. The net position will
include all transactions traded before Ex-Date that remain unsettled on Record Date.
In each case the outturn can either be a Distribution or a Reorganisation.
These event types determine the number of transactions that are entered into the settlement netting
performed by LCH. In each case, there are two further distinctions that determine whether LCH has to
accept instructions from buyers to pass to sellers.
Events with Options on the Residual Security
These are mandatory events with options, all voluntary events (where the option is either to accept or
reject the event) and voluntary events with options. At the time of distribution of the residual outturn, it is
already known that a further event will take place on that security which includes optionality for the
shareholder (in this context the seller, although the right of election belongs to the buyer). For example,
when a nil paid right is distributed, it is known that a call payment event will take place on it in the future. If
there is optionality, LCH must set deadlines by which the buyer’s instructions are provided and set
deadlines for settlement of the original residual to avoid involvement in the further event.
Events without Options on the Residual Security
These are distributions of stock where no further event has been announced so that there are no buyer
protection issues on the netted residual transactions. For example, the distribution of a loan note as part
of a takeovers consideration will lead to residual transactions but, as there are no future events on the loan
notes, there are no buyer protection issues.
LCH will employ these general procedures in dealing with residual transactions.
3 Margin
Clearing members will be charged margin on all residual outturns in accordance with LCH procedures at
rates determined from time to time. For claims, margin will initially be charged on the basis of the nonsettling claims transactions raised by CREST and provided to LCH as part of each margin run. Following
the removal of the non-settling claims from CREST on Payment Date, LCH will maintain clearing members
positions manually. These will be updated daily to reflect settlement and will normally be margined once a
day in the end-of-day margin run. LCH may, if it feels there is sufficient risk in the event, call margin more
frequently. Transformations into residual outturns will be included in the positions file provided by CREST
until they reach their ISD. Following their removal from CREST, they will be maintained by LCH as
described above for non-settling claims.
4 Delivery Methods
LCH will not accept or make deliveries via the CREST CCSS. All deliveries of residual securities by sellers
to LCH will therefore be made using the CREST ‘RES’ transaction as an audit trail but physical transfer will
be inter-office. LCH will, following validation and possible splitting of the entitlements, advise buyers that
their entitlements are available for collection.
Deliveries to LCH must be received by no later than 10:00 am on any business day in order for payment to
be made on the same day. Collections from LCH must be made before 12:00 noon and payment made on
the same day.
In the event that a corporate event creates a residual transaction in a non-CREST security (this would
include a cash transaction in a non-CREST currency), LCH will supply settlement instructions to clearing
members as part of the advice of net positions.
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5 Partial Settlement
LCH will accept partial settlement of any outstanding residual transaction provided that the amount being
delivered is equal to, or greater than, fifty percent of the outstanding amount. A CREST settlement
participant will not be permitted to refuse to accept a partial delivery of an outstanding residual claim. If a
CREST Settlement Participant fails to accept a partial delivery, the equivalent value of any associated
payment or the value of the stock, as determined by LCH, may be debited from the account of the LCH
clearing member via the PPS system. In the event that delivery of the security is against payment, a prorated amount will be calculated and paid. In the event that the residual is a non-UK security, acceptance
of the partial is dependent on applicable market practice.
6 Settlement of Cash
Cash settlement of all residual transactions settling against payment will be made through CREST with the
CREST Settlement Participant ID in accordance with the netted positions. Sellers should input a ‘RES’
transaction prior to delivery of securities. LCH will match the transaction following receipt and validation of
the securities. LCH will advise the buyer that the entitlements are ready to be collected and also allege a
‘RES’ transaction against the buyer. The buyer will be required to match this prior to collecting the
entitlements from LCH. If the buyer fails to match the ‘RES’ transaction, LCH will debit the full amount due
to the account of the clearing member via the PPS system. Transactions should be alleged to LCH’s
CREST Participant LCH01.
7 Splitting
In order for LCH to ensure that it can achieve same day turnaround of stock and cash, when advising
selling CREST participants of their netted delivery requirements in the residual event, LCH will advise the
selling CREST participant of the delivery shapes required for onward delivery. LCH will not accept a
delivery from the selling CREST participant that is not in the advised shapes, unless it is a partial delivery,
in which case it should meet the requirements set out above.
8 Optional Events
The following procedures are only relevant to transactions, in events that contain options, where they
remain outstanding towards, at, or after the end of the period of optionality.

LCH will implement a rule setting the Last Date for Delivery of entitlements. This will allow LCH
sufficient time to perform any splitting prior to passing the entitlement to buyers. The dates are:
Call Payments

five business days prior to the call or payment date.
LCH will implement a rule setting the last time for instruction by a buyer on unsettled claims. This will
allow LCH sufficient time to pass on instructions and give sellers time to make any necessary
elections. The dates are:
Call Payments
11:00 am two business days prior to the date set by the London Stock Exchange.
In all cases, LCH will, in the event that a buyer has not instructed by the above deadline, allow the default
option to occur. If the default option involves the payment of call money, in all cases LCH will debit the
account of the clearing member for transactions across all CREST settlement accounts associated to
them.
In the event that a buyer instructs LCH to allow the option to lapse and this results in a payment being due
to the buyer, LCH will effect payment of the amount on the due date by raising ‘RES’ transactions debiting
and crediting the CREST Settlement Participants. If either CREST Participant fails to match the ‘RES’
transaction, LCH will debit the clearing members involved via the PPS system.
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9 Optional Events with Cash
Where a distribution involves a potential cash payment at the end of a pre-determined period, in order to
encourage settlement prior to such a call, LCH will:

implement a rule that allows for the collection of the equivalent of 50% of the value of the call payment
as additional margin from the seller at Ex-Date plus five business days, if they have failed to deliver.
The payment would be a cash rather than contingent liability.

further, implement a rule that allows for the collection of the equivalent of the remaining 50% of the
value of the potential cash payment from the seller at Ex-Date plus ten business days, if they have still
failed to deliver. Raising the additional margin held in cash to the equivalent value of the call payment.
As an incentive to settle, interest will not be paid on that amount. These amounts will be collected via the
PPS system as they represent additional margin rather than a settlement sum associated with the
transaction.
10 Fractional Cash Entitlements
CREST does not raise claims for fractional entitlements, which on occasion can be large sums of money.
In Stock Situations, where the Registrar determines that a cash entitlement is payable, LCH will calculate
the net amount due, performing the net calculation in the same way as outlined above. Buyers will be
expected to input a ‘RES’ transaction in CREST against LCH’s CREST Participant ID LCH01 for the net
amount due to them quoting in shared note field the underlying transaction ID and corporate action number
for which the fractional entitlement is due. If this agrees with LCH’s calculation, then LCH will input an
identical but opposite ‘RES’ transaction in CREST against the Seller. Once the seller has matched this,
LCH will match the buyers ‘RES’ transaction and both transactions should settle. If the seller fails to match
LCH’s ‘RES’ transaction, the amount will be debited from the appropriate clearing member's account via
the PPS system.
11 Exceptions
The above notes and those LCH rules that apply are intended to be applicable to all events. However, it is
recognised that there will be circumstances when LCH has to provide additional information or guidance
for events that are not covered, or introduce new requirements.
12 Conclusion
It is the intention of all members of the CCP project to continue discussions with market participants and
those who have responsibility for the issuance of paper securities. We will continue to argue a view
encouraging the introduction of all such securities, especially rights issues, into CREST for dematerialised
settlement. We firmly believe that this move would be of great benefit to the whole UK market.
List of guidance notes
The project has published a number of guidance notes. The others published to date, or in production, are
listed below, please contact the project for any later guidance notes.
01/00
Disclosure of shareholdings
02/00
UK Stamp Duty Reserve Tax
03/00
Agency and riskless principal trading
04/00
Balance sheet reporting
05/00
Impact of late settlement
06/00
Adjustment to LCH’s Default Fund to
Cover Clearing of London Stock
Exchange Business
07/00
Tripartite NCM-GCM-LCH Agreement
08/00
Irish Stamp Duty
09/01
UK equity collateral in the CCP
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10/01
Residual settlement of non-CREST
outturns
11/01
Corporate events in CREST in the CCP
Contact points
The CCP for Equities project can be contacted on 020 7849 0510 or via email at ccp@crestco.co.uk.
Members of the Exchange, LCH or CRESTCo can also make use of their usual contacts in these
organisations.
Information about the service is also available on the following websites:
www.crestco.co.uk
www.lch.co.uk
www.londonstockexchange.com
This guidance note has been prepared by the London Stock Exchange, LCH and CRESTCo to assist participants in their
planning for the CCP for Equities project. The London Stock Exchange, LCH and CRESTCo do not represent or warrant
the completeness or accuracy of the information contained in this guidance note. Recipients should not rely on this
guidance, which is not a substitute for specific legal advice, and should consult their own legal advisers.
© January 2001 CRESTCo Limited, registered in England and Wales No 2878738, London Stock Exchange plc, registered
in England and Wales No 2075721, and The London Clearing House Limited, registered in England and Wales No 25932.
The CREST logo is a trademark of CRESTCo Limited. SETS, SEAQ, SEATS Plus and the London Stock Exchange crest
and logo are trademarks of London Stock Exchange plc. The London Clearing House logo is a trademark of The London
Clearing House Limited.
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