Al Nanji, managing director, clearing and settlement operations, and Dawn Davies, manager, Alberta region, delivered a presentation on dematerialization to the Canadian Bar Association, Securities Subsection (South).

1. Going paperless
in the Canadian securities market
Alberta Chapter – Canadian Bar Association
January 12, 2011
© 2011 CDS Clearing and Depository Services Inc.

2. Points to cover today
 CDS overview
 Dematerialization
 Book-Entry-Only Securities Services Agreement
 Electronic entitlement payments and TRAX
 Sample trust indenture – uncertificated securities
 Issue eligibility
 Electronic closings
 Private placements
 U.S. restricted securities
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3. CDS participants and owners
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 CDS is owned by six 7 4 11
8
Schedule A banks, 11
TSX
and IIROC 51
Banks (11)
 Offices in Toronto, Trust companies (8)
Montreal, Calgary, Investment dealers (51)
Other (11)
Vancouver Transfer agent limited participants (7)
ATON limited participants (4)
ACT limited participants (4)
 96 participants
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4. CDS - a top-rated central securities
depository
AA Public Depository
Rating (Thomas Murray)
retained in 2010
“CDS remains one of the top
rated CSDs in the world. The
strength of CDS confirms the
excellence of Canada’s capital
market infrastructure.”
~ Simon Thomas,
Thomas Murray
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5. Bank of Canada Mandate
 CDS is recognized as
– Critical infrastructure to the financial sector
– (provinces of ON & QC, and federal government)
– of systemic importance (BoC, OSC, AMF)
 Reliability is essential in terms of the services we
provide and role we play in the financial sector
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6. Dematerialization

7. Steps to dematerialization
 Immobilization
– CDS & Co. registered positions represented by certificated securities
held at CDS
 Non-certificated inventory (NCI) securities
– CDS & Co. registered positions represented by electronic records on
security holders’ register at issuer or transfer agent; other positions may
be certificated
 Book-entry-only (BEO) securities
– 100% of security’s issue held by CDS is registered in CDS & Co.; no
certificates available outside CDS; may be global certificate or
uncertificated
 Uncertificated
– Term used in provincial Securities Transfer Acts (STA) to represent
either NCI or BEO holdings
 Dematerialization
– Company board or legislation determines that no certificates to be
issued to represent company’s securities
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8. Examples of dematerialization
 Canada Bonds and T-bills are fully dematerialized
 Fully dematerialized countries:
– Australia, Denmark, France, Japan, New Zealand, South
Africa
 Countries initiating some form of dematerialization:
– Belgium, India, Ireland, Italy, Netherlands, Norway, South
Korea, Spain, Sweden, UK, Ukraine, USA
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9. Impediments to dematerialization
 In absence of legislation mandating dematerialization, CDS has
been pursuing changes to market practice to eliminate certificates
and cheques for entitlement payments
 Documentation, such as trust indentures, requiring certificates for
debt issuance
 Reliance on paper for evidentiary purposes
 Related processes are typically certificate-based
(i.e. issuer buy-backs and stock options) replaced now with TRAX
 Resistance to change
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10. Paper handling – it costs all of us!
 Few participants in the securities industry benefit from
paper certificates (e.g. couriers, printers)
 Investors who report lost, stolen or fraudulent
certificates have to pay to replace the certificate
 Other costs are borne by issuers, brokers and financial
intermediaries via:
– custody and vault costs, audits, file maintenance
– surety bonds
– transporting physical certificates
– loss replacements, clerical processing
 Education and co-operation are needed to change this
outdated "tradition"
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11. BEO Securities Services Agreement

12. BEO Securities Services Agreement
 BEO Securities Services Agreement (BEO SSA) has
replaced Letters of Representations (LORs)
 Once signed, BEO SSA replaces the LOR for all
securities held at CDS
 BEO SSA comprises:
– A short Agreement requiring signature by issuer and
electronic delivery to CDS
– Issuer Procedures incorporated by reference as part of the
Agreement
– BEO Acknowledgment, as part of the Procedures, for
signature by issuer and electronic delivery to CDS for each
deposit of a new issue
 Posted on www.cds.ca, as periodically amended
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13. BEO Securities Services Agreement
 BEO SSA and Issuer Procedures:
– Set out general provisions for making an issue eligible for
deposit and use of BEO services at CDS
– Permits CDS to replace a lost or stolen certificate without a bond
of indemnity
– Eligible BEO securities now include uncertificated securities
– CDS holdings can be evidenced by entries of a CDS recognized
agent without any certificates being delivered to CDS
– CDS recognized agent to provide daily closing balance
confirmation of registered holdings in CDS nominee name
– Securities represented by a global certificate may be converted
to uncertificated issues with issuer agent’s agreement
– Requires electronic payment of entitlements in same-day final
and irrevocable funds
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14. Electronic Entitlement Payments and TRAX

15. Electronic Payments for Entitlements
 Effective November 1, 2011 all entitlement payments paid to CDS
must be in electronic form and must be final and irrevocable
 Transfer agents acting as paying agent in CDSX
– TA assumes role or designates a CDS participant to act on their
behalf
– TA provides CDS with payment details
– CDS matches TA payments to events in CDSX to ensure accuracy
– Once funding is in place, TA releases the funds in CDSX for allocation
to participants’ ledgers or advises its paying agent to release the
funds
– CDS will work with TAs who wish to assume this role
 LVTS payments also acceptable
 CDS will be analyzing the cheques still received to determine how
to move these payments to electronic form
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16. Sample Trust Indenture – Uncertificated Debentures

17. Uncertificated debentures:
Key concepts
 Trust indentures typically require paper certificate to be signed and
delivered before debenture can be duly issued or a binding
obligation
 Certificates are used as evidence of ownership and are endorsed
and given to the trustee to effect a transfer
 CDS worked with the main corporate trustees to develop a sample
indenture with provisions enabling issuance of uncertificated
debentures
– Use of master record and internal procedures of trustee for
authentication, issuance and record-keeping
– Transaction statements and statements of account to reflect transfers,
payments, other changes pertaining to holders
– Preferred form of global debentures deposited with CDS and payments
must be paid in electronic form
 Sample trust indenture posted on www.cds.ca
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18. Issue Eligibility

19. General eligibility criteria
 General eligibility criteria for deposit of issues in CDS
(requirements may vary depending on particulars of issue):
– A transfer agent recognized by CDS
– No requirement for CDS to sign any documentation to effect a
transfer of a security
– If there are features that require special procedures, CDS may not
make the issue eligible
– The security must be defined in documentation, for example:
offering circulars, final prospectuses, offering memorandums, copies
of certificates, statement of material facts, information circulars, shelf
prospectuses and for name changes or reorganizations articles of
amendments
– Denominated in Canadian or US funds
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20. Eligibility Fees
 CDS has instituted a new fee for eligibility of all certificated
issues (money market issues are exempt from the fee):
Definitive certificates held by CDS $1,000
BEO Global certificates held by CDS $500
Uncertificated, no certificates held by CDS $0
 Web-based process, similar to the ISIN issuance process,
for requesting eligibility, collecting information and billing of
the fees
– The firm that requests the issue’s eligibility will pay the fee
– By credit card if a non-participant
– CDS participants can choose to pay via credit card or via monthly
CDS invoices
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21. Electronic Closings

22. Electronic closings
 Closings usually still rely on issuance of one or more
certificates for exchange between issuer’s legal
counsel and underwriter’s legal counsel
 Exchange of payment typically done by wire transfer
between closing parties’ financial institutions
 Inefficient, risky and unnecessarily costly to still require
certificate to be produced for exchange and then
subsequently cancelled
 CDSX functionality enables new issues to be closed in
an electronic format
 All parties involved in the closing must agree to
manage the process without requiring a certificate
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23. Using CDSX to settle funds
 Instead of wire transfers (LVTS), funds for closings can be
exchanged in CDSX, provided issuer’s banker:
 Prior to the closing
– Issuer's bank enters a deposit request for the new issue security
– Issuer's bank enters a CDSX trade against the underwriter, where the
quantity and value equal that of the new issue, with the trade’s value
date equal to closing date
– Underwriter confirms the trade
 At closing, after all documentation is accepted:
– Transfer agent/custodian or CDS, as a custodian, confirms the deposit
– The trade between the bank and underwriter settles in real-time
– Bank credits the issuer's bank account based on funds received in
CDSX
 Bank will settle its daily activity, including these funds, at
CDS’s payment exchange, where settled funds are final and
irrevocable funds
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24. Private Placements

25. Private placements
 More private placements than IPOs year over year
– In the last year 2,320 common equity private placements were
brought to market (statistics are from IIAC’s website)
– As of November 30, 2010, there were 62 issues still in the hold
period and 111 issues where the hold period had expired
 Participants are seeking ways to reduce certification and
increase deposits in CDS
– Certificated issuance of private placements has high costs and
risks
– Average number of certificates held in CDS participant vaults: 800
(for smaller firms) to 25,000 (for larger firms)
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26. Possible impediments
 Why are private placements not being made eligible in
CDSX?
– Lack of understanding of CDS eligibility criteria which allow deposits of
private placements
– Belief that physical certificates provide issuers and transfer agents
better control on trading restrictions and provide a cross guarantee at
closings
 Since late 2009, when NI 45-102 and 45-102CP were
amended, issuers are no longer required to obtain regulatory
comfort to have their issues brought into CDSX and CDS
has ceased applying settlement restrictions
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27. Eligibility criteria for private placements
Reporting Non-Reporting
Private Placement Eligibility Requirements Issuer Issuer
Apply online for ISIN through CDS Securities Management Solutions
Inc (Available in April 2009) Required Required
Temporary ISIN assigned if there are freely traded shares Required Not Required
After 4 months and 1 day (end of the “hold” period) CDS runs an
automated process to move all positions from the temporary ISIN to
the unrestricted ISIN Required N/A
Attach necessary documentation regarding issue (Offering
Memorandum, Subscriptions Agreement) Required Required
Book-entry-only (held by CDS or a TA in NCI format) Required Required
Register via recognized transfer agent Required Required
Confirmation letter from the issuer on when the hold period should be
lifted Required Required
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28. U.S. Restricted Securities

29. U.S. Restricted Securities (144A, Reg S & D)
 Non-reporting issuers bringing an issue to market in the US face
restrictions (mandated by the SEC) on potential purchasers:
– 144A – Qualified Institutional Buyers
– Reg S – Non-U.S. purchasers
– Reg D – Accredited investors
 In 2009 CDS implemented a new bulletin type for restricted
securities whereby participants can advise others about
requirements/processes for removing restrictions
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30. CDS Contact Information
Al-Karim Nanji Dawn Davies
Managing Director, Manager, Alberta Region
Customer Service and 403 232-5676
Operations ddavies@cds.ca
416 365-8631
ananji@cds.ca
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31. Going paperless
in the Canadian securities market