Market Profiles

RBC IS operates an omnibus account structure in this market.

For further information or support around accessing this market, please contact your RBC IS representative.

Client Notice

Please note not all financial instruments and exchanges listed below are available as an RBCIS product offering. Please consult our Terms & Conditions or reach out to your RBCIS representative for further details.

The securities traded on the exchanges are primarily corporate equities and bonds (corporate and government). The buyers and sellers of shares in an auction process determine the prices. Securities may be cross-listed on all exchanges.

The main exchanges in the U.S. are the BATS Exchange, NYSE Amex Equities, Chicago, NASDAQ, NASDAQOMX BX, National, NYSE Euronext, NYSE ARCA, Nasdaq OMX PHLX, and San Diego Stock Exchanges. The Chicago exchange acquired the National exchange on December 30, 2011. Both exchanges will operate separately under their current names. Each exchange is a self-regulatory organization (SRO), which establishes rules for securities trading and standards for its members. Of these exchanges, the New York Stock Exchange (NYSE), founded in 1792 is the most prestigious. The NYSE group and Euronext merged in 2007. Euronext was originally created by a merger of the Amsterdam, Paris and Brussels Stock Exchanges in 2000. Euronext acquired the shares of the London International Financial Futures and Options Exchange in 2001 and merged with the Portuguese Stock Exchange in 2002. In 2008 the NYSE Euronext acquired the American Stock Exchange.

New York Stock Exchange (NYSE)
NYSE was founded in 1792 and is the leading self-regulatory organisation in the US. It is the examining authority for all the major US securities firms. 

NASDAQ
NASDAQ was created in 1971 and is the largest and fasted growing electronic stock market in the US. It is home to over half of the companies that trade on the US primary market and allows all market participants to openly trade. Buyers and sellers do not interact so the system relies on market makers competing against themselves to keep share prices competitive.

There are six other main exchanges – American, Boston, Chicago, Cincinnati, Pacific and Philadelphia, San Diego and Arizona – which are all self-regulatory organisations that establish rules for securities trading and standards for their members.

The US market has high liquidity as trading is encouraged among a virtually unlimited number of market participants.

The NYSE, NASDAQ and AMEX, as well as the regional markets, are connected by the Intermarket Trading System (ITS) which allows brokers to execute transactions on another exchange to take advantage of more favourable pricing.

NYSE: most trading is conducted on the trading floor at various posts at which groups of specialists are assigned. At any given post there are specialists that trade in only one share or a specific group of shares, as well as floor traders acting on behalf of member firms. The specialist may act as broker and/or dealer.

New York Stock Exchange
Outside the official trading hours of 9:30 am to 4:00 pm, (ET), Monday through Friday, the NYSE has two off-hour trading sessions.

NYSE Matchpoint matches aggregated orders at 4.45pm with prices derived from on-going floor trading. It covers all NYSE, NASDAQ and regional stocks. 

Crossing Session II is from 4:00 pm until 6:30 pm (ET) and is used for trading of portfolios (baskets of at least 15 NYSE securities regardless of value). 

NYSE trading is bid driven and is conducted on the trading floor, at posts around which specialists are grouped. At any given post, there will be specialists who trade in only one share or a specific group of shares, as well as floor traders acting on behalf of member firms. Extraordinarily large trades, referred to as "blocks", may by-pass the floor auction as such orders may adversely affect prices. Traders on off-exchange desks will cross the block order with institutional customers and other dealers whenever possible to obtain the best price.

Most transactions are settled on a cash basis and payment is effected upon settlement. Stock purchases may also be done on margin. In margin transactions, purchasers make a partial payment and have the balance advanced by their broker. The initial margin requirement is currently 50%. Minimum margin limits are set by the NYSE and the Federal Reserve.

Trading that occurs prior to issuance of the actual securities is termed "when-issued" or syndicate transactions. These transactions do not settle until the securities have been issued.

Member firms communicate directly with the trading floor through their floor brokers or through any of the following electronic means:

NYSE SDBK (replaced the Super Designate Order Turnaround) is a server based system based on NYSE Arca's industry-leading trading engine, providing excellent flexibility, scalability and lower operating costs. The electronic order routing system allows member firms transmit orders in NYSE - listed securities directly to the specialist post where the securities are traded, or to the member firm's booth. After the order has been executed in the auction market, a report of execution is returned electronically to the member firm's office. The execution is then submitted directly to the comparison system.

The NYSE Bonds trading platform allows subscribing member firms to enter and execute bond orders through terminals in their offices.

The NMS Linkage System is an electronic communication network that links nine markets, including the NYSE, NYSE Amex Equities, Chicago (MSE), National, NYSE ARCA, the Chicago Board Options Exchange (CBOE), NASDAQ OMX BX, NASDAQ OMX PHLX, and the NASDAQ. The system enables brokers, specialists and market makers to interact with their counterparts in other markets whenever the nation-wide Consolidated Quotation System (CQS) shows a better price. The CQS collects and disseminates, electronically, current bid and asked quotations, along with volume, from and to all market centers trading listed stocks.

NASDAQ: a sophisticated, computerised, multiple-market-maker trading system, used by both domestic and foreign investors. Quotations for securities not registered with the Securities and Exchange Commission (SEC) are carried on NASDAQ's electronic over-the-counter bulletin board. Trading volumes in the NASDAQ market are the second-largest in the world, exceeded only by the NYSE.

NASDAQ
NASDAQ is the world's largest electronic stock market. Rather than one central trading location, NASDAQ trading is executed through a sophisticated computer and telecommunications network, which transmits real-time quote and trade data. As there are no size limitations or geographical boundaries, NASDAQ's "open architecture" market structure allows an unlimited number of participants to trade in a company's stock. The trading process is bid driven.

AMEX: trading is conducted in an auction market, similar to the NYSE. The Post Execution Reporting System (PER) is comparable to SuperDot.

Equities and Bonds
Stock exchanges are open from Monday through Friday with the following schedule in local times (ET):

ISIN (International Securities Identification Numbering): Yes, for international securities

Other: CUSIP for domestic securities, Ticker symbols for domestic securities

Most securities are identified using CUSIP (Committee on Uniform Security Identification Procedures). The CUSIP system identifies security type and issuer for corporate, municipal, state, federal and some foreign issues.

The CUSIP system is based on a number consisting of nine alphanumeric characters allocated as follows:
Issuer number (6 digits)
Issue number (2 characters)
Check digit (1 digit)

Over 7 million securities are identified under the CUSIP system. Each issue is assigned a permanent number, which uniquely identifies that issue.

The CUSIP database has an ISIN reference table so that the CUSIP may be cross-referenced to an ISIN.

Certain issues or types of securities, because of their short term or private placement status, are not normally assigned CUSIP numbers. Examples of such issues are municipal notes of less than one year, commercial paper, certificates of deposit, fractional shares, puts and calls, some Canadian securities and some over-the-counter issues.

Securities and Exchange Commission (SEC) - is the principal regulator and is responsible for all securities issuance and trading, the registration and regulation of financial intermediaries - securities firms, investment companies (including mutual funds), investment advisors, and all self-regulatory organisations (SROs) including the NASD, the NYSE and the regional exchanges. (e.g. investment companies, investment advisers), and for monitoring various disclosure requirements. The SEC also has enforcement authority over fraud and insider trading. Criminal enforcement is carried out by the U.S. Department of Justice.

Federal Reserve - consists of the Federal Reserve Board and regional Reserve Banks and serves as the U.S. central banking system. Its primary responsibility is the regulation of money supply. It shares regulatory functions with the states over about 1,000 state-chartered banks that are members of the Federal Reserve System and with the Comptroller of the Currency over national banks. The Federal Reserve System plays a key role in the payments system, such as check clearance and wire transfer of funds.

The Commodity Futures Trading Commission - regulates all U.S. futures exchanges, as well as the brokers, traders, advisors and pool operators that participate in those markets.Established under authority granted by the 1938 Maloney Act, Amendments to the Securities Exchange Act of 1934, the NASD is the self-regulatory organisation of the securities industry responsible for the regulation of The NASDAQ Stock Market, as well as the vast over-the-counter securities market, and the many products traded in it (including municipal and government securities). 

National Association of Securities Dealers, Inc. (NASD) - operates subject to Securities and Exchange Commission oversight and is the largest self-regulatory organisation in the United States, with a membership that includes virtually every broker/dealer in the nation that is involved in a securities business with the public. Through its subsidiaries, NASD develops rules and regulations, conducts regulatory reviews of members' business activities, and designs and operates marketplace services and facilities. The NASD helps to establish and coordinate the policy agendas of its subsidiaries and oversees their effectiveness.

Federal Deposit Insurance Corporation (FDIC) - provides insurance coverage for all U.S. domestic banks and thrift deposits. FDIC monitors the activities of banks that are not members of the Federal Reserve System.

New York Stock Exchange (NYSE) - a self-regulatory organisation governed by a Board of Directors, under the supervision of the SEC.

Regulatory Organizations
The major organizations responsible for the market regulations and developments in the United States are the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA) , and the Federal Reserve System.

The SEC, created by the Securities Exchange Act of 1934, is the principal regulator with supervisory responsibility over all securities issuance and trading, securities firms, investment companies (including mutual funds), investment advisors, and all self-regulatory organizations (SROs) including the NASDAQ, the NYSE and the regional exchanges.

The CFTC regulates all U.S. futures exchanges, as well as the brokers, traders, advisors and pool operators that participate in those markets.

FINRA (created in 2007 through the consolidation of NASD and the member regulation) is the largest independent regulator for all security firms doing business in the U.S. It oversees approximately 4,495 brokerage firms and 635,515 registered securities representatives. FINRA monitors many aspects of the securities business, from examining security firms to writing rules and enforcing them and the federal security laws. 

The Federal Reserve System, consisting of the Federal Reserve Board and regional Reserve Banks, serves as the U.S. central banking system. Its primary responsibility is the regulation of money supply. It shares regulatory functions with the states over about 1,000 state-chartered banks that are members of the Federal Reserve System and with the Comptroller of the Currency over national banks. The Federal Reserve System plays a key role in the payments system, such as check clearance and wire transfer of funds.

Instruments

The following types of securities are most frequently traded in the United States. They are available to foreign investors without restrictions. They are generally issued in registered form, and held, in most instances, in one of the two depositories. Money market instruments typically have a maturity less than one year. The common maturities for debt instruments are 2, 5, 10, and 30 years. Bonds can be issued as floating, fixed, zero coupon, or convertible bonds. 

Equities
Common Stock
Preferred Stock
-Cumulative preferred
-Convertible preferred
-Callable preferred
-Protected preferred
American Depository Receipts
Exchange Traded Funds (ETFs)
Warrants
Rights
Money Market Instruments
Commercial Paper
Bank Certificates of Deposits (CD)
Bankers Acceptance (BA)
Time Deposits
Eurodollar Instruments
Treasury Bills
Corporate Bonds 
Bonds (Bearer and Registered)
Secured Bonds
Mortgage Bonds
Asset - Backed Securities
-Collateralized Mortgage Obligations (CMOs) 
-Real Estate Investment Trusts (REITs)
Equipment Trust Bonds 
Collateral Trust Bonds
Guaranteed Bonds
Unsecured Bonds
Subordinate Debentures
Income Bonds
Sovereign Debt Instruments
Brady Bonds
Euro Bonds
Other Sovereign Debt Instruments
Municipal Instruments
General Obligation Bonds
Revenue Bonds
Special Tax Bonds
Industrial Revenue Bonds
Public Housing Bonds
Refunding Bonds
Municipal Notes
U.S. Government Instruments
Treasury Bills
Treasury Notes
Treasury Bonds
STRIPS
Federal Agencies
Federal Housing Administration (FHA)
Government National Mortgage Association (GNMA)
Small Business Administration (SBA)
Federal Home Loan Banks (FHLB)
Federal Home Loan Mortgage Corporation (FHLMC)
Federal National Mortgage Association (FNMA)

Other Federal Agency securities

NB Restricted Securities - "Restricted" in this context relates to the sale or transfer of said securities under the Securities Act of 1933. SEC Rules 144, 144A, 145, 145K and Regulation 'S' provide exemptions from the registration requirements of the Securities Act of 1933, and therefore securities issued under said regulations are deemed "restricted" with respect to sales or transfers.

In general, the rules relating to restricted securities are set by the Securities & Exchange Commission (SEC) regulation. The transfer or sale may also be governed by restrictions imposed by the issuing company, its legal counsel, or by the terms of any agreements. Due to the nature of these rules, it is important to verify, before the sale is initiated, that the sale of the restricted security is in compliance with the requirements of the respective regulations. 

Restricted Securities

"Restricted" in this context relates to the sale or transfer of said securities under the Securities Act of 1933. SEC Rules 144, 144A, 144K, 145 and Regulation ‘S' provide exemptions from the registration requirements of the Securities Act of 1933, and therefore securities issued under said regulations are deemed "restricted" with respect to sales or transfers. Restricted securities can be issued in the form of common, capital and preferred shares, warrants, notes and debentures. 

Rule 144 – Securities may be either "restricted" or "control" securities:

Restricted securities (or letter securities) are securities acquired in unregistered, private sales from the issuer or from an "affiliate" of the issuer. An affiliate is usually a Director (board member), a Senior Corporate Officer, or a person who is the owner of 10% or more of the voting power of the company. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, or in exchange for providing "seed money" or start-up capital to the company. The certificates of restricted securities will almost always contain a stamp with a restrictive legend, which indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or exempt from registration requirements. 

Control securities are securities owned by an affiliate of a public company. An investor purchasing securities from an affiliate (or "controlling person") receives restricted securities, even if they were not restricted in the affiliate's hands. The certificates of control securities are usually not stamped with a legend.

Investors acquiring restricted securities or holding control securities must find an exemption from the SEC's registration requirements to sell them in the marketplace. Rule 144 allows public resale of restricted and control securities if a number of conditions are met, including, conforming to a trading value formula and a holding period, as well as providing proof of adequate public information with regards to the company (e.g. 10K filing) and the filing of notice with the SEC via form 144. There is a holding period for restricted securities only, which is a minimum of one year. For control securities there is no holding period requirement, however there are other requirements to which an affiliate is subject with regards to resale. 

Even if you fulfill the conditions of Rule 144, you are unable to sell your restricted securities to the public unless the legend is removed from the certificate. Only a transfer agent can remove a restrictive legend with the consent of the issuer, usually in the form of an opinion letter from the issuer's counsel. Without the issuer's consent, the transfer agent does not have the authority to remove the legend and execute the trade in the marketplace. 

The Transfer Agent of the security should always be contacted, prior to selling, to ascertain the necessary requirements. Some documentation, in addition to applicable negotiability documents, necessary for re-sales under Rule 144 (rule 145 and regulation S) may include:

Form 144 to be completed and signed by the beneficial owner (BO);

Seller's Representation Letter completed and signed by the BO;

Broker's Representation Letter, completed and signed by the executing broker of the seller;

Rule 144A – Rule 144A provides a safe harbor for the resale of Rule 144A eligible restricted securities to institutions that are deemed to be "Qualified Institutional Buyers – QIBs". Rule 144A was issued in order to improve the liquidity and efficiency of the private placement market by giving more freedom to institutional investors to trade securities. It was also implemented to induce foreign companies to sell securities in U.S. Capital markets.

In general terms, securities eligible for trading under the rule include both debt and equity issues of foreign as well as domestic issuers. 144A securities have not been registered under the Securities Act of 1933 and can therefore only be sold to an entity, which the seller reasonably believes is a QIB. A QIB has to meet certain requirements under the Rule. There is also a required holding period before sale can be made to the public markets, which is generally two years from the time that the issuer initially sells the securities until the time they are resold. Therefore, tacking of the holding period of the prior owners is allowed.

The Transfer Agent of the security should always be contacted, prior to selling, to ascertain the necessary requirements. Some documentation, in addition to applicable negotiability documents, for re-sales under Rule 144A may include:

Certificate as to "Qualified Institutional Buyer" under 144A from the buyer;

The Transfer Agent (TA) may require a certification from the seller indicating that the seller is relying on Rule 144A and that the purchaser was notified of the requirements of resale. This document is provided by the TA or the issuer and it varies depending on the security; 

Legal Opinion from the Issuer's counsel, addressed to the Transfer Agent/Bond Trustee.

Rule 144K – Paragraph (k) of rule 144 applies only to restricted securities which:

Have been owned and fully paid for by the BO, for at least two years.

Are owned by a BO that has not been an affiliate of the company during the prior 3 months.

The restriction may be lifted if these two criteria are met. Some documentation necessary, in addition to applicable negotiability documents, for re-sales under Rule 144K include: 

Form 144K Representation Letter to be completed and signed by the BO;

A legal Opinion may also be required.

Rule 145 – Rule 145 is a safe harbor for the resale of securities received in connection with reclassifications, mergers, consolidations and asset transfers.

Under Rule 145, an affiliate of an acquired company who does not become an affiliate of the acquiring company, can resell the securities at any time provided they comply with the requirements of Rule 144 (i.e. the volume and manner of sale restrictions). The sale must comply with all provisions of Rule 144, except that the former affiliate need not comply with the holding period or provide sale notice requirements of Rule 144, since these are not applicable under Rule 145. Shares may be sold free of requirements of Rule 145 after the first year following the merger, consolidation or reclassification by the person who has not been affiliated with the issue for at least three months.

Regulation S – was adopted in order to provide a "safe harbor" from registration of securities offerings or re-sales that occur outside of the U.S.

There are two general requirements for all sales:

Offers must be made, or sales must be executed, offshore (outside of the U.S. and not made to U.S. persons);

Direct selling cannot be made within the U.S. by the issuer or participants.

For certain categories of securities, Regulation S may allow re-sale back into the U.S. after a one-year period, provided that no arrangements were entered into by the participants beforehand in respect to the sale.

Securities are generally issued in registered form and held, in most instances, in one of the two depositories (DTC and FRB).

Physical securities do exist and will mostly be in registered form.

The New York Stock Exchange (NYSE) announced circuit-breaker levels for first quarter 2013, effective from January 2 through February 1, 2013. New circuit breaker levels based on the S&P 500 will be introduced on February 4, 2013. 
Circuit-breaker points represent levels at which trading is halted because an index has fallen by a pre-determined percentage. Circuit-breakers are intended to prevent panic selling and are set quarterly based on the closing values of the previous month, rounded to the nearest 50 points. 
NYSE maintains circuit-breakers at the 10, 20 and 30 percent decline levels of the Dow Jones Industrial Average (DJIA). 
The second quarter 2013 circuit-breakers are: 
Level I Halt: 
A 1,450-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m. Trading will not be halted if the 1,300-point drop occurs at 2:30 p.m. or later, unless there is a level II halt. 
Level II Halt: 
A 2,900-point drop in the DJIA before 1 p.m. will halt trading for two hours; for one hour if between 1 p.m. and 2 p.m. Trading will be halted for the remainder of the day if the drop occurs at 2 p.m. or later. 
Level III Halt: 
A 4,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs. 
All times above are Eastern Standard Times Industrial Average (DJIA).

Effective from May 16, 2011 until September 11, 2011, the NASDAQ stock market will implement a price volatility circuit breaker on securities which comprise the NASDAQ 100 index, for a four month pilot period. From this date trading in a security will be halted for sixty seconds if the executed trading price of the security deviates by the below percentages within the prior 30 seconds:

During the trading pause, NASDAQ will maintain all existing quotes and orders as well as continue to take additional quotes and orders. Additionally, the exchange will broadcast order imbalance information electronically every five seconds. 

After the sixty second halt, NASDAQ's "Halt Cross" procedure will commence as follows: 

• For a duration of five minutes a pre-opening quote-only period will take place.
• Quotes and orders will be accepted but not executed.
• NASDAQ will extend the quote-only period for one minute if prices fluctuate by +/- 10 per cent or by +/- USD 0.50 based on the securities price immediately prior to the halt.
• When trading is resumed after the quote-only period, the security's price is set by volume.
• No circuit breaker will be invoked on the execution price. The trading halt and subsequent quote-only period on affected securities will allow for manual intervention prior to the resumption of trading.

Effective March 18, 2014 the Securities and Exchange Commission (SEC) will implement a fee charge in accordance with Section 31 of the Securities Exchange Act of 1934. The rate will change to USD 22.10 per million which will remain in place until September 30, 2014. There will be no change to the fee applied on futures transactions, which will remain at USD 0.0042 for each round turn transaction.

The Securities and Exchange Commission (SEC) adopted rule changes to accelerate the settlement cycle in the U.S. market for most broker-dealer transactions in securities from T+2 to T+1 which was implemented May 28, 2024.

USD

The OTC market is open to all investors for trading outside of the exchanges.
The OTC equities market has two principal components - the NASD electronic OTC Bulletin Board (OTCBB) and the "Pink Sheets" which are daily bulletins published by the National Quotation Bureau. 

The OTC Bulletin Board is an electronic trading service that lists small companies, frequently speculative issues of start-up companies or formerly listed companies who no longer meet the listing requirements of the exchange. The "Pink Sheets" is a quotation service that collects and redistributes market maker quotes in the OTC equity securities and the "Yellow Sheets" is a quotation service for all taxable debt. The service transmits real time quotes, prices, and volume information in domestic and foreign securities. 

U.S. Treasury and government agency securities are traded OTC. All marketable treasuries are also listed on the NYSE.

Settlements through any of the three main securities depositories listed above are processed in a book-entry environment:

Depository Trust Company 
The vast majority of broker to broker equity and corporate debt trades clear and settle as pre the following procedures.

TD: The investment manager instructs a broker to initiate a trade in the market. Trades conducted on the exchanges, as well as those that are negotiated outside an exchange and reported to the NSCC by dealers, are transmitted to DTC for settlement. Investment managers send allocations for block trades back to the brokers who then submit a "Notice of Execution" via Omgeo TradeSuite (DTC's trade messaging and settlement services were incorporated into Omgeo TradeSuite in 2001). 

T+1: Omgeo TradeSuite adds the transaction(s) to the ID system trade data -base, assigns an id control number and forwards an electronic trade confirmation for each trade to the IM, B-D and IMs custodian. Counterparties view the trade details to affirm the trades and once affirmed, the trades are matched and become irrevocable. Deadline for affirmation is T+1. DTC sets the trade up for automatic settlement on T+1. If either side does not affirm the trade, it is deemed ineligible for Institutional Delivery settlement, and must settle outside of DTC via a separate "Delivery Order". The deadline for institutional trade affirmation at DTCC is 9.00pm on the trade date.

Settlement occurs in DTC by book-entry delivery of securities to the account of the buying customer's custodian bank or broker, against payment to the account of the selling broker or bank. Each DTC settling bank must wire funds to cover its net debit obligation. Likewise, if the settling bank maintains a net credit position at the end of the day, DTC will wire the necessary funds to the settling bank. 

Lack of Settlement Finality
Settlement in many markets, particularly in Europe, has "finality." Once the delivering party has effected delivery to settle a trade, assuming the main elements of the delivery are correct, the receiving counterparty cannot return the delivery. Confirmations of receipt or delivery are generally regarded as a confirmation of final settlement. 

In the US market, there is no finality of settlement. Accordingly, because a delivering or receiving party in the US market cannot guarantee that its delivery or receipt will not be returned or recalled, any related advice, by SWIFT or other means, can be regarded only as confirmation of delivery or receipt. SWIFT acknowledges the lack of settlement finality in the US market and has therefore developed and approved the use of a code in its messaging system.

After settlement has taken place, it is possible for a participant to "DK" a security back to the original delivering party. The recipient of the "DK" (original delivering party) must accept the instruction, thereby crediting their securities account with the DK'd securities and debiting their cash account. Normally, DK does not occur because the trade has not settled through the IDS but the most common reason for a reclaim is failure of the instructing party to provide proper beneficiary account information to the recipient's executing broker.

Federal Reserve System 
All U.S. treasuries are dematerialised and settle on the Federal Reserve (FRB) book-entry system. Settlement for Treasury securities occurs next day (T+1) unless the counterparties instruct otherwise for same day settlement. Forward settlements may also be negotiated between the counterparties. 

The FRB book entry system is a real-time gross settlement system (RTGS). Securities and cash settle on a real-time gross basis. All book-entry movements are immediate and irrevocable, assuming that if there is sufficient position. 

On line transfers at the FED take place from 08:30 to 15:00 for free-of-payment (FOP) and delivery vs. payment (DVP) transactions. The deadline for deliveries by Broker Dealers is 15:15, however, in general, market participants should observe 15:00 as the deadline for origination of deliveries of Fedwire eligible securities. The incremental 15 minute settlement period between 15:00 and 15:15 (formerly known as dealer time), will be extended to all parties as an exception process, provided that both parties bilaterally agree.

For DVP deliveries via the FED, the settlement is immediate if there is sufficient position in both accounts (cash and securities) and the custodians FED account is debited with the stock and credited with the cash. If the counterparty rejects the stock, the security and cash movement are reversed. 
There is a par value limitation of USD50 million on FRB transfers therefore any trades that are greater than USD 50 million par must be split into USD 50 million lots, plus residual, otherwise they will be rejected.

Voluntary fail charges on failing United States (US) Treasury settlements were implemented on May 1, 2009. The fail charge will be 3% less the Fed Funds target rate, or if a Fed Funds target band exists, the fail charge will be 3% less than the lower end of the band. The fails charge will be accrued on each calendar day in the period including the date of the delivery failure, but excluding the date the deliver is eventually settled. The penalty calculation is as follows: 

Transaction net cash consideration x (three per cent per annum minus the Fed Funds target rate).

Other Securities 
Mortgage - Backed Securities (MBS) 
MBS issues such as FHLMC, GNMA and FNMA settle once a month on a floating schedule, although settlement occurs approximately the same time every month. The issues are divided into one of several "classes" according to agency, maturity, and coupon. Each class settles on a different day, and all securities within that class settle on the same day. 

MBS trades can either be specified or generic: in a specified transaction, the exact pools are agreed upon at the time of the trade; if generic pools are used, the seller has until 15:00 on the second business day before settlement to advise the buyer of the exact pools being delivered (the 48 hour rule). If the information required is not communicated as required by the 48 hour rule, delivery cannot be made earlier than two business days after the information is given. 

On settlement date, agency MBS are transferred via Fedwire, while private label MBS settle physically between the dealers. The settlement methods for CMO's vary depending on the issuer and whether the securities are DTC eligible. CMO's can either settle physically, at DTC, or at the Federal Reserve. 

Futures and Options 
The clearance and settlement of futures trades is rather complex as a result of daily or twice-daily margin calls. The futures exchanges and their associated clearinghouses handle the settlement and clearing of futures trades. Options are settled and cleared by the Options Clearing Corporation (OCC). Each exchange on which options are traded assumes the responsibility of reconciling trade data and forwarding the data to the OCC who then perform any necessary margin calls. Settlement occurs on the morning of T+1, with same day funds.

Matching Process

There is an affirmation process (DTC-ID) with regard to trade settlement in which the affirming party (broker/IM/custodian) acknowledges that it will settle the trade on settlement date by sending an affirmed confirmation through the system. Trades not affirmed (DTC-Non ID) can be settled by Delivery Orders (DOs). Delivery Orders are used to deliver securities against payment or free to another participant, when either a previously submitted ID confirm has not been affirmed within the specified time-frame, or to make a rapid delivery. A DO is also utilized to "Reclaim" or "DK" a position back to the original sender, if the receiver does not recognize the trade. DOs are processed as and when received by DTC, on a real-time book-entry basis.

Settlement Process

Institutional deliveries of securities within DTC's systems occur through debits and credits to participants' accounts on a gross basis. At the same time, corresponding debits/credits occur to the memorandum cash accounts on the Same Day Funds System (SDFS). 

DTC's SDFS system provides significant control features including collateralization of and caps on each participant's intraday net settlement. It allows participants to settle one net money obligation each day, using Fed Funds. Each settling bank monitors its participant's collateral and its net-debit cap. A participant's net debit cap should not exceed its collateral position. If this occurs, all pending receives will queue until sufficient collateral is established. Sufficient collateral can be established by either reclassifying certain securities as "collateral" or by wiring in funds.

Broker-to-Broker Clearing

Broker-to-broker trades are processed and recorded through the National Securities Clearing Corp (NSCC). Details of all trades and legally binding contracts are sent to brokers from the NSCC on T+0 for settlement on T+1. The NSCC acts as central counterparty and its guarantee of trades begins at midnight on T+1, when it reports back to brokers that the trades have been compared. Transactions that fail to match are reported back for corrections. NSCC's instructions remain in force throughout the processing day, so that when securities become available in participant broker accounts, they are utilized for continuous net settlement. 

NSCC nets the trades processed by participants to a single cash balance. At the end of the settlement day, a broker will either owe NSCC a net cash obligation or NSCC will owe a broker. 

"Cross endorsement" is performed between DTC and NSCC to offset net credit/net debits for brokers with trades involved in both settlement systems. Each participant's net settlement balances are separately summarized, with the final end of day DTC and NSCC balances netted and/or aggregated into one DTC/NSCC balance for each participant. 

The vast majority of institutional equity and corporate debt clear and settle in the following manner:

TD: Trade will begin with the institution or the Institutions Investment Manager (IM) placing an order with the Broker-Dealer (B-D). Once the trade is executed (notice of execution) the B-D will advise the IM of the execution details. If it is a block trade the IM will advise the B-D how the trades should be allocated among its accounts. The B-D submits the trade data to Omgeo TradeSuite (DTC's trade messaging and settlement services were incorporated into Omgeo TradeSuite in 2001) 

T+1: Omgeo TradeSuite adds the transaction(s) to the ID system trade data -base, assigns an id control number and forwards an electronic trade confirmation for each trade to the IM, B-D and IMs custodian. The IM reviews the confirmation. If the confirmation is accurate the IM or custodian (if they have been assigned to affirm the trade(s) on the IMs behalf) affirms the trade. Omgeo generates an affirmed confirmation and sends it to the B-D/IM and the IMs custodian (if they are affirming on the IMs behalf). At this point the trade is sent to DTCs settlement system and is authorized by the party obligated to deliver the securities for settlement on T+1. If either side does not affirm the trade, it is deemed ineligible for ID settlement, and must settle outside of DTC via a separate "Delivery Order".

Settlement occurs in DTC by book-entry delivery of securities to the account of the buying customer's custodian bank or broker, against payment to the account of the selling broker or bank. During the end of day net settlement process, each DTC participant settles its net cash position with DTC by payment or receipt of a same-day funds wire via the Fed wire system. DTC sends settlement reports to the brokers and custodians identifying the trades that settled on T+1. After settlement has taken place, it is possible for a participant to deliver or "DK" a security back to the original delivering party. The recipient of the "DK" (original delivering party) must accept the instruction, thereby crediting their securities account with the DK'ed securities and debiting their cash memorandum account. Normally, a DK occurs when a security has not been settled through the DTC-ID system, and therefore has not gone through the confirmation/affirmation process. 

Government Fixed Income Settlement

All U.S. treasuries are dematerialized and settle on the Federal Reserve (FRB) book-entry system. Settlement for Treasury securities generally occur next day (T+1). However there are times when same day settlement occurs (T+0). Forward settlements may also be negotiated between the counterparties. 

The FRB book entry system is a real-time gross settlement system (RTGS). Securities and cash settle on a real-time gross basis. All book-entry movements are immediate, if there is sufficient position, and they are irrevocable. On-line transfers at the FED can take place from 8:30 am to 3:00 pm (ET) for free-of-payment (FOP) and delivery vs. payment (DVP) transactions. 

On July 1, 2009 the deadline for deliveries by all market participants was changed to 3:00 PM EST from 3:15 PM EST. The incremental 15 minute settlement period between 3:00 and 3:15 PM EST (formerly known in the market as dealer time) is now extended to all parties, as an exception process, provided both parties to the trade bilaterally agree. 

For DVP deliveries via the FED, the settlement is immediate if there is sufficient position in both accounts (cash and securities). The Bank of New York Mellon Asset Servicing's Fed acct is debited with the stock and credited with the cash immediately. If the counterparty rejects the stock, the security and cash movement are reversed. 

There is a par value limitation on FRB transfers. Section 10.2.1 of Operating Circular #7 of the Federal Reserve Bank sets a par amount maximum of USD 50 million for transfers ("the limit"). A Reserve Bank will reject a transfer message with a par amount greater than the limit. For the transfer of units greater than USD 50 million par, such trades must be split into USD 50 million lots, plus residual. For example, a trade with a par value of USD 75 million must be split into two separate trades of 50 million and 25 million par. In this situation, many custodians will accept the 75million par trade from the client and will split the trade on their behalf (50million plus 25 million) before sending to the market. Clients should be aware of this limit and should split trades accordingly, if their custodian doesn't offer this service. 

Mortgage - Backed Securities (MBS)

Typically, eligible GNMAs, FNMAs and FHLMCs are delivered over the Fedwire.

MBS issues such as FHLMC, GNMA and FNMA settle once a month on a floating schedule, although settlement occurs approximately the same time every month. Settlement dates are announced a year in advance on a rolling 12 month basis. The issues are divided into one of several "classes" according to agency, maturity, and coupon. Each class settles on a different day, with all securities in that class settling on the same day.

MBS trades can either be specified or generic (to be announced (TBA)). In a specified transaction, the exact pools are agreed upon at the time of the trade. If generic pools are used, the seller has until 3:00 pm (ET) on the second business day before settlement to advise the buyer of the exact pools being delivered (the 48 hour rule). If the information is not communicated as required by the 48 hour rule, delivery cannot be made earlier than two business days after the information is given.

On settlement date, agency MBS are transferred via Fedwire, while private label MBS settle physically between the dealers. The settlement methods for CMOs vary depending on the issuer and whether the securities are DTC eligible. CMOs can either settle physically, at DTC, or at the Federal Reserve.
Claims Process

The Treasury Markets Practice Group (TMPG) issued a fails charge market practice recommendation in June 2011 (updated in September 2011) for agency debt and agency pass through MBS. This follows on from the fails charge market practice for US Treasuries which was introduced in May 2009. The TMPG believe the practice will preserve and enhance the efficiency and operational integrity of the marketplace for these products by reducing the number of fails. The implementation date for incurring fails charges is February 1, 2011. While the market practice is only a recommendation the expectation is that all industry players will adopt this as a market practice. 

For the agency debt market, the TMPG trading practice recommends 1) A settlement fail charge be calculated based on the greater of a) 3 percent minus the federal funds target rate and b) zero. 2) The charge accrues each calendar day a fail is outstanding and is applied with a minimum $500 threshold. Debentures issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks are subject to this charge. This is a similar structure to the Treasury Market Fails charge market practice.
For the agency pass through MBS market, the TMPG trading practice recommends 1) A settlement fail charge be calculated based on the greater of a) 2 percent minus the federal funds target rate and b) zero. 2) The charge accrues each calendar day a fail is outstanding, although an agency MBS fail is not subject to a charge if delivery occurs on either of the first two business days following contractual settlement date (referred to as the resolution period). On the third business day following settlement date, a charge accruing from contractual settlement date becomes effective. 3) Charges for fails settled in a given calendar month are aggregated between legal entities that are counterparties to one another in a transaction, and a claim is made if aggregate charges for the month exceed $500. Agency MBS issued by or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are subject to this charge. 

The recommended TMPG fails charge is not applicable in respect of any transaction where delivery is not against the payment of funds or the transfer of securities (i.e. where there is a "free delivery," such as where a party is to deliver or deposit agency debt or agency pass through MBS for margin purposes). The TMPG advised that the charge should not apply to CMOs or other structured securities. 

The TMPG recommends the following: 1) That the fails charges apply to transactions in agency debentures and agency MBS entered into on or after February 1, 2012, as well as to transactions that were entered into prior to, but remain unsettled as of, February 1, 2012. 2) For transactions entered into prior to, and unsettled as of, February 1, 2012, the TMPG recommends that the fails charge begin accruing on the later of February 1, 2012, or the contractual settlement date. 

For both agency debt and agency MBS claims non-failing parties would provide notice 1) to the failing party of the amounts owed by the 10h business day of the month following the month in which the fail is resolved. 2) Failing parties would make full payment of all fails charges (or reject the claim charges) by the last business day of the month following the month in which the fail is resolved. 

Futures and Options 

The clearance and settlement of futures trades is rather complex, due to daily or twice-daily margin calls. The futures exchanges and their associated clearinghouses handle the settlement and clearing of futures trades.

Options are settled and cleared by the Options Clearing Corporation (OCC). Each exchange on which options are traded assumes the responsibility of reconciling trade data and forwarding the data to the OCC. The OCC performs any necessary margin calls. Settlement occurs on the morning of T+1, with same day funds.

Physical Securities 

Securities held physically in proper negotiable form settle on a T+1 basis. Physical delivery and receipts account for less than 2% of all activity.

The SEC has announced that the emergency orders related to naked short selling have been made permanent under Rule 204. The naked short selling rules were originally due to expire on July 31, 2009, under Rule 204T.

Rule 204 requires that short sellers and their broker-dealers deliver securities by the close of business on settlement date (T+1) or be subject to penalties. Investors who fail to deliver equities on settlement date for short sales may be subject to buy-ins. A long position is considered to be securities sold while out on loan and where a bona fide recall is initiated within two business days after trade date. Clients executing short sales should be aware of the penalties associated with non-compliance and ensure that they have pre-borrowed the necessary shares in order to complete delivery on settlement date.

Failure to comply with the close-out requirement is a violation of the rule. Participants who are none compliant with the close-out requirement will not be able to short sell securities either for itself or for another account, unless it has previously arranged to borrow or has borrowed the securities.

Back-to-Back Settlements

Same day turnaround transactions are fairly common. The majority of these transactions occur in the depository environment because of the relative ease provided by the book-entry system. Physical turnarounds are not sent out for registration since there is a pending same day delivery.

The National Securities Clearing Corporation (NSCC) is a central counterparty that provides centralised clearance, settlement and information services for virtually all broker-to-broker equity, corporate bond and municipal bond, exchange-traded funds and unit investment trust (UIT) trades in the U.S. It is also the main provider of centralised information services and money settlement for mutual funds and insurance and annuity transactions, linking funds and insurance carriers with their broker/dealer, bank and financial planner distribution channels. It is a wholly owned subsidiary of the DTCC and is the largest of its clearing corporations.

Central Counterparty
The National Securities Clearing Corporation (NSCC), established in 1976 provides clearing and settlement, risk management and a completion guarantee for trades involving a variety of instruments, including broker-to-broker equities, corporate and municipal debt, money market instruments, ADRs, ETFs, UITs, mutual funds, and insurance products. It is the largest of the clearing corporations according to transaction volumes and nets trades and payments for participants at the end of the day using the Continuous Net Settlement System. NSCC generally clears and settles trades on a T+1 cycle. The Fixed Income Clearing Corporation (FICC) was created out of a merger between the Government Securities Clearing Corporation (GSCC) and the MBS Clearing Corporation (MBSCC) in January 2003. The Government Securities division of the FICC clears, settles, and nets U.S. Government debt issues, including repos or repurchase agreements. Specifically, it performs multilateral netting and guarantees settlement of all netted trades. The MBS Division of the FICC provides comprehensive netting and settlement services that address the needs of this specialized market. The division offers automated to be announced (TBA) and specified pool trade matching which reduces participants overall settlement obligations. 

The Fixed Income Clearing Corporation (FICC) was created out of a merger between the Government Securities Clearing Corporation (GSCC) and the MBS Clearing Corporation (MBSCC) in January 2003. The GSCC clears, settles, and nets U.S. Government Securities transactions, including purchases, sales, and repos of Treasury and Government Agency securities.

Depository Trust & Clearing Corp. (DTCC) is the holding company for NSCC, the Depository Trust Company (DTC) and Fixed Income Clearing Corporation (FICC). 

FICC was formed by the merger of the Government Securities Clearing Corporation (GSCC) and the MBS Clearing Corporation (MBSCC) FICC is divided into the Government Securities Division and the Mortgage-Backed Securities Division. The Government Securities Division clears, settles and nets a broad range of U.S. Government securities transactions for its 104 member firms (brokers, dealers, banks and other financial institutions) and more than 400 correspondent firms that clear through these members. The Mortgage-Backed Securities Division operates two primary business units: clearing services, which include trade comparison, confirmation, netting, and risk management, and Electronic Pool Notification (EPN) services, which allow customers to transmit/retrieve MBS pool information in real-time as opposed to standardised message formats.

DTC is the depository for most equities, corporate bonds, municipal bonds, local government debt, ADRs and money market instruments. 

There are two primary depositories in the U.S.: The Depository Trust Company and the Federal Reserve System. Please refer to the CSD Risk Review for more detailed information on each CSD.

Depository Trust Company

The Depository Trust Company (DTC), established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making "book-entry "changes to ownership of the securities. In 1999, the NSCC, the entity that provides centralized clearing and settlement services for broker-to-broker trades, was merged with DTC to form the Depository Trust and Clearing Corporation (DTCC). DTCC is the holding company for the central depository, the Depository Trust Company (DTC) and it's clearing subsidiaries: the National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC). DTCC is owned by its participant banks, broker-dealers, mutual funds firms, and other companies within the financial services industry, such as NASDAQ and the NYSE. DTC is regulated by the Securities and Exchange Commission, the Federal Reserve, and the New York State Banking Authority.

DTC provides custody, post-trade processing and a wide range of portfolio servicing. Securities that are eligible for custody and servicing at DTC include, common and preferred stocks, issues of both listed and unlisted corporate debt securities, municipal bonds, certain U.S. Treasury and Federal agency issues, warrants, ADRs, certificates of deposit, some commercial paper, certain mutual funds and closed-end funds, certain global bonds, certain Canadian common and preferred stock and collateralized mortgage obligations. Securities not in Book Entry Only form are immobilized and held in DTC's vaults. 

DTC does not act as a Central Registry for the market. Each Member-participant has one or more accounts at DTC in which it holds its own securities or those of its clients.
International Links

DTC has international links with the following depositories which facilitate trading in DTC-eligible securities in local markets.

*Two-way Link

Federal Reserve Bank (FRB) is the depository for all government-issued debt and mortgage-backed securities.

Physical Settlement: Physical securities can settle either through DTC physical custody in NY or via physical delivery to the counterparty through the subcustodian bank.

Federal Reserve System
The Federal Reserve Book Entry System handles all settlements of U.S. Treasury securities, federal agency securities, treasury bills and re-purchase agreements. The Federal Reserve System provides safekeeping for securities, in both ordinary and pledged accounts. The system also provides repo tracking facilities and offers automated cash adjustment facilities for pooled instruments. In addition, it provides U.S. banks and agencies of foreign banks and domestic depositories with access to its book-entry conversion and wire transfer services (e.g. Fedwire Funds Transfer System).

BIS is an international organisation which fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability. The Committee on Payments and Market Infrastructures (CPMI) uses three common structural approaches, or models, to categorise the links between delivery and payment in a securities settlement system.

DTC (ID settlements): Although there are significant differences, the DTC system is similar to BIS model 2 - gross simultaneous settlement of securities followed by net settlement of funds. Settlements are usually in batches following overnight processing and other transfers are processed on a real time basis. The source of the transfer instruction determines whether a batch method or a real time method is used.

Broker-to-broker transactions (DTC): BIS Model 3 - securities transfers occur on a trade-for-trade (gross) basis throughout the processing cycle. However, fund transfers occur on a net basis at the end of the processing cycle. Security transfers are made via book entry and are final; fund transfers are irreversible, but not final. Therefore, final transfer of securities precedes final transfer of funds (i.e. delivery precedes payment). The netting procedure is made through the NSCC.

Fedwire: BIS Model 1 - simultaneous transfer of securities and associated funds from the buyer to the seller. All transfers occur on a trade-by-trade (gross) basis with all transfers made via book entry. All transfers are final. Settlement is made via RTGS systems.

Registration: Equity and debt instruments in the U.S. market are generally held in book-entry form with the depository, if eligible. 

Book-Entry: Securities held at the DTC are held in the nominee name of the depository, Cede & Co. in the account of the member broker or custodian. All instruments held at the FED are in dematerialised book-entry form and registered in the participant's name.

Depository Eligible – Issues

Depository Trust Company Eligible Issues: Securities, which are eligible for safekeeping at the central depository, Depository Trust Company (DTC) are held in the nominee name of the depository, Cede & Co, in the account of the broker or custodian who is a member of the depository.

Fed Book-Entry Eligible Issues: All instruments held at the Federal Reserve are in dematerialized, book-entry form.

Physical: All physical equity and the majority of long-term debt securities are in registered form. Registered securities must be forwarded to the transfer agent to change the evidence of ownership on the legal records of the issuing company. Under SEC regulations, transfer agents are required to complete re-registration of non-restricted securities within three business days. In practice, however, transfer agents may take longer. Shares are not blocked for trading, but cannot be settled until the registration process has been completed.

Physical Securities

All physical equities are in registered form. Registered securities must be forwarded to the transfer agent to change the evidence of ownership on the legal records of the issuing company. Generally, a transfer agent is a bank or trust company appointed by the issuing corporation. However, some corporations perform this function themselves. Transfer agents are required to complete (turn around) a transfer according to rules set by the SEC. The rules require that most securities be processed for transfer within three business days of receipt, however according to market practice this sometimes takes longer. Transfer agents must also keep records of the number and timeliness of transactions processed for at least two years.

Securities are normally registered in the name of the owner or a nominee. Nominee registrations are commonly used by banks, trust companies, clearing houses, brokers, mutual funds and their financial institutions to minimize re-registration of securities and speed the delivery and settlement process. By holding securities in nominee name (for example, Hare & Co., one of Bank of New York Mellon Asset Servicing's nominees) the bank or fiduciary can readily satisfy delivery requirements by having an authorized officer of that nominee endorse the securities. If it is in nominee name, the nominee will receive all income and corporate action notifications and forward to the beneficial owner.

Transfer fees for physical securities vary by agent and by issue.

Transfer Agents.

Transfer agents are required to complete (turn around) a transfer according to rules set by the SEC. The rules require that most securities be processed for transfer within three business days of receipt. Transfer agents must also keep records of the number and timeliness of transactions processed for at least two years.

• Regarding book-entry registration, the depositories maintain an aggregate record of holdings for each custodian and automatically adjust these records on settlement date. The custodian maintains records of individual client holdings.
• Non Restricted Physical certificates requiring re-registration must be guaranteed by a bank or trust company, duly endorsed and submitted to the issuer's transfer agent. Registration timeframes vary depending on the location of the transfer agent. The range is 36 hours to two weeks for certain issues (e.g. private placements) for New York based agents and up to 15 business days for other agents.

Non Restricted Certificates are normally automatically registered in the custodian's nominee name, but may be registered in the name of the beneficial owner.

Share holdings may be required to be disclosed by the beneficial owner, particularly when holdings reach or exceed prescribed disclosure limits. Investors must ensure that they comply in full by reporting such holdings to the appropriate organisations for this market, within the timeframe required. If you have any questions regarding this issue we encourage you to consult your legal counsel. 

Failure to comply with reporting requirements may lead to penalties and/or other sanctions.

The acquisition of more than 5% of a company's stock requires the filing of a schedule 13D with the SEC and the issuing company within 10 days. A Schedule 13D must also be filed for acquisitions exceeding 10% or when beneficial ownership increases or decreases by more than 5%.

Disclosure Requirements

Investors must adhere to the following disclosure requirements. United States Code 18, section 1001 stipulates that anyone who knowingly and willfully falsifies information can be fined or imprisoned, or both. 

All investors, resident or non-resident, who acquires a 5% or greater share of one class of an equity issue, must disclose the specifics of the transaction to the SEC within ten calendar days of the acquisition (Section 13(d) of the Securities Exchange Act of 1934). If the company is listed on the exchange, the disclosure must be filed with exchange, too. 

In 2002, the Sarbanes Oxley act was enacted. Section 403(a) of the Act amended section 16(a) of the Securities Exchange Act of 1934. Directors, officers, or principal stockholders who directly or indirectly own more than 10 percent of an equity issue (other than an exempted security) must disclose that information to the SEC within ten calendar days after becoming a beneficial owner, director, or officer (Section 16(a) of the Securities Exchange Act of 1934)

Rule 13f-1 provides that every Investment Manager which exercises investment discretion with respect to accounts holding Section 13(f) securities, as defined in rule 13, having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100,000,000 shall file a report on Form 13F with the SEC within 45 calendar days after the last day of such calendar year and within 45 calendar days after the last day of each of the first three calendar quarters of the subsequent calendar year. 13(f) securities include exchange traded (e.g. NYSE) or NASDAQ quoted stocks, equity options and warrants, certain convertible debt securities, Exchange Traded funds (ETFs) and shares of closed-end investment companies. Mutual funds should not be included.

Formal buy-in exists in the US market but vary by instrument, Stock Exchange, and Clearing Corporation. Buy-in procedures are rarely initiated by brokers and cannot be initiated by a custodian on behalf of an investor.

There is no specific deadline for the initiation of a buy-in after S/D; however, SEC Regulation 240. 15c3-3 (m) states that a buying broker can initiate a buy-in if securities are not delivered within 10 business days after S/D.

Investors who fail to deliver equities on settlement date for short sales, or T+6 for long sales, may be subject to buy-ins. A long position is considered to be securities sold while out on loan and where a bona fide recall is initiated within two business days after trade date. 

To initiate a buy-in, the buying broker delivers a "Letter of Intent" to the selling broker referencing the details of the failed transaction and the date on which the buying broker will buy-in the shares. Investors are able to opt for either the market open price or a value weighted average price when conducting a buy-in. The selling broker has two business days to supply the securities to the buying broker. If the selling broker is unable to furnish the securities, he may ask the purchasing broker for an extension on the buy-in. However, granting of an extension is entirely at the buying broker's discretion. 

If an extension is not granted and the selling broker is not able to deliver the shares within two business days, the buying broker can close the transaction by purchasing the shares on the market. 

Buy In

The rules and procedures for buy-ins vary according to the type of market, security and the clearance system through which the failing trade was processed. Buy-ins are rare in the U.S. market. When they occur, they are usually initiated by the broker. The defaulting broker may be held liable for losses resulting from price movement. There are no auto-borrowing mechanisms in the U.S.

FINRA rule 11810 provides the buy-in procedures and requirements. 

A securities contract, in which a security has not been delivered by the seller, can be bought in by the buyer, no sooner than three business days after the due date for delivery (i.e. for delivery of an equity that is SD+3). The buying broker must deliver a written buy-in notice not later than 12pm EST, two business days before the execution of the buy-in. If the seller doesn't accept the buy-in notice, a rejection must be sent to the buyer by 6pm EST on the date of issuance of such notice. If the seller has not delivered by 3pm EST on the buy-in notice date the buyer can initiate a buy in by purchasing the shares in the market and passing the cost onto the seller. The buyer must advise the selling broker no later than 6pm EST on day of execution of the buy in as to the details of the trade and the price paid. The buying broker should also accept a partial trade if the selling broker can deliver a portion, but not all of the securities in question.

The market for securities lending in the U.S. is well developed and extremely large. Virtually any type of security can be lent. 

Securities Investor Protection Corporation (SIPC). All brokers or dealers registered with the SEC are obliged to register with SIPC. 

The SIPC provides certain protection against financial loss to investors thus promoting investor confidence in the securities markets. Currently, the limits of protection are USD 500,000 per customer, except claims for cash which are limited to USD 100,000 per customer.

Guarantee Fund

There is no stock exchange guarantee fund in the U.S. market. However, the Securities Investor Protection Corporation (SIPC), a non-profit membership organization established under the Securities Investor Protection Act of 1970 (SIPA), does provide some protection to U.S. investors. Brokers or Dealers registered with the SEC are also required to register with the SIPC. The primary purpose of the SIPC is to afford certain protections against financial loss to customers of broker/dealers, and thereby promote investor confidence in the securities markets. Currently, the limits of protection are USD 500,000 per customer, (except claims for cash, which are limited to USD 250,000 per customer).

Additionally one of the central depositories, DTC, maintains a guarantee fund for settlement failure. For more information regarding this fund, please refer to the Depository section.

Additionally DTC maintains a guarantee fund to satisfy settlement losses or liabilities, incurred by DTC, which cannot be fully satisfied by applying the actual fund deposit of the participant(s) responsible for causing the loss or liability. Known as the "Participant's Fund", it is comprised of participants' cash deposits and each participant is required to make a minimum deposit of USD10,000, with additional deposit amounts based on the size of their intraday net debits in the system. In addition, a participant may make voluntary fund deposits.

DTC Fund

The central depository, DTC, maintains a guarantee fund for settlement failure. DTC's guarantee fund, known as the "Participant's Fund", is comprised of participants' cash deposits. It is required that each participant make a minimum deposit of USD 10,000, and participants are required to deposit additional amounts based on the size of their intraday net debits in the system. According to DTC's rules, it may require a participant to deposit an additional amount into the fund. In addition, a participant may make voluntary fund deposits.

The purpose of the Participant Fund is to satisfy settlement losses or liabilities, incurred by DTC, which cannot be fully satisfied by applying the actual fund deposit of the participant(s) responsible for causing the loss or liability.

USA PATRIOT Act Section 314(b) permits financial institutions, upon providing notice to the United States Department of the Treasury, to share information with one another in order to identify and report to the federal government activities that may involve money laundering or terrorist activity.

OFAC: Clients should note that the Office of Foreign Assets Control (OFAC) administers and enforces trade sanctions against a number of bodies whose activities are deemed to be a threat to national security, foreign policy, or the economy of the United States. As a result, all payments are filtered and OFAC have the right to refuse USD payments to countries/beneficiaries identified on their website. It is possible the funds could be seized pending additional information as regards the final destination of the funds, or any details contained in the payment instruction".

For further information please refer to the US Department of the Treasury website.

For clients serviced out of certain locations this is an FII market. Please refer to the Terms & Conditions for Global Custody or contact your RBC Investor Services' Client Manager before making portfolio investments.

Foreign ownership is restricted in certain sectors, including communications, aviation, mining on federal land, financial services (banking/insurance), real estate, defence and utilities.

Foreign ownership is generally limited to 25%, although companies do have discretion in determining the rate. Foreign investors are disadvantaged in that there is no central register which can provide details on companies that have ownership limits, or indicate whether the limits have been reached. The transfer agent identifies foreign-held shares with a foreign ownership designation, based on information provided by the subcustodian. If a limit has been exceeded, holdings must be disposed of on a last-in-first-out basis. For physical shares, the limit is determined when certificates are presented for transfer. The original share certificates will be returned if registration to a foreign owner has been denied. Otherwise, reregistered shares will be accompanied by a non-transferable "foreign certificate".

Limitations for non-residents

The following sections summarize publicly available information relating to legal limitations on the foreign ownership of securities in the United States. They are not intended to constitute legal advice. If an investor intends to purchase securities in the local market, The Bank of New York Mellon strongly advises the investor to confirm the following information, as it applies to the investor, with a local broker or counsel.

Currency Limitations

In general, non-residents may purchase securities and repatriate income and capital without restrictions. Foreign investors may also maintain accounts in USD. Overdrafts are allowed in the U.S. market.

Foreign Ownership Limits

There are no restrictions on foreign ownership by class of share. Investments in regulated industries such as communications, airlines, maritime companies, banks and companies which produce products related to the national defense are monitored by U.S. government agencies in the interest of national security. Foreign investment in these industries is not totally prohibited, but restricted. There are no set limits per sector. The restrictions, which are stated in various laws as to the allowable percentage of "Non U.S. owners", vary depending on the nature of the company. Most companies affected by the restrictions refer to the actual limit in their offering prospectus and/or annual reports. There is no foreign ownership of oil and gas for limited partnerships allowed.

There is no central agency or reporting service that lists companies that are subject to restrictions on foreign ownership. Nor is there any central service for determining whether the limit for any given company has been reached. Foreign investors are advised to check with the appropriate regulatory authorities, prior to trading shares in the limited industries to ensure that the intended transaction complies with the appropriate guidelines and limits.

Foreign ownership control of shares, in regulated industries, held at DTC is administered through the use of segregated account number 100 (Seg-100). A participant who settles a buy on behalf of a non-resident client must inform DTC to give the position a Seg-100 designation. These shares must be maintained in the Seg-100 account until acquired by a U.S. citizen. Periodically, DTC informs issuers' transfer agents of all shares held with Seg-100 designation. If the agent determines that the total foreign holding exceeds the appropriate limit, it notifies DTC. DTC then reverses credits to the Seg-100 accounts on a "last-in first-out" basis.

Under the Seg-100 procedures, a participant is required to withdraw immediately from its DTC general account any foreign-owned shares which cannot be credited to the participant's Seg-100 account because of foreign ownership limitation.

For the purchase of physically held securities, compliance with foreign ownership restrictions is established at registration. For regulated industries, the issuer will instruct their transfer agent of the restriction. It is up to the transfer agent to understand the restriction and to document whether the security is foreign owned or owned by citizens of the U.S. Regardless of the registration format used, transfer agents require that investors, either directly or through their custodians, report if the beneficial owner is a non-resident. A foreign investor who learns through this reporting process that a purchase exceeds the permitted level must unwind the transaction or the part thereof in excess of the limit. If the transaction is approved, the transfer agent issues a "foreign certificate" to accompany the re-registered shares. This certificate is not transferable.

Income, capital and sale proceeds can be repatriated freely.

There are no restrictions on foreign exchange. The USD is freely transferable in both directions. However, currency transactions in excess of USD 10,000 must be reported to the U.S. Internal Revenue Service within 15 days by the financial institution affecting the transfer (IRS form 4789).

There are two payment systems in the United States: the Fedwire® Electronic Funds Transfer system and the CHIPS (Clearing House Interbank Payment System) network. 

Payment for securities related and non-securities related activity is normally done via the Fedwire® Electronic Funds Transfer system, commonly referred to as "Fed Funds", for same day value. The Fedwire® Funds Transfer System is a large-dollar electronic payment system owned and operated by the Federal Reserve Banks who act as intermediaries (though not counterparties) in all Fedwire® funds transfers for Fedwire®. Participants include banks that are registered and authorised to have accounts with the Federal Reserve Banks. Fedwire® is a real-time, gross settlement system which means that each transaction is processed individually and is initiated and settled individually. 

DTC and the National Securities Clearing Corporation (NSCC) use Fed Funds for settlement purposes. When a depository institution transfers funds, it irrevocably authorises its Reserve Bank to debit its deposit account with the Reserve Bank for the amount of the transfer, and instructs the receiving depository institution's Reserve Bank to credit the same amount to the receiving institution. Funds for equities and fixed income trades (including corporate, munis, and money market instruments) may be transferred until 17:00 on SD. Funds for government and government agency instruments may be transferred intraday until 15:15 on SD. The Federal Reserve does not provide a "credit line" to its members, however, participants extend credit to each other over the window. Participants are required to provide collateral against any overnight borrowing. 

Generally, physical transactions handled by brokers and custodian banks are paid for in Fed Funds or through the CHIPS (Clearing House Interbank Payment System) network for same day availability. CHIPS allows members of the New York Clearing House to settle interbank obligations on a netting basis via computer. It is commonly used for smaller banks that do not have an account at the Federal Reserve and members decide themselves whether or not they will extend a credit line.

Value dating is not common practice in the U.S. Compensation is based on the Clearing House Compensation Rules. The basis of a claim is the cost of funds, which usually is the Fed Funds rate.

Payment Systems

There are two main payment systems in the United States: the Fedwire^® Electronic Funds Transfer system and the CHIPS (Clearing House Interbank Payment System) network.

Payment for securities related and non-securities related activity is normally done via the Fedwire^® Electronic Funds Transfer system, commonly referred to as "Fed Funds", for same day value. The Fedwire^® Funds Transfer System is a large-dollar electronic payment system owned and operated by the Federal Reserve Banks which act as intermediaries (though not counterparties) in all Fedwire^® fund transfers for Fedwire^®participants. Participants include banks that are registered and authorized to have accounts with the Federal Reserve Banks. Fedwire^® is a real-time, gross settlement system. This means that each transaction is processed, and settled individually. 

DTC and the National Securities Clearing Corporation (NSCC) use Fed Funds for settlement purposes. When a depository institution transfers funds, it irrevocably authorizes its Reserve Bank to debit its deposit account with the Reserve Bank for the amount of the transfer and instructs the receiving depository institution's Reserve Bank to credit the same amount to the receiving institution. Funds for equities and fixed income (including corporate, munis, and money market instruments) may be transferred until 5:00pm (ET) on SD. Funds for government and government agency instruments may be transferred intraday until 3:15 pm (ET) on SD. The Federal Reserve does not provide a "credit line" to its members. Rather, participants extend credit to each other over the window. Participants are required to provide collateral against any overnight borrowing.

Generally, physical transactions handled by brokers and custodian banks are paid for in Fed Funds or through the CHIPS (Clearing House Interbank Payment System) network for same day availability. CHIPS is a real-time final settlement system that continuously matches, nets and settles payment orders. It is commonly used for smaller banks that do not have an account at the Federal Reserve. Members decide themselves if they will extend a credit line or not.

Continuous Linked Settlement (CLS) is a private sector special purpose bank that uses the CLS system to settle payments associated with a foreign exchange transaction simultaneously thus eliminating settlement risk. 

Value dating is not common practice in the U.S. Compensation is based on the Clearing House Compensation Rules. The basis of a claim is the cost of funds, which usually is the Fed Funds rate.

Please be advised that overdrafts are permitted in the U.S. market.

Dividends are paid in cash, stock or a combination of both. Entitlement is based on the settled position as of Record Date. Since several days are required to change ownership records on the books of the transfer agent, the exchanges establish an Ex-Dividend Date (Ex-Date) in order not to disrupt trading in the stock. Unless a
security is purchased prior to the Ex-Date, the new owner is not entitled to that dividend payment. Normally, the Ex-Date is set two business days before the record date. Record Date may precede Payment Date by at least one week or up to a month.

Dividends

Dividends are commonly declared quarterly. They are paid in gross by cash, stock or a combination of both. Dividends originate with the directors of the issuing corporation making a declaration as to the type and amount of dividend, the Payment Date and the Record Date. Payment is allocated based on the settled position as of Record Date. Since several days are required to change ownership records on the books of the transfer agent, the exchanges establish an Ex-Date in order not to disrupt trading in the stock. Normally, the Ex-Date is set two business days before the record date. Unless a security is purchased prior to the Ex-Date, the new owner is not entitled to that dividend payment. Record Date may precede Payment Date by at least one week or up to a month.

For depository eligible securities, dividend payments are usually forwarded on payment date to the account holder at the depository in whose name the shares are registered. If the account holder is acting as agent, it is the account holder's responsibility to forward the dividends to its clients which hold sub-accounts on the books of the agent. In the case of physical shares a check is mailed on payment date to the owner of record. 

Dividend/ Interest Claims

If an expected payment is not received, or is thought to be incorrect, a dividend or interest claim can be initiated. A confirmation is obtained from the transfer or paying agent of the record date holdings (number of shares or units) of the registered shareholder or bondholder. Once the record date holdings are verified, the proper claim can be established and payment made.

Due Bill Processing

Shares purchased shortly before a dividend record date may not be re-registered in the name of the new owner in time for the current dividend distribution. The seller will receive the dividend although the seller is not entitled to it. This problem is resolved by including a due bill in the transaction.

Quarterly, semi-annual or annual
Physical items: Depends on paying agent, it is the responsibility of the paying agent to pay cash dividends as well as the shares.

Interest on corporate bonds and government debt is paid semi-annually, but can also be paid monthly or annually, while certain asset-backed securities pay interest.
Physical items: depends on paying agent.

Interest

Registered Bonds

Interest on bonds is paid in gross, usually on a semi-annual basis. However, some bonds may pay monthly, quarterly or annually. The payment frequency is fixed at the time the bond is issued. Holders of fully registered bonds will receive all payments automatically.

Entitlement is based on the settled position as of Record Date. Interim accounting at DTC has eliminated the use of record date for the majority of debt instruments. In those cases, the owner of record is established at the close of business on the day before payment.

Some bonds have a principal pay-down feature in addition to their periodic interest. These bonds disburse principal throughout the life of the bond instead of a lump sum payment at maturity. Principal amounts are determined using a pool rate factor. Securities that disburse periodic principal interest are mortgage-backed and other asset-backed securities.

Bearer Bonds

Interest coupons are clipped from bearer bonds and presented to the paying agent. On payment date, the paying agent disburses funds to the collection agent who credits the accounts of beneficial owners.

Accrued interest on U.S. issues is calculated on a simple interest basis. The interest accrues from the previous payment date (inclusive) to the settlement date (exclusive). The dollar amount of the accrual is computed by dividing the number of days accrued, by the number of days in the period, multiplied by the annual interest rate.

Interest accrues as follows:

Corporate bonds, municipal bonds, asset backed bonds - 30/360-day basis

Treasury bonds, variable rate bonds - actual/actual

Physical items: depends on paying agent

Corporate Actions

Common forms of corporate actions in the U.S. market include tender offers, conversions, mergers, exchanges, maturities, called bonds, rights, warrants, liquidations, bankruptcies, stock splits, stock distributions and put bonds. The most commonly used sources for corporate action information are DTC depository notices, Financial Information Incorporated (FII), Interactive Data Corp, the Wall Street Journal, the New York Times, the NYSE and letters from the offering company or agent. 

Voluntary corporate actions such as tender offers and redemptions include an effective date, which is when solicitations may legally begin, and an expiration date, which is when solicitations may cease. There is generally no fixed pattern when voluntary corporate actions are announced. Most mandatory corporate actions carry an effective date and are announced approximately 48 hours from the effective date. 

Corporate action rights can be either transferable or non-transferable and entitlements are based on traded positions.

Additional common events include conversions, maturities, called bonds, warrants, liquidations, bankruptcies, stock splits, stock distributions and put bonds.

The most commonly used sources for corporate action information are DTC depository notices, FII, SCITEK, the Wall Street Journal, the New York Times, and the NYSE.

Voluntary corporate actions such as tender offers and redemptions include an effective date, which is when solicitations may legally begin, and an expiration date, which is when solicitations may cease. There is generally no fixed pattern when voluntary corporate actions are announced. Most mandatory corporate actions carry an effective date and are announced within approximately 48 hours from the effective date.

Entitlement is based on the settled position as of Record Date. Protection will be afforded if available, as long as the T/D is on or prior to the actual expiration date of the event and provided the trade is booked in the system and instructions are received.

Proxy Voting 

Listed companies hold annual general meetings, which are open to all shareholders. Companies, not local custodians, are required to announce the meeting, provide the agenda, distribute annual reports, and make the meeting results available upon request. The majority of annual meetings occur during the end of the first quarter/beginning of the second quarter.

All shares that carry voting rights entitle shareholders to vote on company business, including selection of the board of directors. Foreign shareholders are not restricted from voting and entitlements are calculated based on record date. Shareholders may attend meetings in person, mail in a proxy card, go on-line to vote their shares, or appoint a third party to vote on their behalf. There are no restrictions upon who can act as a third party. For shares held in street name, it is the responsibility of the account holder in whose account the shares are held to forward proxy materials to their clients that hold sub-accounts. Shares can be traded at any time, as there is no blocking in the U.S. market. Re-registration of shares into the name of the final beneficiary prior to the meeting is not legally required.

Neither DTC nor its nominee, Cede & Co ever exercise any voting rights. Instead, the Omnibus proxy from DTC enables issuers to communicate directly with participants. The Omnibus proxy is in effect an assignment. Cede & Co., the nominee shareholder of record, assigns each participant the voting rights of shares in that participant's DTC account as of record date. DTC forwards the Omnibus proxy, with a list of participant assignees to the issuer. It simultaneously informs each participant that it has sent the Omnibus proxy specifying the number of shares that the participant is entitled to vote. As appropriate, participants can either exercise voting rights for securities they hold or further assign those rights to the beneficial owner.

Foreign investors are entitled to exercise voting rights on securities not considered to be in strategic sectors (e.g. communication, transportation, shipping and mining).

Yes. Certain ADRs are blocked from the vote cut-off date until completion of the meeting.

Provided in English. Annual general meetings and extraordinary general meetings are announced four to five days in advance.

On request, subject to availability

On request, subject to availability

Required

N/A

30% withholding tax at source for foreign investors (which can be reduced pursuant to an applicable Double Taxation Avoidance (DTAT)).

Tax documentation: Non-resident aliens must provide W8BEN or local-approved KYC (Know Your Client) documentation.

The withholding tax exemption for interest-related dividends and short-term capital gain dividends designated and paid by U.S. RICs has been retroactively and permanently extended.

Important Regulatory Changes

Internal Revenue Service Code 305(c):

In 2016, proposed changes to regulations were published by the US Treasury and the US Internal Revenue Service (IRS) regarding the tax treatment of stock dividends, stock splits and the distribution of stock rights, over concerns that financial services firms may be failing to withhold US tax on deemed dividends. The current and proposed changes are encapsulated within Internal Revenue Code 305, specifically 305(c). Section 305 governs the tax treatment of stock dividends, stock splits and the distribution of stock rights. It determines that distributions (where some shareholders receive cash and others receive stock) are fully taxable. Under Section 305(c) holders of convertible securities (bonds, preferred shares) may be deemed to receive a dividend due to a dividend or a corporate action affecting the underlying common stock. Under 305(c) a change in the conversion rate of the convertible security is treated as a deemed dividend to the holder of the security and where the deemed divided is linked to a security held by a Non-US person it is subject to withholding tax at the statutory rate of 30% which may be reduced by an applicable tax treaty.

Internal Revenue Service Section 871(m):

In 2016 the US Treasury and US Internal Revenue Service (IRS) issued final regulations regarding the implementation of Section 871(m) a tax reporting and withholding regime on dividend-equivalent payments, effective on security instruments issued on or after January 1, 2017.

The regulation is intended to close a perceived US tax avoidance gap, where non-US persons or entities who purchased in-scope products* would benefit from a derivative’s appreciation without paying tax on that economic benefit, also referred to as dividend equivalent payments.

U.S. source interest and Original Issue Discount (OID) received by non-residents is generally subject to a 30% withholding tax. An OID is a bond issue sold at a discount, for which the IRS requires special tax treatment. A portion of the discount is recognised as income each year the bond is held, adjusting the basis upward so it will reach par as of maturity.

Certain categories of interest received by non-residents are not subject to U.S. withholding tax. These include interest on bonds issued by a state or political subdivision (for example, municipal bonds), short-term obligations issued at a discount and payable 183 days or less from the date of issue, and debt obligations of U.S. companies issued after July 18, 1984. 

Institutions that are tax exempt in their own countries may be granted tax exemption by the IRS. Income is then received without tax withheld.

Non-resident Alien (NRA) Tax Regulations
On January 1, 2001, new Non-resident Alien (NRA) withholding tax regulations came into effect. These regulations made significant changes to the rules governing payments made to foreign intermediaries, foreign partnerships and foreign trusts.

The Internal Revenue Service (IRS) recognized that an actual account holder may not be the actual beneficial owner of the income. One of the objectives of the regulations was to identify intermediaries, that is, a person acting on behalf of another. An intermediary can choose to enter into an agreement with the IRS and become a Qualified Intermediary (QI). Those intermediaries that do not make this choice become Non-qualified Intermediaries (NQI). 

The main goal of the IRS was to identify U.S. investors under the umbrella of an offshore account and foreign investors benefiting from a tax treaty illegally. 
Income affected under the rule is Fixed, Determinable, Annual and Periodic Income, otherwise known as FDAP. This is income paid by U.S. Issuers, such as interest and dividends.

A foreign client who is the owner of the income (beneficial owner) was not affected, except for the signing of a new form (Form W8-BEN). Intermediaries who hold the assets on behalf of their clients were greatly affected. Such intermediaries were obligated to elect to become either a qualified or non-qualified intermediary.
Regardless of the intermediary's status, U.S. beneficial owners who are subject to 1099 and/or backup withholding must be disclosed.

A Qualified Intermediary is a foreign financial institution or clearing organization, a foreign branch of a U.S. financial institution or clearing organization, acting as an intermediary for foreign and U.S. account holders. QIs must enter into a contractual agreement with the IRS. One advantage of becoming a QI is that the confidentiality of non-U.S. account holders is safeguarded. That is, non-U.S. account holders need not be divulged to the withholding agent (A withholding agent is any U.S. or foreign institution/person that has the control of income and withholding taxes per payment). Another advantage is that at year-end, the QI is responsible only for furnishing aggregate level Form 1042S reporting to the IRS.

Responsibilities of a QI:
Enters into a contractual agreement with the IRS.

Provide Form W-8 IMY (and a withholding statement, if applicable) to the withholding agent to certify Intermediary status and indicate if assuming primary withholding responsibility.

Obtain and maintain all of the necessary tax documentation for all non-U.S. underlying owners (family of Forms W-8 described below) and provide aggregate 1042S reporting per withholding pool. A withholding pool consists of one rate of withholding for multiple underlying owners for a specific income event. For example, France and Germany have the same rates of withholding for interest and dividends, therefore French and German underlying owners may be "pooled" for reporting purposes on an aggregate level. 

Provide the IRS with Form 1042 reporting. The total income received and total taxes paid are reported on Form 1042. If the QI receives income from more than one withholding agent, the total income received and the total amount of taxes withheld, from all of the withholding agents, are reflected on Form 1042.

Obtain W-9 forms for all non-exempt U.S. payees, (that is U.S. payees subject to 1099 reporting, e.g., U.S. individuals).

Provide asset allocation information at an aggregate withholding rate to the withholding agent for accounts with Non-U.S. underlying owners. 

A Non-Qualified Intermediary is a foreign financial institution or clearing organization, a foreign branch of a U.S. financial institution or clearing organization that is not a QI. It is an intermediary who either does not elect Qualified Intermediary status, or an intermediary who does not qualify as a QI. A Non-Qualified Intermediary is not obliged to enter into an agreement with the IRS. All of the withholding and reporting responsibilities would remain with the withholding agent. The main disadvantage of the NQI status is that, unlike the QI, both U.S. and non-U.S. account holder confidentiality cannot be preserved. Also, the NQI must provide the withholding agent with each underlying owner's position and the applicable withholding amount for each income event, otherwise known as asset allocation information. This information at the underlying owner level allows the withholding agent to apply the appropriate withholding rates and report correctly to the IRS.

Responsibilities of an NQI:
Provide Form W-8 IMY and a withholding statement to the withholding agent to certify Intermediary status.

Obtain all of the necessary tax documentation for all non-U.S. underlying owners (family of Forms W-8 described below). The NQI, however, would be required to forward these documents to the U.S. withholding agent. The NQI must also collect and forward Form W-9 to the U.S. withholding agent.

Provide asset allocation information for each underlying owner. These include the beneficial owners of the income as well as other intermediaries. This information is provided to the U.S. withholding agent for 1042S/1099 reporting and withholding at the underlying owner level.

Regulatory Updates 
1. On March 18^th, 2010 the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentive to Restore Employment (HIRE) Act of 2010 (H.R. 2847) was signed into law. This legislation has a major impact on the current tax information reporting and withholding rules as it imposes new reporting responsibilities on Foreign Financial Institutions (FFIs) and non-Financial Foreign Entities (NFFEs) that have U.S. investors as well as a new 30% withholding on all FFIs and NFFEs that do not agree to disclose their U.S. account holders to the IRS. Notices 2010-60, 2011-34 and 2011-53 relating to FATCA were issued by the Internal Revenue Service over the course of the last year. Notices 2010-60 and 2011-34 provided initial and supplemental guidance regarding certain aspects of FATCA, as well as indications of what will appear in formal regulations. The IRS has acknowledged that significant systems and process changes will be required by withholding agents and announced a phased implementation of FATCA in Notice 2011-53. Proposed regulations were issued in February, 2012. As with all proposed regulations, they will generally be effective when published as final regulations in the Federal Register. 

Withholding Tax on Dividends and Interest

Dividends 
Dividend payments to non-resident investors are subject to a 30% withholding tax, unless the U.S. has entered into a double taxation treaty with a foreign country, in which case the tax is reduced to the treaty rate.

Interest
U.S. source interest and Original Issue Discount (OID) received by non-residents is generally subject to a 30% withholding tax. An OID is a bond issue sold at a discount, for which the IRS requires special tax treatment. A portion of the discount is recognized as income each year the bond is held, adjusting the basis upward so it will reach par at maturity.

Certain categories of interest received by non-residents are not subject to U.S. withholding tax. These include interest on bonds issued by a state or political subdivision (for example, municipal bonds), short-term obligations issued at a discount and payable 183 days or less from the date of issue, and debt obligations of U.S. companies issued after July 18, 1984.

Institutions that are tax exempt in their own countries may be granted tax exemption by the IRS. Income payments entitled to an exemption are then received without tax withheld.

Important Note For Non Resident Aliens (NRA) Clients 
In line with the Internal Revenue Code (section 302), the proceeds received by Non-Resident Alien (NRA) clients will be treated as a dividend and thus subjected to taxes unless the client indicates a reduction in proportionate interest, or there has been a complete termination of interest. 

The Bank of New York Mellon will be applying the section 302 certification to corporate actions for mergers, self-tenders and redemptions. 

Attached to this Securities Market Report is a copy of the "Certificate templates and the instructions". Clients should contact their relationship manager for the Bank of New York Mellon processing details.


Qualified Securities Lender (QSL) Certificate 
As a result of the Hiring Incentives to restore Employment (HIRE) Act effective September 14, 2010, changes are required in the way that withholding agent's process substitute dividend income payments made pursuant to a securities lending transaction or sale-repurchase transaction. Generally, such payments are subject to 30% tax withholding or lower income tax treaty rate. However, withholding is generally not required if the withholding agent (i.e. Bank of New York Mellon) makes the payment to a Qualified Securities Lender ("QSL"). The QSL must provide a written certification to the withholding agent certifying that it is a QSL and that it will withhold and remit or pay the proper amount of U.S. gross-basis tax with respect to substitute dividend payments that it receives or makes.

Non-resident investors are not subject to capital gains tax, unless they were present in the U.S. for 183 days or more during the tax year in which case gains are taxed at 30% or the lower treaty rate.

Double Tax Treaties

The general rule is that the issuer, its paying agent or the U.S. custodian must withhold tax at a statutory rate for recipients from non-treaty countries, and at the appropriate treaty rate for recipients from the following treaty countries:

* The U.S. - People's Republic of China income tax treaty does not apply to Hong Kong.
** The U.S.-USSR treaty is still in effect for the following members of the Commonwealth of Independent States:

In order for a non-resident investor to receive favorable treatment under a tax treaty, the investor must prove entitlement to treaty benefits. Depending on the client, this generally requires the investor to file IRS Forms W-8 BEN, W-8 EXP or W-8 ECI.

None

Family of W-8 Forms
The following forms must be on file with a QI and/or Withholding Agent (if the final intermediary opts for NQI status) to claim an exemption or reduced rates of withholding on certain U.S. source income. If no documentation is received, then 30% NRA tax withholding will be applied to a foreign person or foreign entity.

W-8 BEN - To establish foreign status of the beneficial owner of income, enabling a claim of exemption from U.S. withholding (or back-up withholding) on certain types of income and to enable the foreign beneficial owner of certain types of income to claim reduced rates of withholding under an income tax treaty with the U.S. [Valid in year signed plus 3 additional calendar years] 

W-8 EXP – To allow a foreign government, foreign central bank, or international organization to claim exemption from U.S. withholding on U.S. source investment income. [Valid in year signed plus 3 additional calendar years]

W-8 ECI – To allow a U.S. branch of a foreign bank or foreign corporation to claim exemption from U.S. withholding tax on income that is effectively connected with its U.S. trade or business. [Valid in year signed plus three additional calendar years]

W-8 IMY – To allow a foreign nominee, custodian, or agent acting as intermediary and receiving payments of U.S. source income on behalf of account holders, to alert the U.S. withholding agent as to its Intermediary status.
The following form must be on file with a withholding agent for a U.S. person who is required to file an information return with the IRS, i.e., individuals, Corporations, etc:
W-9 - Allows for an exemption of 28% backup withholding against income owned by a U.S. person.

Tax Relief at Source
The withholding procedure for the U.S. market is relief at source. As a result, income entitled to a treaty rate is taxed favorably at the time of payment.

Tax Reclaim Procedures
The IRS does not allow foreign investors to file for a tax reclaim in the U.S. However, in the event a foreign investor has been over withheld upon, the investor may request for a refund of any withholding by filing a U.S. Non-resident Alien Income Tax Return (form 1040 NR), or an Annual Tax Return of a Foreign Corporation (form 1120 F) with the IRS. The forms must be filed after the year-end and within three years of the tax year in question. Please note that when filing either form, the client is required to obtain a U.S. Taxpayer Identification Number (TIN) or an Employer Identification Number (EIN).

Direct U.S. Beneficiary Tax Regulations
The IRS requires that W-9 tax documentation be provided certifying the U.S. status and Tax identification Number for a U.S. beneficiary (some exceptions may apply). At year-end the withholding/reporting agent has an obligation to issue 1099 reporting to the end beneficiaries and the IRS for U.S. Non-exempt recipients and some U.S. corporations. There are a number of 1099 forms that may be issued. The most common are the 1099-DIV (for dividend income), 1099-INT (for interest income) and the 1099-B (for broker proceeds). However, there are additional forms such as the 1099-OID (for Original Issue Discount instruments), additional statements such as Real Estate Mortgage Investment Conduits (REMIC), Mortgage Back Securities (MBS), and Unit Investment Trust (UIT) statements that will all be issued to the end beneficiary in accordance with IRS requirements.

Upcoming Regulatory Changes
Part of the Emergency Economic Stabilization Act of 2008, Division B, Section 403, expanded the filing requirements of Form 1099-B. A form 1099-B is a U.S. IRS tax form issued to U.S. recipients by a broker or barter exchange that summarizes the gross proceeds realized from dispositions. These changes in the Act more broadly defined the term "broker" to include custodians, mutual funds, escrow agents for corporate acquisitions, traditional brokers, and transfer agents. The act also expands Form 1099-B to require adjusted basis and short-term versus long-term gain or loss reporting, in addition to the current requirement of gross proceeds realized from dispositions.

United States Holiday Calendar

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