Norm on Securities Clearing and Settlement

Resolution No. CD-SIBOIF-1068-1-AGOST16-2018
Dated August 16, 2018

NORM ON SECURITIES CLEARING AND SETTLEMENT

The Board of Directors of the Superintendent of Banks and Other Financial Institutions,

CONSIDERING

I

That Article 6 of Law No. 587, "Capital Markets Law," published in La Gaceta, Official Gazette No. 222, of November 15, 2006, empowers the Board of Directors of the Superintendent to issue general norms to regulate the securities market.

II

That according to Article 154 of the Capital Markets Law, Stock Exchanges and Securities Clearinghouses that provide securities clearing and settlement services must comply with the requirements set forth in said Law and act in accordance with what is established by general norm by the Board of Directors of the Superintendent.

III

That the regulation of stock market settlement aims to provide the securities market with a secure and efficient system for the transfer of funds and securities among its participants, through the adoption of the principles for clearing and settlement established in Article 156 of the Capital Markets Law.

In exercise of its powers,

HAS ISSUED

The following:

Resolution No. CD-SIBOIF-1068-1-AGOST16-2018
NORM ON SECURITIES CLEARING AND SETTLEMENT

CHAPTER I
GENERAL PROVISIONS

Article 1. Concepts.- For the purposes of this norm, the terms indicated in this article, whether in uppercase or lowercase, singular or plural, shall have the following meanings:

a) Clearing Agent: Agent in charge of the securities clearing and settlement process, whose functions may be exercised by a stock exchange, securities clearinghouse, or clearing and settlement company.

b) Clearing Bank: The Central Bank of Nicaragua or a banking entity in which the stock exchange positions of the Securities Clearing and Settlement System transfer and receive the funds corresponding to the monetary settlement of their operations, to and from the account of the institution in charge of securities settlement.

c) Stock Market Clearing: The process by which clearing agents, after stock market contracts are closed and the respective custodial entities confirm the transaction details and holder assignment, calculate settlement obligations, so that at the end of each process, each clearing member knows their final settlement obligations. The amount to be paid is the result of netting their operations; that is, the result between their receivable balances and their payable balances.

d) Bilateral Settlement: Transfer of securities and cash carried out between two clearing members.

e) Gross Settlement: Transfer of securities and cash carried out operation by operation, from the buyer to the seller.

f) Stock Market Settlement: Fulfillment of obligations assumed as a consequence of negotiation in a stock exchange, through the transfer of securities from the seller to the buyer and the transfer of funds from the buyer to the seller.

g) Multilateral Settlement: Transfer of securities and cash carried out among three or more clearing members.

h) Capital Markets Law: Law No. 587, Capital Markets Law, published in La Gaceta, Official Gazette, No. 222 of November 15, 2006.

i) Clearing Members: Stock Exchange positions registered in the Securities Register of the Superintendent of Banks and Other Financial Institutions.

j) Superintendent: Superintendent of Banks and Other Financial Institutions.

k) Superintendent: Superintendent of Banks and Other Financial Institutions.

Article 2. Objective.- The purpose of this norm is to establish the guidelines to be complied with by entities authorized by the Capital Markets Law to provide securities clearing and settlement services.

Article 3. Scope.- The provisions of this norm are applicable to stock exchanges and securities clearinghouses when they develop securities clearing and settlement services, as well as to clearing and settlement companies established in Article 153 of the Capital Markets Law.

CHAPTER II
SECURITIES CLEARING AND SETTLEMENT SYSTEM

Article 4. Securities Clearing and Settlement System.- The securities clearing and settlement system is composed of the stock exchange, the clearing agent, the securities clearinghouse, the clearing members, and the clearing bank. The entity responsible for directing the operation of this system shall be the one exercising the functions of clearing agent.

Article 5. Applicable Principles.- In the performance of clearing and settlement functions, the clearing agent must follow the following principles:

a) Universality: Procedures for clearing and settlement must be the same for all operations, except for differences necessary due to the characteristics of the traded securities or existing operations.

b) Delivery versus Payment: Transfers of securities are carried out only and exclusively if the corresponding payment is made.

c) Objectification of the settlement date: The settlement corresponding to each Stock Exchange session must take place within a fixed number of days in accordance with the operation slip, respecting the maximum term established by the stock exchange, which must always be the same and as short as possible.

d) Assurance of Delivery: Clearing agents will have mechanisms that allow them, without incurring risk for their users, to ensure that clearing members involved in an operation can have access to the securities or cash on the date fixed for settlement. These mechanisms must be established in their internal regulations and operational manuals approved by the Superintendent.

e) Financial Neutrality: Charges and credits in the cash account maintained at the Central Bank of Nicaragua or in the bank designated for fund settlement must be made with same-day value; so that the resulting balance is available with that same valuation in any of the respective accounts of said bank.

f) Principle of Finality: Transfers of securities and cash resulting from settlement will be carried out through mechanisms that ensure irreversibility; they will be firm and irrevocable, cannot be cancelled, and are legally enforceable and opposable to third parties.

CHAPTER III
RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND OPERATIONAL REQUIREMENTS

Article 6. Responsibilities of the Board of Directors.- The Board of Directors of the clearing agent will be responsible for approving policies and procedures that allow them to guarantee the adequate implementation of the securities clearing and settlement process, under the terms of this norm and the regulations issued for such purposes; ensuring compliance with said policies and procedures, which must be implemented by the institution's management. The aforementioned policies and procedures must be clearly defined in the regulations provided for in this norm.

Article 7. Operational Requirements.- In order to provide the clearing and settlement service, the clearing agent must comply with the following operational requirements:

a) Have an information system that meets the minimum requirements established in the following article.

b) Maintain a centralized register on the information of clearing members that contains at least the name, authorization number, and legal representative.

c) Have specialized operational personnel to provide the service.

d) Have an internal control structure that ensures operational effectiveness and efficiency, information reliability, as well as compliance with internal policies and procedures, and regulations on internal control and auditing of securities entities.

e) Have written procedures for each process of securities clearing and settlement.

f) Have an operational regulation for clearing members that establishes the clearing and settlement operation policies, in accordance with what is established in this norm. In said regulation, the parameters that clearing members must meet must be fixed, which must consider at least the criteria of average trading volume, equity level, available guarantees, and operational and technological requirements.

The regulations and their updates must be approved by the Superintendent, who may require necessary modifications to ensure compliance with what is established in this norm.

Article 8. Information System.- The clearing agent must have an information system that meets the following functional requirements:

a) Allow automated links between trading systems and settlement systems; as well as with custody systems, book-entry systems, and the clearing bank's systems, ensuring rapid and accurate transmission of data on stock market contracts and their settlement process.

b) Allow the opening, modification, suspension, and closure of accounts for clearing members.

c) Allow the assignment and confirmation of contracts resulting from stock market operations by clearing members.

d) Allow the settlement of confirmed contracts resulting from stock market operations by clearing members.

e) Allow the generation of movement history for any date by clearing members.

f) Allow access to information on open positions pending settlement by clearing members.

g) Facilitate the issuance of information to clearing members using their services, for the activation of mechanisms for the resolution of incidents and non-compliance in the settlement process of stock market contracts.

h) Allow the identification of the settlement value of stock market contracts.

i) Allow the recording of debit notes and credit notes.

j) Allow the generation of alarms in case of incidents.

k) Allow the generation of statistics and reports on incidents, cancellations, and non-compliance by clearing members.

l) Allow the novation of open positions in case of closure of operations, non-compliance, or bankruptcy of a clearing member.

m) Allow the generation of information related to the administration of guarantees for the corresponding accounting registration purposes.

n) Allow the generation of statistics and indicators of all activity recorded in the system.

This system must comply with the regulations governing the matter on technological risk, taking into consideration, at a minimum, the conditions of security, availability, auditability, and integrity of the information systems.

Article 9. Non-compliance with Requirements.- Non-compliance with the requirements established in this Norm could imply the suspension or revocation of the authorization granted to provide securities clearing and settlement services. Prior to the suspension or revocation of the authorization, the Superintendent may request a correction plan for a determined period, according to the assessment made of the specific case, the gravity of the offense, and its possibility of correction. In case of non-compliance with said plan, the process of suspension or revocation of the authorization will continue.

CHAPTER IV
CONFIRMATION, CLEARING, SETTLEMENT, AND FEES

Article 10. Types of Settlement. The centralized settlement of securities and cash carried out by the clearing agent can be performed in gross or net, bilateral or multilateral, in real time or during the settlement processing cycle.

Article 11. Settlement Terms for Stock Market Contracts.- Stock market contracts executed in organized markets must be settled within the terms established by the respective stock exchanges for each type of operation.

Article 12. Confirmation of Stock Market Contracts.- Stock market contracts carried out by exchange participants must be communicated by the latter to the clearing agent, immediately after their execution; using technical means that ensure the receipt and storage of records.

Once the above information is received, the clearing agent must inform clearing members through the established systems about the stock market contracts that have been registered by the stock exchange, in order for them to proceed with their confirmation. On their part, clearing members must confirm the contracts assigned by the clearing agent, through the established information systems.

Article 13. Settlement of Securities and Cash.- Securities to be traded in a stock exchange must be previously custodied in a securities clearinghouse, so that operations can be settled by the clearing agent.

In cases where clearing and settlement services are not provided by a securities clearinghouse, the clearing agent must communicate to the securities clearinghouse, during the hours and through the procedures that the entities establish by regulation, the securities balances to be settled for each clearing member. The communication procedure must guarantee the reconciliation of securities balances to be credited and debited, as well as the availability of securities.

In the case where the securities clearinghouse provides clearing and settlement services, the above will be carried out through internal processes.

The clearing agent will communicate daily to each clearing member, the positions to be settled, using the mechanisms established in Article 10. Such positions must be communicated to clearing members by the means and hours established in the operational regulation by the clearing agent. This communication must guarantee the reconciliation of securities balances to be credited and debited. Once notified, clearing members must confirm the positions to be settled, in order to proceed with stock market settlement.

The settlement of cash for stock market contracts must be given through credits and debits through the clearing agent's account, which it must maintain for this purpose, in the clearing bank's system. Such credits and debits must occur on the same day of their communication. This process must guarantee the reconciliation of cash balances to be credited and debited.

The clearing agent and the clearing bank must determine by regulation the procedure to follow to inform about the cash balances to be settled by each clearing member, in order to guarantee the reconciliation of cash balances to be credited and debited.

The clearing agent will establish adequate financial mechanisms to ensure the execution of stock market settlement, through the adoption of safeguards that minimize the risks of a possible lack of cash or securities, such as requiring their members to deliver securities in advance, crediting sufficient funds, offsetting shortages with monetary balance credits, sale of securities, and other safeguards deemed adequate for the clearing and settlement system; mechanisms that must be defined in the operational regulation.

Article 14. Finality in the Settlement of Confirmed Stock Market Contracts.- The finality of confirmed stock market contracts implies that payment and delivery obligations must be considered by clearing members as final and irrevocable, once they have been confirmed. It will be up to the clearing agents to define in the operational regulation when such payment or delivery obligations of securities will be considered confirmed.

Article 15. Availability of Securities.- All sell offers made in the stock exchange must be made with securities previously deposited in the client's account, which are immobilized by the trading system; in order to ensure the availability of securities at the time of settlement. The immobilization or blocking will be permanent for as long as the sell offer of said securities lasts and during the settlement period.

The foregoing is excepted for repo operations with securities previously reported and whose maturity date coincides with the settlement of the new repo operation offered for sale.

Article 16. Non-compliance in the Settlement of Stock Market Contracts.- In unforeseen cases, in which securities cannot be delivered to the buyer, nor cash to the seller, the clearing agent must establish in the operational regulation the mechanisms for the resolution of non-compliance in the settlement process of stock market contracts. Likewise, the clearing agent must establish in said regulation the corresponding sanctions, for which it must consider among other criteria, risk exposure, recidivism, and its frequency.

The clearing agent must immediately communicate to the Superintendent the non-compliance in the settlement of a stock market contract.

Article 17. Fees.- Clearing agents must establish the fees applicable to securities clearing and settlement and to other related services.

The fees and their modifications must be freely fixed, nevertheless, they must be communicated in advance of their entry into force, to the Superintendent and to clearing members, as well as be available on their respective website.

CHAPTER V
GUARANTEES

Article 18. Constitution and Characteristics of Guarantees.- Members of each clearing agent must constitute a liquid guarantee that ensures among them the fulfillment of pending settlement operations.

The clearing agent will define in the operational regulation the object, risks to be guaranteed, methodology for calculating the guarantee, minimum amount thereof, and the frequency of its update, which will be communicated to clearing members and to the Superintendent.

The guarantee may be contributed in cash in a bank account in the name of the clearing agent; in public debt securities issued by the Ministry of Finance and Public Credit and by the Central Bank of Nicaragua, given as guarantee to the clearing agent; through bank guarantees payable on first demand in favor of the clearing agent; or through any other instrument that provides a sufficient and liquid guarantee of risk coverage.

In any case, payment from the presented guarantee must be able to be made effective within a maximum period of twenty-four (24) hours following the moment it is requested by the clearing agent.

Article 19. Responsibility for Guarantee Management.- The clearing agent will be in charge of the management of guarantees, for the purposes of constituting the individual contributions of its members, as well as for ordinary asset management that may arise or, in its case, for the use of the necessary amounts to meet the guaranteed obligations. The clearing agent's accounting will include in off-balance sheet accounts the rights and obligations related to this guarantee.

Article 20. General Guidelines for Guarantee Management.- The use and management of the guarantee by the clearing agent must comply with the following aspects:

a) The guarantee contribution made by each clearing member responds to the fulfillment of settlement obligations incurred by the member who contributed the guarantee. This guarantee will also serve as additional guarantee for the fulfillment of the obligations of the remaining members, in cases where its use is necessary.

b) If a clearing member incurs in total or partial non-compliance with its settlement obligations, the clearing agent will immediately proceed to execute the necessary guarantee to cover the amount of the uncovered balance.

c) When the guarantee of a clearing member falls below the established minimum level, or when a member reaches a risk notably higher than the coverage of its guarantee, the clearing agent will require it to replenish or increase its guarantee within the maximum term it grants, which will not exceed three (3) business days. If after this term the guarantee has not been contributed, the clearing agent may agree on the provisional suspension of the member and grant a new term for it to be contributed. Likewise, the stock exchange will suspend the clearing member in this condition while the suspension established by the clearing agent remains in effect. The condition established above must be communicated to the Superintendent immediately.

CHAPTER VI
AUTHORIZATIONS

Article 21. Authorization for Stock Exchanges and Securities Clearinghouses.- Stock exchanges or securities clearinghouses interested in providing securities clearing and settlement services must submit a written request to the Superintendent, attaching for review the regulation established in Article 7, letter f, of this norm. Additionally, and prior to the granting of the respective authorization, the Superintendent, through an on-site inspection, will verify compliance with the operational and technological requirements established in this Norm; and if found compliant, will grant the authorization within a maximum term of twenty (20) business days counted from the date of closure of the inspection. Otherwise, it will communicate to the petitioners the deficiencies found so that they are remedied at the latest within the term determined by the Superintendent, and once the deficiency is repaired, it will grant the authorization within the term of ten (10) business days, counted from the date of repair.

Article 22. Authorization for Clearing and Settlement Companies.- Clearing and settlement companies must be constituted as joint-stock companies complying with the requirements established in the following articles.

Article 23. Constitution Requirements.- Those interested in constituting a clearing and settlement company must submit a formal request to the Superintendent, accompanied by the following documents:

a) The draft deed of incorporation and its bylaws.

b) Have a minimum social capital of nine million córdobas (C$9,000,000).

c) The economic-financial feasibility study, which includes, among other aspects, considerations on the market, the characteristics of the institution, the projected activity, and the conditions in which it will operate according to various contingency scenarios.

d) Information about its shareholders.

1. For natural persons:

i. Name