Spanish Market Infrastructure

The Spanish market infrastructure is composed by a holding company (Bolsas y Mercados Españoles,
Holding de Mercados y Sistemas Financieros - BME Group) which was formed to consolidate all the
Spanish market infrastructure components into a single group. There are a number of stock
exchanges and ECNs and a single depository, IBERCLEAR, which operates the ARCO platforms with all
cash settling through the Bank of Spain. BME Clearing, which is also part of the BME Group, acts as
the CCP for equity market. In September 2017, the settlement function was outsourced to the Pan
European platform Target2 Securities (T2S)

Settlement

With the migration to T2S, all the settlement services have been outsourced to the European
platform, which provides an integrated DVP model between T2S and Target2 which are owned by
the same infrastructure. Asset commitment periods have been reduced compared to the previous
model as T2S provides real time settlement, either in its night-time or day-time cycles, with no
blocking of cash or securities

In April 2016, the Spanish market has implemented a major Clearing, Settlement and Registry
market reform which consolidated the Spanish infrastructure components and introduced central
clearing for the equity market. The reform concerns the equity market while the bond market
moved to the new environment in September 2017, in line with the migration to Target2 Securities
(T2S).

The new reform has removed one of the major weaknesses which was the registration of securities
as part of the settlement process, which required investors to strengthen static-data control in the
Spanish Market in order to minimise operational risk and reduce fail rates. Now the registration is
easier through the new system and based on balances.

The introduction of central clearing through BME Clearing also reduces counterparty risk with typical
CCP lines of defence in line with European standards, including margin funding and default fund
mechanism.

Asset Safety

At IBERCLEAR-SCLV, securities are dematerialised and only registered at the participant level, but
participants are in turn required to keep details of the beneficial owners. Nominee accounts are not
allowed in Spain, however market practice proves the opposite.

Asset Servicing
Local banks usually delegate the central paying agent for equity dividends and interest on corporate
debt function to IBERCLEAR. Government bond interest is credited directly to the sub-custodians
account at Banco de Espana. Corporate actions require the action of an agent bank that will collect
the instructions from all their participants. IBERCLEAR will only settle cash and securities movements
according to instructions received from the issuer's agent bank.

With the Spanish market reform, SWIFT messages ISO 15022 were introduced, as well as buyer
protection and automatic compensation by IBERCLEAR.

Cash

Capital, capital gains and income may be freely repatriated without restriction.

Cash settlement is in central bank funds. TARGET2-Banca d'Espana is the Spanish national
component of TARGET2, the trans-European automated real-time gross settlement (RTGS) system
for large-value interbank payments.

The EUR is a CLS currency. CLS settles multi-currency (18 currencies) cash transactions with finality
using a combination of payment-versus-payment settlement over CLS central bank accounts,
domestic RTGS systems and multilateral netting of payments.

With the migration to T2S, there has been some significant development as the settlement services
have been outsourced to T2S.

Furthermore, the EC issued a common regulation for CSDs which entered into force on 17
September 2014. The main changes are:

• A move to a T+2 settlement cycle which reduces the counterparty risk exposure in most markets
where a T+3 cycle is in place; this was implemented on 6 October 2014 for the fixed income market
and on 3 October 2016 for the equity market.

• Deterrent settlement discipline measures (mandatory cash penalties and ‘buy-ins’ for settlement
fails);

• Strict prudential and conduct of business rules for CSDs;

• Strict access rights to CSD services;

• Increased prudential and supervisory requirements for CSDs and other institutions providing
banking services ancillary to securities settlement.

Overall, the fails management is expected to be improved, particularly for OTC settlements where
the trades are typically cancelled, with the introduction of mandatory buy-ins and penalties.
Furthermore, the regulation introduces the possibility for users to choose a CSD and the creation of
a “passport” for CSDs to provide services in other States which will open competition between all
European CSDs and may lead to revenue loss as investors switch to more competitive/ cheaper
solutions offered elsewhere or even to consolidation between CSDs. However, other aspects of local
regulations, including the Securities Law Directive, would need to be passed to allow issuers to
choose other CSDs than their local one.

The CSDR regulatory and implementing technical standards, except the standards for the settlement
discipline regime, were published in the official journal of the EU on 10 March 2017. The European
Commission published the Delegated Regulation with regard to regulatory technical standards on
settlement discipline on 25 May 2018. The standards will enter into force 24 months after the
publication of the Delegated Regulation in the Official Journal of the European Union.

Capital Market Infrastructure Summary

Bolsas y Mercados Españoles, Holding de Mercados y Sistemas Financieros has consolidated all the
Spanish market infrastructure components into a single group. There are a number of stock
exchanges and ECNs, a CCP (BME Clearing) and a single depository, IBERCLEAR, which operates the
ARCO platform for equities and debt, with all cash settling through the Bank of Spain via TARGET2.
T2S (TARGET2-Securities) is the European securities settlement engine which offers centralised
delivery-versus-payment (DvP) settlement in central bank money across all European securities
markets.

ARCO platform: since the implementation of the new system, fails are managed by the CCP, BME
Clearing. Previously, the major drain on liquidity was settlement fails due to incorrect registration
details on stock exchange trades, however this has been addressed with the new process.

Other Considerations

IBERCLEAR now provides registration name information for unmatched OTC equity trades in SUC as
well as all details that counterparties provide in reference to unmatched trades, for free and against
payment OTC trades, including allegement of registration names.

Iberclear introduced penalties for the transactions introduced on 18 January 2011 (OTC transactions
with a change of beneficial owner and MTF transactions) with matched status which fail to settle on
SD (T+3) due to lack of cash or securities. The depository introduced three special cycles for the
above transactions (at 10.30am, 11.30am and 2.00pm) however, and issue has been detected in the
processes of the third batch (leading to rejection of trades) which prevents settling agents from
using it. Appropriate adjustments in Iberclear’s system are expected in due course.

In August 2012, Iberclear has also increase penalties for automatic repos executed to cover failed
deliveries of fixed income securities in order to reduce settlement failures and improve liquidity.

Tri-party Collateral Management to be Developed

Iberclear and Clearstream have signed an agreement to develop a new tri-party collateral
management service for the Spanish market. The service will target the collateralisation of
exposures in the Spanish market of Iberclear clients.

In the first phase of the project, the service will cover the exposures resulting from domestic repo
transactions, including the possibility of pledging received assets from a repo transaction with the
Spanish central bank in order to get access to central bank money.

Through this service, Iberclear will outsource the allocation, optimisation and substitution of
domestic collateral to Clearstream’s Global Liquidity Hub, the collateral management system.
Iberclear’s clients will therefore be able to handle their domestic collateral holdings and exposures
more efficiently while keeping them in the Spanish environment.

In September 2015, LCH.Clearnet launched clearing services for Spanish equities executed on Bats
Europe, Turquoise and Traiana. As a result, clearing members are able to choose between EuroCCP
and LCH.Clearnet. CCP interoperability enables cross netting of trades for participants that use the
same CCP for transactions executed on different trading venues, which has a positive impact on
Liquidity Risk.

BME Clearing acts as CCP for stock exchange trades which mitigates counterparty exposure for
participants. EuroCCP and LCH Clearnet also provide central clearing in the Spanish market for MTF
trades and bond platforms respectively. All the CCP covered trades have a reduced counterparty
exposure with typical CCP stringent membership requirements, margin funding and default fund
mechanisms.

Other Considerations

LCH.Clearnet launched clearing services for Spanish government bonds and repos on 9 August 2010.
The clearing is operated by LCH.Clearnet’s RepoClear service while settlement takes place at either
Euroclear Bank or Clearstream Banking Luxembourg. Additionally, LCH.Clearnet SA started operating
as a CCP for Spanish government bonds settled at IBERCLEAR (transactions from trading and
matching platforms such as ICAP, Tullet Prebon, MTS and Euroclear Bank) and plans to introduce
netting service for such trades on 9 March 2012.

LCH.Clearnet has announced that it will start offering clearing services for Spanish securities
executed on Bats Europe, Turquoise and Traiana from 7 September 2015, subject to regulatory
approval.

Effective from 10 June 2010, Circular 2/2010, which governs the requirements for obtaining CSD
membership as well as the remote trading membership of the Spanish stock exchanges has been in
place at Iberclear. The requirements are as follows:
• Applicants must complete and submit the membership agreement, with the documents according
to Circular 4/1992;

• An external legal opinion must be sought, which confirms the applicants are entitled to apply for
membership according to the local legislation and legal requirements established by Iberclear.

• Applicants seeking to obtain the status of remote trading member of the stock exchange were also
expected to become settlement members of Iberclear. However, this is no longer a requirement and
instead trading members can have a formal agreement with an Iberclear participant for the clearing
and settlement of their trades. The formal document to be used is a triparty agreement provided by
Iberclear in Circular 3/2013. Trading members can assign a primary and a back-up settlement
participant. Settlement participants accepting an assignment must meet the necessary minimum
level of own resources, currently set at EUR 100 million, and assume as their own all the obligations,
risks and guarantee requirements arising from the trading member’s transactions. These changes
could lead to smaller trading members exiting the settlement system.

MEFF Exchange is currently an official secondary market which provides trading services for futures
and options. BME Clearing acts as a CCP for these products. Also, BME Clearing offers CCP services
for fixed income products since November 2012.

Other Clearing and Settlement Factors

The Delivery Versus Payment (DVP) mechanism in Spain is simultaneous and final via T2S where the
securities and the cash systems are integrated within the same infrastructure operated by the ECB.

Settlement in T2S is on a gross basis, although T2S may include technical netting in its optimisation
procedures, either on the securities side or cash side or both. T2S accepts netted instructions from
CCPs.

Cash settlement is processed in central bank money via TARGET2 (T2) whereby a T2S dedicated cash
account (DCA) exclusively used for securities settlement is linked to an RTGS account in T2. With T2
being also owned by the ECB, the securities and cash settlement are run on the same technical
infrastructure with the same interface specifications.

Participants can fund their DCA at any time during the settlement day and the platform will check for
availability of cash before each cycle.

BME Clearing has started to centrally clear equities as of April 2016 as part of the Spanish market
reform. LCH.Clearnet started acting as a CCP for government bonds transactions from ICAP, Tullet
Prebon, MTS and Euroclear bank effective from August 2010.

BME Clearing also operates a CCP service for transactions on SENAF via the process of novation.

Guaranteed settlement is facilitated by a securities lending programme for failing securities

deliveries and the use of credit lines in the case of failing cash settlements. The seller has an extra
day before IBERCLEAR forces final settlement via a buy-in of the stock exchange or Latibex trades
(SD+4).
For debt instruments, IBERCLEAR apply penalties from SD+1 due to lack of securities.

For Stock Exchange and Latibex trades: IBERCLEAR operates a centralised securities lending
programme. For SCLV securities, lending participants place securities at IBERCLEAR’s disposal to
facilitate failed settlements. IBERCLEAR makes a pool of lendable securities from which securities are
chosen according to established lending criteria. The return of securities to lending participants
restores the original RR number.

Since IBERCLEAR provides guaranteed settlement, it has to deliver securities. It can borrow the
securities via its centralised securities lending programme. If the seller does not deliver securities by
T+4, IBERCLEAR can buy-in securities and restore the original RR numbers to the lender.

From 1 June 2007, IBERCLEAR introduced changes to the procedures of the automatic securities
lending. IBERCLEAR now allows any CADE member, who meets the general conditions established
for automatic securities lending, to provide for the lack of securities. In addition, the instruction also
introduces an increase in the price used as reference for the calculation of the effective amount of
the overnight penalised DVP repurchase transaction.

Stock loans became eligible for matching through the SUC system from 21 November 2005. This
system is based on dual instruction matching unlike the previous affirmation process, and also allows
for the DVP settlement of securities loans against cash collateral.

Traditionally there have been large numbers of open loan positions in IBERCLEAR due to
inefficiencies between brokers, custodians and IBERCLEAR in notifying the return of shares. Hence,
under Operational Instruction 5/2006 effective 3 April 2006, IBERCLEAR allows for the closure of
loans under the following three circumstances:

1. Early maturity and redemption of an open securities loan in case the loan has been compensated
as a result of the agreement of the two parties involved.

2. Early maturity and redemption of an open securities loan as a result of the lender or borrower
exiting the market, becoming bankrupt or any other situation by which one of the parties ceases
trading.

3. Early maturity and redemption of an open securities loan as a result of a corporate event affecting
the lender or borrower or any other entity involved in the transaction.

IBERCLEAR members who use this procedure on behalf of their clients are obliged to ensure that a
documented record of each loan closed through this procedure is available should IBERCLEAR
request it. Though the above will effectively work as an amnesty to encourage market participants to
solve this open loan problem, there is no real impetus to take advantage of it and it relies entirely on
the goodwill of these participants to be effective.

In May 2009, IBERCLEAR issued a new circular (10/2009) setting conditions and procedures for the
return of stock loans, relating to open loans in the market, where either the borrower or lender has
entered into administration. The new procedures planned to permit the participants to close loan
positions without the actual movement of stock, or the acceptance of the other party, once
IBERCLEAR has received satisfactory documentation detailing information on the receivership. The
proposal was withdrawn by IBERCLEAR, due to insufficient technical procedures.

Short Selling

Short selling measures have been harmonised across Europe as of 1 November 2012, when the EU
Regulation on Short Selling No. 236/2012 came into effect.

The regulation stipulates that anyone entering into a short position must, at the time of the sale,
should have borrowed the instruments, entered into an agreement to borrow them or made other
arrangements to ensure they can be borrowed in time to settle the deal (a so-called ‘locate rule’).
Uncovered (naked) short selling of credit default swaps (CDSs) on sovereign issuers is banned.

Moreover, according to the regulation, net short positions reaching the threshold of 0.2% of the
issuer’s share capital or of certain amount in government securities have to be reported to the
competent authority, while net short positions in shares of 0.5% of the share capital must be publicly
disclosed.

Finally, the European Securities Market Authority (ESMA) has been given a key co-ordination role to
ensure consistency between competent authorities and to guarantee that necessary short selling
measures are put in place in exceptional situations that threaten financial stability.

It should be noted that due to high volatility in the markets, a ban on short selling in all stocks
admitted to trading had been implemented by CNMV from 23 July 2012 to 31 January 2013.

CNMV lifted the ban on 1 February 2013, citing remission of the circumstances that led to its
adoption on 1 November 2012.
Guarantee Funds

Following the Spanish Market reform, the Collective Market Security Deposit was replaced by the
CCP guarantee system (default fund).

BME Clearing has established a Default Fund for each segment. The amount of the Default Fund for
each segment must cover the Risk, under Stress Test conditions, of the Clearing Member with the
highest risk, or the sum of the second and the third Clearing Members with the highest risks. The
Default Fund amount is updated every month.

Every Clearing Member must make at least a minimum contribution to the Default Fund of the
segment or segments in which it is active, but its contribution may be higher. The minimum amounts
are established by Circular and are the following:

Cash Equities Segment

• ICM: EUR 500,000

• GCM: EUR 1,000,000

In order to calculate which Clearing Members must contribute to the Default Fund with a higher
amount than the minimum amount, the necessary Default Fund amount as will be shared between
the different Clearing Members on a proportional basis to each Member's average exposure (stress
test risk) in relation to the total for all Clearing Members in the Clearing House. As a result of this
distribution calculation, those Members who are assigned an amount which is less than their
minimum contribution will be removed from the distribution. For the remaining Members, the
average exposure percentages will be recalculated, and the additional contribution to the Default
Fund will be calculated in respect of the minimum amount they need to contribute by multiplying
their average exposure percentage by the difference between the amount that the Default Fund
must hold in total and the sum of the minimum contributions of all Clearing Members.

BME Clearing modifies the default fund amount of the Equities segment on a quarterly basis. In
Circular (C-GEN-09/2016), BME Clearing has revised the amount available from its own resources to
the default fund. The only change is the increase from EUR 1 million to EUR 1.5 million for the Equity
segment. The complete list of dedicated resources is as follows:
• EUR 2 million for the Financial Derivatives segment;

• EUR 0.5 million for the Energy segment;

• EUR 1 million for the Fixed Income Securities segment;

• EUR 1 million for the OTC segment;

• EUR 1.5 million for the Equity segment.

Liquidity Alliance Formed for Collateral Management

The Liquidity Alliance that was formed on 16 January 2013 will have streamlined access to TARGET2-
Securities (T2S) through their Eurozone peers in Spain and Germany.

T2S is going live in 5 waves from 2015 to 2017, during this period the Liquidity Alliance members will
be able to benefit from access to the future pan-European liquidity pool that T2S will create.
Iberclear in Spain and Clearstream Banking AG in Germany will act as the gateway into T2S for the
entire Liquidity Alliance.

The Liquidity Alliance has already developed concepts to utilise offshore collateral for the coverage
of domestic exposures. Now, Liquidity Alliance members will be able to use collateral their
customers hold in T2S markets to cover exposures in their home markets.

The Spanish market is a beneficial owner market, as all assets are assigned to a registration name.
Assets may be kept in client omnibus accounts, which increases the asset safety risk, since the
nominee concept is not recognised. Nevertheless, the law recognises the owner of assets with the
registration details that appear in the Detailed Register and not with the owner of the account at the
CSD.

Iberclear

IBERCLEAR is wholly owned by BME the holding company for the Spanish capital market
infrastructure, which is listed on the Stock Exchanges. As such, IBERCLEAR is supported by BME's
substantial capital and profits. IBERCLEAR carries no principal risk exposure.

IBERCLEAR has robust operational procedures and controls supported by good IT disaster recovery
arrangements. Annual (at minimum) operational audits are carried out by internal auditors, while
there is no operational audit performed by external auditors.
The dematerialisation of all securities held at IBERCLEAR significantly reduces operational risks
related to safekeeping. Secure electronic communication to the IBERCLEAR system is achieved by
controlled participant access through secure lines. IBERCLEAR appears to exercise efficient position
control in the settlement process and securities account debit positions are prohibited. The disaster
recovery procedures are well established and tested regularly with market participation.

Other Considerations

Operational risk exposure on the safekeeping of the limited amount of physical certificates is fairly
low, due to the generally sound internal risk controls and procedures.

Other Safekeeping Factors

Nominee Status

The failure of Spanish law to recognise ‘nominee’ status and its effective prohibition has not stopped
some custodians from holding nominee accounts. Safekeeping of assets in these accounts could
expose investors to the risk that their assets could be frozen in the event that their custodian goes
into liquidation, or possibly even used to pay the creditors of that custodian. However, provided that
clients’ securities are properly identified within the books of the custodian, retrievability of securities
should not be impeded.

Safekeeping

Most securities in Iberclear are dematerialised and in registered form since all assets are
represented by a RR.

Operational risks remain on the safekeeping of physical AIAF traded bonds in relation to fraud, theft,
error and loss. However, these securities form a tiny proportion of the Spanish market. This risk
must be controlled by stringent operational procedures employed by the local custodian bank
safekeeping these certificates. The contractual arrangements governing the safekeeping procedures
for these securities is between IBERCLEAR (SCLV) and the custodian, and are therefore outside of the
investor’s sphere of influence.

Segregation of Securities
The fact that the CSD only maintains records at the participant level means that evidence of
beneficial ownership is based entirely on local custodian records. The accuracy of these records is
therefore critical for the servicing of assets, and their retrievability in the event of the custodian’s
insolvency.

Registration Period

Communication between the market infrastructures and the trading, clearing and settlement agents
are managed by an ancillary system, the ‘PTI’ (Post-Trade Interface), which will simplify the
requirements and burdens on these entities and make it easier for the CNMV to trace trade details.
Each participant will have to feed the PTI with the required information on a daily basis. Registration
of transaction in the PTI will be also mandatory for bonds activity post T2S.

The CNMV has accepted the use of COD codes for transaction reporting. CNMV and Iberclear
recommend foreign holders to use the same identification codes both in the trading instructions and
settlement instructions. Specifically, the codes allowed are either BIC, LEI, CIF/NIF, or COD, in this
order. This is because the same code needs to be used for registration in PTI.

In general, all trading participants will have to continue reporting the registration of the stock
exchange transactions to the PTI (except for the Financial Intermediary model), and all the
settlement agents will have to communicate every movement performed under third-party
accounts.

In order to simplify the registration process, Iberclear also introduced an alternative settlement
figure called "Special Financial Intermediary" (SFI). Within this model, participants considered SFI are
not required to communicate registrations to the PTI for stock exchange transactions, and a new
transaction called "auxiliary" is used for that purpose. Special reports to executions and auxiliary
transactions are required instead.

Reconciliation and Audit

Securities transfers and account balances are normally reconciled on a daily basis.
The CSD obliged participants to reconcile with them the total of securities held, comparing RR by RR
and checking that the total position held at the CSD account is equal to the sum of the positions held
at the different segregated account opened in the participant’s books. This reconciliation is
performed twice a year with the CSD.

Lien

If the buyer participant does not pay the cash in case of purchase of securities, IBERCLEAR can retain
the unpaid securities and sell them out (if the guarantees deposited by the participant is not enough
to cover the overdraft). This procedure extends to all securities owned by the participants as well as
the customers of participants.

Issuers are legally obliged to notify the depository of all corporate actions and the majority of
communications are via safe and efficient electronic means. However, IBERCLEAR does not accept
responsibility for the timeliness and accuracy of information, or for the successful execution of
corporate action instructions. Corporate actions require the action of an agent bank that will collect
the instructions from all their participants. IBERCLEAR will only settle cash and securities movements
according to instructions received from the issuer's agent bank. IBERCLEAR does not provide proxy
voting.

Other Considerations

Asset Servicing risk exposure arises from the lack of a central paying agent for equity dividends and
interest on corporate debt, the fact that new shares from rights and bonus issues are not tradable
for a period of 2 weeks to 6 months after pay date, and the absence of a central organisation
responsible for the administration of market claims.

The Law 25/2011, transposing the EU Shareholders’ Rights Directive (2007/36/EC) into Spanish law,
was published in the Official Gazette on 2 August 2011 and came into force two months later. The
legislation stipulates the following points in connection to shareholders’ meetings (GMs):

• Extended timeframe for extraordinary general shareholders' meetings arrangements by

shareholders representing 5% of share capital (or less in case the company bylaws allow for it);

• More flexible measures for public announcements of GMs;

• Equality of all shareholders’ rights to access information, participate in a general meeting and
exercise their votes;
• Provided that all shareholders have the access to electronic voting mechanisms, listed companies
can arrange an extraordinary general meeting within 15 days, following the announcement;

• The general meeting’s details have to be announced by listed companies in a way that they are
freely accessible to any shareholder within the EU;

• Listed companies are obliged to provide, in a GM's pre-advice, the date by which shares should be
registered in the name of shareholder who wish to participate and vote in the meeting;

• Minimum documentation that should be published on the company's website between the
announcement date and the meeting is specified;

• Proxy voting will be available with no limits (any company’s bylaws restricting this right will be
automatically removed);

• Financial intermediaries are obliged to provide the issuer with shareholders’ identification, the
number of shares held and voting instructions within seven days of the meeting;

• The approved resolutions and voting results from the general meeting have to be published on the
company’s website within 5 days following the meeting.

Corporate Actions Procedure

New shares from rights and bonus issues are not tradable for a period of 2 weeks to 6 months after
pay date. This exposes the investor to market risk during this period.

Central Paying Agent

Local banks delegate to Iberclear the function of paying agent for most payments, and Iberclear
distributes the funds on pay date to its members according to their entitlements. Government bond
interest is credited directly to the sub-custodians account at Banco de Espana.