Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 4

Each market must have clear rules assuring investor protection by safeguarding participants from the financial risks of failed settlement and ensuring that listed companies are required to follow sound policies on corporate governance, transfer of economic benefits and shareholder rights.

1.	Does the depository or the market have securities lending and borrowing schemes in place, and are these open to all market participants and their settlement agents?	A lending system does not yet exist although it is foreseen under the KDD's General Business Rules and plans to build it are under way. The technological part of the system is already in place; the legal part of the lending system is being considered, as the Dematerialized Securities Act does not allow securities booked into non-ownership-specified accounts. At present, lending is being performed on a bilateral basis since at the end of the trade date (T+0) every member (broker) knows what its exact position is or will be in two days when final settlement occurs. Thus, a member can promptly borrow the missing securities although it has two days to do so. Securities have to be "in place" on T+2 by 11.00 a.m.
2.	Does the settlement system mark fail trades to market and collect margin from the failing counterparty to protect the innocent counterpart's interest?	Since 1996, when KDD started to clear securities market transactions, there has not been a case of failed securities settlement; nor did KDD ever have to initiate the buy-in procedure (intended to cover the settlement risk). Settlement risk is, as history shows, well under control in the Republic of Slovenia. Lending would probably increase (instead of de-crease) the settlement risk, as this would encourage more speculative short selling. However, there are procedures in place with the aim of protecting investors against trade failiure which we describe bellow: Undelivered securities (buy-in / sell-out) KDD does not allow short positions in securities accounts. Failure of participants to meet their obligations is dealt with in two stages: Firstly, when a participant's positions (accounts) are not "cleared" on T+2 by 11.00 o'clock, the respective participants are notified. They are also requested to clear their positions by 12.00 o'clock. Secondly, if this request has not been met, KDD starts buy-in or sell-out procedures, depending on participant's position (short/long). KDD steps in and buys the missing or unallocated securities from the group account to the seller's account (short position) or sells unallocated securities from the group account to the buyer's account (long position). KDD buys or sells against the failing member. The non-performing member is charged with all costs arising from such procedure, plus a fine. KDD performs this procedures because no substitution by novation is possible (foreseen) under the Slovenian law. Therefore, KDD takes over all payments obligations (debt takeover) and claims (assignment) from its members, arisen from their trades. KDD is, under membership agreements, obliged and liable to its members for clearing (and settlement of) their positions. The above procedures are featured in KDD's Rules and Procedures for buy-in or sell-out of securities, which represent a constitutional part of the KDD membership agreement. Cash failure The cash deposit risk is allocated to KDD. The instruments of interest bearing Guarantee Fund and daily-calculated Liquidity Reserve serve as tools to manage the cash deposit risk. They are both managed by the KDD with the objective of covering the cash deposit risk exposure. According to the KDD's Rules and Procedures, member's insolvency (i.e. when a member is unable to meet its outstanding obligations towards KDD or other members) would constitute default and KDD would use exceptional settlement arrangements. 1.Liquidity Reserve default KDD calculates the amount of the Liquidity Reserve of an individual member as a difference between his net to pay balance on T+0 and 25% of the total Guarantee Fund. This amount becomes due on T+1 by 9.25 a.m. If KDD does not receive a confirmation of the presentation of payment orders by 9.25 a.m. on T+1 it is deemed that the respective KDD member has failed to comply with its liquidity reserve obligation. KDD immediately suspends the member who defaulted the Liquidity Reserve payment and requests its suspension from the Stock Exchange. 2. Activation of the Guarantee Fund KDD calculates the net to pay amount for a particular member, arisen from his trade on T+0. This amount becomes due on T+2 by 12.30 p.m. Members must however present to the Payment Agency their payment orders not later than 10.30. a.m. In case that a member fails to make the payment, the Agency notifies KDD immediately or not later than 12.15 p.m. Upon receipt of the failure notice, KDD activates the Guarantee Fund. A member has defaulted cash settlement. If a KDD member fails to deliver funds owed, KDD activates either the Liquidity Reserve or the Guarantee Fund (if the Liquidity Reserve is not sufficient) from which net-to-pay obligations of such member are met. KDD can simultaneously initiate the termination procedure of membership of such participant. If the Guarantee Fund is activated KDD also exercises its right to put a lien on all not paid for securities, which can be sold to cover the replenishment of the Guarantee Fund. KDD's general business rules are fairly detailed with respect to both, conditions and procedures, which are to be followed if such conditions are fulfilled. KDD's discretion in the determination of default and the application of the above default procedures form part of the membership agreement. Of course, the Securities Market Agency and the Ljubljana Stock Exchange are an integral part of such procedures and they are promptly notified. The same applies also backwards - KDD is promptly notified of any such procedures started by either the Agency or the Ljubljana Stock Exchange. Thus, KDD has two hours before the final settlement occurs to meet all outstanding securities and fund transfer obligations. If not, the final resorts are activated - the buy-in procedure in case of failure to deliver securities and Guarantee Fund in case of payment default.
3.	Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions; and which sectors of the market does it cover?	Members of the transfer and settlement system must, upon becoming members of the said system, contribute to the Guarantee Fund (which is not owned by the KDD but by the contributors). The Guarantee fund consists of so called basic payments (annual - all members pay the same amount) and additional payments (monthly - for each member separately). Basic payments: The amount of basic payment is calculated annually for all members and equals: BP = ((A * N) / T) * 2, where A= daily average net to pay for 1 member, last year N= daily average % of net to pay members (Number of net to pay members / Number of all clearing members), last year T= total number of clearing members on 31st of December, last year Additional payments: AP = AM * NM - BP, where AM = average daily net to pay for member X, last month NM= number of days in month where member X was net to pay member / total number of clearing days, last month BP = basic payment of each clearing member in guarantee fund (yearly).
4.	Are the stock transfer agents (share registrars) linked electronically to the depository?	Not applicable: A system of total dematerialization exists in the Repuplic of Slovenia; KDD functions both as the central depository as well as the share registrar.
5.	Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so, does market practice adhere to the deadline?	I. Organised market trades Transfer of securities KDD operates a rolling T+2 settlement system (on a trade for trade principle) for all stock exchange trades. All securities transfers (and funds transfers), deriving from Ljubljana Stock Exchange trade, are executed on T+2. Securities transfers in KDD are processed directly as debits and credits to the securities accounts of participants or their clients. (Brokerage firms often buy and sell securities from or to the client group account. In such cases they have two days to "clear" the client group account by allocating securities to the proper end-accounts (buyer's, seller's). If not, buy-in or sell-out procedures are started. However, that does not mean that the securities are transferred to the client group account, they are always processed directly as debits and credits to the final customers' accounts. Thus, client group accounts are only virtual accounts with no inventory.) Securities transfers occur at the end of T+2 (13.00) in continuous batches. By 11.00 on T+2 participants are expected to have "cleared" their accounts, if not they are reminded and a request is issued to them to do so by 12.00. The final settlement is run at 13.00 on T+2. The above applies to trading on the organized market, off-market trades are conducted continuously, and are executed when posted securities transfers are approved by the KDD. Transfer of funds KDD executes funds settlement on a multilateral netting principle. KDD does not maintain cash accounts for its participants, all accounts, including KDD's central clearing account, are currently still held with the Slovenian Payments Agency. According to the agreement between KDD and the Slovenian Payment Agency, the systems are "linked". KDD issues instructions to the Slovenian Payment Agency on T+1, and is notified by the Agency on T+2 by 11.00 of a possible member's non-performance. Legally, KDD becomes a sole debtor and sole rightful claimant of all funds owed and claimed by KDD's members since KDD takes over all payments obligations and claims from them. Therefore KDD becomes a funds transfer guarantor at the moment it takes over claims and obligations i.e. on T + 2. Funds transfers become irrevocable and final on T + 2 at 12.30, when cash transfer orders are executed by the Slovenian Payments Agency and the funds are paid to the KDD's central clearing account (thus unreachable to members). At the same time a buy-in procedure might be initiated if securities were not delivered by 12.00, so that securities will be in place by the time final settlement occurs. As KDD by 13.00 re-transfers received funds to claiming (net to receive) members, it is possible for them to re-transfer received funds the same day. II. Off-market trades KDD operates a FOP system and securities transactions occur as posted transactions are approved by the KDD - under KDD's rules at the latest within two days (in practice usually on the same day) III. DVP-OTC market KDD operates a DVP system where securities transactions occur conditionally upon delivery of funds (and vice versa); therefore same day. Market practice always adheres to the above-mentioned deadlines.
6.	Are investors entitled to all benefits arising on a security from the point of purchase; and how are any rules enforced?	No, investors are entitled to securities` benefits from the date when they become legal owners - that happens on T+2 for market trades As posted transactions become approved for off-market trades (usually same day) When transactions occur on the OTC-DVP Market (real time). However, investors are notified of ex-dates through daily newspapers and more important through Ljubljana Stock Exchange notifications, which include detailed information on such corporate events. As KDD operates a rolling T + 2 settlement, ex-date for share trades is always on day before the entitlement record date. For bond trades, under the LJSE regulations, the ex-coupon usually starts trading four days before the entitlement record date, but this time limit may be modified if agreed upon with the issuer. The time limits are set out in the bond prospectus. The entitlement record date means trade date, whereas the payment date depends entirely on the issuer and is usually set as a time period.
7.	Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method?	Voting is performed on the basis of corporate share-books on a given date, which KDD provides to the issuers' executive board on request. In order to vote, shareholders must register their presence at the meeting. Usually this is done by giving notice of an "intention to attend", prior to the meeting. In the case of bearer securities, which make up only 1.5% of all issued securities in Slovenia, the owners must acquire KDD's confirmation of ownership on the concerned date. Shareholders can transfer their voting rights to another person. There are two types of voting right transfers - with or without instructions on how to vote. In any case, these transactions have to be notarized and presented before the shareholders' meeting. A custodian will typically not exercise any voting rights in respect of securities held by it, unless specifically instructed to do so by the customer. Furthermore, the custodian will exercise its best efforts to promptly transmit to the customer all notices, proxies and proxy soliciting materials with respect to the securities held in the account, all public information, financial reports, stockholder communications and other notices.
8.	Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events, including registration, the calling of shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions?	Investors are notified of ex-dates through daily newspapers and through Ljubljana stock exchange notifications (to LJSE members) which include detailed information on such corporate events. General obligations (i.e. daily nationwide newspaper notification duty) are governed by the Securities Market Act -1. LJSE Rules that cover this topic in detail are available on Ljubljana Stock Exchange's website.
9.	Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors?	Voluntary corporate actions are communicated through mass media (daily newspaper available nation-wide). Under the LJSE Rules the securities whose issuer disregards reporting duties may be expelled from trading until official reports are issued to clarify the situation. Such temporally expulsion (and thus enforcement of the reporting duties) is used regularly.
10.	Is information on corporate actions available electronically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion?	As explained above the information gets published in mass media as well as in LJSE notices (more detailed information).