General Information
The Icelandic Securities Depository Ltd. (ISD) is one of the principle participants on the Icelandic securities market. The ISD is a registry, a depository and a clearing house for the settlement of securities in dematerialized form. It guarantees the accuracy of information, possessed by the securities register.
The Icelandic Securities Depository Ltd. was established in June 1997 by all the market participants. The ISD received its operating license from the Ministry of Commerce on June 9th, 2000 and commenced operation on June 14th 2000. On December 1 2006 the ISD became a 100% subsidiary of OMX Group. From February 2008 the ISD has been owned by NasdaqOMX. NasdaqOMX is an American company that owns and runs the NASDAQ stock exchange, 8 other stock exchanges in the Nordic countries and in the Baltic area and 3 Securities depositories. NasdaqOMX headquarters are located in New York.
The ISD system hold equities and bonds in a book entry form. All trades executed on the Exchange in dematerialized securities are cleared and settled through the ISD. All members of the ISD can be connected directly to the system, but only specific members can do transfers within the system. The ISD is governed by the Rules and Regulations made under Act. No. 131/1997 on electronic registration of rights of title to securities. ISD operations are subject to the supervision of the Icelandic Financial Supervisory Authority. Holdings are primarily in the name of the beneficial owner. However nominee accounts are allowed according to law 33/2003. The ISD is a National Numbering Agency for Iceland and a member of ANNA the Association of National Numbering Agencies. All securities issued in the ISD system or listed on the Stock Exchange have been given ISIN numbers in accordance with international standards. At the end of year 2009 the total value of issued securities in the ISD system was approximately 3,1 billion IKR. The total number of issues was 303, thereof 60 equities issues and 243 bond issues.
Service provided by ISD
Service to issuer
Registered companies have access to services provided by the ISD, including central management for issuance of shares, funds units or bonds. All companies, publicly or privately owned, can register at the ISD. All information regarding cost and necessary documents will be sent by request. The ISD service to issuers includes payments of dividends and interest, stock increase and decrease, merger, stock split and reverse stock splits. Also the ISD keeps records and offers members access to share book via special link so companies can keep their records up to date for their shareholders.
Service to investors
The service offered to investors includes opening and closing of an account, pledging and payment of dividends and interest, issuing information about holdings and allocations. All accountholders has to open an account in their own name at the ISD but they can also register in a nominee account at the ISD Members.
As of October 24th, 2002 the ISD and VP of Denmark have established a link between the two companies making it possible for investors to register ownership in Danish securities in Iceland and vice versa. That implies that a registered investor with ISD can if he chooses to hold Danish securities in his Icelandic account and receive dividends payments and other services in same manner as they were still in Denmark. Also, will it enable the investor the possibility to buy and sell Danish stock and bonds in Iceland.
Clearing and settlement
The Clearing and Settlement primary task is to monitor payment and delivery in securities transactions, and the execution of settlement of securities on the stock and money market. Our customers consist primarily of securities trading intermediaries, for example banks and securities companies, as well as large institutional investors and pension funds.
All trades executed on ICEX, the Icelandic Stock Exchange are cleared and settled by the ISD. The standard settlement cycle to process on-exchange transactions in Iceland is T+3 for equities and T+1 for fixed income. Securities settle on a trade-by-trade basis, whilst cash settles on a net basis, thereby following BIS Model 2.
All trades that are to be settled are reported to the ISD system through its Trade Reporting System (TRS) for matching purposes. The ISD sends payment instructions to the Central Bank of Iceland, which acts as intermediary for netting in the payment system. Only settlement banks can be a part of the netting process. The settlement cycle is T+3 for equities and T+1 for fixed income and all trades are settled before opening on the settlement day. It is also possible to send in trades with other settlement dates.
All Ask and Bid´s in dematerialized securities are matched in the Trade Reporting System, both for on exchange trades and OTC trades. The members can send into the TRS their buy and sell orders until the day before settlement (S-1). The system is open for reporting of trades from 9:10 to 17:00. On the day before settlement all matched trades are sent automatically during the day to the ISD system for settlement. The securities settlement system is operated from 9:10 hrs. to 17:00 hrs. on regular banking days.
Times and processes in securities settlement
Securities settlement takes place at 12:05 hrs. on regular banking days. Before this occurs, the preparatory actions listed below must have been completed within the stated time limits, assuming a normal settlement process:
17:10 On the day before settlement (S-1), the ISD sends settlement agents preliminary information on their payment obligations relative to securities settlement. These payment obligations will not change on the following day unless it proves necessary to cancel a trade. This information is also sent to the Central Bank at the same time as it is sent to the settlement agents.
11:00 Matched transactions wait in allocation accounts until the account operator has recorded the name of the ultimate purchaser/seller. This must be completed by 11:00 hrs.
11:00 Settlement agents must have deposited funds to their securities settlement accounts with the Central Bank by 11:00 hrs. on the settlement date, in accordance with the information sent out by the ISD at 17:10 hrs. on the day before settlement (S-1). The Central Bank sends the ISD a confirmation of whether purchasers have fulfilled their obligations or not.
11:00 The ISD runs a preliminary settlement to verify the availability of sufficient securities for settlement.
11:00 If the preliminary settlement reveals that account operators (sellers) do not have sufficient securities for settlement, the ISD will cancel the trades with a negative balance. These transactions will be entered in the matching system once again, with a new settlement date. The ISD sends both parties to the transaction information on the trades that must be cancelled, and sends the respective settlement agents new information on their payment obligations. The ISD shall inform the Central Bank of the trades that are cancelled.
11:15 The ISD sends a final payment register to RB for netting. At this time, all ISD members have in their accounts the securities required to finalize securities settlement, and they have in their securities settlement accounts the monetary balances necessary to fulfill their payment obligations. RB calculates the net payment instructions for the settlement agents and sends the payment instructions to the Central Bank.
11:15 If a change in the final payment register means that settlement agents no longer have sufficient funds in their securities settlement accounts with the Central Bank, they have until 11:45 hrs. to deposit the remaining balance so that settlement can take place on the basis of the payment register sent by the ISD to RB at 11:15.
11:46 The Central Bank sends the ISD a confirmation of whether the relevant settlement agents have sufficient funds in their securities settlement accounts to fulfill their payment obligations according to the payment register sent at 11:15.
11:46 If it is revealed that a settlement agent does not have sufficient funds to fulfill its payment obligations, the ISD will unilaterally cancel enough of its securities purchases to enable settlement to take place. The ISD then sends a new payment register to RB, which recalculates the settlement. Trades will be cancelled in accordance with the ISD rules authorizing the selection of trades for cancellation so as to guarantee that settlement will take place within the specified time limits. If the number of cancellations is so high that it is foreseeable that the time limits for the settlement process will not be met, the ISD is authorized to keep the system closed beyond the conventional settlement time, until settlement has been ensured; that is, until the securities and monetary sides of settlement have been balanced.
12:00 The ISD closes its system and prepare securities settlement based on the funds that settlement agents have deposited to their securities settlement accounts according to information from the Central Bank.
12:05 The ISD settles the securities and sends the Central Bank a confirmation that settlement is complete.
12:05 The Central Bank transfers/enters net settlement transfers between the securities settlement accounts of the buyers and sellers and sends the ISD a confirmation that settlement is complete.
12:05 The Central Bank enters the balances on securities settlement accounts over to RTGS accounts.
12:15 The ISD system opens for business again and sends a confirmation to this effect to the Central Bank. The following picture shows how the ISD Clearing and settlement system works and how the setup is.
Corporate Actions
All corporate events in dematerialized securities are processed through the ISD system. In Iceland the most common types of corporate actions are payments of dividends and interest, drawing, merger and stock splits.
Cash Dividend
Icelandic companies pay dividends on an annual basis. At companies Annual General Meeting (AGM) dividend payments and payment dates are decided. The dividend is paid out through VBS system based on holdings on the record date. The amount is transferred on the payment day from the issuers account to investors chosen account (cash account), which is linked to their investment account.
Interest
Interest payments are paid according to holdings on maturity day. The payment is made directly from the issuer to account operator and the account operator distribute the payment accordingly to his customers, usually the day after the maturity date.
Redemption
Redemption is done by the ISD on maturity day. The payment is made directly from the issuer to account operator and the account operator distribute the payment accordingly to his customers, usually the day after the maturity date.
House Bonds are redeemed 4 times a year. This drawing procedure ensures that all investors get the same relative part of their holdings drawn to a given due date. ISD calculate the drawing from a percentage given by the issuer.
Merger and Stock Splits
Merger and stock splits are done by ISD on a pre-announced date after the market is closed. All trades are halted the same day.
Security
The ISD has placed emphasis on building a secure environment for its customers. The Depository system runs on IBM iSeries which is one of the most secure hardware offered on the market. The ISD has set up two such machines which run in parallel. Thus, all data is simultaneously stored on both of the iSeries computers. The computers are located at two different sites at the Banks’ Datacenter, which is the most advanced and secure datacenters in Iceland. All communications with the system goes through the bank computer network. Backup are done daily and the tapes are stored at a secure location.