CENTRAL: The Securities Clearinghouse Created by CETIP

CENTRAL: The Securities Clearinghouse Created by CETIP António Marcos CostaRisk Director ACSDANovember 2001

Outline 1. What is CETIP? 2. What is CENTRAL? 3. Why did CETIP create CENTRAL? 4. CETIP & CENTRAL: The Model 5. CENTRAL’s Innovations 6. CENTRAL’s Risk Management Structure 6.1. The Fundamental Pillars of CENTRAL’s Risk Management Structure 6.1.1. Fundamental Pillar 1: Collateral & Safeguards 6.1.2. Fundamental Pillar 2: Dynamic Real-Time Operational Limits 6.1.3. Fundamental Pillar 3: Dynamic Real-Time Monitoring 6.2. CENTRAL’s Real-Time Risk Management Structure 7. Conclusion

1. What is CETIP ? • The largest depository and financial settlement company in Brazil • An organized over-the-counter market for securities registration, trading and settlement

2. What is CENTRAL ? • A clearinghouse corporation for Brazilian Securities • Settlement and netting transactions traded at CETIP or other markets as defined by CENTRAL´s Board of Directors

CETIP remains “risk free” CETIP created CENTRAL to manage risks CENTRAL acts as central counterpart for participants • - Reduction of • systemic risk • Transference of • risk to private • sector • Change to • real-time Guaranteeing the settlement and netting of the transactions 3. Why did CETIP create CENTRAL ? The Brazilian Payments System (SPB) is reorganized

Central Counterpart (novation) Deferred Net Settlement - DNS DVP 3 Risk Management Adequate operational infra-structure and contingency plans Transparent access criteria 4. CETIP & CENTRAL: The Model

“Real-Time” Novation Dynamic Limits Pre-funded collateral posted by Clearing Agents and Participants Clearing Agents and Participants may establish their own negotiating strategy T+0 Finality DVP for Participants 5. CENTRAL´s Innovations

6.1. The Fundamental Pillars of CENTRAL’s Risk Management Structure Management of Financial Risks Dynamic Real-Time Operational Limits Dynamic Real-Time Monitoring Collateral & Safeguards

6.1.1. Fundamental Pillar 1 -Collateral & Safeguards SLP Net Equity LEVEL 3 LEVEL 2 LEVEL 4 LEVEL 1 COLLATERAL & SAFEGUARDS INDIVIDUALCOLLATERAL CLEARING FUND SPECIAL EQUITY INSURANCE Clearing Agent (1 ) Clearing Agent (2 ) Segregated by Agents’ Clients ClearingAgent (3))

Collateral Agent’s Limit *CENTRAL’s Risk Monitor Market Risk, Liquidity Risk, Credit Risk, Systemic Risk... (Mainly Simulations +Liquidity & Credit Criteria) Obligation (due to Transactions) Total rights Rights (due to Transactions) Total Obligation * Extended Lamfalussy Principle: Enough guarantees to cover the simultaneous default of CENTRAL’s “n” bigger risk exposures 6.1.2. Fundamental Pillar 2 - Dynamic Real-Time Operational Limits (1/2) Dynamic Real-Time Monitoring Pre-deposited Collateral Non-Settled Transactions

Scenario [95%] Individualized Collateral + Positions (Agent) 0 Max (Scenario [99%], Scenario "Stress”) Individualized Collateral + Funds/n + Positions (Agent) 0 Rights Funds/n Agent’s Position (x) 95% 99%% Rightsguarantees ³ 0 Scenarios Rights Transactions Obligations Transactions Market Risk Management 6.1.2. Fundamental Pillar 2 - Dynamic Real-Time Operational Limits (2/2) ³ ³

Collective Individual • Concentration • Issuer • Currency / Index • Marketability • Total • Minimun • Etc. Nível I • Concentration • Issuer • Currency / Index • Marketability • Minimun • Etc. Max (Cenário "Modelo" [99%], Cenários "Stress") Garantia Individual + % Fundos + Posições (Agente) >= 0 Market Alerts Actions 6.1.3. Fundamental Pillar 3: Dynamic Real-Time Monitoring

Risk Committee (Including CENTRAL´s Economics Dept.) RW Transaction Answer RiskWatch by Algorithmics Acceptance? Market information 6.2. CENTRAL’s Real-Time Risk Management Structure CETIP Risk Monitor CENTRAL

CETIP CENTRAL Straight Through Processing to End End Conclusion CENTRAL´s Risk Management Structure Best International Standards Solid Contigency Plan

WWW.CENTRALCLEARING.COM.BR E-mail: central@centralclearing.com.br

CENTRAL: The Securities Clearinghouse Created by CETIP