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BM&FBOVESPA MARKET INFRASTRUCTURE: A VERTICALLY INTEGRATED MODEL

BM&FBOVESPA MARKET INFRASTRUCTURE: A VERTICALLY INTEGRATED MODEL. Paulo Oliveira Chile – Santiago October 2008. 1. BM&FBOVESPA INFRASTRUCTURE MODEL. 2. 3. BM&FBOVESPA DERIVATIVES INFRASTRUCTURE. AN INTEGRATED INFRASTRUCTURE FOR SECURITIES TRADING.

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BM&FBOVESPA MARKET INFRASTRUCTURE: A VERTICALLY INTEGRATED MODEL

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  1. BM&FBOVESPA MARKET INFRASTRUCTURE: A VERTICALLY INTEGRATED MODEL Paulo Oliveira Chile – Santiago October 2008

  2. 1 BM&FBOVESPA INFRASTRUCTURE MODEL 2 3 BM&FBOVESPA DERIVATIVES INFRASTRUCTURE AN INTEGRATED INFRASTRUCTURE FOR SECURITIES TRADING

  3. Vertically integrated multi-asset class exchange TRADING PLATFORMS AND REGISTRATION SYSTEMS Spot Markets Derivatives Markets CASH • Stocks • Funds • Corporate Bonds • Government Bonds • US Dollar • Gold • Commodities FUTURES & OPTIONS • Equities • Interest Rate • Currencies • Indices • Metals • Agricultural • Commodities • Energy CLEARINGS AND CENTRAL SECURITIES DEPOSITORY Securities Settlement Systems Central Counterparty SETTLEMENT BANK Custody Services

  4. Trading, registration and clearing model Derivatives Open outcry Electronic trading OTC registration FX Cash Market Open outcry OTC registration Stocks andCorporate Bonds Electronic Trading OTC Registration GovernmentBondsElectronic trading OTC registration Derivatives Clearinghouse FX Clearinghouse CBLC Securities Clearinghouse

  5. 1 BM&FBOVESPA INFRASTRUCTURE MODEL 2 3 BM&FBOVESPA DERIVATIVES INFRASTRUCTURE AN INTEGRATED INFRASTRUCTURE FOR SECURITIES TRADING

  6. Vertical line of protection: Customer, Broker and Clearing Member Margin requirements are based on the worst case scenario for the customers’ net portfolio Margin reduction for diversified portfolios – offsetting opposite exposures to common risk factors Intraday risk is captured via the Intraday Risk Limit Stress testing based on conservative scenarios High degree of transparency to market participants and authorities – all risk models and stress scenarios are publicly available Credit risk mitigation through concentration limits, additional margin calls, and cumulative loss monitoring Liquidity risk mitigation through six different previously committed credit facilities and access to the Central Bank discount window through BM&F Settlement Bank Derivatives clearinghouse focus on risk management

  7. Safeguard structure Safeguard structure for the derivatives market BM&FBOVESPA Clearing Member Clearing Member Brokerage House Brokerage House Customer’s Default Costumer Customer

  8. Derivatives clearinghouse sound safeguards USD 1.49 billion BM&FBOVESPA Tangible Assets USD 157 million Clearing Fund (FLO) USD 19 million Special ClearingMember Fund (FEMEC) USD 24 million Agricultural MarketTrading Fund (FOMA) Clearing Member Proprietary Collateral Clearing Member Guarantee Fund USD 47 million Brokerage House Proprietary Collateral Brokerage House Operational PerformanceFund (FDO) USD 530 million Customer Collateral Customer USD 45 billion

  9. 1 BM&FBOVESPA INFRASTRUCTURE MODEL 2 3 BM&FBOVESPA DERIVATIVES INFRASTRUCTURE AN INTEGRATED INFRASTRUCTURE FOR SECURITIES TRADING

  10. Conception based on an integrated model Central securities depository Securities settlement system Central depository Clearing and settlement activities Central counterparty function Fully integrated to the exchange Trading activities directly link with the clearing and settlement system Straight through processing Overview: our model At the same structure

  11. CBLC’s overview: corporate facts • Clearing and Depository Corporation for fixed income, equities and equity derivatives • For-profit company owned by BM&F BOVESPA S.A. • Self regulatory corporation under the supervision of the Brazilian Securities and Exchange Commission (CVM) and the Brazilian Central Bank.

  12. Brazilian Clearing and Depository corporation - CBLC CENTRAL SECURITIES DEPOSITORY SECURITIES SETTLEMENT SYSTEM CENTRAL COUNTERPARTY

  13. Depository services Depository services for securities

  14. Depository services Depository services for equities, corporate bonds, REITs, asset-backed securities and other instruments Main Features • Full Dematerialization • Fiduciary Ownership • Account Segregation • Daily Reconciliation • Proxy Statements • Corporate Actions

  15. Depository services Securities Under CBLC’s Depository Services - (USD billion) 800 600 699.6 693.4 400 450.5 200 320.1 0 2005 2006 2007 2008* Exchange rate as of June 30th, 2008 * June 2008

  16. Clearance & Settlement Clearance & Settlement services for securities

  17. Clearance & settlement services STP – Straight Through Processing Depository Services for equities, corporate bonds, REITs, asset-backed securities and other instruments Equities Derivatives Fixed Income Real Time CBLC

  18. Clearance & settlement services GROSS SETTLEMENT • Public offerings, initial public offerings, privatizations, special services and fixed income instruments • SFI-DVP Model 1 (BIS) SETTLEMENT CYCLE Equities T+0 T+n Fixed Income T+0

  19. Clearance & settlement services NET SETTLEMENT • Multilateral netting across different markets and instruments (equities, derivatives and fixed income instruments) • SFI-DVP Model 3 (BIS) SETTLEMENT CYCLE Equities - Cash T+3 T+1 Equities - Derivatives Fixed Income T+0 T+1

  20. Central counterparty and risk management Central counterparty and risk management services for securities

  21. Central counterparty Equities Derivatives* Fixed Income Securities Lending • Trading information is captured on a real-time basis and in a STP fashion • All trades are previously collateralized CBLC’s Risk Management, Clearing and Depository Services STP * Options on stocks

  22. Layers of protection Special Net Worth CBLC´s Model Settlement Fund Collateralization Participants Requirements Hybrid model: Collateralization and Settlement Fund

  23. Risk management services DEALING WITH FAILURES DELIVERY PAYMENT • 1st: Collaterals posted by the defaulter • 2nd: Settlement Fund • Defaulters’ contribution • Survivors’ contribution • 3rd: Special Net Worth • 1st: Securities Lending • 2nd: Buy-in Procedures

  24. Risk management services RISK ANALYSIS • Back-tests • The risk is analyzed by CBLC’s Board every month • The participants have full access to the • criteria • methodology • risks incurred by CBLC • The participants also have the same tools and systems CBLC applies to calculate its own risk

  25. Overview …providing creative and safe solutions to the financial market. RATING Very Low Risk by Maximum Rate by Item “Transaction costs and settlement efficiency”

  26. CBLC in the international scenario Fair Access Conditions Transparency Sound Legal Basis CPSS-IOSCO -2001 Segregation of Accounts G-30 - 2003 Delivey vs. Payment Same Day Finality in Central Bank CPSS-IOSCO - CCP -2004 Securities Lending CCP – Risk Management Collateralization and Settlem. Fund Contingency Plan and Backup Site

  27. Advantages of a integrated model • High level of Straight Through Processing (STP) • Synergies • Reaching all post-trade services • Dealing with failures • Investors services • Facilitate the clearing services • Information pool

  28. www.bmfbovespa.com.br

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