ACSDA SEMINAR APPROACHES TO TRUE DVP ACSDA SEMINAR BEST ACHIEVEMENTS ON DEPOSITORY, CLEARANCE AND SETTLEMENT SERVICES IN THE AMERICAS APPROACHES TO TRUE DVP Margarida Baptista November 16, 2001

AGENDA The New Brazilian Payment System CBLC at a glance CBLC Model: SFI-DVP 3

The New Brazilian Payment System CBLC at a glance CBLC Model: SFI-DVP 3

CBLC at a glance Major milestones... l 1997: CBLC creation l CSD, CCP and settlement corporation for equities (cash, options and forward markets) l 2000: l 2000: CBLC becomes the only CSD, CCP and settlement corporation for the Brazilian equities market (exchanges and OTC markets) l 2000/2001: Diversification process l Government Bonds: Clearance and Settlement functions l Corporate bonds: CSD, clearance and settlement corporation, CCP

CBLC at a glance CBLC at a glance What we are l CSD for private issued securities (equities and corporate bonds) l Clearing and Settlement Corporation: l equities l corporate bonds l government bonds l Central Counterparty (equities and corporate bonds)

CBLC at a glance Near future... l April 2002: l CCP and guarantor for equities, debt instruments (corporate and government) and money market l Exchanges and OTC markets l New operational model: SFI-DVP 3 è NEW BRAZILIAN PAYMENT SYSTEM

AGENDA The New Brazilian Payment System CBLC at a glance CBLC Model: SFI-DVP 3

The new Brazilian Payment System Main objectives... l Reduction of systemic risk l Compliance with international best practices and recommendations Improvement of the Brazilian market competitiveness

The new Brazilian Payment System Main features... l Control of reserves accounts in real time by Central Bank, not allowing overdrafts (RTGS payment facilities) l SELIC (Central Bank’s depository and government bonds settlement system) operating in a RTGS fashion l Implications: l Maximum principal risk mitigation l Greater liquidity requirements Minimizing...

The new Brazilian Payment System Main features... l Private clearinghouses operating DNS systems with direct access to Central Bank systems (SELIC and STR) through settlement accounts l FOREX l Payments l Securities Central Counterparties COMPLEMENTARITY RTGS AND DNS SYSTEMS

The new Brazilian Payment System The Central Counterparties Role... l Definition (CPSS-IOSCO): “an entity that interposes itself between the counterparties to trades, acting as the buyer to every seller and the seller to every buyer” l Main function: l To measure, manage and assume counterparty risk l Main advantages: l Guarantee of anonymity l Supports multilateral netting l Absorption of risks between trade and the settlement period l Protection of participants in the event of a participant default l Prevents the spillover of securities settlement risks to the payments system

AGENDA The New Brazilian Payment System CBLC at a glance CBLC Model: SFI-DVP 3

CBLC Settlement Model What was taken into account... l Objectives and regulations of the New Brazilian Payment System l International best practices and recommendations l Profile and the characteristics of the Brazilian financial market l CBLC accumulated expertise as a central counterpaty and settlement corporation

CBLC Clearance and Settlement Model General characteristics... l CBLC as a central counterparty l SFI-DVP model 3 - multilateral netting both for securities and cash legs l For cash leg, multilateral netting across different markets and instruments - single net position l Same day finality in central bank money l Settlement cycles: l Equities: T+3 l Corporate Bonds: T+1 l Government Bonds: T+0 and T+1 l Settlement window: 3:30 p.m.-3:55 p.m.

Allocation to Beneficial Owner Allocation to Beneficial Owner Allocation Process Information to Brokers Information Trading and Matching (Trading Systems) Trading (Trading Systems) Broker A Broker B Sell Order Buy Order Matching CBLC After Matching all trades are reported to CBLC

CBLC becomes CCP to Clearing Agents CBLC becomes CCP to Clearing Agents CBLC(CCP) Clearing Agent A Clearing Agent B Multilateral Netting Multilateral Netting Multilateral Netting Broker A1 Settlement Bank of Clearing Agent A Broker B1 Settlement Bank of Clearing Agent B Netting Information (Securities and Cash) Netting Information (Securities and Cash)

CBLC’s Settlement Account in CBLC Depository Service CBLC’s Settlement Account in SELIC Delivery Process to CBLC CBLC has settlement accounts in SELIC Depository Service Bonds (Government Bonds) and in CBLC Depository Service (Equities and Corporate Bonds). Selic Participant must instruct the delivery. SELICParticipant CBLC Depository Service (Equities and Corporate Bonds) SELIC Depository Service (Government Bonds) Securities are transferred on net basis from the seller accounts to CBLC Settlement Accounts: T+3 - Equities (11:00 a.m.) T+1 - Corporate Bonds (2:00 p.m.) T+0/T+1 - Government Bonds (2:00 p.m.)

Payment Process to CBLC (3:30 p.m.) STR (Central Bank Money Transfer System) Transfer System) CBLC Account in STR Clearing Agent C SettlementBank Clearing Agent A SettlementBank Clearing Agent B SettlementBank

At Settlement Window CBLC coordinates DVP model 3 STR (Central Bank Money Transfer System) CBLCAccount in STR Settlement Bank (Clearing Agent A) Settlement Bank (Clearing Agent B) Settlement Bank (Clearing Agent C) Settlement Bank (Clearing Agent D) Depository Services CBLCAccountsinDepositoryServices CBLC SELIC SFI - Delivery versus Payment (3:55 p.m.)

CBLC Clearance and Settlement Model Failure Procedures... l Settlement window: 3:30 p.m.- 3:55 p.m. l Delivery failure : l Securities lending l Buy-in l Payment failure : l Financial Credit Lines l Collateral Execution l Settlement Fund l Segregated Networth

THANK YOU VERY MUCH !