1. UNIDROIT CONVENTION ON INTERMEDIATED SECURITIES
VII ACSDA General Assembly
29 – 31 March San Salvador, El Salvador
UNIDROIT
CONVENTION ON INTERMEDIATED SECURITIES
The Brazilian Clearing and Depository Corporation
Margarida Baptista

2. Background Last two decades: Financial Innovations
Growth of the estimated value of securities held in custody worldwide: US$ 50 tri (2004)
Expansion of cross-border securities transactions
Enlarging complexity of the intermediation chain
The Brazilian Clearing and Depository Corporation was created in 1997 as a spin-off of BOVESPA.
CBLC is a for-profit corporation, owned by market participants (its clearing agents), and also is a self-regulatory organization under the supervision of the CVM, the Brazilian Securities and exchange Commission, and the Brazilian Central Bank.
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Increasing awareness of the legal risks inherent to the securities transactions

3. In fact... 1980/90s 2000s Credit risk Operational risk Liquidity risk
Market risk
Legal risk
1980/90s
The Brazilian Clearing and Depository Corporation was created in 1997 as a spin-off of BOVESPA.
CBLC is a for-profit corporation, owned by market participants (its clearing agents), and also is a self-regulatory organization under the supervision of the CVM, the Brazilian Securities and exchange Commission, and the Brazilian Central Bank.
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4. Cross border situation
Country A
CSD
Intermediary
Country B
Country C
Intermediary
Collateral
Secured creditor
Investor
One of the main characteristic introduced was the transfer of reserves between the clearinghouses and banks through the Central Bank Money Transfer System (STR).
The STR system works on a real time gross settlement basis and overdrafts are not allowed.
The most important results of the STR were: it allowed true DVP for clearing houses and it eliminates the settlements risks.
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Loan
Problem: growing of legal uncertainty in cross-border securities transactions

5. Solutions in a cross-border context
Conflict-of-laws
International Private Law elements are used to define which is the applicable law (jurisdiction) in case of conflicts.
Substantive law
All criteria for participation are publicly disclosed and clearly defined at CBLC.
Custodians are the participants that use the CBLC’s depository services for the safeguard of their securities and for the securities of their clients.
Financial institutions that wants to become a clearing agent at CBLC must buy CBLC’s shares. These participants are the ones responsible for the collateralization and settlement of all transactions under their responsibility.
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Harmonization of statutory or written law that governs rights and obligations of those who are subject to it.

6. Hague and UNIDROIT Conventions
Conflict of Law
Benefits:
Protection of market participants
Protection of financial system
Gains in economic efficiency
Lower transaction costs
Lower credit costs
Hague Convention
Substantive Law
I would like to conclude by stressing the CBLC is one of the world’s safest and most reliable depositories.
Thomas Murray, an independent British risk rating company, awarded CBLC the best possible grade on a scale of 5: CBLC was considered a “low risk” depository and clearinghouse.
Wilshire, which provides assessments for one of the biggest US pension fund (CalPERS), gave Brazil the maximum rating for the item “transaction costs and settlement efficiency”.
I believe thie presentation gave you a general picture of the Brazilian Stock Exchange and also of CBLC. Thank you very much for your time and attention. I will be more than happy to clarify any doubts.
UNIDROIT Convention

7. Hague Convention - Overview
International multilateral treaty intended to remove, at a global scale, legal uncertainties for cross-border securities transactions
Basic purpose: update and unify conflict of laws principles to:
Reduce Legal Risks
Better reflect market reality in securities holdings
Final version: December 2002
Principle: PRIMA – Place of the Relevant Intermediary Approach
Article 4 – Primary Rule: the law governing the main proprietary issues of indirect securities holding systems is the law agreed upon as governing the account agreement between the investor and his direct intermediary, provided several factual conditions are met.
Incorporated in the G-30 Recommendations (rec. 15)
All CBLC’s activities are supported by a strong legal basis, which comprehends laws, resolutions, circular letters and instructions.
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8. Hague Convention – Limited solution?
Relevant questions:
Is the domestic law identified by the international rule clear and satisfatory?
Does the domestic law combine, i.e. work effectively with other juristictions, in a cross-border context?
Complementary solutions:
Hague Convention cannot address issues of substantive law
EU Directives
UNIDROIT

9. Unidroit Convention - Overview
Objectives:
“Promote internal soundnes and cross-border system compatibility through the provision of a basic legal framework for the modern intermediated securities holding system”
Suggests a framework that comprehensively adressess issues of substantive law related to intermediated securities
Reduction of Legal Risk

10. Unidroit Convention – History (I)
September 2002:
First Meeting of the UNIDROIT Study Group on Harmonized Substantive Rules Regarding Intermediated Securities
2003/2004:
Consultations in 20 countries
2004:
Preliminary Draft Convention and Explanatory Notes (UNIDROIT Study LXXVIII – Docs. 18 and 19)
May 2005:
First Session of the Committee of Governmental Experts
Delegations of 33 countries and 10 international organizations
Amended Draft Convention (Doc. 24)

11. Unidroit Convention – History (II)
Inter-Sessional Regional Meetings (2005/2006):
Europe:
September 2005: Bern/Switzerland
January/February 2006: Paris/France
Latin America:
October 2005: São Paulo/Brazil
Organized by UNIDROIT, CBLC, Caja de Valores, BM&F, and Comisión Nacional de Valores
Participation of ACSDA’s representatives (Brazil, Argentina and South Africa)

12. Unidroit Convention – History (III)
March 2006: Second Session of the Committee of Governmental Experts
Delegations of 39 countries and 11 international organizations
Participation of 8 ACSDA member countries:
Argentina
Brazil
Canada
Chile
Colombia
Mexico
South Africa
USA
Preliminary Draft Convention (UNIDROIT Study LXXVIII Doc. 42)
ACSDA’s Members States of Unidroit:
Argentina Bolivia
Brazil Canadá
Chile Colombia
Mexico Nicaragua
South Africa USA
Uruguay

13. Unidroit Convention Main Principles:
Scope: cross-border and domestic transactions
Neutrality, functionality, accomodation of distinct legal approaches
Compatibility with other relevant instruments, like the Hague Convention
Credit/debit of book-entry accounts: pre-condition for acquisition and disposition of securities and securities’ interest in intermediated systems
The continuous upgrading of CBLC’s services allows it to comply with all the principal international recommendations developed and published by prestigious groups and associations such as CPSS-IOSCO Task force, G-30, ISSA, among others.

14. Unidroit Convention – Issues covered
Core-issues:
Clear and simple rules for acquisition and disposition of securities
Fruits, voting rights, etc
Investor protection in case of insolvency of the intermediary
Integrity of the account holder / intermediary relationship
Finality and irrevocability
Net settlement
Relations with issuers of securities
Creation and realisation of security interests
Right to use clients’ assets for own purposes

15. Unidroit Convention – Structure*¹
Definitions, Scope of Application and Interpretation
Articles 1 to 3
Rights Attached to the Securities
Articles 4 and 9
Acquisition and Disposition of Securities
Articles 5, 7 and 11
Security Interests in Intermediated Securities
Articles 6, 7, 10 and 11
Exemptions for SSS/Clearinghouses
Articles 8 and 13
Insolvency of Intermediary
Articles 12 and 14
Duties of Intermediary and Loss Sharing of Securit. in Case of Insolvency
Articles 15 to 18
Relations with Issuers of Securities
Articles 19 and 20
Special Provisions on Collateral Transactions (Chapter 7)
Articles 21 to 25 *²
*¹ There are proposals for a new structure (France and USA)
*² Fall Back Rules – Chapter 7

16. Unidroit Convention – Article 8
[Overriding effect of certain rules os securities settlement [or clearing] system]
Any provision of the rules or agreements governing the operation of a securities settlement [or clearing] system [which is directed to the stability of the system or the finality of transactions effected through the system] shall, to the extend of any inconsistency, prevail over [any provision of Articles 7, X, Y,...] this Convention].

17. Unidroit Convention – Article 13
[Effectiveness of debits, credits etc. and instructions on insolvency of operator or participant in securities settlement [or clearing] system]
1. – Any provision of the rules or agreements governing the operation of a securities settlement [or clearing] system [which is directed to the stability of the system or the finality of transactions] shall have effect notwithstanding the commencement of an insolvency proceeding in respect of [the operator of] the system or any participant in the system in so far as that provision:
(a) precludes the invalidation or reversal of a debit or credit of securities to, or a designating entry in, a securities account which forms part of the system after the time at which that debit, credit or designating entry is treated as final under the rules of the system;
(b) Precludes the revocation of any instruction given by a participant in the system for making a disposition of securities, or for making a payment relating to an acquisition or disposition of securities, after the time at which that instruction is treated under the rules of the system having been entered irrevocably into the system.
2. – Paragraph 1 applies notwithstanding that any invalidation, reversal or revocation referred to in that paragraph would occur by mandatory operation of the insolvency law of a Contracting State.

18. Unidroit Convention – Next steps...
Discussions of the new version of the Draft Convention and proposed amendments (Unidroit Study LXXVIII Doc. 42)
Production/publication of comments by National Governments
November 6-15, 2006: Third Session of the Committee of Governmental Experts

19. For more information...
All CBLC’s activities are supported by a strong legal basis, which comprehends laws, resolutions, circular letters and instructions.
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