ACSDA SEMINARACSDA SEMINAR

BEST ACHIEVEMENTS ON DEPOSITORY, CLEARANCE

AND SETTLEMENT SERVICES IN THE AMERICAS

APPROACHES TO TRUE APPROACHES TO TRUE DVPDVP

ACSDA SEMINARACSDA SEMINAR

BEST ACHIEVEMENTS ON DEPOSITORY, CLEARANCE

AND SETTLEMENT SERVICES IN THE AMERICAS

APPROACHES TO TRUE APPROACHES TO TRUE DVPDVP

Margarida BaptistaNovember 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 glanceCBLC at a glanceMajor milestones Major milestones ...... 1997: CBLC creation1997: CBLC creation

CSD, CCP and settlement corporation for equities (cash, options and forward markets)

2000:2000: CBLC becomes the only CSD, CCP and settlement corporation for the Brazilian equities market (exchanges and OTC markets)

2000/2001: Diversification process2000/2001: Diversification process Government Bonds: Clearance and

Settlement functions Corporate bonds: CSD, clearance and

settlement corporation, CCP

CBLC at a glanceCBLC at a glanceWhat we are ... ...

CSD for private issued securities (equities and corporate bonds)

Clearing and Settlement Corporation: equities

corporate bonds

government bonds

Central Counterparty (equities and corporate bonds)

CBLC at a glanceCBLC at a glanceNear future Near future ......

April 2002: April 2002: CCP and guarantor for equities, debt

instruments (corporate and government) and money market

Exchanges and OTC markets

New operational model: SFI-DVP 3

NEW BRAZILIAN PAYMENT SYSTEMNEW BRAZILIAN PAYMENT SYSTEM

AGENDA

The New Brazilian Payment System

CBLC at a glance

CBLC Model: SFI-DVP 3

The new Brazilian Payment The new Brazilian Payment SystemSystemMain objectives Main objectives ......

Reduction of systemic risk Compliance with international best practices and

recommendations

Improvement of the Brazilian market competitiveness

The new Brazilian Payment The new Brazilian Payment SystemSystemMain features Main features ......

Control of reserves accounts in real time by Central Bank, not allowing overdrafts (RTGS payment facilities)

SELIC (Central Bank’s depository and government bonds settlement system) operating in a RTGS fashion

Implications: Maximum principal risk mitigation

Greater liquidity requirements

Minimizing ...

The new Brazilian Payment The new Brazilian Payment SystemSystemMain features Main features ......

Private clearinghouses operating DNS systems with direct access to Central Bank systems (SELIC and STR) through settlement accounts FOREX Payments Securities

Central Central CounterpartiesCounterparties

COMPLEMENTARITY RTGS AND DNS COMPLEMENTARITY RTGS AND DNS SYSTEMSSYSTEMS

The new Brazilian Payment The new Brazilian Payment SystemSystemThe Central Counterparties The Central Counterparties Role Role ...... 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”

Main function: To measure, manage and assume counterparty

risk Main advantages:

Guarantee of anonymity Supports multilateral netting Absorption of risks between trade and the

settlement period Protection of participants in the event of a

participant default 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 ModelCBLC Settlement ModelWhat was taken into account ... What was taken into account ...

Objectives and regulations of the New Brazilian Payment System

International best practices and recommendations

Profile and the characteristics of the Brazilian financial market

CBLC accumulated expertise as a central counterpaty and settlement corporation

CBLC Clearance and Settlement CBLC Clearance and Settlement ModelModel General characteristics General characteristics ... ...

CBLC as a central counterparty SFI-DVP model 3 - multilateral netting

both for securities and cash legs For cash leg, multilateral netting across

different markets and instruments - single net position

Same day finality in central bank money Settlement cycles:

Equities: T+3 Corporate Bonds: T+1 Government Bonds: T+0 and T+1

Settlement window: 3:30 p.m.-3:55 p.m.

Allocation toBeneficial

Owner

Allocation toBeneficial

Owner

• Allocation Process

• Information to Brokers

Information Information

• Trading and Matching (Trading Systems)

TradingTrading(Trading Systems)(Trading Systems)

Broker ABroker A Broker BBroker B

Sell

OrderBuy

OrderMatchingMatching

CBLCCBLC

• After Matching all trades are reported to CBLC

• CBLC becomes CCP to Clearing AgentsCBLC becomes CCP to Clearing Agents

CBLCCBLC(CCP)(CCP)Clearing Agent A Clearing Agent A Clearing Agent BClearing Agent B

• Multilateral Netting Multilateral Netting

Multilateral Netting

Broker A1Broker A1

Settlement Bank ofSettlement Bank ofClearing Agent AClearing Agent A

Broker B1Broker B1

Settlement Bank ofSettlement Bank ofClearing Agent BClearing Agent B

• Netting Information (Securities and Netting Information (Securities and Cash)Cash)

CBLC’s Settlement Account in CBLC

Depository Service

CBLC’s Settlement Account in SELIC

Delivery Process to Delivery Process to CBLCCBLC

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.

SELICSELICParticipantParticipant

CBLC CBLC Depository ServiceDepository Service

(Equities and Corporate Bonds)(Equities and Corporate Bonds)

SELICSELICDepository ServiceDepository Service

(Government Bonds)(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.)Payment Process to CBLC (3:30 p.m.)

STR STR (Central Bank Money(Central Bank Money

Transfer System)Transfer System)

CBLC Accountin STR

Clearing Clearing Agent CAgent C

SettlemenSettlement t

BankBank

Clearing Clearing Agent AAgent A

SettlemenSettlement t

BankBank

Clearing Clearing Agent BAgent B

SettlemenSettlement t

BankBank

At Settlement Window CBLC At Settlement Window CBLC coordinates DVP model 3coordinates DVP model 3

STR (Central Bank Money Transfer System)STR (Central Bank Money Transfer System)

CBLC CBLC AccountAccountin STRin STR

Settlement BankSettlement Bank(Clearing Agent (Clearing Agent

A)A)Settlement BankSettlement Bank(Clearing Agent (Clearing Agent

B)B)

Settlement BankSettlement Bank(Clearing Agent (Clearing Agent

C)C)Settlement BankSettlement Bank(Clearing Agent (Clearing Agent

D)D)

Depository ServicesDepository ServicesCBLC CBLC

AccountsAccountsinin

DepositoryDepositoryServicesServices

CBLCCBLCDepository Depository Services Services

SELICSELICDepository Depository

ServicesServices

SFI - Delivery versus Payment (3:55 SFI - Delivery versus Payment (3:55 p.m.)p.m.)

CBLC Clearance and Settlement CBLC Clearance and Settlement ModelModel Failure Procedures Failure Procedures ......

Settlement window: 3:30 p.m.- 3:55 p.m.

Delivery failure :

Securities lending

Buy-in

Payment failure :

Financial Credit Lines

Collateral Execution

Settlement Fund

Segregated Networth

THANK YOU VERY MUCH !THANK YOU VERY MUCH !