BM&FBOVESPA POST TRADE INTEGRATION

Marcelo WilkBM&FBOVESPA

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1. BM&FBOVESPA´s Business Model

2. Post Trade Environment

3. The Post Trade Integration Project

4. Key Benefits to The Brazilian Financial and Capital Markets

5. Project Governance and Main Challenges

Agenda

Agenda

1. BM&FBOVESPA´S BUSINESS MODEL

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BM&FBOVESPA´S BUSINESS MODEL

Fully Integrated and Diversified Business Model

Listing(stocks, bonds, funds,

asset-backed securities, among others)

CommoditiesCertification

Trading(stocks, derivatives, corporate and government bonds, funds, spot US Dollar, among others)

Central Counterparty (CCP)Clearing and Settlement

(for all the products)

Services for Issuers and Commodities

Trading, Clearing and Depository Activities

Central Securities Depository(stocks and corporate bonds)

Securities Lending(stocks)

Custody(services provided for

funds, and other marketparticipants)

Market Data

Index Licensing

Software Licensing(used by brokerage houses

and other market participants)

Other Services

OTC DerivativesRegistration and Collateral

Management

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BM&FBOVESPA´S BUSINESS MODEL

One-stop-shop for Brazilian Exchange Traded and OTC Assets

2. POST TRADE ENVIRONMENT

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POST TRADE ENVIRONMENT

The configuration of BM&FBOVESPA’s post-trade environment is the result of the historical evolution of the two exchanges and their merger

SSS

• Government bonds spot market

• Money and repo markets

• Securities lending

• Futures & options contracts based on interest rates, exchange rates, inflation rates, equity indices, agribusiness, energy and metal commodities

• OTC derivatives (swaps and flexible options)

DERIVATIVES CLEARINGHOUSE

• Equities, ETFs and BDRs

• Corporate Debt and MBS

• Equity and equity index derivatives

• Securities lending service

EQUITIES AND CORPORATE DEBT CLEARINGHOUSE

• Interbank Spot FX market (BRL vs. USD)

FX CLEARINGHOUSE GOVERNMENT BONDS CLEARINGHOUSE

CCP

SSS

CCP

CSD

SSS

CCP

SSS

CCP

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BM&FBOVESPA POST-TRADE ENVIRONMENT

Derivatives ClearinghouseCentral Counterparty

Interest rate futures and options

FX futures and options

Commodities futures and options

OTC derivatives (swaps and options)

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BM&FBOVESPA POST-TRADE ENVIRONMENT

Equities and Corporate Debt ClearinghouseCentral Counterparty

Equities, ETFs and BDRs

Corporate Debt and MBS

Equity and equity index derivatives

Securities lending

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BM&FBOVESPA POST-TRADE ENVIRONMENT

FX ClearinghouseCentral Counterparty

Interbank spot FX market

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BM&FBOVESPA POST-TRADE ENVIRONMENT

Government Bonds ClearinghouseCentral Counterparty

Spot transactions

Repo transactions

Securities lending

3. THE POST TRADE INTEGRATION PROJECT

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Registration, clearing &

settlement

Central counterparty (CCP)

Main functions performed by each clearinghouse

THE POST TRADE INTEGRATION PROJECT

•Trade capture, registration, give-up & allocation

•Open position management

•Marking to market

•Calculation & netting of rights and obligations in currencies, securities & commodities

•Settlement processing in currencies, securities & commodities

•Provision of information to participants & regulators

•Risk system development & management

•Maintenance of stress scenarios & further risk parameters

•Collateral acceptance, limit control & valuation

•Regular back-testing analysis of risk models

•Management of defaults & crisis situations

•Approval of CCP risk management processes by DEBAN/Central Bank

THE POST TRADE INTEGRATION PROJECT

Organization of the post-trade environment by type of asset/product

4 rulebooks and 4 operating procedure manuals

4 distinct participant structures, with different operational & capital requirements

4 systems/processes for give-up, allocation and open position management

4 risk management systems/processes not taking into account the effects of risk-offsetting among the several products and assets, including those posted as collateral

4 collateral pools not communicating with each other, often preventing the benefit of the collateral posted from being fully explored

4 settlement windows and 4 multilateral balances not netted against each other, requiring a higher intraday liquidity and a greater number of payment transactions

4 different IT environment/architectures, generating a higher operational risk and requiring constant maintenance efforts, thus impacting the time frame of projects

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4 registration systems of participants and clients

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Governmentbonds

Corporate debt securities

Interbank spot FX

Futures, options, forwards

Securities lending

OTC derivatives

Other products & assets

Equities, ETFs, BDRs

• Organization of thepost-trade environment by type of process, instead of product

• Streamlining & standardization of rules, processes, requirements & documentation

• Creation of a single settlement window for all the markets

• Development of an integrated risk model & a single collateral pool

• Thorough modernization and simplification of the technological infrastructure

THE POST TRADE INTEGRATION PROJECT

Clearinghouse Integration (environment by process)

Rulebook & Manual

Participant structure

Participant & client registration

Give-up & allocation

Position control

Netting & settlement

Risk management

Collateral pool

Real-time clearingsystem

Participantregister

Pricing

Instrument register

Fees

SPB & CSD settlement

CORE

Collateral management

Taxation

Intraday risk management

Calculation of cashsettlement values

Trade capture & reg.

Give-up & allocation

Position management

Exchange of information with other systems

Information services

THE POST TRADE INTEGRATION PROJECT

Marking to market

New process and system architecture

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4. KEY BENEFITS TO THE BRAZILIAN FINANCIAL AND CAPITAL MARKETS

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• Greater efficiency in managing intraday liquidity

• Single settlement window for all the markets

• Netting of payable and receivable flows among the several asset/product classes

• Saving of average intraday liquidity amounting to BRL0.5 billion

• Example:

• Balance payable on the futures market: (-) BRL100 million

• Balance receivable on the options market: (+) BRL110 million

• Balance to be settled with the integrated clearinghouse: (+) BRL10 million

KEY BENEFITS

Key benefits to the market

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• Increased efficiency in the use of capital

• New risk evaluation model called CORE

• Integrated portfolio risk calculation, covering traded assets & contracts, including OTC contracts and posted collateral

• Integrated & robust modeling of market, liquidity and cash flow risks for the different assets/contracts/collateral included in the portfolio

• Risk-offsetting between assets & contracts with mutual risk factors

• Examples:

• Futures vs options

• Futures vs swaps

• Options with different expiration dates

• Short BTC position vs equities posted as collateral

• Short options position vs equities posted as collateral

• CORE has the potential of becoming a new international benchmark for CCP risk management

KEY BENEFITS

Key benefits to the market

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KEY BENEFITS

• Reduced operational risks & increased operational efficiency

• Simplification & standardization of countless back-office processes

• Elimination of redundancies

• Increased automation of processes

• Reduced back-office & infrastructure costs for the whole chain of participants

• Less time to launch new products and meet market and regulatory demands, because of a more modern, compact & modular technology architecture

Key benefits to the market

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KEY BENEFITS

• Modernization & standardization of the technological infrastructure

• Complete technological renovation, with the adoption of a state-of-the-art IT architecture – kernel & modules

• Processing capacity of more than 10 million trades per day

• Real-time risk processing capacity

• High availability & disaster recovery

• Functionality & flexibility due to a modular architecture and a multimarket feature

Key benefits to the market

5. PROJECT GOVERNANCE AND MAIN CHALLENGES

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MARKET

REGULATORS

BM&FBOVESPA

• Strong Project Management

• Model definition

• IT development and testing

• Change management

• Interaction with market and Regulators

• Engagement and participation

• Model and process validation

• Testing Committee

• Internal IT modifications

• Certification & parallel production

• Reporting and monitoring

• Review & approval of Rulebook and Manual

• Review & approval of risk management model

• System ratification, process & IT auditing

PROJECT GOVERNANCE AND MAIN CHALLENGES

PROJECT GOVERNANCE AND MAIN CHALLENGES

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THE POST-TRADE INTEGRATION PROJECT

2008

2009

2010

2011/12

2013

BM&F AND BOVESPA MERGE

GOVERNANCE INTEGRATION

INTEGRATION AND INCORPORATION OF THE LEGAL ENTITIES

2008 FINANCIAL CRISIS

INTEGRATION INITIAL STUDIES

INITIAL STANDARDIZATION PROCESSWHITE PAPER – RESEARCH AND DEVELOPMENT

WHITE PAPER - PUBLISHED

INTERNAL TASK FORCE

WORKING GROUP WITH MARKET PARTICIPANTS

INTEGRATION OPPORTUNITIES – R&D

ROADMAP DEFINITION

INTEGRATION OPPORTUNITIES – R&D IMPLEMENTATION

NEW UNIFIED CCP - DERIVATIVES

IBM ASSESSMENT POTENTIAL PARTNERSHIPS

2014 NEW UNIFIED CCP – DERIVATIVES AND EQUITIES

2015 NEW UNIFIED CCP – DERIVATIVES, EQUITIES, FX, GOV. BONDS

• The Post Trade Integration Project is subject to prior authorization from regulators

Thank you!

Marcelo Wilkmwilk@bvmf.com.br