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Introduction ........................................................................................................................ 2 Questions 23 and 24 ......................................................................................................... 3 Questions 45, 50 and 52 .................................................................................................. 8 Question 49 ......................................................................................................................... 9

Item c – Collateral Handling ......................................................................................... 9 Questions 51 and 53 – Collection of corporate actions entitlements, interests and dividends ..................................................................................................................... 13 Question 90 – Procedures for Guaranteeing Settlement....................................... 13 Question 91........................................................................................................................ 20 Question 96 and 97 ......................................................................................................... 22

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Introduction

The Brazilian Clearing and Depository Corporation (CBLC) was created in

December, 1997 with the mission of providing an integrated nationwide

clearance, settlement, central counterparty and risk management solution for

the Brazilian securities market, covering cash and derivatives. CBLC is also the

Brazilian Central Securities Depository (CSD) for equities and one of the

CSDs for corporate bonds.

Since its creation, CBLC has been the central counterparty and guarantor

(CCP) for the equities market traded at Bolsa de Valores de São Paulo

(BOVESPA). With the integration of the Brazilian stock exchanges in 1999,

CBLC became the national clearinghouse for the equity market, including OTC

transactions (SOMA). Early in 2001, CBLC extended its services to the

corporate bonds market traded at BOVESPA

In its role as a CSD, all securities held in CBLC Depository Service are totally

dematerialized, registered in book-entry form and identified by ISIN codes.

CBLC Depository Service is certified by both the U.S. Securities and

Exchange Commission and the British Securities and Futures Authority.

CBLC’s participants comprise 72 Clearing Agents among major Brazilian and

foreign-owned banks and brokers. Clearing Agents have to be shareholders of

CBLC and to prove operational and financial capabilities in order to comply with

the responsibilities inherent in their role. Additionally, 259 financial and non-

financial institutions participate in CBLC as Depository Agents (custodians).

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Although they are not required to be shareholders of CBLC, Depository

Agents also must demonstrate operational capability in accordance with the

size of their activities and number of clients.

CBLC’s Board of Directors is composed of seven permanent representatives

and three deputies: two representatives from the full clearing agents

category, two representatives from the self clearing agents category, two

representatives from BOVESPA and the CEO.

The executive responsibilities are divided into three areas: Operations, Risk

Management and Products and Services.

Gilberto Mifano Chief Executive Officer

Amarílis Prado Sardenberg Chief Operating Officer

João Batista Fraga Products Development Director

Francisco Carlos Gomes Director of Control

Questions 23 and 24

Participants and Participation: Eligibility requirements

As CBLC is at the same time a clearinghouse (CCP), a depository and a

settlement system. Its direct participants can be Clearing Agents and/or

Depository Agents.

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Clearing Agents

CBLC has an open structure, which allows for a wide range of participants.

Nonetheless there is a formal set of admission criteria. All participants,

whether they self-clear or clear for third parties must meet financial

standards (in terms of minimum capital, liquidity, and earnings in the context

of the participant’s trading activities) and demonstrate managerial skills,

ethical behaviour, and operational competence as specified in CBLC’s by-laws.

The minimum capital requirements are:

Non-banking self-clearing agents:

• A minimum net worth of BRL 3.0 million;

• A minimum working capital and short-term capital of BRL 1.0 million.

Self-clearing agents which are banks:

The highest value of the two alternatives below is required:

• A minimum net worth of BRL 3.0 million;

• What is required by the Basle Committee.

o Immobilization Index according to the Basle Committee;

o Excess Capital in Relation to Fixed Assets of BRL 1.0 million

Full-clearing agents which are not banks:

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- The highest value of the two alternatives below is required, up to the

maximum amount of BRL 17 million:

• Minimum net worth of BRL 3 million plus BRL 2.0 million for each

intermediary;

• Minimum of BRL 3 million plus BRL 2.0 million for each BRL 100

million settled for intermediary/month;

- The highest value between the two alternatives below is required, up to the

maximum amount of BRL 15 million:

• A minimum working capital and short-term capital of BRL 1 million

plus BRL 0.5 million for each intermediary.

• A minimum working capital and short-term capital of BRL 1 million

plus BRL 0.5 million for each BRL 100 million settled for

intermediary/month;

Full-clearing agents which are banks:

- The highest value among the three alternatives below is required, up to the

maximum of BRL 17 million or what is required by the Basle Committee:

• A net worth of BRL 3 million plus BRL 2.0 million for each intermediary;

• BRL 3 million plus BRL 2 million for each BRL 100 million settled for

intermediary/month;

• What it is required by the Basle Committee.

• An immobilization index according to the Basle Committee;

- The highest value between the two alternatives for excess capital in relation

to fixed assets below is required, up to the maximum amount of BRL 15 million:

• BRL 1.0 million plus BRL 0.5 million for each intermediary/month;

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• BRL 1.0 million plus BRL 0.5 million for each BRL 100 million settled for

intermediary/month;

Both the Cooke Ratio and the Liquidity Ratio reflect Basle Standards. CBLC’s

board of directors must approve all candidates for admission. In addition, all

full clearing participants must be either a broker-dealer or a bank approved by

the Brazilian central bank.

The membership consists of 24 banks and 48 broker-dealers. According to the

Brazilian legislation and CBLC’s by-laws, all clearing agents have to be legally

established in Brazil.

It is important to emphasize that both brokers and banks are able to act as

Full Clearing Agents provided they meet all CBLC requirements regarding

capital and operational capabilities.

CBLC establishes different capital requirements for each type of Clearing

Agent.

Depository agents

There are two categories of participants in the Depository Service: the

Depository Agents and the Special Depository Agents.

Both Depository Agents and Special Depository Agents use CBLC Depository

Services for securities custody purposes. The difference between them is

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that Depository Agents are authorized to render custody services for

investors and to manage a sub-account structure while Special Depository

Agents are not.

Financial institutions such as brokerage firms, universal, retail and investment

banks as well as dealers are eligible for becoming Depository Agents. Pension

funds, insurance companies and corporations are eligible for becoming Special

Depository Agents. It is important to mention that international financial

institution must have a local sub-custodian; therefore the Special Depository

Agents are only domestic institutions.

Also, both CBLC clearing and depository agents have to fulfill the following

general requirements (article 30 of the by-laws), independently if they are

brokers, banks or others depository agents:

• To meet the requirements prescribed in the Operational Rules;

• To provide the guarantees set out by the Executive Office;

• To formally adhere to the Operational Rules;

• To obtain approval from the Board of Directors.

As of September 2003:

Clearing Agents - 72

Banks – 24

Brokers – 48

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Depository Agents - 259

Banks - 47

Brokers - 130

Dealers – 39

Pension Funds – 6

Mutual Funds – 5

Insurance Companies – 4

Others - 28

Questions 45, 50 and 52

Since the characteristics of the corporate action (subscription, dividend,

interest payment, etc.) are defined, the issuer contacts the Issuer

Relationship Department, which registers the corporate action in CBLC

systems and informs all departments affected. Corporate Actions Processing

Department will then take the record of the shareholders, which have the

right to receive the corporate action (up to the level of beneficial owner) as

well as the amount each of them will receive.

For subscription of shares, the participants must send a requirement to CBLC

two days before the subscription’s expiry date (E-2), until 8:00 p.m. The

cession of share rights can be made until one day before the subscription’s

expiry date (E-1) until 8.00 p.m.

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Payments related to cash dividends and interest must be credited to CBLC’s

cash account in STR (Transfer System of Central Bank Money) by the issuer’s

bank on the payment date (P) until 10.30 a.m.

Payments related to subscriptions must be posted by the local sub-custodian’s

bank to CBLC’s cash account in STR on the expiry date (E) until 10.30 a.m.

CBLC will then reconcile payments and credit the sub-custodians (depository

agents) and issuers’ banks at 12:30 p.m.

The timetables and deadlines can be viewed better in the table bellow:

Instruction Deadline Timetable

Subscription Requirement E-2 Until 8.00 p.m.

Cession of rights E-1 Until 8.00 p.m.

Transfer of cash relative to subscription by the depository agents’ bank E Until 10.30 a.m.

Transfer of cash relative to cash dividend and interest by the issuer’s

bank P Until 10.30 a.m.

Transfer of cash relative to corporate actions from CBLC settlement

account in STR to the issuers’ or depository agents´ banks P 12:30 p.m.

Note: All corporate actions occur through Central Bank Money Transfer System (STR).

Question 49

Item c – Collateral Handling

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CBLC distinguishes two different main situations in what concerns the timing

of the collateral release: (i) collateral accounts maintained in the Brazilian

depositories; (ii) collateral accounts maintained abroad.

(i) Collateral accounts maintained in the Brazilian Depository:

CBLC has three main collateral accounts maintained in Brazil that are

currently used by its participants and investors:

(a) Collateral account held in the CBLC depository service

(b) Collateral account held in SELIC (the Brazilian Depository for

Government Bonds)

(c) Collateral account held in CETIP (a Corporate Bonds depository).

In all these cases, the collaterals are released real time, once the instructions

are sent by the participants. What is variable is the electronic means to do so

and some other minor details, as follows:

(a) once the participant instructs the withdraw of the equities from the

collateral account at CBLC to the regular depository account of the

participant, the process is totally automatized and the equities are released in

real time. It is important to clarify that, contrary to the US reality, in Brazil

all the equities traded at the exchange or in the organized OTC market need

to be deposited at CBLC, according to the local regulation.

(b) In what concerns SELIC, it is important to clarify that both the Central

Bank Systems (including Selic), CBLC and the banks of its participants are

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integrated in a whole massaging system (XML protocol) called RSFN - National

Financial System Network. Therefore, the withdraw of the government bonds

from the collateral account of CBLC at SELIC is instructed via this messaging

system and released in real time. Naturally, these instructions can be sent

during the SELIC working schedule (from 6:30 a.m. to 6:30 p.m.)

(c) Regarding CETIP, the release of the collaterals deposited in the CBLC

collateral account is made in a real time bilateral comparison fashion, but

through the proprietary network of CETIP and not the RSFN messaging

system. These instructions can be sent during the CETIP working schedule

(from 8:30 am to 5:30 p.m.)

(ii) Collateral accounts maintained abroad:

Although CBLC maintains three collateral accounts abroad (at DTCC, Euroclear

and Clearstream) that accept U.S. Government Bonds and ADRs, the only one

that has been used in a regular basis is the Euroclear one.

Naturally, in this case the withdraw mechanisms are those adopted by

Euroclear that have the following models:

- Credit instruction sent by CBLC to Euroclear

- Bilateral matched instructions (CBLC and the participant).

According to the instruction, the collateral account withdraw can be

processed during the night batch or daylight.

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Questions 51 and 53 – Collection of corporate actions entitlements, interests and dividends

In the Brazilian Stock Market, an issuer can pay corporate actions

entitlements, interests and dividends directly to the investor. Nevertheless,

CBLC is responsible for about 90% of the total market intermediation (the

remaining payments are paid directly by the company to the investor). CBLC

receives and pays the corporate actions (from/to the depository agents´

banks) in the same day and in Central Bank Money.

Question 90 – Procedures for Guaranteeing Settlement

Like in any another CCP, CBLC has three main risk categories to be managed:

credit risk (principal risk and market risk or replacement cost risk) and

liquidity risk.

CBLC mitigates principal risk adopting true delivery versus payment models (1

and 3, according to BIS standards). Concerning the DVP-3 model, both the

securities and the cash legs are settled on a net basis. Principal risk is

eliminated through a link between securities transfer and funds transfer. This

ensures that a delivery occurs if and only if payment has occurred, and vice

versa. These transfers are simultaneous, final and irrevocable. CBLC

coordinates the DVP through settlement accounts in the central bank money

transfer system (STR) and in the CBLC depository.

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Also, CBLC imposes its participants a collection of eligibility requirements. The

participants´ requirements are a collection of clearing agents exigencies such

as mandatory ownership of CBLC stocks, reputation and minimum capital

requirements that vary with the type of institution (non-banking self-clearing

agent, banking self-clearing agent, non-banking full-clearing agent and banking

full-clearing agent).

In order to deal with replacement cost risk, or market risk, CBLC has three

additional protection layers: collateralisation, settlement fund and special net

worth.

The CBLC risk model is based on 'defaulters pay' and 'survivors pay' principles

both for cash and derivatives markets.

In what concerns collateralisation, operational limits for clearing participants

are fixed according to posted collaterals calculated by the CBLC’s RiskWatch

system for regular settlement of cycles, which includes equities, fixed income

instruments and derivatives, and by the system CM-TIMS for open positions in

derivatives markets and in the securities lending programme. The CBLC

acquired the RiskWatch system from Algorithmics, a Canadian provider.

RiskWatch is a risk management software, which provides the clearing

members with complete risk information throughout the regular settlement

cycle.

The risk management system CM-TIMS was developed by the Options Clearing

Corporation (OCC) of Chicago to conduct a daily evaluation of the necessary

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margin requirements (performance bonds) for open positions in derivatives

markets so that obligations by participants in the derivatives markets and in

the securities lending program will be secured. Some modifications were made

to CM-TIMS to adapt its original model to the Brazilian market. The main

change was the need to perform the margin calculation at individual client

(beneficial owner) level. CM-TIMS provides CBLC Clearing Agents with the

margin requirement on the portfolio of positions held by the clients (investors)

for whom they provide clearing services. The total margin requirement for a

portfolio of open option contracts is obtained by calculating two components:

the Premium Margin and the Risk Margin.

• Premium Margin - The premium margin corresponds to the current cost of

liquidating an investor’s portfolio based on the current market option

premiums (for the options market), or the difference between the

underlying asset’s market close and the quotation of the

forward/securities lending contract.

• Risk Margin - The risk margin is the additional amount necessary to secure

a portfolio in case of adverse market price movements. The risk margin

calculation is based on ten different scenarios (five upwards and five

downwards) based on a ‘Margin Interval’ set according to the historical

volatility and liquidity of the underlying stock.

Once these margins have been calculated, the CM-TIMS system assesses the

availability of securities pledged to secure margins on that particular account.

In the event that the available securities are insufficient, the system

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automatically debits the clearing agent’s cash account. CBLC margin

procedures are fully automated and positions are updated on a real time basis.

Sellers of stock covered call options must lodge the securities through the

Depository Service on T+0. There are special arrangements for “Buy/Write”

trades on same trading day.

CBLC may require additional margins in extreme market circumstances from

individual or all Clearing Agents.

Amongst other advantages, the system:

• Provides CBLC’s clearing agents with the level of guarantees compatible

with the risks of their clients' portfolios;

• Calculates the total margin required for the portfolio of an investor

(position in options, forwards and securities lending);

• Off-sets the position margins by class (positions relating the same

underlying asset) or by product (asset classes, which show a high degree

of correlation);

• allows clearing agents to simulate margin requirements based on changes

in investors’ positions; and

• provides on-line information for all parameters used for calculating

margin requirements.

The guarantee system is completely automated. It updates investors’ positions

on a real time basis. The CBLC may require additional margins in extreme

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market circumstances from individuals or all clearing members. The groups of

risk and their positions are published in CBLC website (www.CBLCnet.com.br).

The third layer of protection is a settlement fund based on the 'survivors pay'

principle. Contributors to the settlement fund are the CBLC's clearing agents

and CBLC itself. Their collateral contributions are calculated based on the risk

exposure of their positions. CBLC calculates the clearing members' risk

exposure stressing their full portfolio - both regular settlement cycle and

open positions in derivatives markets - at a level of 99% confidence. (The

portfolio of CBLC participants is stressed through the RiskWatch system

using scenarios like the Russian crisis and Brazilian depreciation. 99% means

that the CBLC settlement fund value is allowed to drop in only one of a

hundred simulations below BRL 154 million, i.e. the value of the settlement

fund in September 2003.) In case of calls to make further contributions, the

clearing members' liability is limited to their risk exposure and they can

decide to fulfil the obligation or to reduce their risk exposure to the level of

their current participation in the fund. The fund is composed mainly of

Brazilian federal government bonds held in CBLC’s account at the Special

System for Settlement of Government Bonds named SELIC. The Central Bank

of Brazil is prohibited by law to be a guarantor either for clearinghouses or

for banks. The clearing members' contributions to the fund are updated

monthly but calculated daily. In case of a drop in the value of these bonds and

hence in the value of the settlement fund, CBLC´s rules and procedures

permit recomposition of the fund before the end of the month. The value of

the settlement fund is calculated daily.

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CBLC has a special net worth as the last protection layer. This segregation was

made compulsory by the central bank in order to protect the clearinghouse

itself.

In order to mitigate the liquidity risk, CBLC also has an automatic credit line

from a pool of banks operating in Brazil fully integrated with its settlement

system.

Payment failure

In case of a clearing member’s default, the assets available to meet losses

incurred by CBLC are applied in following order: a) margin collateral lodged by

the defaulting clearing member; b) defaulting clearing member's contribution

to the Settlement Fund; c) CBLC contribution to the fund; d) other clearing

members' contribution to the Settlement Fund; and e) CBLC pledged

segregated net worth.

To avoid liquidity risk, once CBLC has only a short period of time to execute

collaterals (from 3:30 pm to 3:55 pm), it has automatic financial credit lines

from a pool of banks operating in Brazil completely integrated with CBLC´s

systems.

Delivery failure

In case of delivery failure, CBLC has two instruments: a securities lending

program called BTC (implemented in 1996) and buy-in procedures.

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Securities lending program:

Since CBLC is the counterpart to stock lending transactions, it requires full

collateralisation to 100% of value, plus an additional 2 days’ volatility. Cash,

government securities, gold certificates, shares of open capital companies

which are traded at the stock exchanges, private sector securities, securities

traded on the international markets, bank letters of guarantee, letters of

guarantee or letters of credit issued by institutions domiciled overseas, credit

insurance issued by companies in Brazil or overseas, an other assets or

instruments are accepted as collateral. There is a daily mark-to-market of

outstanding positions. This service is also enforced by a well-established legal

basis.

Access to stock borrowing is via CBLC’s service network available between

8.30am and 7.00pm.

In December 2003, the stock lending service was made automatic, mandatory

and fully integrated in the settlement system.

Buy-in procedures:

Buy-ins are instituted to ensure that all trades entered in the system are

settled even if the securities available in the securities lending service are not

enough to guarantee the delivery of securities. The buy-in process adopted by

CBLC allows the broker representing the buyer’s investor to execute a new

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buying operation at market price, should the equities acquired in T+0 not be

delivered until T+3 by the seller (in CBLC, the settlement cycle for equities is

T+3).

At T+4, CBLC issues a buy-in order to the referred broker that needs to be

executed until T+6.This buy-in order execution has to be confirmed by the

broker to CBLC until T+7.

In the case of material impossibility of buy-in order execution (if the shares

remained not traded during the execution period), the buy-in order will be

valid for the next three days after the restart of trade.

The buy-in order can be canceled since the defaulter delivers the shares and

should the buyer agree with the buy-in order cancellation. Once the buy-in

order execution is confirmed, the sellers’ clearing agent must pay all the

related execution expenses, as well as the difference between the equities’

buy-in value and the value of the original operation. The buyer’s clearing agent

must pay the minor price between the original operation and the buy-in

execution price.

Question 91

CBLC is responsible for the assets kept in deposit. This responsibility is

clearly expressed in article 41 of the Brazilian Corporate law (Law nº

6.404/76), the sole paragraph of this article says that the institution

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authorized to act as custodian is obliged to return to the depositor the

quantity of shares received.

The Brazilian Securities Commission (CVM) also enacted a rule "Instrução

CVM" number 115/90 and its article 9th expresses that the Depository (i.e.

CBLC) is liable for damages caused by errors or irregularities involving shares

received for deposit.

CBLC´s rules, mainly its Operational Rules (item 1.2.4), clearly state that CBLC

is responsible for the total integrity and secrecy of the assets deposited.

The standard deposit agreement to be entered into between CBLC and its

clients clearly mentions in item 1.2 that CBLC is responsible for returning the

same amount of the shares received.

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Question 96 and 97

In April 2002 a new payment system was established in Brazil. Among other

features, this restructuring process involved the implementation of a

proprietary network (XML protocol), named RSFN – Rede do Sistema

Financeiro Nacional (National Financial System Network), that connects the

Central Bank Systems, the private depositories and/or clearinghouses and

banks. These Systems are SELIC (the government bonds depository and

settlement system) and STR, an interbank funds transfer system that

operates in a real time gross settlement fashion allowing the settlement in

central bank money.

That is:

a) The RSFN is the communication vehicle that connects all three above

mentioned institutions (including CBLC) and the Brazilian Payment

System (Question 97b);

b) The RSFN is also a messaging network that connects CBLC and the

banks chosen by its direct participants (issuers, depository agents and

clearing agents – Questions 97, Items d up to f) in what relates to all

necessary instructions to pay/receive funds through the STR.

Besides, CBLC communicates with all its direct participants through a

proprietary network and Internet, both having severe contingency facilities.

The communication via Internet does not involve instructions but also

information and is protected by all the mechanisms referred in Question 95.

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Also, the beneficial owner can see their securities statements in the

protected area of the CBLC website (also with unique user IDs and

passwords).

In what concerns the communication between the trading and clearance and

settlement environments – São Paulo Stock Exchange (BOVESPA) and

Organized Over0the-Counter (SOMA), each one having two different trading

systems (equities and corporate bonds) – and CBLC in a proprietary network.

It is important to emphasize that this connection did not occurs through

telephone lines. STP allows CBLC to become CCP at the time of trade.