AT A GLANCEORGANIZATION:CCLV, Contraparte Central S.A.www.cclv.cl

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SREDUCING TOTAL MARKET RISK IN CHILE WITH ALGO MARKET ANALYTICS AND ALGO CREDIT EXPOSURE.

CCLV helps modernize Chilean financial market with sophisticated and advanced risk management

CCLV, Chile’s newly established central counterparty, needed to quickly prove itself to domestic and foreign market participants. It was able to do so by establishing a solid risk-management platform based on Algorithmics’ products.

Created by the Santiago Stock Exchange in Chile, CCLV, Contraparte Central S.A.(CCLV) is the only central counterparty in the Chilean market.Established in 2010, CCLV provides clearing and settlement systems, implements operational and financial risk administration, giving greater efficiency in guaranties and liquidity management for local brokers. The company serves 40 participants, and handles around USD$1.5 billion in daily trades.

Reduce systemic and counter-party risks in a way that satisfies international standards.

Algo Market Analytics, Algo Credit Exposure

CCLV chose Algorithmics’ products because of their expertise and experience in South American markets, as well as their ability to help design a financial risk management model tailored to the needs of CCLV and the Chilean market.

A CLOSER LOOK AT: MARKET RISK

OVERVIEW

ALGO MARKET ANALYTICS

FOR MORE INFORMATIONhttp://www.algorithmics.com/EN/services/18-prodserv.cfm or sales@algorithmics.com

Algorithmics, an IBM Company, offers products and solutions to help firms progressively address regulatory compliance and best-practice risk management. In addition to Algo Market Analytics, Algorithmics offers Algo Credit Economic Capital and Algo Credit Expo-sure. Credit Risk for Economic Capital enables banks to calculate enterprise-wide economic capital across credit and market risks. With Algo Credit Exposure, banks can measure and manage counterparty credit risk, supporting the real-time demands of operations while addressing all areas of Basel II for the trading book.

Algo Market Analytics supports market risk capital measurement, management and mark-to-market, enabling calculation of minimum capital under standardized and internal model approaches. Algo Market Analytics captures and consolidates exposures arising from multiple risk factors including interest rates, equity markets, credit spreads, volatilities, FX, power, and commodities.

ALGO CREDIT ECONOMIC CAPITAL Algo Credit Economic Capital enables enterprise-wide economic capital calculations for market and credit risks. Driven partly by competitive pressures and best practice, and partly by regulator expectations, the software supports financial institutions seeking to implement management approaches founded on risk-based economic capital calculations.

ALGO CREDIT EXPOSURE Algo Credit Exposure is a comprehensive solution for measuring and managingcounterparty credit risk. It provides a single cross-asset class, 7x24, always-on view ofcredit exposure across the full trading book using multi-step Monte Carlo simulation,accounting for portfolio offsets, close-out and settlement netting, and collateral. It alsoincludes the ability to administer limits and excess management and to compute EPE,several forms of Credit Valuation Adjustment (CVA) and CVA sensitivities, and conductstress testing. It can also be used to meet Internal Models Method (IMM) requirementsfor regulatory capital and risk management through the use of approved models.

In August 2010,the Santiago Stock Exchange in Chile – commonly known as the

Bolsa de Comercio de Santiago (BCS) – created the CCLV,

Contraparte Central S.A. (CCLV). This move, in response to new

legislation on securities settlement systems, was part of the

country’s drive to modernize market operations and attract more

foreign investors. In fact, it was required for Chile’s entry into the

Organization for Economic Co-operation and

Development (OECD).

With a main objective of reducing systemic and counterparty

risks and meeting international standards, CCLV is based on the

former Clearing and Settlement System (SCL) – a system used by

local brokers to settle their transactions – and the Derivative

Clearing House, both owned by BCS. CCLV’s purpose is to

manage the clearing and settlement of financial instruments for

the equity and derivative stock markets as a Central

Counterparty, and to serve as a Clearing House for bonds, money

markets, and stock repos. In addition to providing clearing and

settlement systems, CCLV implements operational and financial

risk administration, giving greater efficiency in guaranties and

liquidity management for local brokers.

TASKED WITH PROVING THEIR VALUE CHOOSING ALGORITHMICS FOR EXPERIENCEAND FLEXIBILITY

The BCS had only 15 months to establish the new securities clearance and settlements systems in compliance with the new legislation. During that time, it needed to set up a new company (in other words, CCLV) with all the necessary facilities, employees, a risk system interconnected with the real-time gross settlement (RTGS) system managed by the Central Bank of Chile, and modify the SCL.

Once the CCLV was established, the major challenge was to win and maintain the confidence of the Chilean securities markets. “As the first Central Counterparty to operate on the Chilean stock market, we need to provide reliable and efficient services to CCLV users,” explains Gonzalo Ugarte Encinas, Chief Research and Development Officer for CCLV.

In order to succeed, CCLV required a system that would enable it to manage non-compliance risks – such as lack of securities or cash – by participants. Moreover, the system would have to interoperate with the financial instruments’ clearing and settlement systems. “We needed to adopt international recommendations and best practices for risk management,” continues Ugarte.

After assessing many of the options available, CCLV chose Algorithmics because of their extensive experience with risk systems, as well as their successful projects in the Mexican and Brazilian markets. Another deciding factor: The Algorithmics team that would implement the system for CCLV had previous experience in the Chilean market.

According to Ugarte, the Algorithmics team played a key role in the success of the project. It helped design a new financial risk management model tailored to the needs of CCLV and the Chilean market. It also enabled CCLV to respond to the market’s demands by adapting the intra-day calculation of guarantees and valuation of instruments within the solution, which is based on Algo Market Analytics and Algo Credit Exposure. “Algorithmics’ adaptations fit perfectly into the array of financial instruments on the Chilean risk management market,” says Ugarte. Algorithmics also recommended a risk valuation methodology, which CCLV adapted.

Algorithmics’ products are integrated into the CCLV system, composed of the SEBRA-SCL clearing and settlement system and the SEBRA guarantee system (platforms implemented and maintained by BCS). Algo One, the basis of all of Algorithmics’ analytics solutions, is the architectural framework that enabled this integration and manages enterprise-wide data flow processes. Algo Market Analytics receives market data under a link up with SEBRA systems. Through the CCLV system, users can view the calculations of required guarantees and the valuation of the guarantees paid, both of which are generated via the Algo One framework.

According to Ugarte, CCLV was impressed with the flexibility of Algorithmics’ solution to integrate with their existing systems. They were also impressed that Algorithmics developed its project within a reasonable period of time, helping to CCLV to meet its goals and within the limits imposed by Chilean laws and regulations. “The success of the system’s implementation has been a key factor in the smoothness of our operations, which has been recognized by the Santiago Stock Exchange – our parent company –, and also by the market participants and corresponding authorities,” explains Ugarte.

“We needed to adopt international recommendations and best practices for risk management”

EFFICIENTLY CONTROLLINGAND REDUCING RISKS

INSPIRING CONFIDENCE INMARKET PARTICIPANTS

The Algorithmics solution is an essential component of CCLV’s daily monitoring activities. CCLV uses their systems combined with Algorithmics’ solutions to estimate the market risk of all transactions entering CCLV in equities, bonds and money markets every hour. This usage considers the market value assessment and historic scenarios of the participants and CCLV portfolios, which are used in Value-at-Risk models to determine the amount of guarantees that participants must hold in order to operate in the CCLV.

The system also estimates risks under crisis scenarios in order to determine which agents should not be covered in the event of high volatility and should therefore be asked for additional guarantees. Current regulations allow guarantees in cash and financial instruments. As a result, it is important for CCLV to determine the values at which the latter will be accepted as guarantees, considering the individual volatility of the instruments. Once the guarantees have been deposited, CCLV needs to consider the exposure of the portfolio as a whole and separate from the positions portfolio, because the guarantee portfolio mitigates the positions portfolio. CCLV also uses the solution to estimate inexistent prices when there are no transactions in an instrument, and to calculate the retrospective test.

With the Algorithmics solution, CCLV’s risk analysts, risk manager, and chief officers can measure the exposure of the central counterparty and each participant. They can even measure exposure in an instrument in a particular hour. According to Ugarte, “We re-run the batch several times per day to be timed with the market. Because the Algorithmics solution enables us to re-run the batch and measure exposure at any given point, we can efficiently control risks for CCLV and their participants while reducing the total market risk.”

Algorithmic’s solutions are integrated to the clearing and settlement systems administered by CCLV, while providing the flexibility to support CCLV’s future needs. Going forward, CCLV plans to incorporate the Santiago Stock Exchange derivatives market into their systems. By tapping into the Algo One framework, CCLV will be able to estimate the derivatives risk.

According to Ugarte, Algorithmics’ solutions have become a fundamental component of the clearing and settling process for financial instruments. “With Algorithmics, we have a sophisticated and advanced measurement of the requirement and valuation of the instruments deposited on guarantee, as well as the risk inherent to all the members of CCLV. Combined, this provides us with an accurate measure of market risks.”

The creation of the only central counterparty in the Chilean market and the adoption of international standards in risk management have put CCLV in line with the most developed financial markets. “International stock markets are now confident about participating in the Chilean Securities Market,” concludes Ugarte.

“Algorithmics’ adaptations fit perfectly into the array of financial instruments on the Chilean risk management market”

“With Algorithmics, we have a sophisticated and advanced measurement of the requirement and valuation of the instruments deposited on guarantee”

© 2011 Algorithmics Software LLC. All rights reserved.You may not reproduce or transmit any part of thisdocument in any form or by any means, electronic or mechanical, including photocopying and recording,for any purpose without the express written permission of Algorithmics Software LLC or any other memberof the Algorithmics’ group of companies. (Notwithstanding the foregoing, a reasonable number of copiesmay be made for internal purposes only.)

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About Algorithmics

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Algorithmics is a leading provider of risk solutions. Financial organizations from around the world use Algorithmics software, analytics and advisory services to help them make risk-aware business decisions, maximize share-holder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management.