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BM&FBOVESPA Integration Projects CLASSIFICATION OF INFORMATION: CONFIDENTIAL RESTRICTEDCONFIDENTIALINTERNAL USEPUBLIC X.

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Presentation on theme: "BM&FBOVESPA Integration Projects CLASSIFICATION OF INFORMATION: CONFIDENTIAL RESTRICTEDCONFIDENTIALINTERNAL USEPUBLIC X."— Presentation transcript:

1 BM&FBOVESPA Integration Projects CLASSIFICATION OF INFORMATION: CONFIDENTIAL RESTRICTEDCONFIDENTIALINTERNAL USEPUBLIC X

2 Integration Projects  Main characteristics of Project Management  New Multi-Asset Trading System: Derivatives (online in Oct´11), Equities (1H12) and Fixed income (2012)  Clearing Integration: ongoing delivery of some integration basics and project planning for 2013 new clearing infrastructure Agenda

3 Integration Projects -Scope of the Project -Chronogram of the Project -Budget of the Project -Risk Analysis of the Project -Planning of the Resources of the Project – Teams and Main Acquisitions -Development of the Teams of the Project – Training -Analysis and Control of the evolution of the Project -Control of the Project Changes -Analysis of the Legal Environment -Control of the Results of the Project Main characteristics of Project Management

4 Integration Projects New Multi-Asset Trading System: Derivatives (online in Aug´11), Equities (1H12) and Fixed income (2012) Main characteristics: The objective was to jointly develop with CME a new multi-asset eletronic plataform that will be used by BVMF´s markets such as derivatives, equities, FX and fixed income. This new trading system will substitute the current plataforms (GTS, Megabolsa, SISBEX and BolsaFIX). The main drivers of the projetc are:  Low Total Cost of the Ownership  Knowledge Transfer  Time to maket  Tecnology New Multi-Asset Trading System

5 Integration Projects Project Work streams  Program initiatives  Business Streams  Cross- Program  Technology  Steering Committee  Knowledge Transfer  Change Management New Multi-Asset Trading System

6 Integration Projects Project Work streams 1. Program Iniciatives 2. Business Streams The sub-streams are: 1. Operations 2. External Transition 3. Marketing and Communication 4. Legal and Regulatory 5. Accounting New Multi-Asset Trading System

7 Integration Projects Project Sub-Stream 1. Operations  Market Operations  Disaster Recovery New Multi-Asset Trading System

8 Integration Projects Project Sub-Stream 2. External Transition  Certification  Forums  Mock Trading  Market Data New Multi-Asset Trading System

9 Integration Projects Project Sub-Streams 3.Marketing/Communication 4. Legal and Regulatory 5. Accounting Additional work-streams:  Cross- Program  Technology  Steering Committee  Knowledge Transfer  Change Management New Multi-Asset Trading System

10 Integration Projects Main Characteristics  Full DVP and netting  State-of-the-art risk management  Financial safeguards and sound collateralization  Settlement on Central Bank reserve account  Central securities depository  Clearinghouses as CCP of every trades  Model recognized by the IMF and recommended by G-20 Segregation by final beneficial owner  Collateral  Margining  Positions Clearing Integration

11 Integration Projects Equities, Equity Derivatives, Corporate Bonds Financial & Commodity Derivatives Government BondsForeign Exchange  Equity cash market  Options, futures, forwards  Securities lending – BTC  Corporate bond cash market  Options, futures, forwards  OTC derivatives  Gold spot market  Cash market & forward market for gvt. bonds  Repos  Securities lending – SET  FX spot market (BRL vs. USD) Clearing Structures (Markets) Products CCP SSS CSD CCP SSS CCP SSS CCP SSS Services Clearing Integration

12 Integration Projects New Post-Trade Model- Equities, equity derivatives, corporate bonds Financial & commodity derivatives Government bonds Foreign exchange Review of business model for post-trade activities and proposed creation of integrated structure Integrated Structure Equities, equity derivatives, corporate bonds Financial & commodity derivatives Gvt. bonds FX Clearing Integration

13 Integration Projects FINANCIAL DERIVATIVES AND COMMODITIES EQUITIES, DERIVATIVES ON SINGLE STOCKS SEC. LENDING FIXED INCOME SPOT FX OPERATIONAL EFFICIENCY INTEGRATED SYSTEMS CLEARING EFFICIENCY NETTING POSITIONS RISK MANAGEMENT EFFICIENCY CAPITAL ALLOCATION REDUCTION Clearing Integration

14 Integration Projects Unified Clearing Structure Pillars: Foundations: Single Netting and Consolidated Settlement New Risk Model Versatile Safeguard Structure Participant Structure Allocation and Give-up Position Control Account Structure Collateral Management Clearing Integration

15 New safeguard structure will be based on classic layers: Defaulter Pays, Survivors Pay, and CCP Capital Criteria for sizing layers will be unified for all markets Survivors Pay layer: Collateral and fund deposit requirements based on participant’s risk profile and on specific market involved Defaulter Pays layer: Flexibility in responsibility for pledging collateral (investor, broker or clearing member), Collateral Sequence of utilization CCP Clearing member Investor Trading participant / Direct participant CCP Capital Collateral Mutual funds CCP Capital Survivors pay Defaulter pays Key: Integration Projects Safeguard Structure

16 Increase in capital efficiency for market participants –Offsetting across positions and collateral portfolio Adherence to single netting model, maintaining alignment with interests of participants in various markets Main benefits Integration Projects

17 Netting Settlement cycle ComposiçãoFrequência Netting Settlement cycle ComposiçãoFrequência Netting Settlement cycle ComposiçãoFrequência Netting Settlement cycle CompositionFrequency  In the new model, the three elements that determine netting have the following characteristics: – Settlement cycle: Maintenance of settlement cycles in each market and of the sequence of events that alter the calculation of rights and obligations – Netting composition: Unification of clearing members’ financial obligations, resulting in more efficient use of intraday liquidity – Frequency of calculation of rights and obligations: Event-driven clearing enables real-time delivery of information  In the new model, the three elements that determine netting have the following characteristics: – Settlement cycle: Maintenance of settlement cycles in each market and of the sequence of events that alter the calculation of rights and obligations – Netting composition: Unification of clearing members’ financial obligations, resulting in more efficient use of intraday liquidity – Frequency of calculation of rights and obligations: Event-driven clearing enables real-time delivery of information Single netting Settlement cycle CompositionFrequency Current model:Future model: Integration Projects Single Netting

18 Reduction in number and value of payments required to settle trades: –Less intraday liquidity required from participants –Enhanced trading efficiency for participants –Enhanced operating efficiency for BM&FBOVESPA Combined products can easily be created – e.g. settlement of loans and cash trades can be offset Integration Projects Main benefits

19 Integration Projects Risk assessment consolidating multiple assets and markets: –Transactions not settled in cash market –Derivatives –Assets pledged to CCP as collateral Use of closeout concept to calculate participant’s margin requirement Possibility of risk offsetting across markets and asset classes Balancing of risk between participant’s portfolio and collateral New Risk Model

20 Fragmentation of methodologies; Low offsets between different assets and markets; Collateral portfolio is poorly factored into the model; Difficulty in introducing new products and services. DeficienciesChallenges Increasing sophistication in the local market; Increased portfolio complexity; Participants’ capital needs to be allocated more efficiently; Growing investor base; Higher volume of trades and High Frequency Traders (HFTs) Integration Projects

21 Fixed margin values by contract; Compensation between opposing positions on an ad hoc basis 1st GENERATION2nd GENERATION3rd GENERATION Use of tools for quantitative analysis; Portfolio risk concept (MtM). DEFICIENCY Unintuitive; Difficulty in the treatment of complex products. DEFICIENCY Does not consider adequately the issue CCP risk Overly optimistic or pessimistic depending on the case Adequate representation of the CCP risk problem; Risk closeout concept. CHALLENGE Increased complexity of the model; More computationally intensive. CCPs risk system evolution BM&FBOVESPA future state Integration Projects Risk model deals with the risk that a counterparty will not settle its obligations for full value at any time (i.e., will default on a contract). Moving to the future state will involve migrating from the current segregated model towards an integrated approach.

22 Increased capacity to clear diversified portfolios and potential reduction in collateral required Consolidation of assets pledged as collateral when assessing portfolio closeout risk, making risk allocation more robust and efficient Flexibility to create new services, assets and markets, assuring agility in delivery of new functionalities (time to market) Main benefits Integration Projects

23 Clearing Integration Integration Projects Clearing Integration: ongoing delivery of some integration basics and project planning for 2013 new clearing infrastructure Work streams: 1.Program Iniciatives: white-paper 2.Business Model 3.Regulatory 4.Process Review 5.External Transition 6.Internal Transition 7.Technology 1.Development 2.Architecture 8.Communication 9.Interfaces 10.Knowledge Transfer 11.Change Management

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