2 Vertically Integrated Business Model Cetip overviewFixed Income Electronic Trading PlatformRisk Mitigation tools: Triparty Collateral Management for bilateral deals and Calculation AgentCentralised Settlement ProcessingMore than daily.CSD - largest of Latin America with USD 1.8 trillion AUCTrade Repository for OTC Derivatives with notional of USD 300 billionTradingVertically Integrated Business Model
4 Use of collateralcomparing Brazil to other markets
5 Lula’s First Government OTC Derivatives Market in BrazilCETIP HISTORICAL DATA OF OTC DERIVATIVES MARKET – Notional Outstanding Amounts - U$ BillionBrazilian FX CrisisU$/R$ - 1,68; Inflation – 0,3% p.m.; 3,66% p.a.; Interes Rate – 27,21% p.a.Lula’s First GovernmentU$/R$ - 3,59; Inflation – 1,52% p.m.; 20,56% p.a.; Interes Rate – 25,85% p.a.Global Credit CrisisU$/R$ - 1,619
6 Mandatory Registration Pioneering solution - registrationCentralisedTransparentBrazilian OTCMandatory RegistrationOTC transactions must be registered in a centralised system approved by the Brazilian Securities Commission and the Central Bank of BrazilMandatory identification of the beneficiary ownerRegistration through a centralised electronic system by the authorised participantsThe OTC Clearinghouse are responsible for analysing and approving of the transactions submitted to registration and tradingFirst regulation issued in 1994
7 Mandatory Registration Collateral Management Pioneering solution – calculation agentCentralisedTransparentBrazilian OTCMandatory RegistrationCollateral ManagementCalculation AgentCETIP hired Algorithmics to support their MtM calculation.Calculation Agent:In June 2010 Cetip starts to act as Calculation Agent with Algorithmics system.Availability of files and reports, often daily, containing the value of transactions recorded exposures
8 Mandatory Registration Collateral Management Pioneering solution – Collateral ManagementCentralisedTransparentBrazilian OTCMandatory RegistrationCollateral ManagementCalculation AgentCetip and Clearstream cooperate in the area of collateral management for the benefit of the Brazilian market and its ParticipantsThe cooperation is guided by feedback received from market participants and counts with formal approval by the CVM and the Central BankRoll-out of the services will take place step by step in project phases.Phase I:Collateralisation of OTC derivative exposuresCetip exposure calculation as optional featureCetip and SELIC assets eligible as collateralCollateral management functions powered by ClearstreamCollateral movements will only occur domestically, i.e. in the Brazilian jurisdictionNew customer web based interface
9 How it worksRequest by the Participant (all forms available at Cetip site)Cetip sets up Pool accounts, collateral accounts and elegibility criteriaParticipant receives authenticated letter with sign on to CETIPCOLateralParticipants access the system and creates users and group of users
11 Contract set-up formAs per the Contract Set-up form, also known as Eligibility Form, the counterparties using CETIPCOLateral may establish various parameters and criteria for the eligibility of securities that may be used or accepted as collateral. Some of the key parameters are:Independent amount: it is an amount to be collateralised independently of the regular exposure.Threshold: It establishes a limit to the deficit or excess of collateral to be applicable prior to an automatic collateral margin allocation.MTA – Minimum Transfer Amount: It is the minimum collateral value applied to each top-up collateral movement.Limits per securities: it is possible to set concentration limits per type of securities.Limits per issuer: it is possible to set concentration limits per issuer.Haircuts: it is possible to establish haircuts depending on ratings of the securities.
14 Contract set-up formThe form must be signed by two authorised people from each Participant. Cetip will validate the signatures. The signed form must be delivered to the Cetip´s Collateral Management Operations area.
15 Exposure notification Exposure CalculationCounterparties doing their own exposure calculationCounterparties agree to use only the exposure calculation from one counterpartyCETIP as Calculation Agent for Both CounterpartiesCETIP as calculation agent for one counterparty
17 Eligible securities Securities at the Cetip Depository Debentures Bank CDs Interbank Certificates Financial Notes (“Letras Financeiras”) issued by banksAll eligible securities must have a valid ISIN. If a particular asset has no ISIN, please contact Cetip Collateral Management Operations.Securities at the Selic DepositoryFederal Government SecuritiesFiduciary account at SelicIn order to have Selic securities in the collateral pool account, the client must have a fiduciary account at Selic managed by Cetip. The account opening must be done with Cetip Collateral Management Operations.
18 Eligible securities Cash as collateral In order to allocate cash, the Participant must effect the deposit previously with Cetip.Once cash transfer is settled, the cash will move to the pool account to be available to the automatic allocation process.The cash will be held in the name of Cetip in a segregated cash account with the settlement bank used by Cetip.
19 Systems functionalities Auto-allocation processThe securities that may be used as collateral must be available in the Pool account. From the Pool account CETIPCOLateral will automatically transfer the securities to the collateral accounts depending on the bilateral risk exposure previously notified into the system.Upon the risk exposure notification, there will an automatic top-up or withdraw between the pool account of the giver and the collateral account(s) of the taker(s). The auto-allocation process aims at optimising the use of collateral and takes place every 15 minutes.
20 Auto-allocation with SELIC securities CETIP Collateral Giver Collateral Pool account(SELIC and CETIP assets)SELIC Collateral Giver Trading accountSELIC Collateral Giver Fiduciary accountAssets 1Assets 1Assets 2Assets 2Assets 3Assets 3Assets ...Assets ...1. Collateral Giver moves the Selic from the free trading account to the Selic Collateral Giver Fiduciary assignment account which is solely controlled by Cetip and reflected in the Cetip Collateral Pool account.2. Once Selic assets are reflected in the Cetip Collateral Pool account, the auto-allocation process will use them similarly to the Cetip assets in the Cetip Collateral Pool account.
21 Auto-allocation process collateral account beneficiary “A”CETIP Collateral Giver Collateral Pool account(SELIC and CETIP assets)CETIP & SELIC Collateral Giver Trading accountsAssets 1collateral account beneficiary “B”Asset 1Asset 1Assets 1Asset 2Asset 2Assets 2Asset 3Asset 3collateral account beneficiary “C”Assets ...Assets ...Assets 1Assets ...1. Collateral Giver moves the assets to be used under collateral management service, into a Collateral Pool account2. Collateral Management system will monitor in real-time basis all movements of assets in the Collateral Pool account in order to deduct which assets are freely available for collateral management3. Appropriate movements of SELIC assets will be automatically initiated by CETIP.
22 System functionalities Automatic margin calls and withdrawIn case of over-collateralization, the collateral management system will return the excess of collateral to the collateral giver collateral pool accountUnlimited automatic substitutionsIf a security used as collateral is recalled by the collateral giver out of his collateral pool account, the collateral management system will automatically try to replace eligible securities by an other one available in the collateral pool account before authorising the substitutionIn case there is no more eligible collateral in the collateral pool account, then a substitution of collateral between collateral accounts (collateral swap) will be triggered providing that differences in eligibility profiles between a collateral giver’s counterparties create the opportunity for a three-way substitution
23 Corporate events Interest or any payments including amortisations Any payment due to a security being held as collateral will be credited to the trading account of the collateral giver.RedemptionsThe cash received by Cetip due to a redemption will considered cash collateral in the collateral account of the collateral Taker.
24 Default caseIn case of Default, Cetip may block the collateral accounts upon formal notification of the Participant in accordance with the bilateral agreement. The auto-allocation process is imediatelly suspended with no further movements of securities. At this stage the movement of securities will performed by Cetip.The securities are transfered free of payment. In no case Cetip will sell or redeem secutiries to move cash to Participants.
25 E-learningCetip offers to its participants an e-learning tool to access the description and functionalities of the CETIPCOLateral.