2. Vertically Integrated Business Model
Cetip overview
Fixed Income Electronic Trading Platform
Risk Mitigation tools: Triparty Collateral Management for bilateral deals and Calculation Agent
Centralised Settlement Processing
More than daily.
CSD - largest of Latin America with USD 1.8 trillion AUC
Trade Repository for OTC Derivatives with notional of USD 300 billion
Trading
Vertically Integrated Business Model

3. CETIPCOLateral A new services dimension

4. Use of collateral
comparing Brazil to other markets

5. Lula’s First Government
OTC Derivatives Market in Brazil
CETIP HISTORICAL DATA OF OTC DERIVATIVES MARKET – Notional Outstanding Amounts - U$ Billion
Brazilian FX Crisis
U$/R$ - 1,68; Inflation – 0,3% p.m.; 3,66% p.a.; Interes Rate – 27,21% p.a.
Lula’s First Government
U$/R$ - 3,59; Inflation – 1,52% p.m.; 20,56% p.a.; Interes Rate – 25,85% p.a.
Global Credit Crisis
U$/R$ - 1,619

6. Mandatory Registration
Pioneering solution - registration
Centralised
Transparent
Brazilian OTC
Mandatory Registration
OTC transactions must be registered in a centralised system approved by the Brazilian Securities Commission and the Central Bank of Brazil
Mandatory identification of the beneficiary owner
Registration through a centralised electronic system by the authorised participants
The OTC Clearinghouse are responsible for analysing and approving of the transactions submitted to registration and trading
First regulation issued in 1994

7. Mandatory Registration Collateral Management
Pioneering solution – calculation agent
Centralised
Transparent
Brazilian OTC
Mandatory Registration
Collateral Management
Calculation Agent
CETIP 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 Management
Centralised
Transparent
Brazilian OTC
Mandatory Registration
Collateral Management
Calculation Agent
Cetip and Clearstream cooperate in the area of collateral management for the benefit of the Brazilian market and its Participants
The cooperation is guided by feedback received from market participants and counts with formal approval by the CVM and the Central Bank
Roll-out of the services will take place step by step in project phases.
Phase I:
Collateralisation of OTC derivative exposures
Cetip exposure calculation as optional feature
Cetip and SELIC assets eligible as collateral
Collateral management functions powered by Clearstream
Collateral movements will only occur domestically, i.e. in the Brazilian jurisdiction
New customer web based interface

9. How it works
Request by the Participant (all forms available at Cetip site)
Cetip sets up Pool accounts, collateral accounts and elegibility criteria
Participant receives authenticated letter with sign on to CETIPCOLateral
Participants access the system and creates users and group of users

10. How it works

11. Contract set-up form
As 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.

12. Contract set-up form

13. Contract set-up form

14. Contract set-up form
The 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 Calculation
Counterparties doing their own exposure calculation
Counterparties agree to use only the exposure calculation from one counterparty
CETIP as Calculation Agent for Both Counterparties
CETIP as calculation agent for one counterparty

16. OTC Derivatives Trades
Collateral Management Services
OTC Derivatives Trades
Participant A
(Cetip)
Participant B
(Cetip)
Exposure
Notification
Exposure
Notification
Collateral
Transfer Instruction
Exposure
Notification

17. Eligible securities Securities at the Cetip Depository Debentures
Bank CDs Interbank Certificates Financial Notes (“Letras Financeiras”) issued by banks
All eligible securities must have a valid ISIN. If a particular asset has no ISIN, please contact Cetip Collateral Management Operations.
Securities at the Selic Depository
Federal Government Securities
Fiduciary account at Selic
In 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 process
The 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 account
SELIC Collateral Giver Fiduciary account
Assets 1
Assets 1
Assets 2
Assets 2
Assets 3
Assets 3
Assets ...
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 accounts
Assets 1
collateral account beneficiary “B”
Asset 1
Asset 1
Assets 1
Asset 2
Asset 2
Assets 2
Asset 3
Asset 3
collateral account beneficiary “C”
Assets ...
Assets ...
Assets 1
Assets ...
1. Collateral Giver moves the assets to be used under collateral management service, into a Collateral Pool account
2. 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 management
3. Appropriate movements of SELIC assets will be automatically initiated by CETIP.

22. System functionalities
Automatic margin calls and withdraw
In case of over-collateralization, the collateral management system will return the excess of collateral to the collateral giver collateral pool account
Unlimited automatic substitutions
If 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 substitution
In 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.
Redemptions
The cash received by Cetip due to a redemption will considered cash collateral in the collateral account of the collateral Taker.

24. Default case
In 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-learning
Cetip offers to its participants an e-learning tool to access the description and functionalities of the CETIPCOLateral.

26. Thank you

27. Eduardo Ambrosio