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BM&FBOVESPA POST TRADE INTEGRATION

Explore the integration of BM&FBOVESPA's post-trade environment, its business model, benefits, and challenges in this comprehensive overview. Discover how the project aims to optimize processes, enhance efficiency, and maximize market potential.

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BM&FBOVESPA POST TRADE INTEGRATION

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  1. BM&FBOVESPA POST TRADE INTEGRATION Marcelo Wilk BM&FBOVESPA

  2. Agenda • Agenda • BM&FBOVESPA´s Business Model • Post Trade Environment • The Post Trade Integration Project • Key Benefits to The Brazilian Financial and Capital Markets • Project Governance and Main Challenges

  3. 1. BM&FBOVESPA´S BUSINESS MODEL

  4. BM&FBOVESPA´S BUSINESS MODEL • Fully Integrated and Diversified Business Model Services for Issuers and Commodities Trading, Clearing and Depository Activities Other Services Trading (stocks, derivatives, corporate and government bonds, funds, spot US Dollar, among others) Custody (services provided for funds, and other market participants) Listing (stocks, bonds, funds, asset-backed securities, among others) Commodities Certification Market Data Central Counterparty (CCP) Clearing and Settlement (for all the products) Index Licensing Software Licensing (used by brokerage houses and other market participants) Central Securities Depository (stocks and corporate bonds) OTC DerivativesRegistration and Collateral Management Securities Lending (stocks)

  5. BM&FBOVESPA´S BUSINESS MODEL • One-stop-shop for Brazilian Exchange Traded and OTC Assets

  6. 2. POST TRADE ENVIRONMENT

  7. POST TRADE ENVIRONMENT The configuration of BM&FBOVESPA’s post-trade environment is the result of the historical evolution of the two exchanges and their merger DERIVATIVES CLEARINGHOUSE EQUITIES AND CORPORATE DEBT CLEARINGHOUSE FX CLEARINGHOUSE GOVERNMENT BONDS CLEARINGHOUSE • Futures & options contracts based on interest rates, exchange rates, inflation rates, equity indices, agribusiness, energy and metal commodities • OTC derivatives (swaps and flexible options) • Equities, ETFs and BDRs • Corporate Debt and MBS • Equity and equity index derivatives • Securities lending service • Interbank Spot FX market (BRL vs. USD) • Government bonds spot market • Money and repo markets • Securities lending CSD SSS SSS SSS SSS CCP CCP CCP CCP

  8. BM&FBOVESPA POST-TRADE ENVIRONMENT DerivativesClearinghouse Central Counterparty Interest rate futures and options FX futures and options Commodities futures and options OTC derivatives (swaps and options)

  9. BM&FBOVESPA POST-TRADE ENVIRONMENT Equities and Corporate Debt Clearinghouse Central Counterparty Equities, ETFs and BDRs Corporate Debt and MBS Equity and equity index derivatives Securities lending

  10. BM&FBOVESPA POST-TRADE ENVIRONMENT FX Clearinghouse Central Counterparty Interbank spot FX market

  11. BM&FBOVESPA POST-TRADE ENVIRONMENT GovernmentBondsClearinghouse Central Counterparty Spot transactions Repo transactions Securities lending

  12. 3. THE POST TRADE INTEGRATION PROJECT

  13. THE POST TRADE INTEGRATION PROJECT Main functions performed by each clearinghouse • Risk system development & management • Maintenance of stress scenarios & further risk parameters • Collateralacceptance, limitcontrol & valuation • Regular back-testing analysis of risk models • Management of defaults & crisissituations • Approval of CCP risk management processes by DEBAN/Central Bank • Trade capture, registration, give-up & allocation • Open position management • Marking to market • Calculation & netting of rights and obligations in currencies, securities & commodities • Settlement processing in currencies, securities & commodities • Provision of information to participants & regulators Registration, clearing & settlement Central counterparty (CCP)

  14. THE POST TRADE INTEGRATION PROJECT Organization of the post-trade environment by type of asset/product 4 rulebooks and 4 operating procedure manuals 4 distinctparticipantstructures, with different operational & capital requirements 4 different IT environment/architectures, generating a higher operational risk and requiring constant maintenance efforts, thus impacting the time frame of projects 4 systems/processes for give-up, allocation and open position management 4 settlement windows and 4 multilateral balancesnot netted against each other, requiring a higher intraday liquidity and a greater number of payment transactions 4 risk management systems/processes not taking into account the effects of risk-offsetting among the several products and assets, including those posted as collateral 4 registration systems ofparticipantsandclients 4 collateral pools not communicating with each other, often preventing the benefit of the collateral posted from being fully explored

  15. THE POST TRADE INTEGRATION PROJECT ClearinghouseIntegration(environment by process) Equities, ETFs, BDRs Otherproducts & assets • Organization of thepost-trade environment by type of process, instead of product • Streamlining & standardization of rules, processes, requirements & documentation • Creation of a single settlement window for all the markets • Development of an integrated risk model & a single collateral pool • Thorough modernization and simplification of the technological infrastructure Governmentbonds Rulebook & Manual Participantstructure Participant & clientregistration Give-up & allocation Positioncontrol Netting & settlement Risk management Collateral pool OTC derivatives Corporatedebtsecurities Securitieslending Interbank spot FX Futures, options, forwards

  16. THE POST TRADE INTEGRATION PROJECT New process and system architecture Real-timeclearingsystem Participantregister CORE Instrumentregister Intradayrisk management Trade capture & reg. Give-up & allocation Pricing Collateral management Position management Marking to market Fees Taxation Calculation of cash settlement values Exchange of information with other systems SPB & CSD settlement Informationservices

  17. 4. KEY BENEFITS TO THE BRAZILIAN FINANCIAL AND CAPITAL MARKETS

  18. KEY BENEFITS Key benefits to the market • Greater efficiency in managing intraday liquidity • Single settlement window for all the markets • Netting of payable and receivable flows among the several asset/product classes • Saving of average intraday liquidity amounting to BRL0.5 billion • Example: • Balance payable on the futures market: (-) BRL100 million • Balance receivable on the options market: (+) BRL110 million • Balance to be settled with the integrated clearinghouse: (+) BRL10 million

  19. KEY BENEFITS Key benefits to the market • Increased efficiency in the use of capital • New risk evaluation model called CORE • Integrated portfolio risk calculation, covering traded assets & contracts, including OTC contracts and posted collateral • Integrated & robust modeling of market, liquidity and cash flow risks for the different assets/contracts/collateral included in the portfolio • Risk-offsetting between assets & contracts with mutual risk factors • Examples: • Futures vsoptions • Futures vs swaps • Options with different expiration dates • Short BTC position vs equities posted as collateral • Short options position vs equities posted as collateral • CORE has the potential of becoming a new international benchmark for CCP risk management

  20. KEY BENEFITS Key benefits to the market • Reduced operational risks & increased operational efficiency • Simplification & standardization of countless back-office processes • Eliminationofredundancies • Increasedautomationof processes • Reduced back-office & infrastructure costs for the whole chain of participants • Less time to launch new products and meet market and regulatory demands, because of a more modern, compact & modular technology architecture

  21. KEY BENEFITS Key benefits to the market • Modernization & standardization of the technological infrastructure • Complete technological renovation, with the adoption of a state-of-the-art IT architecture – kernel & modules • Processing capacity of more than 10 million trades per day • Real-time risk processing capacity • High availability & disaster recovery • Functionality & flexibility due to a modular architecture and a multimarket feature

  22. 5. PROJECT GOVERNANCE AND MAIN CHALLENGES

  23. PROJECT GOVERNANCE AND MAIN CHALLENGES PROJECT GOVERNANCE AND MAIN CHALLENGES • Engagement and participation • Model and process validation • Testing Committee • Internal IT modifications • Certification & parallel production • Strong Project Management • Modeldefinition • IT developmentandtesting • Change management • InteractionwithmarketandRegulators • Reporting and monitoring • Review & approval of Rulebook and Manual • Review & approval of risk management model • System ratification, process & IT auditing

  24. THE POST-TRADE INTEGRATION PROJECT 2008 FINANCIAL CRISIS 2008 BM&F AND BOVESPA MERGE GOVERNANCE INTEGRATION INTEGRATION AND INCORPORATION OF THE LEGAL ENTITIES INTEGRATION INITIAL STUDIES WHITE PAPER – RESEARCH AND DEVELOPMENT 2009 INITIAL STANDARDIZATION PROCESS WHITE PAPER - PUBLISHED INTEGRATION OPPORTUNITIES – R&D 2010 IBM ASSESSMENT POTENTIAL PARTNERSHIPS INTERNAL TASK FORCE WORKING GROUP WITH MARKET PARTICIPANTS ROADMAP DEFINITION INTEGRATION OPPORTUNITIES – R&D IMPLEMENTATION 2011/12 NEW UNIFIED CCP - DERIVATIVES 2013 NEW UNIFIED CCP – DERIVATIVES AND EQUITIES 2014 NEW UNIFIED CCP – DERIVATIVES, EQUITIES, FX, GOV. BONDS 2015 • The Post Trade Integration Project is subject to prior authorization from regulators

  25. Thankyou! Marcelo Wilk mwilk@bvmf.com.br

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