BM&FBOVESPA Integration Projects CLASSIFICATION OF INFORMATION: CONFIDENTIAL...

BM&FBOVESPA Integration Projects

CLASSIFICATION OF INFORMATION:

CONFIDENTIAL RESTRICTED CONFIDENTIAL INTERNAL USE PUBLICXX

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

AgendaAgenda


- 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 ManagementMain characteristics of Project Management


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 SystemNew Multi-Asset Trading System


Project Work streams

Program initiatives

Business Streams

Cross- Program

Technology

Steering Committee

Knowledge Transfer

Change Management



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



Project Sub-Stream

1. Operations

Market Operations

Disaster Recovery



Project Sub-Stream


Certification

Forums

Mock Trading

Market Data



Project Sub-Streams

3.Marketing/Communication

4. Legal and Regulatory

5. Accounting

Additional work-streams:

Cross- Program

Technology

Steering Committee

Knowledge Transfer

Change Management



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

Segregation by final beneficial owner

Collateral

Margining

Positions

Clearing IntegrationClearing Integration


Equities, Equity Derivatives,

Corporate Bonds

Financial & Commodity Derivatives

Government Bonds Foreign 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

CCPSSSCSD

CCPSSS

CCPSSS

CCPSSSServices



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



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



Unified Clearing Structure

Unified Clearing Structure

Pillars:Pillars:

Foundations:Foundations:

Single Netting and Consolidated Settlement

Single Netting and Consolidated Settlement New Risk Model

New Risk Model Versatile Safeguard Structure

Versatile Safeguard Structure

Participant StructureParticipant Structure

Allocation and Give-upAllocation and Give-up

Position ControlPosition Control

Account StructureAccount Structure

Collateral Management Collateral Management


• 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

Sequ

ence

of u

tiliz

ation

CCP

Clearing member

Clearing member

Investor

Trading participant / Direct participant

CCP Capital

Collateral

Mutual funds

CCP CapitalSurvivors payDefaulter pays

Key:


Safeguard StructureSafeguard Structure

• 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 benefitsMain benefits


NettingNetting

Settlement cycle

Settlement cycle Composição

ComposiçãoFrequência

Frequência

NettingNetting

Settlement cycle



Frequência

NettingNetting

Settlement cycle



Frequência

NettingNetting

Settlement cycle

Settlement cycle Composition

CompositionFrequency

Frequency

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 nettingSingle netting

Settlement cycle

Settlement cycle Composition

CompositionFrequency

Frequency

Current model: Future model:


Single NettingSingle Netting

• 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




• 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 ModelNew Risk Model

• 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.

Deficiencies Challenges

• 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)


• Fixed margin values by contract;• Compensation between opposing

positions on an ad hoc basis

1st GENERATION 2nd GENERATION 3rd 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


• 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.

• 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)





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


6. Internal Transition

7. Technology

1. Development

2. Architecture

8. Communication

9. Interfaces

10.Knowledge Transfer

11.Change Management

www.bmfbovespa.com.br

Date post:	01-Apr-2015
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BM&FBOVESPA Integration Projects CLASSIFICATION OF INFORMATION: CONFIDENTIAL...

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