Aug 28, 2017 - transactions accepted by the clearinghouse, that is, in the settlement of such ...... pre-trade risk mana
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BM&FBOVESPA CLEARINGHOUSE RISK MANAGEMENT MANUAL
June 2017
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TABLE OF CONTENTS Introduction
5
Functions and Notation
8
Chapter 1 - Safeguard Structure
9
1.1
Safeguard structure components
9
1.2
Collateral posted on layer 1
9
1.3
Layer 2: settlement fund (FLI)
14
1.4
Liquidity risk management
19
1.5
Sequence of use of collateral
20
1.6
General provisions
21
Chapter 2 - Procedures in the event of default
23
2.1
Chain of responsibilities
23
2.2
Default by investors
27
2.3
Default by trading participants
31
2.4
Default by full trading participants or settlement participants
36
2.5
Default by clearing members
42
2.6
Operational defaulter
49
2.7
Sequence of use of collateral
49
2.8
Procedures in the event of physical delivery failure
49
Chapter 3 - Risk monitoring
55
3.1
Post-trade risk monitoring
55
3.2
Position limits
66
3.3
Pre-trade risk monitoring
70
Chapter 4 - Collateral management 4.1
73
Eligibility criteria
73
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4.2
Valuating assets accepted as collateral
81
4.3
Limits for accepting assets as collateral
82
4.4
Monitoring and meeting collateral calls
100
4.5
Procedures for posting and withdrawing collateral
103
4.6
Procedures for transferring collateral
123
4.7
Handling events associated with assets that constitute collateral
125
4.8
Monetizing collateral not linked to events of default
127
Chapter 5 - Risk calculation
128
5.1
Introduction to the CORE methodology
128
5.2
Defining the main calculation components
129
5.3
Determining the portfolio closeout strategy
135
5.4
Determining portfolio’s losses under a scenario
140
5.5
Determining a portfolio’s permanent and transient losses
141
5.6
Minimum margin for options
142
5.7
Subportfolio 2 Procedure – offsetting risk between positions with short and long maturities
142
Appendix 1 - Assigning the amount of a participant’s financial failure to the participants under its responsibility
144
Appendix 2 - Numerical examples on risk monitoring
147
Appendix 3 - CORE - Detailing the mathematical model
158
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CHANGELOG
Chapter
Version
Date
Introduction
1
08/18/2014
Functions and notation
1
08/18/2014
Chapter 1 - Safeguard structure
1
08/18/2014
Chapter 2 - Procedures in the event of default
1
08/18/2014
Chapter 3 - Risk monitoring
2
06/08/2017
Chapter 4 - Collateral management
2
12/28/2015
Chapter 5 - Risk calculation
1
08/18/2014
Appendix 1 - Assigning the amount of a participant’s financial failure to the participants under its responsibility
1
08/18/2014
Appendix 2 - Numerical examples on risk monitoring
1
08/18/2014
Appendix 3 – CORE - Detailing the mathematical model
1
08/18/2014
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Introduction
An essential precondition for the proper functioning of the markets managed by BM&FBOVESPA is the certainty of settlement, that is, the assurance that transactions will be effectively settled under specified terms and time frames. By acting as a central counterparty for transactions by means of its clearinghouse, BM&FBOVESPA is able to provide that precondition to the markets it manages. With regard to the principles and rules of the Brazilian Payment System (SPB), the clearinghouse is designated as systemically important, being subject to the regulation and supervision of BCB, which authorizes its operation. A systemically important clearinghouse is one that clears and settles transactions of such magnitude and/or type which could pose a risk to the soundness and regular functioning of the financial system. To ensure market integrity and participants rights, as well as to mitigate risks to the continuity of its activities in a safe and efficient manner, including in the event of failure of one or more participants in the performance of obligations resulting from their transactions, the clearinghouse counts on a proprietary risk management system and safeguard structure, pursuant to the provisions of CMN Resolution #2882 and BCB Circular #3057. Upon acceptance of a transaction by the clearinghouse, the obligations resulting therefrom are novated, with BM&FBOVESPA becoming the central counterparty to said transaction, that is, assuming the position of buyer to the seller and of seller to the buyer of the transaction. By acting as a central counterparty, BM&FBOVESPA is exposed to various risks, among which the credit, liquidity, legal and operational risks stand out, as follows: -
Credit risk, which is made up of replacement cost risk and principal risk, is the risk that a participant does not settle an obligation for its total amount within the prescribed time frame;
-
Liquidity risk is the risk of temporary unavailability of funds or assets needed to meet obligations, what may not be necessarily linked to the insolvency of a participant or the clearinghouse itself;
-
Legal risk is the risk of loss resulting from the unexpected application of a law or regulation, or change in the construction thereof; it also includes the risk of loss resulting from a delay in the recovery of a financial asset, or a freezing of positions resulting from a legal procedure;
-
Operational risk is the risk of loss arising out of deficiencies in information systems, internal controls and process execution.
When providing central counterparty services for the settlement of transactions, the major source of risk faced by the clearinghouse is the possibility of default or delay by the participants in the performance of obligations arising out of their transactions. Therefore, the clearinghouse is directly exposed to the credit risk, i.e. the risk of loss associated with nonreceipt of the prescribed resources, as originally specified. No event of default occurring, the clearinghouse has no direct exposure to the market and liquidity risks, because it does not hold net long or net short positions in assets or contracts admitted to registration in its
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systems. However, an increase in price volatility can affect the magnitude of the amounts to be settled by the participants and reduce market liquidity, thereby increasing the probability of default by such participants. In a default situation, that is, when one or more clearing members fail to make the payment or the delivery of the assets or commodities due as the result of their transactions, the clearinghouse becomes directly exposed to the market and liquidity risks. In such a situation, the market risk is given by the risk of loss due to a price change in positions in excess of collateral, which is also susceptible to price volatility, whereas the liquidity risk is related to the lack of appropriate conditions for the liquidation of collateral within the time due. In a default event, the clearinghouse triggers its safeguard mechanisms to ensure proper settlement of transactions in the required manner and time frames. Thus, in the event of default by one or more participants, the issue of risk management for a central counterparty is its ability to provide both the resources and liquidity needed to close out the positions held by the defaulter participants under the market conditions prevailing during a given time period.
This manual describes the risk management model adopted by the clearinghouse, meaning the risk management rules, procedures and criteria associated with the transactions to which it acts as central counterparty. Its risk management model consists of several elements, among which the following stand out: (i) chain of responsibilities in the settlement process; (ii) safeguard structure; (iii) risk monitoring; (iv) collateral management process; and (v) risk calculation model. The chain of responsibilities in the settlement process is a set of (co-)(inter-)responsibility relations between the different classes of participants and BM&FBOVESPA in the performance of obligations arising out of the transactions accepted by the clearinghouse, that is, in the settlement of such transactions. The safeguard structure organizes the mechanisms established for the purpose of mitigating
losses
associated with default events, that is, associated with any failure to meet obligations during the transaction settlement process, pursuant to the chain of responsibilities. Chapter 1 and appendix 1 deal with the BM&FBOVESPA safeguards, whereas chapter 2 presents the chain of responsibilities and procedures applicable by BM&FBOVESPA in the event of default by participants. Risk monitoring covers control of the use of the operational limits assigned to participants; analysis of the pre-trade risk limits assigned by full trading participants to investors holding direct market access; and monitoring of intraday risk through which the risk of each participant and the relevant impact on safeguards are assessed during trading hours and upon transaction registration. Risk monitoring is the subject matter of chapter 3 and appendix 2 of this manual. The collateral management process comprises the rules and procedures associated with the transfer, custody, valuation and liquidation of collateral, as detailed in chapter 4 of this manual. The risk calculation model defines how to quantify potential losses in the event of default by one or more participants, as well as the impact of such an event on the BM&FBOVESPA safeguards. The risk calculation model, including parameters, is defined by the BM&FBOVESPA Market Risk Technical Committee, which is
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responsible for ensuring constant review of the calculation model, which is presented in chapter 5 and appendix 3.
The content of this manual applies to the derivatives markets managed by BM&FBOVESPA, excluding equities derivatives and derivatives on exchange-traded funds (ETFs), covering the transactions executed in exchange-traded markets as well as in organized OTC markets using the “collateralized” and “partially collateralized” registration modes. The terms in bold type, both in the singular and plural forms, as well as the acronyms used in this manual are subject to the definitions and meanings contained in the BM&FBOVESPA glossary of terms and acronyms, which is independent from other rules and regulations issued by BM&FBOVESPA. This manual is complemented by: -
The clearinghouse rules;
-
The clearinghouse operating procedures manual;
-
The BM&FBOVESPA access rules and manual; and
-
Applicable circular letters and external communications published by BM&FBOVESPA and in force.
The values of parameters utilized in the calculation criteria and methodologies presented in this manual are available on the BM&FBOVESPA website (www.bmfbovespa.com.br).
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Functions and Notation
Throughout this manual, the following functions are used:
min ( ⋅) max ( ⋅)
x if x ≤ y y if x > y
: the minimum value function, min ( x , y ) =
y if x ≤ y x if x > y
: the maximum value function, max ( x , y ) =
− x if x < 0 x if x ≥ 0
abs ( ⋅) : the absolute value function, or module function, abs ( x ) = x = n
∑ ai i =1
n
: the sum function,
∑a
i
i =1
n
∏ai i =1
= a1 + a2 + ⋯ + an−1 + an
n
: the product function,
∏a
i
i =1
= a1 × a2 × ⋯ × an −1 × an
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Chapter 1 - Safeguard Structure
The safeguard structure that supports the central counterparty (CCP) function performed by BM&FBOVESPA offers mechanisms to mitigate the credit risk inherent in that function.
1.1
Safeguard structure components
1.1.1
Safeguards aimed at mitigating market risk The safeguards aimed at covering market risk are arranged in two layers: Layer 1: which is constituted by (i) collateral posted by investors to cover losses associated with their positions in the event of failure to perform their obligations; (ii) collateral posted by full trading participants, settlement participants and clearing members to cover the intraday risk arising out of transactions registered under their responsibility; and (iii) minimum nonoperating collateral deposited by full trading participants and clearing members. Layer 2 or settlement fund: a set of financial resources and assets which are deposited by BM&FBOVESPA and clearing members to cover losses arising out of failure of clearing members to meet obligations to the clearinghouse. The minimum amount a participant must deposit as collateral with the clearinghouse to make up the safeguards, regardless of the layer to which it is intended, is called required collateral.
1.1.2
Safeguards aimed at mitigating liquidity risk The safeguards aimed at covering liquidity risk consist of (i) both collateralized and uncollateralized liquidity assistance facilities; and (ii) a portion of the BM&FBOVESPA capital. Liquidity assistance facilities are based on contracts between BM&FBOVESPA and financial institutions, in order to ensure that the clearinghouse has the required liquidity to meet its obligations in the prescribed manner and time, that is, to cover its potential need for cash in the event of default by any clearing member.
The following sections present the characteristics of the components of the BM&FBOVESPA safeguard structure, with the calculation methodology detailed in chapter 5 (Risk calculation) of this manual.
1.2
Collateral posted on layer 1 The first element of the safeguard structure is collateral posted by investors on layer 1, in order to cover losses deriving from any failure to meet their obligations. The minimum amount to be deposited
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by investors as collateral is called margin. Through margin calls, the clearinghouse informs the required margin amount resulting from the risk update of investors’ portfolios. Collateral intended to cover the intraday risk is required by the clearinghouse of full trading participants, settlement participants and clearing members, in accordance with the criteria described in chapter 3 (Risk monitoring) of this manual. The amounts required as minimum nonoperating collateral are defined in the BM&FBOVESPA access manual.
1.2.1
Calculating the amount of collateral required of investors for layer 1 The margin required of investors is equivalent to the risk of their portfolios, which is defined as the greatest potential closeout cost for the positions included therein. Margin is calculated according to the CORE (Closeout Risk Evaluation) methodology by considering scenarios which are defined in order to ensure a confidence level of at least 99% for the margin model. This set of scenarios is called
Φ
and it is generated as described in chapter 5 (Risk calculation) of this manual. The amount of
collateral posted by any investors must be greater than or equal to their respective required margin amounts. Consider the following notation:
Φ;
NSCN :
the number of stress scenarios belonging to
Φi :
the i-th stress scenario belonging to
RR ( Φi ) :
the potential financial loss from the closeout process of an investor’s portfolio under
Φ , i = 1, 2,..., NSCN; and
scenario Φ i , given by the residual risk associated with that scenario, as calculated by the CORE methodology; the residual term derives from the fact that collateral already deposited on layer 1 of the safeguard structure is considered in risk calculation for the concerned portfolio; RR ( Φ i ) ≤ 0 . The following table presents the potential financial loss deriving from the portfolio closeout process under each scenario of the set
Φ.
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Scenario belonging to
Φ
Residual risk of investor under scenario Φ i
Φ1
RR ( Φ1 )
Φ2
RR ( Φ2 )
⋮
⋮
(
ΦNSCN
RR Φ N SCN
)
Table 1.1 - Calculation of the collateral amount required of the investor for layer 1 of the safeguard structure The margin required of the investor is given by the worst potential financial loss from the portfolio closeout process, among the losses associated with each scenario of the set
Φ , representing the
residual portfolio risk.
(
(
MarginInvestor = min RR ( Φ1 ) , RR ( Φ2 ) , … , RR ΦNSCN
))
(1.1)
For risk and margin calculation purposes, it is possible to consolidate the portfolios of the same investor registered in separate accounts under the responsibility of the same full trading participant, or settlement participant, and of the same clearing member. To that end, the full trading participant or the settlement participant must request consolidation through the BM&FBOVESPA participant registration system by indicating the destination account, meaning the account that will contain the consolidated portfolio. It is incumbent solely on the clearinghouse to decide on the acceptance of any portfolio consolidation requests. For the purposes of the foregoing paragraph, investors are identified by their respective Corporate Taxpayer Registry (or CNPJ) numbers or Individual Taxpayer Registry (or CPF) numbers, or the CVM code for nonresident investors, as the case may be.
1.2.2
Using investors’ collateral The investor’s collateral posted on layer 1 of the safeguard structure can be used: (i)
By the trading participant, in order to ensure fulfillment of the obligations assumed by the investor before said trading participant, in the prescribed time and manner; and/or
(ii)
By the full trading participant, in order to ensure fulfillment ofwith the obligations assumed before said full trading participant, in the prescribed time and manner, by: (a)
The investor; or
(b)
The respective trading participant, involving the transactions of said investor, in case:
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(b1)
The funds transferred by the investor to the trading participant are not transferred by the trading participant to the full trading participant, in the prescribed time and manner; or
(b2)
The funds owed by the investor to the trading participant are not transferred to the latter, and as a result the funds owed by the trading participant to the full trading participant are not transferred to the latter, in the prescribed time and manner; and/or
(iii)
By the settlement participant, in order to ensure fulfillment of the obligations assumed by the investor before said settlement participant, in the prescribed time and manner; and/or
(iv)
By the clearing member, in order to ensure fulfillment of the obligations assumed by the relevant full trading participant or settlement participant before said clearing member, involving the transactions of the investor, in case: (a)
The funds transferred by the investor are not transferred to said clearing member through the chain of the responsible participants, in the prescribed time and manner; or
(b)
The funds owed by the investor to the trading participant, full trading participant, or settlement participant are not transferred to the latter, and as a result the funds owed to the clearing member are not transferred to said clearing member, in the prescribed time and manner; and/or
(v)
By the clearinghouse, in order to ensure fulfillment of the obligations assumed by the relevant clearing member before the clearinghouse, involving the transactions of the investor, in case: (a)
The funds transferred by said investor are not transferred to the clearinghouse through the chain of the responsible participants, in the prescribed time and manner; or
(b)
The funds owed by the investor to the trading participant, full trading participant, or settlement participant are not transferred to the latter, and as a result the funds owed by the clearing member to the clearinghouse are not transferred to the clearinghouse, in the prescribed time and manner.
If collateral posted by an investor through other participants is available, it might be used by the clearinghouse to compensate for any losses incurred by any clearinghouse participants, or by the clearinghouse itself, by virtue of the default of said investor. The use of collateral linked to a certain investor is limited to the performance of obligations arising out of the transactions of said investor.
1.2.3
Using collateral posted by full trading participants Collateral posted by the full trading participant can be used:
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(i)
By the clearing member, in order to ensure fulfillment of the obligations assumed by the full trading participant before said clearing member, in the prescribed time and manner; and/or
(ii)
By the clearinghouse, in order to ensure fulfillment of the obligations assumed by the relevant clearing member to the clearinghouse, involving the transactions of the full trading participant, in case: (a)
The funds transferred by said full trading participant to the clearing member are not transferred by the clearing member to the clearinghouse, in the prescribed time and manner; or
(b)
The funds owed by the full trading participant to the clearing member are not transferred to the latter, and as a result the funds owed by the clearing member to the clearinghouse are not transferred to the clearinghouse, in the prescribed time and manner.
1.2.4
Using collateral posted by settlement participants Collateral posted by the settlement participant can be used: (i)
By the clearing member, in order to ensure fulfillment of the obligations assumed by the settlement participant before said clearing member, in the prescribed time and manner; and/or
(ii)
By the clearinghouse, in order to ensure fulfillment of the obligations assumed by the relevant clearing member to the clearinghouse, involving the transactions of the settlement participant, in case: (a)
The funds transferred by said settlement participant to the clearing member are not transferred by the clearing member to the clearinghouse, in the prescribed time and manner; or
(b)
The funds owed by the settlement participant to the clearing member are not transferred to the latter, and as a result the funds owed by the clearing member to the clearinghouse are not transferred to the clearinghouse, in the prescribed time and manner.
1.2.5
Using collateral posted by clearing members Collateral posted by the clearing member can be used by the clearinghouse, in order to ensure fulfillment of the obligations assumed by the clearing member to the clearinghouse, in the prescribed time and manner.
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1.2.6
Resources acceptable to constitute collateral on layer 1 The assets acceptable to constitute collateral at layer 1 level are listed in chapter 4 (Collateral management) of this manual.
1.3
Layer 2: settlement fund (FLI) The settlement fund is made up of the following: (i)
A fixed contribution by BM&FBOVESPA; and
(ii)
The fixed contributions by clearing members.
The resources of the settlement fund (cash and assets) are used by the clearinghouse to cover losses resulting from the default of one or more clearing members to the clearinghouse, after exhaustion of collateral posted by the participants under the responsibility of the defaulter clearing members. Contributions to the settlement fund are differentiated by contributor category, by amount and by use in the event of default, according to the table below:
Contributor
Contribution amount
Loss sharing mechanism
BM&FBOVESPA
Fixed
Yes
Clearing member
Fixed
Yes
Table 1.2 - Contributions to the settlement fund
1.3.1
Resources acceptable to constitute the settlement fund The assets acceptable to constitute the settlement fund are listed in chapter 4 (Collateral management) of this manual.
1.3.2
BM&FBOVESPA contribution The BM&FBOVESPA contribution to the settlement fund consists of a portion of its capital allocated to the fund. The amount of that contribution shall correspond at least to the sum of the fixed contributions required of clearing members. The BM&FBOVESPA contribution to the settlement fund is used according to the criteria described under subsection 1.3.4 (Rules for settlement fund use) hereof, and it will not be used prior to the depletion of the resources deposited by the defaulter clearing member.
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1.3.3
Fixed contributions by clearing members The fixed contributions made by clearing members are mandatory and their value is defined by BM&FBOVESPA, at its sole discretion, and set forth in the BM&FBOVESPA access manual. The values of these fixed contributions can be differentiated by clearing member category, but are equal for all clearing members of the same category. The fixed contributions of clearing members to the settlement fund are mutualizable, meaning that the amount of the contribution made by a particular clearing member may be used to cover losses resulting either from its own default or from the default of other clearing members, pursuant to the provisions under subsection 1.3.4 (Rules for settlement fund use) hereof.
1.3.4
Rules for settlement fund use Rule 1 The resources in the settlement fund can only be used by the clearinghouse, upon authorization of the BM&FBOVESPA Executive Board.
Rule 2 The resources in the settlement fund can only be used in the event of default by one or more clearing members to the clearinghouse, in order to cover the resulting losses.
Rule 3 The fixed clearing member contributions and the BM&FBOVESPA contribution to the settlement fund are mutualizable, meaning that said contributions are liable to be used to cover losses resulting from the default of any clearing member, in accordance with the order and criteria established in Rule 5.
Rule 4 The resources posted by the clearing members for settlement fund replenishment purposes can only be used to cover losses resulting from defaults occurring after the one that gave rise to the need to replenish the fund.
Rule 5 - Order of use of settlement fund resources The use of the settlement fund in case of default of a clearing member CM follows the order established below, either until the losses stop or the resources in the settlement fund capable of being used are exhausted:
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1.
The full fixed contribution of clearing member CM; In the event of simultaneous defaults, that contribution is first earmarked for handling the default of clearing member CM; if only a portion of the contribution is needed to cover the losses resulting from the default of clearing member CM, the remaining balance can be used to mutualize losses resulting from the other defaults, as described in step 3 below;
2.
The full BM&FBOVESPA contribution;
3.
The fixed contributions of the other clearing members; Given the possibility of simultaneous defaults, among these other clearing members there may be nondefaulter and defaulter clearing members, so that the collateral posted by the defaulters as fixed contributions can be fully or partially used by the clearinghouse to handle their respective defaults. Hence, the balance of collateral posted as fixed contribution by a defaulter clearing member and available for mutualization of losses resulting from the defaults of other clearing members may be less than the amount required as fixed contribution. To determine the loss assigned to each clearing member at this step, and consequently the amount to be used from collateral posted as fixed contribution, consider the following:
P:
the losses remaining at this step resulting from the default of clearing member
CM
and from other simultaneous defaults;
N: C1,k
the number of clearing members contributing to the settlement fund; : the balance of collateral deposited by the k-th clearing member as fixed contribution and available to be mutualized; and
Mutk : the amount of mutualizable losses allocated to the k-th clearing member. The portion of losses
P to be allocated to each CMk is calculated as follows: Mutk = min( C1,k , P N )
If the sum of the amounts so allocated to each clearing member is less than losses resources which were posted as fixed contributions are still available, then:
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(1.2)
P, but
(i)
The amounts of
P and C1,k
are updated to
P′ and C1,′ k :
N
P′ = P − ∑Mutk
and
k =1
C1,′ k = C1,k −Mutk
(1.3)
and (ii)
The remaining losses updated balances
P′
are allocated among clearing members
N
considering their
C1,′ k , according to equation (1.3).
Steps (i) and (ii) are repeated until no losses remain or until the collateral deposited in the settlement fund as fixed contribution is exhausted, whichever comes first.
Rule 6 Simultaneous defaults are those which (i) occur on the same date, or (ii) are submitted to the clearinghouse management process in concurrent periods of time (that is, the management process for one starts during the course of the management process for another). The time frame between the beginning of the first process and the end of the last process is called simultaneity period. In the event of simultaneous defaults: (i)
The resources in the settlement fund are used throughout the simultaneity period, as needed by the clearinghouse to cover losses resulting from those defaults;
(ii)
After the end of the simultaneity period, the clearinghouse calculates the total amount of losses resulting from the simultaneous defaults that have been covered by settlement fund resources and allocates the calculated amount to settlement fund’s contributors, so that: (a) The order established in Rule 5 is preserved; and (b) The mutualizable portion of the total losses is allocated to the clearing members in proportion to the balances of their respective fixed contributions on the concerned date.
Rule 7 If liquidity conditions or operational issues impede or preclude the order defined in Rule 5 from being followed, BM&FBOVESPA may adopt another order of use of settlement fund resources. If an order other than the one defined in Rule 5 is adopted, resulting in the use of resources that otherwise would not be used under Rule 5, BM&FBOVESPA will take the necessary measures to restore the amounts of contributions to settlement fund contributors as if the use of resources had followed the order defined in Rule 5.
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Rule 8 For as long as any event of clearing member default is submitted to a management process involving the use of settlement fund resources, both (i) the resources deposited by the defaulter clearing member and (ii) the mutualizable resources deposited by the other clearing members will remain unavailable for withdrawal.
1.3.5
Procedures for settlement fund replenishment The settlement fund can be replenished after the resources therein are used due to the default of one or more clearing members, at the discretion of BM&FBOVESPA. The replenishment of the settlement fund consists of the deposit of cash and assets by its contributors, in the amounts defined by BM&FBOVESPA. Participants are notified of the obligation to replenish the settlement fund, subject to the limit specified in the clearinghouse rules. The relevant deposit of cash and assets must occur on a specific date, to be set by the clearinghouse at each replenishment event, according to the regular collateral posting procedure, that is: (i)
The required amounts are included in the multilateral net balances of the relevant clearing members to be settled on such specified date; and
(ii)
The deposit of assets and financial resources for settlement fund replenishment purposes must be made according to the time grid for collateral posting, as defined in chapter 4 (Collateral management) of this manual.
Any clearing member that fails to meet its obligation to replenish the settlement fund may be declared either a defaulter or an operational defaulter by the clearinghouse.
1.3.6
Contribution procedures due to a review of the fixed contribution of clearing members to the settlement fund The values of the fixed contributions required of clearing members may be reviewed at any time, at the discretion of BM&FBOVESPA, as provided in subsection 1.3.3 (Fixed contributions by clearing members) hereof. If the values of the fixed contributions to the settlement fund are revised upwards, the corresponding contributions by the fund’s contributors must be made in cash and assets, in the amounts defined by BM&FBOVESPA. Participants are notified of the obligation to make new contributions to the settlement fund. The relevant deposit of funds and assets must be made within twenty (20) consecutive business days, as follows:
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(i)
On the last day of the period referred to above, any remaining balance of the required amounts that were not deposited within the specified period is included in multilateral net balances of the relevant clearing members to be settled on that day; and
(ii)
The deposit of assets and financial resources for settlement fund replenishment purposes must be made according to the time grid for collateral posting, as defined in chapter 4 (Collateral management) of this manual.
Any clearing member that fails to meet its obligation to contribute funds and assets due to a review of the settlement fund may be declared either a defaulter or an operational defaulter by the clearinghouse.
1.4
Liquidity risk management In the event of a payment failure, the clearinghouse becomes exposed to the liquidity risk in both monetization process for collateral and assets under settlement and position closeout process for the participant declared a defaulter. These two processes are enforceable within the scope of the treatment of failure situations, which is dealt with in chapter 2 (Procedures in the event of default) of this manual. During a position closeout process, the lack of liquidity may compromise the clearinghouse ability to settle the corresponding positions within the time frame for which the need of collateralwas scaled. In order to reduce this risk, restrictions to the closeout process deriving from liquidity conditions are explicitly incorporated into the CORE methodology for risk calculation. Pursuant to chapter 5 (Risk calculation) of this manual, the closeout strategy that determines the amount of required collateral meets restrictions such as minimum period for each position to start being settled and maximum daily trading limits for each instrument, which does not influence market reference prices in a significant way. Regarding liquidity risk in the monetization process, and in order to ensure that the necessary liquidity is available to meet its obligations in the prescribed manner and time, even in the event of simultaneous failures of one or more clearing members, BM&FBOVESPA imposes restrictions on the types of assets acceptable as collateral and on their corresponding volumes. In addition, it has mechanisms that allow for the rapid monetization of collateral and assets under settlement, which are:
1.4.1
(i)
A portion of the BM&FBOVESPA capital;
(ii)
Uncollateralized liquidity assistance facilities; and
(iii)
Collateralized liquidity assistance facilities.
Portion of the BM&FBOVESPA capital The portion of the BM&FBOVESPA capital, which is made up of highly liquid assets, is the simplest form of the mechanism to mitigate liquidity risk.
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Those assets are intended for use by the clearinghouse when handling any failure in the settlement window, providing it with the necessary funds to fulfill its payment obligations towards creditors clearing members.
1.4.2
Liquidity assistance facilities The clearinghouse counts on liquidity assistance facilities through which it obtains the necessary financial resources should the time period required for collateral liquidation exceed the time period stipulated for the settlement of its obligations to the clearing members. Liquidity facilities are based on contracts between BM&FBOVESPA and financial institutions, which act as liquidity providers, committing to deliver funds to the clearinghouse whenever required, within the prescribed time frame and in the prescribed amount. BM&FBOVESPA counts on both collateralized and uncollateralized liquidity assistance facilities. Collateralized liquidity facilities differ from uncollateralized liquidity facilities to the extent that they are backed by collateral in the process of liquidation by the clearinghouse. Such collateral is valued considering a haircut to its market price, and the proceeds from its liquidation are allocated to the payment of the credit granted. As presented in chapter 4 (Collateral management) of this manual, based on the volumes and types of collateralization underlying the liquidity assistance facilities contracted by BM&FBOVESPA, the clearinghouse determines both liquid and illiquid portions of each participant’s collateral portfolio, limiting the use of the illiquid portion in margin coverage to a fraction of the available cash amount. Therefore, while seeking to maintain a set of liquidity assistance facilities consistent with the types and volumes of the assets that make up collateral, BM&FBOVESPA also mitigates liquidity risk in the monetization process, restricting the acceptance or the effective use of assets based on existing facilities.
1.5
Sequence of use of collateral If the default of an investor causes the default of a trading participant, full trading participant, or settlement participant, and/or clearing member, provided they are all properly identified to the clearinghouse, collateral deposited by participants as well as resources in the settlement fund are used in the following order, until no further losses remain, whether associated with market risk or liquidity risk: 1.
Collateral posted by the investor and linked to the trading participant, full trading participant, or settlement participant, and clearing member;
2.
Any available collateral posted by the investor through other participants, upon authorization
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by such participants; 3.
Collateral posted by the full trading participant or settlement participant and linked to the clearing member;
4.
Collateral posted by the clearing member, except for its contribution to the settlement fund;
5.
The fixed contribution of the clearing member to the settlement fund;
6.
The BM&FBOVESPA contribution to the settlement fund; and
7.
The fixed contributions of the other clearing members to the settlement fund, proportional to the value of the fixed contribution of each one.
In each of steps 1 thru 4, any and all collateral deposited by the concerned participant is liable to be used, regardless of the relevant purposes (which are assigned as described in chapter 4 (Collateral management) hereof. The sequence of use of collateral as shown above is modified in case the participant declared a defaulter does not identify to the clearinghouse the defaulting participants under the defaulter’s responsibility that prompted its default. Modifications to the sequence of use of collateral are described in chapter 2 (Procedures in the event of default) hereof. In order to mitigate its liquidity risk and the liquidity risk of participants, and ensure compliance with settlement window hours, the clearinghouse may change the sequence of use of collateral prescribed above, in the event that the assets posted as collateral present distinct characteristics in terms of liquidity or settlement date, at its sole discretion. Regardless of the order of use of collateral, the final allocation of losses among participants, if any, must adhere to the sequence originally prescribed.
1.6
General provisions
1.6.1
Updating required amounts and complying with safeguard structure obligations Collateral posted by participants must consist of cash or assets, the latter at the discretion of BM&FBOVESPA. The amounts required of participants for making up layers 1 and 2 (settlement fund) of the safeguard structure are updated by the clearinghouse throughout the day, and also after clearing of all the transactions executed on that day. Collateral calls must be met on an intraday basis, whenever required by the clearinghouse, and margin calls that are made after clearing of the transactions executed on a certain day must be met on the next business day, in the time grid for collateral posting or in the settlement window. The time grid for collateral posting and the settlement window hours are respectively given in chapter 4 (Collateral management) of this manual and in the clearinghouse operating procedures manual.
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Collateral amounts to be posted and the resources due to the settlement fund are included in the multilateral net balances (MNBs) of participants, as follows: The margin amount required of any investor (layer 1) under a given trading participant, if applicable, full trading participant or settlement participant, and clearing member, is included in the investor’s MNB corresponding to these participants; and The amounts required of the clearing member to the settlement fund are included in the clearing member’s MNB. The resources allocated for the components of the safeguard structure according to the time grid for collateral posting are deducted from the participants’ MNBs, and the amounts not allocated during that period remain as an obligation of the relevant clearing members, to be settled in cash in the window for payment to the clearinghouse. By monitoring intraday risk, the clearinghouse is able to anticipate margin calls, as well as collateral calls for the other components of the safeguard structure, as often as necessary throughout the day, based on updated positions at the time of risk recalculation. The required collateral amounts, whether deposited or to be deposited, are conveyed to full trading participants, settlement participants and clearing members through the risk and collateral management systems. Trading participants must be informed of those values by their respective full trading participants. The criteria for constituting and moving collateral and other resources earmarked for the safeguard structure are described in chapter 4 (Collateral management) of this manual.
1.6.2
Position transfers The transfer of positions held by any given investor under the responsibility of a trading participant, full trading participant, or settlement participant, and of a clearing member, for other trading participants, full trading participants, or settlement participants, and clearing members, may imply changes to the margin call for said investor.
1.6.3
Posting and withdrawing collateral The criteria and procedures for posting and withdrawing collateral are described in chapter 4 (Collateral management) hereof. Collateral requirements for the settlement fund are eliminated only after the accreditation of the participant as a clearing member is withdrawn, that is, after the participant’s access authorization granted by BM&FBOVESPA is cancelled.
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Chapter 2 - Procedures in the event of default
The failure of any participants to meet their obligations, in whole or in part, in the time, place and manner prescribed by the clearinghouse, is characterized by BM&FBOVESPA as an operational defaulter situation or as a default situation, contingent on the reason for the failure and pursuant to the provisions of the clearinghouse rules and operating procedures manual.
2.1
Chain of responsibilities The transaction settlement process for which BM&FBOVESPA acts as a central counterparty is subject to a chain of responsibilities that comprises BM&FBOVESPA itself, clearing members, full trading participants, settlement participants, trading participants and investors. The BM&FBOVESPA procedures in the event of failure to perform obligations are defined based on that chain, which establishes the responsibilities described below, pursuant to the clearinghouse rules.
2.1.1
Responsibility of BM&FBOVESPA Under article 4 of Federal Law #10214, of March 27, 2001, BM&FBOVESPA assumes the position of central counterparty for the settlement of obligations resulting from the transactions it accepts for clearing and settlement, exclusively towards the clearing members. In connection with the other participants, BM&FBOVESPA is not accountable for the defaults of one another, regardless of the reasons for the failure. BM&FBOVESPA’s responsibility to the clearing members is extinguished: (i)
In the case of cash settlement: upon confirmation by BCB that the clearinghouse settlement account has been debited and the settlement agent’s Bank Reserves account or Settlement account has been credited;
(ii)
In the case of settlement by physical delivery: at the time the delivery of the asset or commodity is effected, in the manner and time frames prescribed in contract specifications and the clearinghouse operating procedures manual; and
(iii)
In the case of settlement in U.S. dollars (dollars) by nonresident investors, under CMN Resolution #2687: at the time the relevant investors receive the corresponding funds in the accounts they hold with settlement banks abroad.
BM&FBOVESPA is exempt from liability for the credit relationship existing between participants, namely:
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(i)
Between clearing members and full trading participants;
(ii)
Between clearing members and settlement participants;
(iii)
Between full trading participants and trading participants;
(iv)
Between full trading participants and investors;
(v)
Between settlement participants and investors; and
(vi)
Between trading participants and investors.
BM&FBOVESPA is exempt from liability for the settlement of transactions registered in the organized OTC market (i) in the “uncollateralized” mode or (ii) in the “partially collateralized” mode, whenever the party that required collateral is the debtor party.
2.1.2
Responsibility of clearing members The clearing members are liable: (i)
For settling with the clearinghouse, in the manner, amount and time frames prescribed by the clearinghouse, the obligations resulting from the transactions assigned to them and to participants that are linked to them;
(ii)
For effecting the collateral posting required by the clearinghouse, also for the settlement fund, in the manner, amount and time frames prescribed by the clearinghouse;
(iii)
For the authenticity and legitimacy of collateral, assets and documents they deliver to the clearinghouse whether directly or through the participants that use their clearing and settlement services; and
(iv)
For settling the obligations assumed before full trading participants and settlement participants that engage their clearing and settlement services.
The clearing member becomes responsible for the obligations arising out of a transaction from the time of the acceptance thereof by the clearinghouse, subject to the give-up rules. This responsibility extends to the complete extinction of all the obligations resulting from transactions, regardless: (i)
Of any failure or inability to make payments or deliveries by full trading participants, settlement participants, trading participants and investors that are linked to the clearing member;
(ii)
Of the sufficiency and quality of posted collateral; and
(iii)
Of the direct or indirect participation of other institutions in the settlement process.
The responsibility of any clearing member for the settlement of transactions at the clearinghouse is considered to have been terminated:
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(i)
In the case of cash settlement: at the time the clearinghouse receives confirmation that the amount of the debit balance was paid to the clearinghouse settlement account, in the manner and time frames prescribed in the clearinghouse operating procedures manual;
(ii)
In the case of settlement by physical delivery: at the time the delivery of the underlying asset is effected, in the manner and time frames prescribed in contract specifications and the clearinghouse operating procedures manual; and
(iii)
In the case of settlement in dollars by nonresident investors, under CMN Resolution #2687: at the time BM&FBOVESPA receives the corresponding funds in its account with the bank it engages to provide cash settlement for their transactions abroad.
2.1.3
Responsibility of full trading participants and settlement participants The full trading participant and settlement participant are liable: (i)
For settling with the clearing member, in the prescribed manner, amount and time frames, the obligations resulting from the transactions assigned to them and to investors that are linked to them;
(ii)
For effecting the collateral posting required by the clearing member and the clearinghouse, in the prescribed manner, amount and time frames;
(iii)
For the authenticity and legitimacy of collateral, assets and documents they deliver to the clearinghouse whether directly or through the trading participants and investors that are linked to them; and
(iv)
For settling the obligations assumed before the trading participants and investors that are linked to them.
The full trading participant remains accountable for the obligations assumed before the clearing member even in the event of failure or inability to make payments or deliveries by the investors and trading participants that are linked to the full trading participant. The settlement participant remains accountable for the obligations assumed before the clearing member and the clearinghouse even in the event of failure or inability to make payments or deliveries by the investors that are linked to the settlement participant.
2.1.4
Responsibility of trading participants The trading participant is liable: (i)
For settling with the full trading participant, in the prescribed manner, amount and time frames, the obligations resulting from the transactions assigned to the trading participant and to investors that are linked to it;
(ii)
For settling the obligations assumed before the investors that are linked to it;
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(iii)
For effecting the collateral posting required by the full trading participant, the clearing member and the clearinghouse, in the prescribed manner, amount and time frames; and
(iv)
For the authenticity and legitimacy of collateral, assets and documents it delivers to the clearinghouse whether directly or through the investors that are linked to it.
The trading participant remains accountable for the obligations assumed before the full trading participant even in the event of failure or inability to make payments or deliveries by the investors that are linked to the trading participant.
2.1.5
Responsibility of investors The investor is liable: (i)
For settling with the full trading participant, settlement participant and trading participant to which the investor is linked, in the prescribed manner, amount and time frames, the obligations resulting from the transactions assigned to the investor;
(ii)
For effecting the collateral posting required by the full trading participant, the settlement participant, the trading participant, the clearing member and the clearinghouse, in the prescribed manner, amount and time frames; and
(iii)
For the authenticity and legitimacy of collateral, assets and documents the investor delivers to the clearinghouse whether directly or through other participants.
Nonresident investors under CMN Resolution #2687 settling their obligations directly with the clearinghouse, in dollars, through the settlement bank engaged by BM&FBOVESPA to settle transactions abroad, are liable for complying with their own obligations to the clearinghouse, as well as to the full trading participants, settlement participants and trading participants to which they are linked. In the case of settlement modes where the transfer of funds occurs directly between the clearinghouse and the investor (meaning settlement by nonresident investors under CMN Resolution #2687 as well as settlement through the special settlement account—CEL account), the corresponding trading participant, full trading participant, or settlement participant, and clearing member, in the event of failure by the investor, remain responsible, assuming the obligations associated with the settlement thereof. The following figure illustrates the chain of responsibilities in the transaction settlement process.
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CLEARINGHOUSE
Clearing member
Full trading participant Settlement participant Trading participant
Investor
Investor
Investor
Figure 2.1 – Chain of responsibilities in the transaction settlement process
2.2
Default by investors
2.2.1
Declaring the default of an investor A declaration stating the default of any investor must be communicated to BM&FBOVESPA by a standard letter: (i)
From the trading participant under which the failure occurred, if the failing investor is linked to a trading participant; or From the full trading participant or settlement participant under which the failure occurred, otherwise.
2.2.2
Procedures for handling the default of an investor In the event of default by any investor, BM&FBOVESPA may adopt the following procedures: (i)
Include the relevant investor in the BM&FBOVESPA’s list of defaulters;
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(ii)
Suspend the accounts, at the clearinghouse, of the investor declared a defaulter linked to the full trading participant or settlement participant under which the failure occurred, having the effect of precluding such accounts from: Effecting allocation of transactions to such accounts; Changing allocation of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions registered in such accounts; Receiving in such accounts transactions arising out of give-ups; and Receiving in such accounts positions arising out of position transfers. For the purpose of processing the closeout of positions held by the investor declared a defaulter, the accounts of said investor are partially suspended, in order to enable the registration of transactions that result in risk reduction, through the following events: Effecting allocation of transactions to such accounts; Changing allocations of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions previously registered in such accounts; Receiving transactions arising out of give-ups to such accounts; and Receiving positions arising out of position transfers to such accounts, exclusively to reduce an existing position.
(iii)
Block the functionalities for registration of accounts to be held by the concerned investor;
(iv)
Block the direct accesses to the markets managed by BM&FBOVESPA which were granted to the concerned investor by full trading participants;
(v)
Communicate to the other full trading participants and settlement participants, as well as to their respective clearing members: The suspension of the accounts under their responsibility and held by the investor declared a defaulter; and The block of direct market accesses they granted to the investor declared a defaulter, and also the reduction of trading limits assigned to the investor’s accounts.
(vi)
Block the movement of collateral: Posted on layer 1 to cover the transactions held by the concerned investor, irrespective of the full trading participants or settlement participants responsible for such transactions; and
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Posted by guarantee issuing banks and made up of certificates of deposit and letters of credit that constitute collateral liable to be blocked, pursuant to the previous item. Blocking the movement of collateral dispenses with any requests or consents by the participants involved, being effected by means of a clearinghouse command in its collateral management system. (vii)
Prohibit deposits of new collateral by any participants, consisting of securities and other instruments issued by the concerned investor;
(viii)
Replace collateral deposited by any participants at the clearinghouse, consisting of securities and other instruments issued by the concerned investor. Such a replacement must be carried out by the participant that posted the collateral or asset;
(ix)
Close out the positions held by the investor declared a defaulter and under the responsibility of any full trading participants or settlement participants, pursuant to subsection 2.2.3;
(x)
Use the concerned investor’s collateral posted on layer 1 to cover the transactions registered in accounts held by said investor, in order to meet said investor’s obligations to the trading participant, full trading participant, or settlement participant, under which the default occurred, pursuant to subsection 2.2.4;
(xi)
Use assets and commodities carrying an obligation of delivery to the investor declared a defaulter, in order to meet said investor’s obligations to the clearinghouse or to the full trading participant or settlement participant under which the default occurred, and/or to the corresponding clearing member; and
(xii)
Adopt further measures, at its discretion, including measures in connection with other services BM&FBOVESPA may provide and/or with the securities and other instruments issued by the investor declared a defaulter.
2.2.3
Position closeout At the discretion of BM&FBOVESPA, the positions of the investor declared a defaulter are closed out: (i)
By the full trading participant, settlement participant, or trading participant under which the default occurred, if not in default; or
(ii)
By another full trading participant or settlement participant to which the positions to be closed out were transferred, or which executes the transactions intended to close the positions out, giving up such transactions to the full trading participant or settlement participant under which the default occurred; or
(iii)
By BM&FBOVESPA.
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The closing out of positions held by any investor declared a defaulter must follow the order, amounts and time frames defined in the optimal closeout strategy, whose determination is intrinsic to the methodology for calculating margin requirement for such positions (CORE). When liquidity conditions are favorable, positions might be closed out in less time and/or at different amounts than those defined in the optimal closeout strategy, provided that such anticipation and/or modification to closed out amounts do not result in increased risk for the remaining portfolio. The portfolio closeout process is subject to clearinghouse monitoring throughout the period during which the failure that prompted it will be handled.
2.2.4
Use of collateral (a)
Investors’ collateral posted on layer 1 The use of the investor’s collateral posted on layer 1 occurs upon request to the clearinghouse submitted by the full trading participant or settlement participant under which the default occurred. That request must be submitted by using a standard collateral liquidation request letter, to which must be attached (i) a declaration of the investor’s default, or (ii) a request for including said investor in the list of defaulters, which are both submitted to the clearinghouse by the full trading participant or settlement participant. The collateral deposited by or for the investor under the responsibility of the full trading participant or settlement participant requesting collateral liquidation is liable to be liquidated. If it is not possible for the clearinghouse to liquidate any of the collateral listed in the collateral liquidation request, other assets liable to be liquidated may be appointed by the requester, by submitting an additional collateral liquidation request. Any available collateral held by the investor declared a defaulter and posted on layer 1 of the safeguard structure through another full trading participant or settlement participant may be used upon authorization by this participant and the clearinghouse. It is incumbent on the clearinghouse to define which party—whether BM&FBOVESPA or the participant submitting a liquidation request—will be responsible for monetizing collateral subject to liquidation. For collateral to be monetized by BM&FBOVESPA, the financial resources resulting from monetization are deposited for the investor as margin associated with layer 1 of the safeguard structure. The amount in excess of the required margin value remains available for: (i)
Withdrawal by the full trading participant or settlement participant, pursuant to the collateral withdrawal procedure described in chapter 4 (Collateral management) hereof; or
(ii)
Transfer to the full trading participant or settlement participant in the settlement window, in which case the clearinghouse must be notified of the transfer amount; said amount is transferred to the clearinghouse settlement account, with a simultaneous
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credit entry to the MNBs of the full trading participant, or settlement participant, and of the clearing member. The full trading participant or settlement participant may choose between (i) and (ii), according to their needs at the time, either choice being subject to veto by the clearinghouse, at its discretion. For collateral to be monetized by the participant requesting the liquidation thereof, the relevant collateral must be withdrawn according to the procedure described in chapter 4 (Collateral management) of this manual.
The use of collateral of the investor declared a defaulter at an amount in excess of said investor’s balance of available collateral requires a specific authorization by the clearinghouse, and it must be linked to the existence of a multilateral net debit balance for the concerned investor. Upon said authorization, the corresponding funds are made available to the participant that requested collateral liquidation solely in the clearinghouse settlement window. The investor’s balance of available collateral is defined under section 4.5 (Procedures for posting and withdrawing collateral) of chapter 4 (Collateral management) hereof. (b)
Collateral posted by guarantee issuing banks Collateral posted by a guarantee issuing bank for the purpose of increasing issuance limits for certificates of deposit (CDs) and letters of credit (LCs) may be used if any of the CDs and LCs it has issued, among those liable to be used in handling the concerned default, cease to be enforceable by the clearinghouse. Liquidation of such collateral is conducted directly by BM&FBOVESPA, dispensing with any requests from other participants.
2.3
Default by trading participants
2.3.1
Declaring the default of a trading participant A declaration stating the default of any trading participant must be communicated to BM&FBOVESPA, by a standard letter from the full trading participant under which the failure occurred. If the investor that prompted the trading participant default is identified, the default of said investor must also be reported to BM&FBOVESPA, pursuant to subsection 2.2.1 hereof.
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2.3.2
Procedures for handling the default of a trading participant In the event of default by any trading participant, BM&FBOVESPA may adopt the following procedures: (i)
Include the relevant trading participant in the BM&FBOVESPA’s list of defaulters;
(ii)
Suspend the accounts of the trading participant declared a defaulter that are linked to the full trading participant under which the failure occurred, having the effect of precluding: Effecting allocation of transactions to such accounts; Changing allocation of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions registered in such accounts; Receiving in such accounts transactions arising out of give-ups; and Receiving in such accounts positions arising out of position transfers. For the purpose of processing the closeout of positions, the accounts of said trading participant linked to the full trading participant under which the default occurred are partially suspended, in order to enable the registration of transactions that result in risk reduction, through the following events: Effecting allocation of transactions to such accounts; Changing allocations of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions previously registered in such accounts; Receiving transactions arising out of give-ups to such accounts; and Receiving positions arising out of position transfers to such accounts, exclusively to reduce an existing position.
(iii)
Block the functionalities for registration of accounts to be held by the concerned trading participant;
(iv)
Block the accesses of the trading participant declared a defaulter to the BM&FBOVESPA trading and registration systems, where applicable, as well as the direct market accesses granted to investors linked to said trading participant;
(v)
Communicate to the other full trading participants and their respective clearing members: The suspension of the accounts under their responsibility and held by the trading participant declared a defaulter; and
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The block of direct market accesses granted to the trading participant declared a defaulter. (vi)
Block the movement of collateral: Posted by the concerned trading participant on layer 1; Posted by the investors of the concerned trading participant on layer 1, irrespective of the trading participant, full trading participant, or settlement participant responsible for the relevant transactions to which it is linked; and Posted by guarantee issuing banks and made up of certificates of deposit and letters of credit consisting collateral liable to be blocked, pursuant to the previous item. Blocking the movement of collateral dispenses with any requests or consents by the participants involved, being effected by means of a clearinghouse command in its collateral management system.
(vii)
Prohibit deposits of new collateral by any participants, consisting of securities and other instruments issued by the concerned trading participant;
(viii)
Replace collateral deposited by any participants at the clearinghouse, consisting of securities and other instruments issued by the concerned trading participant. Such a replacement must be carried out by the participant that posted the collateral or asset;
(ix)
Transfer the positions and corresponding collateral held by nondefaulting investors under the responsibility of the trading participant declared a defaulter to other trading participants, full trading participants, or settlement participants. If any such transfers are not effected within the time period prescribed by the clearinghouse, the relevant positions may be closed out by the clearinghouse, pursuant to subsection 2.3.3;
(x)
Close out the following positions, pursuant to subsection 2.3.3: (a)
Those held by the investors declared as defaulters under the responsibility of the defaulter trading participant, including the positions of the concerned trading participant when acting in the capacity of investor; and
(b)
Those held by the nondefaulting investors under the responsibility of the defaulter trading participant, whenever the transfers thereof to trading participants, full trading participants, or settlement participants do not occur within the time period prescribed by the clearinghouse.
(xi)
Use layer 1 collateral linked to the concerned trading participant’s accounts to meet said trading participant’s obligations to the full trading participant under which the default occurred, pursuant to subsection 2.3.4;
(xii)
Use assets and commodities carrying an obligation of delivery to the trading participant declared a defaulter to meet said trading participant’s obligations to the clearinghouse or to
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the full trading participant under which the default occurred, and/or to the corresponding clearing member; (xiii)
Employ the liquidity risk mitigation mechanisms that make up the BM&FBOVESPA safeguard structure; and
(xiv) Adopt further measures, at its discretion, including measures in connection with other services BM&FBOVESPA may provide and/or with the securities and other instruments issued by the trading participant declared a defaulter.
2.3.3
Position closeout At the discretion of BM&FBOVESPA, the positions of the investors of the trading participant declared a defaulter and that are under the responsibility of the full trading participant under which the default occurred are closed out: (i)
By said full trading participant, if not in default; or
(ii)
By another full trading participant or settlement participant (to which the positions to be closed out were transferred, or which executes the transactions intended to close the positions out, giving up such transactions to the full trading participant under which the default occurred); or
(iii)
By the clearing member responsible for the full trading participant under which the default occurred, in the event that said full trading participant is also declared a defaulter; in this case, the transactions intended to close the positions out are executed by the full trading participant appointed by the clearing member; or
(iv)
By BM&FBOVESPA.
The positions closeout resulting from the default of any trading participant must follow the order, amounts and time frames defined in the optimal closeout strategy, whose determination is intrinsic to the methodology for calculating margin requirement for such positions (CORE). When liquidity conditions are favorable, positions might be closed out in less time and/or at different amounts than those defined in the optimal closeout strategy, provided that such anticipation and/or modification to closed out amounts do not result in increased risk for the remaining portfolio. The portfolio closeout process is subject to clearinghouse monitoring throughout the period during which the failure that prompted it will be handled.
2.3.4
Use of collateral (a)
Collateral posted on layer 1 The use of collateral of the concerned trading participant and respective investors posted on layer 1 occurs upon request to the clearinghouse submitted by the full trading participant
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under which the default occurred. That request must be submitted by using a standard collateral liquidation request letter, to which must be attached the communication from the full trading participant to the clearinghouse on the trading participant’s default. The following collateral is liable to be liquidated: (i)
Collateral of the trading participant declared a defaulter;
(ii)
If the investors that prompted the trading participant default are identified: the collateral posted by or for such investors, under the defaulter trading participant and the full trading participant under which the default occurred;
(iii)
If the investors that prompted the trading participant default are not identified: the collateral of all the investors with a multilateral net debit balance under the trading participant declared a defaulter and the full trading participant requesting collateral liquidation, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors— CMN Resolution #2687.
If it is not possible for the clearinghouse to liquidate any of the collateral listed in the collateral liquidation request, other assets liable to be liquidated may be appointed by the requester, by submitting an additional collateral liquidation request. Any available collateral of the aforementioned investors and defaulter trading participant posted on layer 1 to cover their positions under the responsibility of another trading participant, full trading participant, or settlement participant may be used upon authorization by these participants and the clearinghouse. It is incumbent on the clearinghouse to define which party—whether BM&FBOVESPA or the participant submitting a liquidation request—will be responsible for monetizing collateral subject to liquidation. For collateral to be monetized by BM&FBOVESPA, the financial resources resulting from monetization are deposited on layer 1 of the safeguard structure as collateral of the investor or the trading participant, as the case may be. The amount in excess of the required margin value remains available for: (i)
Withdrawal by the full trading participant, pursuant to the collateral withdrawal procedure described in chapter 4 (Collateral management) hereof; or
(ii)
Transfer to the full trading participant in the settlement window, in which case the clearinghouse must be notified of the transfer amount; said amount is transferred to the clearinghouse settlement account, with a simultaneous credit entry to the MNBs of the full trading participant and clearing member.
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The full trading participant may choose between (i) and (ii), according to its needs at the time, either choice being subject to veto by the clearinghouse, at its discretion. The use of collateral at an amount in excess of the balance of available collateral requires a specific authorization by the clearinghouse, and it must be linked to the existence of obligations, to be settled in the clearinghouse settlement window, resulting from the positions and transactions of the investors of the trading participant declared a defaulter. Upon said authorization, the amount liable to be used is limited to the amount of such obligations to be settled, and the corresponding funds are made available to the participant that requested collateral liquidation exclusively in the clearinghouse settlement window. (b)
Collateral posted by guarantee issuing banks Collateral posted by a guarantee issuing bank for the purpose of increasing issuance limits for certificates of deposit (CDs) and letters of credit (LCs) may be used if any of the CDs and LCs it has issued, among those liable to be used in handling the concerned default, cease to be enforceable by the clearinghouse. The use of that collateral is subject to the order of use of the concerned certificate of deposit or letter of credit. Liquidation of such collateral is conducted directly by BM&FBOVESPA, dispensing with any requests from other participants.
2.4
Default by full trading participants or settlement participants
2.4.1
Declaring the default of a trading participant or a settlement participant A declaration stating the default of any full trading participant or settlement participant must be communicated to BM&FBOVESPA by a standard letter from the clearing member under which the failure occurred. The default is immediately reported by BM&FBOVESPA to BCB. If the trading participant and/or investor that prompted the concerned default are/is identified, the default of said trading participant and/or investor must also be communicated to BM&FBOVESPA, pursuant to subsections 2.3.1 and 2.2.1 hereof, respectively.
2.4.2
Procedures for handling the default of a full trading participant or a settlement participant In the event of default by any full trading participant or settlement participant, BM&FBOVESPA may adopt the following procedures: (i)
Include the full trading participant or settlement participant declared a defaulter in the BM&FBOVESPA’s list of defaulters;
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(ii)
Suspend the accounts under the responsibility of the full trading participant or settlement participant declared a defaulter, having the effect of precluding: Effecting allocation of transactions to such accounts; Changing allocation of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions registered in such accounts; Receiving in such accounts transactions arising out of give-ups; and Receiving in such accounts positions arising out of position transfers. For the purpose of processing the closeout of positions, accounts are partially suspended, in order to enable the registration of transactions that result in risk reduction, through the following events: Effecting the allocation of transactions to such accounts; Changing allocations of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions previously registered in such accounts; Receiving transactions arising out of give-ups to such accounts; and Receiving positions arising out of position transfers to such accounts, exclusively to reduce the existing position.
(iii)
Block the functionalities for registration of accounts under the responsibility of the full trading participant or settlement participant declared a defaulter;
(iv)
Block the accesses to the BM&FBOVESPA trading and registration systems, where applicable, of the full trading participant or settlement participant declared a defaulter, and also of the trading participants linked to the full trading participant declared a defaulter, in addition to the direct market accesses granted to the investors under the responsibility of said participants;
(v)
Adjust, to more restrictive values, the trading and risk limits established by BM&FBOVESPA and/or the clearing member under which the failure occurred and applicable to the full trading participant or settlement participant declared a defaulter;
(vi)
Communicate to the other clearing members to which the participant declared a defaulter is linked: The suspension of the accounts linked to them under the responsibility of the participant declared a defaulter; and The block of the accesses referred to in paragraph (iv).
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(vii)
Block the movement of collateral linked to the full trading participant or settlement participant declared a defaulter, namely: Collateral posted on layer 1:
–
By or for investors and trading participants under the responsibility of the full trading participant or settlement participant declared a defaulter;
–
By the full trading participant or settlement participant declared a defaulter, irrespective of the clearing member with which the relevant collateral is associated; and
–
By the clearing member under which the failure occurred, for operating balance adjustment purposes, and allocated to the full trading participant or settlement participant declared a defaulter; and
Collateral posted by guarantee issuing banks and made up of certificates of deposit and letters of credit that constitute collateral liable to be blocked, pursuant to the previous items. Blocking the movement of collateral dispenses with any requests or consents by the participants involved, being effected by means of a clearinghouse command in its collateral management system. (viii)
Prohibit deposits of new collateral by any participants, consisting of securities and other instruments issued by the full trading participant or settlement participant declared a defaulter;
(ix)
Replace collateral deposited by any participants at the clearinghouse, consisting of securities and other instruments issued either by the full trading participant or settlement participant declared a defaulter. Such a replacement must be carried out by the participant that posted the original collateral or asset;
(x)
Close out the positions under the responsibility of the full trading participant or settlement participant declared a defaulter, pursuant to subsection 2.4.3 hereof;
(xi)
Transfer the positions and corresponding collateral of nondefaulting investors under the responsibility of the full trading participant or settlement participant declared a defaulter to nondefaulting full trading participant(s) or settlement participant(s). The transfer of positions is effected after approval by the clearinghouse, based on the risk criteria described in chapter 3 (Risk monitoring) of this manual, and upon consent by: (a) The clearing member of origin (responsible for the full trading participant or settlement participant declared a defaulter); and (b) The trading participant, the full trading participant, or the settlement participant, as well as the clearing member of destination.
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Should it not be possible for any nondefaulting full trading participant or settlement participant to take responsibility for the positions intended to be transferred, BM&FBOVESPA may decide to close them out. (xii)
Use collateral to meet the obligations of the participant declared a defaulter to the other participants and the clearinghouse, pursuant to subsection 2.4.4 hereof;
(xiii)
Use assets and commodities constituting rights of the full trading participant or settlement participant declared a defaulter, to meet the obligations of this participant to the clearing member under which the failure occurred;
(xiv) Employ the liquidity risk mitigation mechanisms that make up the BM&FBOVESPA safeguard structure; and (xv)
Adopt further measures, at its discretion, including measures in connection with other services BM&FBOVESPA may provide and/or with the securities and other instruments issued by the full trading participant or settlement participant declared a defaulter.
2.4.3
Position closeout All the positions under the responsibility of the full trading participant or settlement participant declared a defaulter are subject to mandatory closeout, irrespective of the clearing members that are responsible for said positions. At the discretion of the clearinghouse, positions are closed out: By the clearing member under which the default occurred, through the nondefaulting full trading participant of the clearing member’s choice; or By another full trading participant, which will execute the transactions intended to close the positions out, giving up them to the full trading participant or settlement participant declared a defaulter; or By BM&FBOVESPA.
The positions closeout resulting from the default of any full trading participant or settlement participant must follow the order, amounts and time frames defined in the optimal closeout strategy, whose determination is intrinsic to the methodology for calculating margin requirement for such positions (CORE). When liquidity conditions are favorable, positions might be closed out in less time and/or at different amounts than those defined in the optimal closeout strategy, provided that such anticipation and/or modification to closed out amounts do not result in increased risk for the remaining portfolio. The portfolio closeout process is subject to clearinghouse monitoring throughout the period during which the failure that prompted it will be handled.
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2.4.4
Use of collateral (i)
The following collateral is liable to be used: (a)
Investors’ collateral posted on layer 1 The collateral deposited for the positions held by investors under the responsibility of the full trading participant or settlement participant declared a defaulter is liable to be liquidated, irrespective of the existence of a trading participant between the two parties. If the investor that prompted the default of the full trading participant or settlement participant is identified, pursuant to subsection 2.2.1 hereof, then: Only the collateral associated with the accounts of said investor may be used; Such collateral is intended to ensure the fulfillment of said investor’s settlement obligations and position closeout process; The use of that collateral takes precedence over the use of collateral of the full trading participant or settlement participant declared a defaulter; and The use of said investor’s collateral deposited under the responsibility of another nondefaulting trading participant, full trading participant or settlement participant is contingent on the authorization of this participant and of the corresponding clearing member. In the event of default by a full trading participant, if the failing trading participant that prompted the default is identified, pursuant to subsection 2.3.1, but the failing investor under said trading participant is not, then: The collateral of the investors of said trading participant with a multilateral net debit balance on the date of default under the full trading participant declared a defaulter may be used, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors—CMN Resolution #2687; The use of such collateral follows the use of collateral of the failing trading participant, but takes precedence over the use of collateral of the full trading participant declared a defaulter; and The use of collateral of investors of the failing trading participant deposited under the responsibility of another nondefaulting trading participant, full trading participant or settlement participant is contingent on the authorization of these participants and of the corresponding clearing member.
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If neither the investor nor the trading participant, if applicable, that prompted the default in question are identified, then: The collateral associated with the accounts of investors with a multilateral net debit balance (including accounts of trading participants with a multilateral net debit balance when acting in the capacity of investors) on the date of default under such full trading participant or settlement participant may be used, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors— CMN Resolution #2687; Such collateral is intended to ensure the fulfillment of the settlement obligations and closeout process of the positions for which it was originally posted; The amount to be used associated with each of the aforementioned accounts is limited, pursuant to the provisions of appendix 1 of this manual; and The use of such collateral must occur after all the collateral of the full trading participant or settlement participant declared a defaulter are used, including collateral posted by this participant when acting in the capacity of investor. Liquidation of investors’ collateral deposited on layer 1 occurs upon request to the clearinghouse submitted by the full trading participant or settlement participant declared a defaulter and also by the clearing member that declared the relevant default. That request must be sent using a standard collateral liquidation request letter, to which must be attached the declaration of the concerned default or the request for including the participant in the list of defaulters, which are both submitted to the clearinghouse by the clearing member. (b)
Collateral posted by the full trading participant or settlement participant declared a defaulter Liquidation of such collateral is conducted by the clearinghouse upon request submitted by the clearing member under which the default occurred, using a standard collateral liquidation request letter.
(c)
Collateral posted by guarantee issuing banks Collateral posted by a guarantee issuing bank for the purpose of increasing issuance limits for certificates of deposit (CDs) and letters of credit (LCs) may be used if any of the CDs and LCs it has issued, among those liable to be used in handling the concerned default, cease to be enforceable by the clearinghouse.
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The use of that collateral is subject to the order of use of the concerned certificate of deposit or letter of credit. Liquidation of such collateral is conducted directly by BM&FBOVESPA, dispensing with any requests from other participants. (ii)
It is incumbent on the clearinghouse to define which party—whether BM&FBOVESPA or the clearing member that declared the full trading participant or settlement participant a defaulter—will be responsible for monetizing collateral. For collateral to be monetized by BM&FBOVESPA, the financial resources resulting from monetization are made available to the clearing member only. Upon said clearing member’s choice and upon consent by the clearinghouse, those resources may either be: (a) Deposited in the Bank Reserves account of the settlement agent appointed by the clearing member, or if it is not possible to use such an account, in the current account held by the clearing member with another financial institution it may appoint to the clearinghouse; or (b) Transferred in the settlement window, with the value corresponding to the debit amount to be covered by the relevant funds being transferred to the clearinghouse settlement account, with a simultaneous credit entry to the MNB of the clearing member.
(iii) If it is not be possible to liquidate any of the collateral listed in the collateral liquidation request, when applicable, other assets liable to be liquidated may be appointed by the requester, by submitting an additional collateral liquidation request.
2.5
Default by clearing members
2.5.1
Declaring the default of a clearing member A declaration stating the default of any clearing member is issued by BM&FBOVESPA, being immediately reported to BCB. If the investor, trading participant, full trading participant, or settlement participant that prompted the clearing member default is identified, the investor or relevant participant must also be declared a defaulter, pursuant to subsections 2.2.1, 2.3.1 and 2.4.1, respectively.
2.5.2
Procedures for handling the default of a clearing member In the event of default by any clearing member to the clearinghouse, BM&FBOVESPA may, upon declaring the corresponding default, adopt the following procedures: (i)
Include the clearing member declared a defaulter in the BM&FBOVESPA’s list of defaulters;
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(ii)
Suspend the accounts under the responsibility of the clearing member declared a defaulter, having the effect of precluding: Effecting allocation of transactions; Changing allocations of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions registered in such accounts; Receiving in such accounts transactions arising out of give-ups; and Receiving in such accounts positions arising out of position transfers. For the purpose of processing the closeout of positions, accounts are only partially suspended, in order to enable the registration of transactions that result in risk reduction, through the following events: Effecting allocation of transactions to such accounts; Changing allocations of transactions previously allocated to such accounts; Effecting give up of transactions allocated to such accounts; Transferring positions previously registered in such accounts; Receiving transactions arising out of give-ups to such accounts; and Receiving positions arising out of position transfers to such accounts, exclusively to reduce an existing position.
(ii)
Block the functionalities for registration of accounts under the responsibility of the full trading participants and settlement participants linked to the clearing member declared a defaulter;
(iii)
Block the accesses to the BM&FBOVESPA trading and registration systems of full trading participants and settlement participants under the responsibility of the clearing member declared a defaulter, as well as of the trading participants linked to said participants, in addition to the direct market accesses granted to investors linked to them;
(iv)
Adjust, to the most restrictive values as possible, the operational limits applicable to the clearing member declared a defaulter and also to the full trading participants and settlement participants linked to said clearing member;
(v)
Block the movement of collateral linked to the clearing member declared a defaulter, namely: Investors’ collateral posted on layer 1 to cover the risk of positions under the responsibility of the clearing member declared a defaulter; Collateral posted on layer 1 by the full trading participants and settlement participants under the responsibility of the clearing member declared a defaulter; Collateral posted on layer 1 by the clearing member declared a defaulter;
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Collateral posted for the settlement fund (layer 2); and Collateral posted by guarantee issuing banks and made up of certificates of deposit and letters of credit constituting collateral liable to be blocked, pursuant to the previous items. Blocking the movement of collateral dispenses with any requests or consents by the participants involved, being effected by means of clearinghouse command in its collateral management system. (vi)
Prohibit deposits of new collateral by any participants, consisting of securities, assets and other instruments issued by the clearing member declared a defaulter;
(vii)
Replace collateral and other assets making up the BM&FBOVESPA safeguard structure and deposited by any participants at the clearinghouse, consisting of securities, assets and other instruments issued by the clearing member declared a defaulter. Such a replacement must be carried out by the participant that posted the concerned collateral;
(viii)
Close out the positions under the responsibility of the clearing member declared a defaulter, pursuant to subsection 2.5.3 hereof;
(ix)
Transfer the positions held by nondefaulting participants under the responsibility of the clearing member declared a defaulter to other clearing member(s). The nondefaulting participants under the responsibility of the clearing member declared a defaulter may have their positions and collateral transferred to nondefaulting clearing members of their choice, upon acceptance by the chosen clearing members, subject to the time limits for transfers specified by BM&FBOVESPA.
(x)
Use collateral to meet the obligations of the concerned clearing member to the clearinghouse, pursuant to subsection 2.5.4 hereof;
(xi)
Use assets and commodities carrying a payment or a delivery obligation of the clearinghouse to the concerned clearing member, in order to meet the obligations of said participant to the clearinghouse;
(xii)
Employ the liquidity risk mitigation mechanisms that make up the BM&FBOVESPA safeguard structure; and
(xiii)
In the context of the other services provided by BM&FBOVESPA, adopt further measures in connection with the procedures prescribed for default situations or resulting therefrom, relative to securities and other instruments issued by the clearing member declared a defaulter.
If the failing investor, trading participant, full trading participant, or settlement participant that prompted the clearing member default is identified to the clearinghouse, the measures prescribed for handling the relevant defaults also apply, pursuant to the provisions set forth in sections 2.2, 2.3 and 2.4, respectively.
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2.5.3
Position closeout The closeout of positions under the responsibility of the clearing member declared a defaulter is determined by BM&FBOVESPA. (i)
If the investors, trading participants, full trading participants, or settlement participants that prompted the clearing member default are not identified, then all the positions under the responsibility of said clearing member are subject to mandatory closeout.
(ii)
If the investors, trading participants, full trading participants, or settlement participants that prompted the clearing member default are identified, pursuant to subsections 2.2.1, 2.3.1 and 2.4.1, respectively, then: The positions of said investors, trading participants, full trading participants, or settlement participants, as well as those of the clearing member declared a defaulter, when acting in the capacity of investor, trading participant, full trading participant, or settlement participant, are subject to mandatory closeout; and The positions of the other investors, trading participants, full trading participants, or settlement participants are also subject to mandatory closeout in the absence of conditions for the transfer thereof in the time and manner prescribed by the clearinghouse.
The positions closeout resulting from the default of any clearing member must follow the order, amounts and time frames defined in the optimal closeout strategy, whose determination is intrinsic to the methodology for calculating margin requirement for such positions (CORE). When liquidity conditions are favorable, positions might be closed out in less time and/or at different amounts than those defined in the optimal closeout strategy, provided that such anticipation and/or modification to closed out amounts do not result in increased risk for the remaining portfolio. The portfolio closeout process is subject to clearinghouse monitoring throughout the period during which the failure that prompted it will be handled.
2.5.4
Use of collateral (i)
It is incumbent on BM&FBOVESPA to decide on the use of collateral held by the clearing member declared a defaulter, as well as by the participants under the responsibility of said clearing member, and BM&FBOVESPA can do so regardless of any requests or consents by said participants. The use of collateral constituting the settlement fund requires a specific authorization by the BM&FBOVESPA Executive Board.
(ii)
Collateral is monetized by BM&FBOVESPA and the proceeds therefrom are used by BM&FBOVESPA to meet obligations to the other clearing members.
(iii)
The following collateral is liable to be used:
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(a)
investors’ collateral posted on layer 1 and linked to their accounts under the responsibility of the clearing member declared a defaulter If the failing investor that prompted the concerned default is identified, pursuant to subsection 2.2.1 hereof, then: Only the collateral associated with the accounts of said investor is liable to be used; and The collateral to be used is intended to ensure the fulfillment of said investor’s settlement obligations and position closeout process. If the failing trading participant that prompted the clearing member default is identified, pursuant to subsection 2.3.1, but the investor is not, then: The collateral associated with the accounts showing a multilateral net debit balance under said trading participant is liable to be used, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors—CMN Resolution #2687; and The collateral to be used is intended to ensure fulfillment of the settlement obligations and closeout process of the positions under the responsibility of said trading participant. If only the failing full trading participant or settlement participant that prompted the clearing member default is identified, pursuant to subsection 2.4.1, and both the investor and the trading participant are not, then: The collateral associated with the accounts of all the investors showing a multilateral net debit balance under said full trading participant or settlement participant, irrespective of the trading participants responsible for said accounts, is liable to be used, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors—CMN Resolution #2687; and The collateral to be used is intended to ensure fulfillment of the settlement obligations and closeout process of the positions under the responsibility of said full trading participant or settlement participant. If the failing investor, trading participant, full trading participant, or settlement participant that prompted the clearing member default are not identified, then: The collateral associated with the accounts of all the investors showing a multilateral net debit balance under the concerned clearing member is liable to
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be used, irrespective of the trading participants, full trading participants, or settlement participants that are responsible for such accounts, pursuant to the procedures described in appendix 1, except investors whose multilateral net debit balances have been settled directly with the clearinghouse through settlement via CEL account or through settlement by nonresident investors—CMN Resolution #2687; The collateral to be used is intended to ensure fulfillment of the settlement obligations and closeout process of the positions of the investors to which said collateral is linked; and The amount to be used associated with each investor showing a multilateral net debit balance is limited pursuant to the provisions of appendix 1 of this manual. The use of collateral posted by investors (on layer 1 of the safeguard structure) takes precedence over the use of collateral deposited by full trading participants and settlement participants, regardless of the purpose thereof, provided that the clearinghouse is notified of the trading participant or investor that prompted the concerned default. In case the full trading participant or settlement participant fails to meet the obligation to inform to the clearinghouse the trading participant or investor that prompted the default, the collateral pledged by investors is used only after exhaustion of the collateral of the full trading participant or settlement participant. (b)
Collateral posted by full trading participants and settlement participants under the responsibility of the clearing member declared a defaulter If the failing full trading participant or settlement participant that prompted the clearing member default is identified, pursuant to subsection 2.4.1 hereof, then: Only the collateral posted by said full trading participant or settlement participant is liable to be used; and The use of such collateral takes precedence over the use of the collateral posted by the clearing members. If the full trading participant or settlement participant that prompted the clearing member default is not identified, then: The collateral posted by all the full trading participants and settlement participants showing a multilateral net debit balance under the responsibility of the concerned clearing member on the date of default is liable to be used, pursuant to the procedures described in appendix 1;
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The use of such collateral takes precedence over the use of the collateral of trading participants and investors deposited on layer 1 under the aforementioned full trading participants and settlement participants; and The use of such collateral occurs after the collateral posted by the clearing member declared a defaulter is used, including collateral deposited as its contribution to the settlement fund. (c)
Collateral posted by the clearing member declared a defaulter, except its contribution to the settlement fund If the full trading participant or settlement participant that prompted the clearing member default is identified, pursuant to subsection 2.4.1 hereof, then the use of collateral deposited by the clearing member follows the use of collateral posted by said full trading participant or settlement participant and by the investors under the responsibility of this participant and whose collateral is liable to be used. If the full trading participant or settlement participant that prompted the clearing member default is not identified, then the use of collateral posted by the clearing member takes precedence over the use of collateral deposited by the full trading participants and settlement participants under its responsibility, as well as by the trading participants and investors linked to said participants and whose collateral is capable of being used. In either case, the use of such collateral takes precedence over the use of the settlement fund.
(d)
Collateral posted for the settlement fund The use of the settlement fund will be subject to the rules for settlement fund use, as set forth in chapter 1 (Safeguard structure) of this manual, and in addition to the following: The contribution of the clearing member declared a defaulter to the settlement fund can only be used after all the other collateral deposited by said clearing member is used; and in case the full trading participant or settlement participant that prompted the clearing member default is not identified, then the BM&FBOVESPA contribution to the settlement fund will follow the use of all the collateral that is capable of being used, pursuant to paragraphs (a), (b) and (c) of this subsection 2.5.4.
(e)
Collateral posted by guarantee issuing banks Collateral posted by guarantee issuing banks for the purpose of increasing issuance limits for certificates of deposit (CDs) and letters of credit (LCs) may be used if any of the
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CDs and LCs they have issued, among those liable to be used in handling the concerned default, cease to be enforceable by the clearinghouse. The use of that collateral is subject to the order of use of the concerned bank certificate of deposit or letter of credit. Liquidation of such collateral is conducted directly by BM&FBOVESPA, dispensing with any requests from other participants.
2.6 Operational defaulter As established in the clearinghouse rules, the failure of a participant to meet obligations may be characterized either as an operational defaulter situation or as a default situation. The actions which may be taken by BM&FBOVESPA in default situations, as described in the previous sections of this chapter, also apply to an operational defaulter situation, except those dealing with position closeout, position and collateral transfers, and inclusion of the participant in the list of defaulters.
2.7 Sequence of use of collateral In order to mitigate its liquidity risk and the liquidity risk of its participants, in addition to ensuring compliance with settlement window hours, the clearinghouse may change the sequence of use of collateral provided in this chapter and in chapter 1 (Safeguard structure) of this manual, in the event that the assets pledged as collateral present distinct characteristics in terms of liquidity or settlement date, at its sole discretion. Without prejudice to this provision, the final allocation of losses among participants, if any, must adhere to the originally prescribed sequence.
2.8 Procedures in the event of physical delivery failure 2.8.1
Gold-based contracts In case of a failed physical delivery of gold associated with contracts based on this asset, the clearinghouse takes the following actions: (i)
Debit to the multilateral net balance of the investor that failed to make delivery of gold (debtor) the financial value corresponding to the delivery failure, given by the product of the amount of undelivered gold by the average price of gold earmarked for delivery, considering all the positions and trades involved in the concerned delivery;
(ii)
Select the investors that will be impacted by the failed physical delivery (creditors), meaning those that will not receive the expected amount of gold; this selection is defined by means of a BM&FBOVESPA algorithm, which seeks to preserve gold delivery to those who are not under the responsibility of the participants responsible for the failure and who are creditors of smaller amounts of gold;
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(iii)
Credit to the multilateral net balance of each creditor, as selected in the previous step, the financial value given by the product of the amount of gold not delivered to the creditor by the average price of gold supposed to be received against all the contracts held by the creditor;
(iv)
Levy a fine on the failing investor for the delivery failure, corresponding to 0.2% of the amount of the delivery failure; and
(v)
Issue a repurchase order with a defined validity period.
2.8.1.1 Repurchase order A repurchase order is the instrument through which the full trading participant or settlement participant responsible for the creditor investor is allowed to execute in order to buy gold spot contracts at market price, in the total amount of unreceived gold, being compensated for the costs of the relevant transactions and for any possible losses. The losses to be compensated for are calculated by considering: (i)
The gold purchase price under the spot contracts bought through the relevant transactions; and
(i)
The gold purchase prices associated with the trades and positions of the creditor investor, with delivery expected to be made in the settlement cycle in which the debtor failed.
2.8.1.2 Repurchase order execution The procedure for executing a repurchase order is described below: Step
Date
Time
Event Issue repurchase order
1
Settlement date
By
when delivery failed 12:30 PM
Repurchase order execution
Up to and including 2
T+1 of settlement
By
date when delivery
6:00 PM
failed
Up to and including 3
The repurchase order must be executed by the full trading participant; if the repurchase order was issued in favor of a settlement participant, the transactions corresponding to the order execution must be given up by the full trading participant to the settlement participant. Notify repurchase order execution
T+1 of settlement
By
date when delivery
6:00 PM
failed
The repurchase order is issued by the clearinghouse, by system registration, in favor of the full trading participant or settlement participant responsible for the creditor investor.
The order execution must be notified to the clearinghouse, by system registration, by the full trading participant or settlement participant in whose favor the repurchase order was issued.
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The transactions carried out as part of the repurchase order execution are settled according to regular multilateral net settlement procedures performed by the clearing members responsible for the buying and selling parties to those transactions. Moreover, the costs of the buying party arising out of such transactions and the amounts specified below are credited and debited, respectively, to the multilateral net balance of the creditor investor damaged by the delivery failure and to the multilateral net balance of the failing investor for settlement on T+1 of the date of the repurchase order execution.
VDebtor = Q × max ( PExec − PDebtor , PCreditor − PDebtor , 0) VCreditor = Q ×max ( PExec − PCreditor , 0)
(2.1) (2.2)
Where:
VDebtor :
the amount to be debited to the multilateral net balance of the failing debtor investor;
VCreditor :
the amount to be credited to the multilateral net balance of the damaged creditor investor;
Q:
the amount of gold underlying the transactions carried out as part of the repurchase order execution;
PExec :
the average purchase price of gold underlying the transactions, as appointed by the creditor, carried out as part of the repurchase order execution;
PDebtor :
the average price of gold included in the repurchase order issued by the clearinghouse and obtained from all the trades and positions held by the failing debtor investor, which were supposed to have been physically delivered when delivery failed; and
PCreditor :
the average price of gold included in the repurchase order issued by the clearinghouse and obtained from all the trades and positions held by the damaged creditor investor, which were supposed to have been physically delivered when delivery failed.
2.8.1.3 Repurchase order cancellation A repurchase order may be cancelled when: (i)
All the parties involved—meaning the party responsible for the failed delivery and the damaged creditor parties—agree with the cancellation thereof; and
(ii)
Gold not previously delivered is available for delivery.
The cancellation of a repurchase order involves the procedures described in the following table, which must be carried out in a single day:
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Step
Date
Time
Repurchase order cancellation request registration
Up to and including T+1 of settlement
1
By
date when delivery 6:00 PM failed
T+1 of settlement
By
date when delivery 6:00 PM failed
Up to and including T+1 of settlement
3
The cancellation request, which may involve the whole or part of the repurchase order, must be registered in the clearinghouse system by the full trading participant or settlement participant responsible for the failed delivery. Gold delivery
Up to and including 2
Event
The amount of gold to be delivered corresponds to the balance of gold stated in the repurchase order cancellation request. For delivery to be effected, that balance must be made available to the custody agent of the failing debtor investor. Repurchase order cancellation request confirmation
By
date when delivery 6:00 PM failed
The buying full trading participant or settlement participant must give its consent to the repurchase order cancellation via registration in the clearinghouse system. Repurchase order cancellation request review The clearinghouse reviews the request and decides on its acceptance or rejection.
Up to and including T+1 of settlement
4
By
date when delivery 6:00 PM failed
In case of acceptance, which requires compliance with all the previous steps, the clearinghouse cancels the order and calculates the amounts to be credited and debited, respectively, to the multilateral net balances of the creditor and debtor investors. In case of rejection, the repurchase order remains valid for execution within the prescribed time period and the clearinghouse returns the gold delivered by the debtor to the origin deposit account, according to step 2.
The delivery of gold, as indicated in step 2, and the cash settlement of the amounts indicated in step 4, occur: (i)
On the same day of the repurchase order cancellation request registration, when the request is made by 12:00 noon; or otherwise,
(ii)
On the business day following the date of the repurchase order cancellation request registration.
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2.8.1.4 Reverse repurchase The clearinghouse proceeds to reverse the repurchase in the absence of registration of the repurchase order execution or cancellation, that is, when the full trading participant responsible for the damaged creditor investor: (i)
Executes the repurchase order and does not notify its execution to the clearinghouse, in the prescribed manner and time; or
(ii)
Does neither execute nor cancel the repurchase order, in the prescribed manner and time.
In both cases, the clearinghouse considers the repurchase order as not executed and the order expires. In case (i), the transactions are regularly settled, as the other transactions executed in the spot market, without including the costs compensation and the values given by equations (2.1) and (2.2). The reverse repurchase is executed by the clearinghouse on T+2 of the settlement date when delivery failed, resulting in compensation to the creditor, in whose favor the corresponding repurchase order was issued, for any costs and damages associated with nondelivered gold. In addition to the amount of the costs incurred by the creditor, the following amounts are credited and debited, respectively, to the multilateral net balances of the creditor and debtor investors:
VDebtor = Q × max ( PAvg − PDebtor , PCreditor − PDebtor , 0 ) VCreditor = Q × max ( PAvg − PCreditor , 0 )
(2.3) (2.4)
Where:
VDebtor :
the amount to be debited to the multilateral net balance of the failing debtor investor;
VCreditor :
the amount to be credited to the multilateral net balance of the creditor investor damaged by the delivery failure;
Q:
the amount of gold pending delivery upon execution of the reverse repurchase;
PAvg :
the last average price of gold at the end of T+1 of the settlement date when delivery failed;
PDebtor :
the average price of gold included in the repurchase order to be reversed and obtained from all the trades and positions held by the failing debtor investor, which were supposed to have been physically delivered when delivery failed; and
PCreditor :
the average price of gold included in the repurchase order to be reversed and obtained from all the trades and positions held by the damaged creditor investor, which were supposed to have been physically delivered when delivery failed.
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2.8.2
Commodity-based contracts Should it not be possible to settle contracts by delivery of the underlying agricultural commodities, by virtue of amendments to existing rules or any other reasons recognized by BM&FBOVESPA as fortuitous events or force majeure, BM&FBOVESPA may, at its discretion, extend settlement time frames and dates, and/or determine that the transaction be subject to cash settlement, setting the relevant prices. When the seller fails to make delivery of the commodity or the buyer fails to effect payment or is not able to take delivery of the actual commodity, the clearinghouse may, at its discretion, appoint a substitute seller or a substitute buyer for effecting the settlement, extend settlement time frames and dates, subject the failing party to fines and other penalties, and/or determine the transaction to be cash settlement, setting the relevant prices. Without prejudice to the clearinghouse, the clearing member responsible for the failing party must pay any possible fines and differences of amounts resulting from the cash settlement of the transaction.
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Chapter 3 - Risk monitoring
The acceptance of transactions by the clearinghouse differs for exchange-traded markets and organized OTC markets. While the acceptance of a transaction registered in an exchange-traded market occurs when the trading system matches the buy and sell orders that originated it, in an organized OTC market acceptance of a transaction registered in the “collateralized” or “partially collateralized” mode and the registrations of early settlement and ownership transfer (in the case of swaps) of such transactions occur after confirmation of existence of balance of collateral posted by the parties to the trade. Due to this difference, the clearinghouse adopts different risk monitoring structures. In order to mitigate the risks associated with the settlement of transactions in exchange-traded markets, the clearinghouse monitors its own exposure to the credit risk of participants during the trading sessions, through monitoring the intraday risk arising out of transactions. This constant monitoring enables the clearinghouse to reduce its own risk exposure, anticipating margin and other collateral calls throughout the day and assuming a central role in the provision of risk mitigation mechanisms, which ensure the stability of the settlement structure in the event of default by one or more participants.
3.1
Post-trade risk monitoring
3.1.1
Intraday risk limit One of the prerogatives of intraday risk monitoring in the post-trade environment is the definition, by the clearinghouse, of a maximum intraday risk limit (IRL) for each full trading participant and settlement participant. The intraday risk limit assigned to each full trading participant and settlement participant by the clearinghouse may be reduced by the corresponding clearing member, since clearing members are ultimately responsible for the settlement of transactions, being incumbent on them the collateral posting required of participants. The intraday risk limit is a reference value for risk exposure, triggering additional collateral posting requirements by the clearinghouse for full trading participants or settlement participants, for investors under their responsibility, or for the corresponding clearing members. When posted by the full trading participant or settlement participant, or by its clearing member, such additional collateral is meant to cover the amount of risk exposure in excess of the relevant intraday risk limit level, thus preserving operational regularity for this full trading participant or settlement participant.
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Through intraday monitoring of the full trading participants and settlement participants’ risk, the clearinghouse assesses, at a frequency it defines, adherence of the set of their transactions to the relevant limits applicable to full trading participants and settlement participants.
3.1.2
Operating balance The operating balance of a full trading participant or settlement participant relative to its activities under a given clearing member
P,
called
OBP ,
CM , is a function of the intraday risk limit
assigned to it, of posted collateral and of the risk associated with its transactions, which is algebraically represented by the following equation:
OBP = IRLP + CollateralP,CM − RiskP
(3.1)
Where:
IRLP :
the intraday risk limit of full trading participant or settlement participant
P ( IRLP ≥0); CollateralP,CM :
the amount of collateral posted by the full trading participant or settlement participant
P
and/or the clearing member
adjustment purposes ( CollateralP ,CM
RiskP :
CM
for operating balance
≥ 0 ); and
the intraday risk associated with the full trading participant or settlement participant
P ( RiskP ≥ 0 ).
Any violation of the intraday risk limit is characterized by
OBP 0)
or short
< 0 ), held by the investor in instrument i .
For options contracts,
QiInvestor
is the delta-equivalent position in instrument i . The delta-equivalent
position of a set of options positions is the quantity of the asset underlying the options that is equivalent, in terms of price change, to the options portfolio. The delta-equivalent position is given by the sum of the quantities of each option position multiplied by the respective deltas thereof. The delta of an option indicates approximately the change in the option price per unit change in the
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underlying asset price. By denoting the option from among the options that define instrument i , with strike price
k , by OP ( k ) , then the delta-equivalent position in that instrument is: QiInvestor = ∑ QiInvestor ( k ) × abs ( ∆i ( k ) )
(3.15)
k∈SP
Where:
SP :
the set of strike prices of the options that define instrument
QiInvestor (k) :
the position held by the investor in option contracts;
∆i ( k) :
OP ( k ) ,
i;
expressed in number of
Qi (k) > 0 for long positions and Qi (k) < 0 for short positions; and
the delta of option
OP ( k ) .
Appendix 2 of this manual provides examples of calculation and application of position limits.
3.3
Pre-trade risk monitoring The full trading participants that have investors with direct market access (DMA) and/or are classified by BM&FBOVESPA as high-frequency investors must necessarily adopt a pre-trade risk management model in connection with the activities of said investors. Moreover, the model defined and provided by BM&FBOVESPA is mandatory for reviewing orders: (i)
Entered by high-frequency investors, irrespective of the access mode; and
(ii)
Entered by investors with direct market access in the following modes: “DMA 3 – Via Direct Connection,” “DMA 4 – Co-location Investor,” and “DMA 4 – Co-location Broker.”
The pre-trade risk monitoring performed by the clearinghouse consists of the risk analysis of said investors through the BM&FBOVESPA pre-trade risk management model. Said model is based on the review of each order against a set of limits prior to being entered into the order book. If an order implies the violation of one or more limits it is rejected, thus not being included in the order book. The types of limits to which orders are submitted are defined by BM&FBOVESPA, whereas the values of the limits assigned to each account held by an investor and to each master account are defined by the relevant full trading participant, subject to the maximum values established by BM&FBOVESPA. Hence, reviews are based on the identification of the account to which the trades resulting from the orders will be allocated, such an identification being required for orders entered by high-frequency investors and/or sent via direct market access. The limits of the BM&FBOVESPA pre-trade risk management model are defined for each instrument admitted to trading and are based:
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(i)
On the characteristics of the order under review (order side, quantity, etc);
(ii)
On the set of orders, identified to the same account of the order under review, in the order book at the time of review; and
(iii)
On the trades allocated, on the date of review, to the same account of the order under review.
By adopting the BM&FBOVESPA model, the full trading participants are able to define the maximum risk values that fit their investors’ profiles, registering in the BM&FBOVESPA pre-trade risk management system the values of the limits defined by the model and applicable to each account. New orders as well as modifications to existing ones are subject to a minimum set of limits, defined as follows: Maximum order size: the maximum quantity (number of contracts or of asset units) of an order to buy or sell an instrument; Maximum size of a potential position in an instrument: the maximum daily amount of a potentially long or short position in an instrument. This limit considers (i) the number of contracts/asset units in the order; (ii) the balance of trades executed on the date of review; and (iii) the orders entered by the investor and available in the trading system’s order book; and Maximum size of a position by equivalent instrument: the maximum daily amount of a long or short position in an equivalent instrument. An equivalent instrument is a fictitious instrument defined by BM&FBOVESPA based on instruments with similar features, such as all the maturities of the futures contract on a given underlying. In general, an equivalent instrument is a consolidation of the selected instruments, based on a risk weighting criterion (so that the risk of a unit of the equivalent instrument is approximately equal to the risk of the set of individual positions in each of the instruments included therein). The weighting factor may be, for example, the duration (for interest rate instruments) or the delta (for options instruments). In order to check for conformity of an order linked to a given account (or for modification of an existing order) involving an instrument that makes up an equivalent instrument, the positions, associated with the concerned account, in the instruments that make up said equivalent instrument are consolidated into a single position in the equivalent instrument, which is processed according to the same risk weighting criterion that defines the equivalent instrument. BM&FBOVESPA may, at its sole discretion, add further limits to the minimum set shown above, as well as cancel or replace existing limits. Limits are checked in a sequential manner, with the automatic rejection of an order, or the modification of an existing one, whenever: (i)
The order or the modification of an existing order results in the violation of any established limits; or
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(ii)
The value of some limit associated with the concerned instrument is not registered in the risk system.
In case a full trading participant fails to meet the obligation to use the BM&FBOVESPA pre-trade risk management model, or assigns inadequate risk limits, under such model, to the accounts under its responsibility, BM&FBOVESPA may, at its discretion: Block the access of the investor that has not been assigned limits, or whose orders are not being submitted to the BM&FBOVESPA review; Determine that the full trading participant proceeds to an immediate review of the limits it assigned to investors; Limit the flow of orders by the full trading participant and/or by the investor; Require additional collateral posting of the full trading participant; and Adopt additional prudential measures, in order to mitigate both the operational risk and the counterparty risk.
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Chapter 4 - Collateral management
Collateral management involves both the acceptance and the management of the assets that are delivered to the clearinghouse by participants in order to integrate its safeguard structure, including the management of the use of collateral in the event of failure by participants to meet their obligations. The central counterparty functions performed by the clearinghouse, ensuring the settlement of transactions to clearing members, expose it to the credit risk of its participants, meaning the risk of loss associated with the resources that will no longer be received in their originally defined form should any of the users of its clearing and settlement services (credit risk of the counterparty) and/or any of the issuers of collateral posted with the clearinghouse (credit risk of the issuer) default. To cover market risk and liquidity risk associated with a default event, the clearinghouse requires participants the collateral posting for the transactions they were assigned, imposing restrictions on how collateral is constituted and used, and monitors the risk that the positions assigned to participants pose to its own operation.
4.1
Eligibility criteria The acceptance of each type of asset as collateral is contingent on criteria for the application of haircuts and use and issuance limits, as well as on any other conditions that the clearinghouse may deem necessary to define. Those criteria are established and defined based mainly on the liquidity conditions of assets. At its sole discretion, BM&FBOVESPA may reject any assets submitted as collateral, without announcing the reasons for its decision. Only the assets that, at the sole discretion of the clearinghouse, have an acceptable level of risk are eligible to be deposited. The eligibility criteria for assets to be accepted as collateral are described in detail in this section. Irrespective of the acceptance of any given assets as collateral by the clearinghouse, the full trading participant, or settlement participant, and the clearing member responsible for the transactions and positions associated with that collateral are liable for the credit risk of the corresponding issuance and for the authenticity of the assets, as well as for the immediate replacement thereof, if so determined by the clearinghouse. This liability goes even further, so as to include those cases where the clearinghouse deems that collateral had its integrity or enforceability affected. In such circumstances, the full trading participant, or settlement participant, and the clearing member may be called upon to make the deposit of the corresponding amount in cash. If BM&FBOVESPA has difficulty in liquidating and/or receiving a certain collateral, the full trading participant, or settlement participant, and the clearing member are responsible for the liquidation thereof, as well as for the immediate replacement of such collateral or for payment of the corresponding amount in cash.
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4.1.1
Eligible assets The collateral posting must be made in cash, but it may be replaced by the deposit of other assets, at the discretion of the clearinghouse. The following cash assets are acceptable: Dollar, exclusively for nonresident investors under CMN Resolution #2687; and The local currency, for the other participants. The following assets are eligible to be accepted by the clearinghouse as collateral, as substitutes for the aforementioned cash assets: (i)
Brazilian federal government bonds;
(ii)
Gold as a financial asset;
(iii)
Shares of stock issued by a publicly-traded company listed on BM&FBOVESPA;
(iv)
Certificates of deposit of shares of stock (units) issued by a publicly-traded company listed on BM&FBOVESPA;
(v)
Bank certificates of deposit (CDs);
(vi)
U.S. Treasury bonds;
(vii)
Bank letters of credit (LCs);
(viii)
Exchange-traded fund (ETF) shares;
(ix)
Selected investment fund shares; and
(x)
Rural product notes (CPRs).
Only nonresident investors under CMN Resolution # 2687 are authorized to constitute collateral in U.S. Treasury bonds and dollars, which are also the only assets eligible to be used by those investors for collateral posting.
4.1.2
Rules and procedures for accepting assets as collateral The clearinghouse adopts specific rules and procedures for individual assets to be accepted and constituted as collateral by the participants. At the discretion of BM&FBOVESPA, the acceptance criteria defined for each asset is a function, among others, of the issuer of the relevant asset, of the amount of collateral constituted by that asset, of the participant category to which the depositor belongs, and of the purpose of collateral. Upon registration of a request for posting or transferring collateral in the clearinghouse collateral management system, the collateral purpose must be identified from among those listed below:
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(i)
Coverage of transactions;
(ii)
Operating balance adjustment;
(iii)
Minimum nonoperating collateral;
(iv)
Fixed contribution to the settlement fund; and
(v)
Adherence to issuance limits.
The following table lists the collateral purposes to the participants to which they apply.
Collateral purpose Operating balance adjustment
Minimum nonoperating collateral
Full trading participant
x
x
Settlement participant
x
Clearing member
x
Participant
Coverage of transactions
Investor
x
Fixed contribution to the settlement fund
Adherence to issuance limits
Trading participant
x
x
Guarantee issuing bank
x
Table 4.1 – Collateral purposes applicable to each participant category The next table lists the assets eligible to be accepted as collateral and the purposes for which they can be used.
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Collateral purpose Coverage of transactions Asset Nonresident investor #2687
Further investors
Operating balance adjustment
Minimum nonoperating collateral
Fixed contribution to the settlement fund
Adherence to issuance limits
Brazilian federal government bonds
x
x
x
x
x
Local currency
x
x
x
x
x
Gold as a financial asset
x
x
x
x
Shares of stock
x
x
x
x
Units
x
x
x
x
Bank CDs
x
x
x
x
Bank LCs
x
x
x
x
ETF shares
x
x
x
x
Selected investment fund shares
x
x
x
x
CPR
x
x
x
x
Dollar
U.S. Treasury bonds
x
x
Table 4.2 - Assets acceptable as collateral and purposes for use
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The assets posted as any given investor’s collateral on layer 1 of the safeguard structure (for the purpose of covering transactions): (i)
Are segregated from the assets posted as other investors’ collateral and, for clearinghouse managerial control purposes, are also segregated by full trading participant, or settlement participant, and clearing member;
(ii)
Must be owned by the investor holding the transactions covered by such assets; exceptions to this condition are the use a bank letter of credit as collateral for the transactions of an investor other than the beneficiary of the LC, but linked to the beneficiary thereof (this is the case of master letters of credit, which provide umbrella-type coverage and which may be used by full trading participants and settlement participants for covering the risk of investors under their responsibility), and the use of federal government bonds held by third parties; and
(iii)
Cannot constitute collateral for transactions held by an investor other than the one to whom/which said assets belong.
The assets posted by any given full trading participant or settlement participant must be owned by the full trading participant or settlement participant that deposited the relevant assets. The assets deposited by any given clearing member: (i)
Must be owned by the clearing member that deposited the relevant assets; and
(ii)
Are segregated, for clearinghouse managerial control purposes, by full trading participant or settlement participant, in the case of collateral deposited for the purpose of adjusting the operating balance levels of full trading participants and settlement participants.
Whenever the assets listed below are issued by associated companies or institutions that are associated with, or subsidiaries or affiliates of, or are controlled by or control the participant constituting the relevant collateral, they are not acceptable as collateral by the clearinghouse: (i)
Bank CDs;
(ii)
Bank LCs; and
(iii)
Securities.
Regardless of the purpose of the assets posted as collateral, the movement or replacement thereof must be expressly authorized by BM&FBOVESPA, through the clearinghouse collateral management system. The movement or replacement of assets can only be performed: For collateral posted to cover transactions, on layer 1, only by the full trading participant or settlement participant responsible for the investor (i) that holds the assets or (ii) for whom/which the assets were deposited, in the case of assets that may be deposited for third parties;
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Only by the full trading participant or settlement participant, in the case of the assets deposited by that participant on layer 1 for the purposes applicable to the relevant participant category; Only by the clearing member, in the case of the assets it deposited for the purposes applicable to clearing members; and In the case of bank LCs: (i)
Only by the full trading participant or settlement participant, in case that participant or the investor under its responsibility is the beneficiary thereof; and
(ii)
Only by the clearing member, in case it is the beneficiary thereof.
Specific additional rules and procedures are presented below for each type of asset. Local currency The deposit of local currency is automatically accepted by the clearinghouse for collateral constitution, with no need for prior consultation. Brazilian federal government bonds The deposit of highly liquid Brazilian federal government bonds is automatically accepted by the clearinghouse for collateral constitution, with no need for prior consultation. To that end, the clearinghouse periodically publishes a list of the Brazilian federal government bonds considered as highly liquid. Collateral made up of other federal government bonds requires prior consultation to and approval by the clearinghouse, which reviews the risks of the relevant assets, also taking into account the time to maturity and liquidity thereof. The acceptance of government bonds as third-party collateral requires prior consultation to the clearinghouse, which evaluates the availability of the limits referred to in section 4.3. Gold as a financial asset The deposit of gold as a financial asset is automatically accepted by the clearinghouse for collateral constitution, with no need for prior consultation. Only gold as a financial asset held in the custody of the BM&FBOVESPA central depository is admitted, in which case the relevant Gold Custody Certificate - BM&FBOVESPA is issued (a document issued by the gold depositary containing the characteristics of the gold bars and the identification of the owners thereof). Shares of stock issued by a publicly-traded company listed on BM&FBOVESPA The deposit of the following shares is automatically accepted by the clearinghouse for collateral constitution, with no need for prior consultation, provided that the limits referred to in section 4.3 are
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still available and also that the risk parameters established for both asset and issuer, which are periodically reviewed by the clearinghouse, are met: (i)
Shares of stocks included in the Bovespa Index theoretical portfolio;
(ii)
Preferred or common shares issued by a company which is also the issuer of a component of the Bovespa Index theoretical portfolio;
(iii)
Shares of stocks included in the Brazil Index theoretical portfolio;
(iv)
Preferred or common shares issued by a company which is also the issuer of a component of the Brazil Index theoretical portfolio; and
(v)
Shares of stocks listed on Novo Mercado or on Level 2 of BM&FBOVESPA’s corporate governance segments.
Excluding the shares issued by BM&FBOVESPA, which are not acceptable, the acceptance of other stocks listed on BM&FBOVESPA requires prior consultation to the clearinghouse, being a function of the asset’s liquidity conditions and risk. Only the stocks that meet the following requirements are acceptable as collateral: (i)
The depositor’s ownership must be proven at the time of deposit; and
(ii)
The relevant shares must be in the custody of the BM&FBOVESPA central depository.
Certificates of deposit of shares of stock (units) issued by a publicly-traded company listed on BM&FBOVESPA The deposit of the following units is automatically accepted by the clearinghouse for collateral constitution, with no need for prior consultation, subject to the limits referred to in section 4.3 and to further risk parameters established for both asset and issuer, which are periodically reviewed by the clearinghouse: (i)
Units included in the Bovespa Index theoretical portfolio;
(ii)
Units included in the Brazil Index theoretical portfolio;
(iii)
Units listed on Novo Mercado or on Level 2 of BM&FBOVESPA’s corporate governance segments.
Excluding the units issued by BM&FBOVESPA, which are not acceptable, the acceptance of other units listed on BM&FBOVESPA requires prior consultation to the clearinghouse, being a function of the asset’s liquidity conditions and risk. Only the units that meet the following requirements are acceptable as collateral: (i)
The depositor’s ownership must be proven at the time of deposit; and
(ii)
The units must be in the custody of the BM&FBOVESPA central depository.
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Bank certificates of deposit (CDs) The acceptance of bank CDs as collateral is subject to prior consultation to the clearinghouse, which assesses whether the limits referred to in section 4.3 are still available, and also the risk of the asset, by considering its features, time to maturity, liquidity and the market and issuer credit risks. Only the bank CDs that meet the following requirements are acceptable as collateral: (i)
They must be issued by banks previously registered and reviewed by the clearinghouse;
(ii)
Their time to maturity must be approved by the clearinghouse; and
(iii)
They must be registered in a registration and cash settlement system authorized by BCB or CVM.
U.S. Treasury bonds Only nonresident investors under CMN Resolution #2687 are allowed to deposit securities issued by the U.S. Treasury as collateral. Such deposit is contingent on prior consultation to and approval by the clearinghouse, which may, at its own discretion, set limits for use thereof. Bank letters of credit The deposit of bank LCs for collateral constitution is subject to prior consultation to the clearinghouse and acceptance thereof is contingent on whether the limits referred to in section 4.3 are still available. The bank LCs that meet the following requirements are liable to be accepted as collateral: (i)
They must be issued by banks previously registered and reviewed by the clearinghouse;
(ii)
Their tenor and form must conform to the standards established by BM&FBOVESPA;
(iii)
They must be signed by attorneys-in-fact of the guarantee issuing bank and affix a notary seal to attest to the authenticity of the signatures thereon; and
(iv)
Their issuance must be electronically confirmed by the corresponding guarantee issuing banks.
The clearinghouse accepts the deposit of master letters of credit issued in favor of: (i)
A clearing member, for the purpose of adjusting the operating balance levels of full trading participants and settlement participants under its responsibility; and
(ii)
A full trading participant or settlement participant, in order to meet the obligations of investors under its responsibility.
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The bank LCs posted as collateral must be replaced prior to the maturities thereof, as determined by BM&FBOVESPA. Such a replacement follows the procedures for depositing new letters of credit and withdrawing the LCs to be replaced, in this order. Exchange-traded fund shares The deposit of exchange-traded fund (ETF) shares for collateral constitution is subject to prior consultation to the clearinghouse, and the acceptance thereof is contingent on whether the limits referred to in section 4.3 are still available and on the asset’s level of risk, which is assessed by the clearinghouse based on the features, composition and liquidity thereof. Selected investment fund shares The deposit of shares of selected investment fund created exclusively to constitute collateral and previously authorized by the clearinghouse, is automatically accepted as collateral by the clearinghouse. The shares acquired by the participant are automatically pledged in favor of the clearinghouse, and only the clearinghouse can authorize their release for redemption, being incumbent on each fund manager to control the investments made in the relevant fund. Rural product notes (CPRs) The rural product notes registered in the BM&FBOVESPA agribusiness securities registration system (RTA), duly endorsed by a financial institution authorized by BM&FBOVESPA, are acceptable as collateral by the clearinghouse. The acceptance of CPRs is contingent on the time to maturity of the relevant notes, on the availability of the limits referred to in section 4.3, and on criteria for the acceptance, use and evaluation of CPRs, which are defined according to the note type, as follows: (a)
Fixed-price financial CPRs are acceptable regardless of the underlying products thereof;
(b)
Financial CPRs indexed to the underlying product price are acceptable upon prior assessment and authorization by the clearinghouse;
(c)
Physical CPRs based on Arabica coffee are acceptable with no need for prior consultation to the clearinghouse; and
(d)
Other physical CPRs are acceptable upon prior assessment and authorization by the clearinghouse.
4.2
Valuating assets accepted as collateral BM&FBOVESPA provides the valuation of assets posted as collateral. The definitions in connection with the calculation models used in asset valuation are incumbent on the BM&FBOVESPA Market Risk Technical Committee.
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Investors’ collateral posted on layer 1 The value of an asset deposited in the portfolio of collateral associated with the portfolio of positions held by any given investor is updated according to the CORE methodology: (i)
At every movement in the portfolio of collateral to which the asset belongs, that is, at every deposit, withdrawal, distribution, or transfer of any collateral to or from the portfolio;
(ii)
After any modifications are made to the portfolio of positions to which the collateral refer, under the intraday risk monitoring activities; and
(iii)
On a daily basis, during the clearinghouse’s nightly processing.
The value of the collateral portfolio associated with any given investor is updated in situations (i), (ii) and (iii) above, and also upon the deposit of new assets. Other collateral The market values of other collateral in the safeguard structure are subject to a haircut. Haircut values are posted on the BM&FBOVESPA website. Therefore, the value of a given asset posted as collateral is contingent on the relevant purpose thereof. An asset making up an investor’s collateral posted on layer 1 of the safeguard structure may assume different values at the same time, depending on whether said collateral is associated with one or another portfolio of positions, which ultimately depends on the worst case scenario chosen for the relevant portfolio under the CORE methodology. Similarly, if an asset constitutes collateral posted for different purposes or components of the safeguard structure, said asset may take on different values, depending on the relevant purpose or component.
4.3
Limits for accepting assets as collateral The definition of limits for the acceptance of assets as collateral aims to control and mitigate the liquidity and credit risks relative to the use of collateral, that is, the risk of failing to obtain the necessary financial resources when the assets that constitute collateral need to be monetized. The limits for the acceptance of a given asset represent a restriction to the amount of collateral to be made up of that asset or instrument, in order to provide coverage for the risk of any given investor or group of investors acting in concert, meaning that collateral postings that violate one or more limits are not accepted by the clearinghouse.
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In order to control adherence to the acceptance limits, the positions in the asset or instrument are aggregated by ID number (CPF, CNPJ, CVM code), meaning that the total volume of the asset or instrument posted as collateral for all the accounts of any investor or group of investors cannot exceed the corresponding limit. The limits defined by BM&FBOVESPA to restrict the use of assets in the constitution of collateral are: (i)
Limits for bank letters of credit and certificates of deposit;
(ii)
Limits for the deposit of assets as third-party collateral;
(iii)
Acceptance limits for shares, ETF shares and units; and
(iv)
Utilization limits for illiquid collateral.
The limits in place for the assets accepted as collateral by the clearinghouse, as well as the values of the parameters that define such limits are available on the BM&FBOVESPA website (www.bmfbovespa.com.br).
4.3.1
Acceptance limits for bank LCs and CDs At its sole discretion, the clearinghouse may establish, for each guarantee issuing bank, limits for the deposit of LCs and CDs as collateral by participants, subject to the procedures, parameters and conditions described below. Irrespective of the limits established by BM&FBOVESPA, the guarantee issuing bank is not allowed to issue LCs or CDs as collateral for the positions: (i)
Held in proprietary portfolio;
(ii)
Held by companies, financial or otherwise, linked to the guarantee issuing bank, including nonresident companies in Brazil;
(iii)
Held by individuals holding the control of the guarantee issuing bank; and
(iv)
Held by statutory directors of the guarantee issuing bank.
The limits for the deposit of bank LCs and CDs refer to the financial volume of collateral posting and collateral utilization in umbrella-type coverage, among others. In order to define such limits, the following factors, among others, must be considered: the analysis of the balance sheets of the guarantee issuing bank; the risk exposure of the positions under the responsibility of the guarantee issuing bank when acting in the capacity of a BM&FBOVESPA participant; the characteristics of the collateral deposited by the guarantee issuing bank and of the other collateral of its issuance, even when acting in the capacity of a registrar (which is the case, for example, of bank-guaranteed rural product notes (CPR)).
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Limits are assigned to each guarantee issuing bank by the BM&FBOVESPA Credit Risk Technical Committee, which can alter or block the relevant limits, at its sole discretion and at any time, immediately applying the new limits or the block, as the case may be. Blocking limits has the effect of rejecting new deposits of collateral consisting of LCs or CDs issued by the guarantee issuing bank. Guarantee issuing banks may request BM&FBOVESPA to increase their limits. After analyzing the reasons for the request as well as the financial and governance conditions of the relevant guarantee issuing bank, among other factors, BM&FBOVESPA will decide whether or not to grant the limit increase. The limit values assigned to each guarantee issuing bank, as well as any limit modifications and blocks are notified by the clearinghouse, becoming valid as of the date of notification. Deposit limits comprise LCs and CDs only issued by banks which: (i)
Are previously registered as “collateral issuer” in the BM&FBOVESPA participant registration system;
(ii)
Submit to BM&FBOVESPA, on a regular basis, their financial statements, balance sheets and documents associated with changes in corporate structure and/or administrative structure; and
(iii)
Keep updated, at the BM&FBOVESPA participant registration center, the signature cards of officers and attorneys-in-fact empowered to sign letters of credit.
The limits applicable to any guarantee issuing bank that fails to meet the provisions set forth in paragraphs (ii) and (iii) above may be blocked, with new deposits of LCs and CDs issued by said bank not being accepted as collateral, even if the new deposits fall within the relevant limits. A single limit is granted to institutions belonging to the same economic group, which can be distributed among the guarantee issuing banks taking part in the conglomerate. In order to grant limits, the BM&FBOVESPA Credit Risk Technical Committee takes into account quantitative and qualitative aspects that determine the credit quality of guarantee issuing banks, including, but not limited to, minimum capital requirements, economic and financial performance indicators, risk ratings issued by rating agencies, and activity profile. To verify adherence of participants and guarantee issuing banks to the limits defined for LCs and CDs, the clearinghouse may consider jointly the institutions belonging to the same economic and/or financial group. The limits applicable to the utilization of LCs and CDs as collateral are: (i)
Issuance limit per guarantee issuing bank ( ILIssuing bank );
(ii)
Issuance limit per investor ( ILIssuing bank, Investor );
(iii)
Limit for posting collateral through full trading participant (FTP), settlement participant (SP), or clearing member (CM) linked to the guarantee issuing bank ( DLFTP , SP , CM ); and linked to IB
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(iv)
FTP,SP
Utilization limit for master letters of credit ( ULMaster LC ).
The aforementioned limits cover bank LCs and CDs posted as collateral for the transactions executed or registered in all of the markets managed by BM&FBOVESPA. The characteristics of said limits, the corresponding prohibitions and the criteria to extend limits are defined below.
4.3.1.1 Issuance limits per guarantee issuing bank Issuance limits are assigned by BM&FBOVESPA to each guarantee issuing bank and cover the total amount of LCs and CDs issued and deposited by any such bank as collateral with the clearinghouse. Regardless of the criteria employed to assign limits, the maximum value granted to each guarantee issuing bank (single institution or financial conglomerate to which several guarantee issuing banks belong) cannot exceed
L, which is established and reviewed periodically by BM&FBOVESPA, in
accordance with its own criteria, that is:
ILIssuing bank ≤ L
(4.1)
The limit granted to any issuer may be extended against the deposit of cash funds or federal government bonds owned by the issuer as collateral with the clearinghouse, pursuant to the provisions set forth in subsection Limit extensions. The issuance limit granted to a given guarantee issuing bank is unique, and it should cover collateral issued by such bank, regardless of the markets to which they are intended. Given two guarantee issuing banks, the simultaneous use by one (or companies linked thereto) of collateral issued by another is forbidden. Denoting such banks by A and B, it is not allowed that bank A (or companies linked thereto) utilizes collateral issued by bank B (or companies linked thereto) and, concurrently, bank B (or companies linked thereto) utilizes collateral issued by bank A.
4.3.1.2 Issuance limits per investor The issuance limit per investor, denoted by
ILIssuing bank, Investor ,
refers to the maximum collateral
amount that may consist of bank LCs and CDs issued by a given guarantee issuing bank in favor of the same investor (individual investor, group of investors, or conglomerate). No more than a certain percentage, which is set by BM&FBOVESPA, of the issuance limit assigned to a particular guarantee issuing bank can be issued for the same investor. Therefore, any
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investor C, whose collateral comprises LCs of which it is the beneficiary, and CDs owned by it, issued by the same guarantee issuing bank, is subject to the following restriction:
IVIssuing bank , C ≤ ILIssuing bank, Investor
(4.2)
ILIssuing bank, Investor = p×ILIssuing bank , Where
IVIssuing bank , C
favor of investor
(4.3)
is the total amount of LCs and CDs issued by the guarantee issuing bank in
C and deposited as collateral for investor C’s positions. This amount does not
include the volume, allocated as collateral for investor which investor
p = 0 . 25
C’s positions, of master letters of credit of
C is not the beneficiary.
The issuance limit per investor may be extended beyond the values established in (4.2) and (4.3), against the deposit of federal government bonds or cash funds by the guarantee issuing bank as collateral with the clearinghouse, pursuant to the provisions set forth in subsection Limit extensions.
4.3.1.3 Limits for posting collateral through full trading participant, settlement participant, or clearing member linked to the guarantee issuing bank Denoted by
DLFTP , SP , CM , such a limit is applied to the total amount of LCs and CDs issued by the linked to IB
guarantee issuing bank and posted as collateral for investors under the responsibility of a given full trading participant ( FTP ), settlement participant ( SP ), or clearing member ( CM ) linked to the guarantee issuing bank, meaning a participant that is associated with, or is a subsidiary of, or is controlled by, or controls the guarantee issuing bank. The total amount of such collateral cannot exceed a certain percentage, which is set by BM&FBOVESPA,
of
the
issuance
limit
assigned
to
the
guarantee
issuing
bank
( ILIssuing bank ) being this rule also applicable to the full trading participant or settlement participant that is not linked to the guarantee issuing bank, but whose clearing member is. Hence, given a full trading participant, settlement participant or clearing member linked to a guarantee issuing bank and whose investors have collateral made up of LCs and CDs issued by said bank, the following restriction applies:
IVFTP , SP , CM ≤ DLFTP , SP , CM linked to IB
linked to IB
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(4.4)
DLFTP , SP , CM = p × ILIssuing bank , p = 0 . 15
(4.5)
linked to IB
Where
IVFTP , SP , CM
is the amount of all the LCs and of all the CDs that are:
linked to IB
IB , whose issuance limit is ILIssuing bank ; and
(i)
Issued by guarantee issuing bank
(ii)
Posted as collateral on layer 1 of the safeguard structure for the positions of investors under the responsibility of full trading participant, settlement participant or clearing member linked to guarantee issuing bank
IB .
This limit may be extended beyond the values established in (4.4) and (4.5), against the deposit of federal government bonds or cash funds by the guarantee issuing bank as collateral with the clearinghouse, pursuant to the provisions set forth in subsection Limit extensions.
4.3.1.4 Utilization limit for master letters of credit This limit refers to the distribution, among investors, of the bank LCs issued in favor of a full trading participant or settlement participant, irrespective of the corresponding issuers. Denoted by
,SP ULFTP Master LC , the limit refers to the maximum portion of the amount of LCs issued in favor
of full trading participant
FTP or settlement participant SP that can be allocated to layer 1 of the
safeguard structure as collateral for the positions held by the same investor or group of investors under the responsibility of that participant. Thus, the following restriction applies to each full trading participant or settlement participant, and each investor under its responsibility: C , FTP , SP FTP ,SP Allocated amtMaster LC ≤ ULMaster LC
(4.6)
,SP FTP ,SP ULFTP Master LC = p × IVLetters of credit
(4.7)
Where: FTP ,SP IVLetters of credit :
the total amount of all the LCs issued in favor of participant
FTP or
SP , that is, of which participant FTP or SP is the beneficiary; C , FTP , SP Allocated amtMaster LC : the amount of collateral made up of master LCs for investor C under
the responsibility of beneficiary participant
p:
FTP or SP ; and
the positive percentage, as defined by BM&FBOVESPA, which cannot exceed 10%; in the case of utilization of letter of credit as collateral for the proprietary portfolio of beneficiary participant
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FTP
or
SP , or of companies linked to that participant, percentage p may
be raised up to 100%, at the discretion of BM&FBOVESPA. Regardless of parameter p’s definition, BM&FBOVESPA may assign different percentages or values as a result of the evaluation of the full trading participant’s or settlement participant’s credit risk. BM&FBOVESPA reserves the right to reject master LCs as collateral for trades consisting of funding transactions.
4.3.1.5 Limit extensions BMFBOVESPA may, at its sole discretion, allow the use of bank LCs and CDs to constitute collateral at an amount representing a violation of the defined limits if the bank that issued them deposits federal government bonds or cash funds as additional collateral in favor of the clearinghouse. Such collateral: (i)
Under current regulations, is subject to the same rules and operating procedures as those applicable to collateral posted with the clearinghouse;
(ii)
Is accepted by the clearinghouse subject to the prices at which the bonds are accepted; should a significant change be verified in the acceptance prices of bonds, BM&FBOVESPA may, at any time, change the amounts thereof required of the guarantee issuing bank; and
(iii)
Remains blocked for as long as the violation of the originally-established limits persists.
The following limits are liable to be extended: (i)
The issuance limit per guarantee issuing bank;
(ii)
The issuance limit per investor; and
(iii)
The limit for posting collateral through full trading participant, settlement participant, or clearing member linked to the guarantee issuing bank.
(a)
Required collateral amount The amount of collateral required of the guarantee issuing bank to extend limits is determined according to the criteria described below. Case A: Where there is no collateral issued for investors linked to a full trading participant, settlement participant, or clearing member linked to the guarantee issuing bank. Let
CollIssuance per investor be
the amount of collateral required of the guarantee
issuing bank due to the excess LCs and CDs it issued in favor of investors, given by the following equations:
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N
CollIssuance per investor = ∑ Gi
(4.8)
Gi = max ( IVi − 0.25 × ILIssuing bank , 0 )
(4.9)
i =1
Where:
N:
the number of investors owning collateral issued in their favor by the concerned guarantee issuing bank;
Gi :
the amount of collateral required of the guarantee issuing bank due to the amount of LCs and CDs it issued for the
IVi :
the amount of LCs whose beneficiary is the held by the
i -th
i -th investor;
i -th investor and of CDs
investor, issued by the concerned guarantee
issuing bank and posted as collateral for the positions of the
i -th
investor (such an amount does not include collateral made up of master letters of credit whose beneficiary is not the
i -th investor);
and
ILIssuing bank :
the issuance limit granted by BM&FBOVESPA to the concerned guarantee issuing bank.
Let
CollIssuance per bank be the amount of collateral required of the guarantee issuing
bank due to the excess issuance per guarantee issuing bank, and not considering the issued portion whose risk is already covered by the deposit of additional collateral, given by:
N CollIssuance per bank = max ∑ IVi − CollIssuance per investor − ILIssuing bank , 0 i =1
(4.10)
The total amount of collateral required of the guarantee issuing bank due to the excess LCs and CDs it issued and that is posted as collateral is given by:
Required CollateralIssuing bank = CollIssuance per investor + CollIssuance per bank
(4.11)
Case B: Where there is collateral issued for investors linked to a full trading participant, settlement participant, or clearing member linked to the guarantee issuing bank. Let
CollFTP,SP,CM be the amount of collateral required of guarantee issuing bank due
to the excess issuance for investors under the responsibility of full trading
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participant
FTP , settlement participant SP , or clearing member CM
linked to
guarantee issuing bank ( IB ), not considering the excess portion whose risk is already covered by the deposit of federal government bonds or cash funds, given by:
N CollFTP , SP ,CM = max ∑ RCE i ,FTP , SP ,CM − DLFTP , SP ,CM , 0 linked to IB i =1
RCEi ,FTP ,SP ,CM = max ( IVi ,FTP ,SP ,CM − Gi , 0)
(4.12)
(4.13)
Where:
DLFTP ,SP ,CM :
the limit for the deposit of LCs and CDs through full trading
linked to IB
participant, settlement participant, or clearing member linked to the guarantee issuing bank, granted by BM&FBOVESPA to the guarantee issuing bank;
N
:
the number of investors owning collateral issued in their favor by the guarantee issuing bank
RCEi ,FTP,SP,CM :
IB ;
the residual credit exposure of the
FTP , SP , or CM
i -th investor under participant
linked to the guarantee issuing bank, given by
the amount of collateral issued for such investor and posted as collateral for its positions under the responsibility of the participant
FTP , SP ,
or
CM
linked to the guarantee issuing
bank, discounted from the amount of federal government bonds deposited by the guarantee issuing bank due to the excess issuance for that investor;
IVi ,FTP ,SP ,CM :
the amount of LCs whose beneficiary is the CDs held by the
i -th investor and of
i -th investor, issued by the guarantee issuing
bank and posted as collateral for the positions of that investor under participant
FTP , SP ,
or
CM
linked to the guarantee
issuing bank; and
Gi :
the amount of collateral required of the guarantee issuing bank due to the amount of LCs and CDs it issued for the as given by equation (4.9).
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i -th investor,
Let
CollIssuance per bank be the amount of collateral required of the guarantee issuing
bank due to the excess issuance per guarantee issuing bank, not considering the portion whose risk is already covered by the deposit of federal government bonds or cash funds, given by:
CollIssuance per bank
N = max ∑ IVi − CollIssuance per investor − CollFTP ,SP ,CM − ILIssuing bank , 0 i =1 (4.14)
Where
CollIssuance per investor and IVi
are given by equations (4.8) and (4.9).
Finally, the amount of collateral required of the guarantee issuing bank to extend the use of LCs and CDs of its issuance is given by:
Required CollateralIssuing bank = CollIssuance per investor + CollFTP,SP,CM + CollIssuance per bank (4.15) (b)
Reserve of collateral deposited by guarantee issuing banks The amount posted as collateral by any given guarantee issuing bank to extend the limits associated with LCs and CDs can be reserved for use by one or more specific participants, provided that such an amount is not required to correct any situations involving limit violation, existing prior to the deposit thereof. The reserve must be registered in the clearinghouse collateral management system by the guarantee issuing bank or by the clearinghouse itself, upon request by said bank. After a reserve is registered and within the time period specified therein, only the participants appointed in the reserve may request the deposit of collateral with the clearinghouse made up of bank CDs and LCs issued by the concerned guarantee issuing bank. Moreover, the total amount included in all the requests for deposit made by any such participant within the specified time period is subject to the maximum value assigned in the reserve by the relevant guarantee issuing bank to said participant.
(c)
Moving collateral deposited by guarantee issuing banks Collateral posted by any given guarantee issuing bank may be moved provided that it is not required to correct any situations involving limit violation in connection with the LCs and CDs issued by said bank, according to the criteria described in section 4.5.
4.3.2
Limits for the deposit of assets as third-party collateral
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At its sole discretion, the clearinghouse may grant limits for the deposit of assets owned by financial institutions, duly authorized by BCB or CVM, to constitute collateral for third parties, subject to the procedures, parameters and conditions described below. Said limits refer to the total financial volume provided as third-party collateral, by asset type, and to the volume liable to be distributed to the same third party. In order to define such limits, the following factors, among others, may be considered: the analysis of the balance sheets of the financial institution holding the relevant asset; the risk exposure of the positions under the responsibility of the financial institution holding the relevant asset when acting in the capacity of a BM&FBOVESPA participant; the characteristics of the collateral deposited by the financial institution and of the other collateral of its issuance, even when acting in the capacity of a registrar (which is the case, for example, of bank-guaranteed rural product notes (CPR)). The limits are assigned to each financial institution by the BM&FBOVESPA Credit Risk Technical Committee, which can alter or block the relevant limits, at its sole discretion and at any time, immediately applying the new limits or the block, as the case may be. Blocking limits has the effect of rejecting new deposits of assets held by the corresponding financial institution. Financial institutions holding a certain asset may request BM&FBOVESPA to increase their limits. After analyzing the reasons for the request as well as the financial and governance conditions of the relevant financial institution, among other factors, BM&FBOVESPA will decide whether or not to grant the limit increase. The limits values assigned to the financial institution holding the asset, as well as any limit modifications and blocks thereto are notified by the clearinghouse, becoming valid as of the date of notification. Limits comprise only the assets acceptable as collateral by the clearinghouse held by financial institutions which: (i)
Are previously registered as “collateral issuer” in the BM&FBOVESPA participant registration system; and
(ii)
Submit to BM&FBOVESPA, on a regular basis, their financial statements, balance sheets and documents associated with changes in corporate structure and/or administrative structure.
The limits applicable to any financial institution that fails to meet the provisions set forth in paragraph (ii) above may be blocked, with new deposits of assets held by said institution not being accepted as collateral, even if the new deposits fall within the relevant limits. A single limit is granted to institutions belonging to the same economic group, which can be distributed among the institutions taking part in the conglomerate. In order to grant limits, the BM&FBOVESPA Credit Risk Technical Committee takes into account quantitative and qualitative aspects that determine the credit quality of the financial institution holing the asset, including, but not limited to, minimum capital requirements, economic and financial performance indicators, risk ratings issued by rating agencies, and activity profile.
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To verify adherence of the financial institution holding the asset and of participants to the defined limits, the clearinghouse may consider jointly the institutions belonging to the same economic and/or financial group. Federal government bonds are eligible to be assigned limits and they can be posted as collateral for third parties acting in the capacity of investors, meaning collateral for the purpose of covering transactions. To all ends, except as expressly stated otherwise in this manual or in the rules that complement this manual, such collateral is treated as collateral made up of assets held by the investor. The limits applicable to the deposit of collateral for third parties are: (i)
Limit for a financial institution to provide collateral for third parties ( LGTIF ); and
(ii)
Limit
for
a
financial
institution
to
provide
collateral
for
third
parties
( LGTIF , Comitente ), per investor. The aforementioned limits cover the assets posted as collateral for the transactions executed or registered in all of the markets managed by BM&FBOVESPA.
4.3.2.1 Limit for a financial institution to provide collateral for third parties The limit for a financial institution to provide collateral for third parties is assigned by BM&FBOVESPA to each institution and covers the total value of assets held by any such institution posted as collateral for third parties at the clearinghouse. Regardless of the criteria employed to assign limits, the maximum value granted to each financial institution (single institution or financial conglomerate to which several financial institutions belong) cannot exceed
M,
which is established and reviewed periodically by BM&FBOVESPA, in
accordance with its own criteria, that is:
LGTFI ≤ M
(4.16)
The limit granted to a given financial institution is unique, and it should cover collateral provided by such financial institution, regardless of the markets to which they are intended.
4.3.2.2 Limit for a financial institution to provide collateral for third parties, per investor This limit refers to the distribution of the assets held by the financial institution among investors. Denoted by
LGTFI , Investor ,
the limit refers to the maximum amount of the limit to the provision of
collateral for third parties, which is granted by BM&FBOVESPA to the financial institution FI , that
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can be deposited as collateral for the same investor or group of investors. Therefore, any investor or group of investors C is subject to the following restriction:
Allocated amtFI ,C ≤ LGTFI ,Investor LGTFI ,Investor = p×LGTFI
(4.17)
(4.18)
Where:
Allocated amtFI ,C : the amount of collateral made up of assets held by the financial institution FI for investor or group of investors C; and
p:
the positive percentage, as defined by BM&FBOVESPA, which cannot exceed 25%.
Regardless of parameter p’s definition, BM&FBOVESPA may assign different percentages or values as a result of the evaluation of the relevant investor’s credit risk.
4.3.3
Acceptance limits for share of stock, ETF share and certificate of deposit of shares (unit) The publication and periodical application of acceptance limits relative to share of stock, ETF share and unit are subject to the following procedures: (i)
The list of shares of stocks, ETF shares and units acceptable as collateral and the relevant acceptance limits are published on the second business day of each month;
(ii)
When shares of a stock, ETF shares, or units are included in the list of acceptable collateral, or when the relevant acceptance limits are extended, the new criteria becomes effective as of and including the date referred to in paragraph (i); and
(iii)
When shares of a stock, ETF shares, or units are no longer acceptable as collateral, or when the relevant acceptance limits are reduced, the new criteria are applied for adjustment purposes as of and including the first business day following the fifteenth day of the current month.
Acceptance limits in connection with shares of stocks, ETF shares and units apply to each participant, identified by CPF number, CNPJ number, or nonresident investor’s CVM code, as the case may be, regardless of the purpose of collateral. Acceptance limits for shares of stocks, ETF shares and units are described below. (a)
Shares of stocks
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The acceptance limit for a certain class of stock
A
acceptable as collateral is given by:
AcceptanceLimitStock ( A) = min( c1 ( A) × MktCap( A) , c2 ( A) × Outstanding ( A) ) (4.19) Where:
A:
each class of the stock subject to restriction;
c1 ( A) :
the positive constant defined by BM&FBOVESPA for A, ( c1
c2 ( A) :
0 ≤ c1 ( A) ≤ 1
( A) = 3.5% , for any A );
the positive constant defined by BM&FBOVESPA for A,
0 ≤ c2 ( A) ≤ 1
(
c2 ( A) = 7.5% , for any A );
(b)
MktCap( A) :
the number of shares of stock
Outstanding ( A) :
the number of outstanding shares of stock
A
issued by the company; and
A.
Exchange-traded fund (ETF) shares The acceptance limit for ETF of ETF
A
A
shares acceptable as collateral is a multiple of the volume
shares traded in the trading environments managed by BM&FBOVESPA within
the time period established by BM&FBOVESPA Market Risk Technical Committee, as follows:
AcceptanceLimitETF ( A,N ) = c ( A) × AvgVol ( A,N )
(4.20)
Where:
A:
the exchange-traded fund subject to restriction;
N:
the time period within which the average volume traded in ETF
A
shares is
calculated ( N corresponds to the month preceding the assessment date for asset acceptance, for any ETF
c ( A) :
A );
the positive constant defined by BM&FBOVESPA ( c
( A) = 3 , for any ETF
A ); and AvgVol ( A, N ) : the average daily number of ETF A
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shares traded within time period
N.
(c)
Certificate of deposit of shares (unit) The acceptance limit for unit A be accepted as collateral is a function of the assets that make it up:
AcceptanceLimitUnit ( A) = min( L1 ( A) , L2 ( A) )
(4.21)
1 1 1 L1 ( A ) = c1 ( A ) × min × MktCap1 ( A ) , × MktCap2 ( A ) , … , × MktCapn ( A ) q2 qn q1 (4.22)
1 1 1 L2 ( A ) = c 2 ( A ) × min × Otsd1 ( A ) , × Otsd 2 ( A ) , … , × Otsd n ( A ) q2 qn q1 (4.23) Where:
A
:
the unit subject to restriction, consisting of n assets
A1 , A2 , ..., An ; each
class of a stock is considered a unit component;
c1 ( A) :
the positive constant defined by BM&FBOVESPA, ( c1
c2 ( A) :
the ( c2
qi :
0 ≤ c1 ( A) ≤ 1
( A) = 3.5% , for any A ); positive
constant
defined
by
BM&FBOVESPA,
0 ≤ c2 ( A) ≤ 1
( A) = 7.5% , for any A );
the quantity of the i-th asset included in
A , i = 1,2,…, n ;
MktCapi ( A) : the issued quantity of the i-th asset included in A , i = 1,2,…, n ; and Otsdi ( A ) : 4.3.4
the outstanding quantity of the i-th asset included in
A , i = 1,2,…, n .
Utilization limits for illiquid collateral Liquid collateral is that whose time frame for monetization (conversion into bank reserves), upon liquidation, is compatible with the clearinghouse settlement window. Conversely, illiquid collateral is that whose time frame for monetization exceeds the available time frame for settlement. Under this definition, federal government bonds may be considered liquid, in view of the fact that the clearinghouse can, if necessary, carry out a sale or a repo transaction for the relevant bonds, in order to receive the corresponding financial resources on the same day, prior to the settlement
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window. On the other hand, shares of stocks, for example, are considered illiquid, in view of the fact that the settlement of such assets purchase and sale transactions occurs only on the third business day after trade registration, that is, on T+3. It is the liquidity assistance facilities between BM&FBOVESPA and some banks that allow the clearinghouse to accept certain illiquid collateral. Through said facilities, the clearinghouse is able to obtain funds, in a short period of time, to make the payments due in the settlement window. In order to manage its exposure to illiquid collateral and mitigate the risks associated with the process of collateral liquidation, the clearinghouse imposes restrictions on how collateral is used. To that end, collateral deposited by a participant is classified by the clearinghouse as either liquid or illiquid, contingent on the available liquidity provision mechanisms in the event of a settlement failure, using half of the monetization capacity of each type of collateral to ensure that it will be capable of meeting its own obligations, even if two participants default simultaneously. With the purpose to define the limits applicable to the use of illiquid collateral by any given participant, consider the following variables:
Vi :
the total amount, in local currency, of collateral type
i , i =1, 2, ..., n , posted by the
participant, except collateral consisting of dollars and U.S. Treasury bonds; collateral “type
i ” refers to the type of asset or instrument that makes it up, such as
shares of stocks, bank CDs, government bonds, etc; Vi corresponds to the value assigned to the asset deposited by the participant at the time the risk of the portfolio of said participant is calculated, according to the CORE methodology;
VUSD :
the amount, in local currency, of the dollars posted as collateral by the participant;
VUST :
the amount, in local currency, of the U.S. Treasury bonds posted as collateral by the participant;
LIQi :
the limit, in local currency, for monetizing collateral type
i , i =1, 2, ...,
n , in the
clearinghouse settlement window timeframe, according to the liquidity assistance facilities in place; for collateral type
i , which is considered liquid, LIQi
assumes an
infinite value, regardless of whether liquidity assistance facilities are in place;
LIQUSD :
the limit, in local currency, for monetizing dollars in the clearinghouse settlement window timeframe, according to the liquidity assistance facilities in place; and
LIQUST :
the value, in local currency, of the liquidity facilities held by the clearinghouse with the custodian bank of the U.S. Treasury bonds posted as collateral.
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(a)
Liquidity rating for collateral type i The total amount Vi of collateral deposited by any given participant, segregated in both a liquid portion and an illiquid portion, respectively
i =1, 2,
ViIlliq
and
..., n , is
Vi Liq . The
portion considered illiquid is given by the value that exceeds half of the limit available to the clearinghouse to monetize collateral type i , with the remainder being considered liquid, that is:
Vi = Vi Illiq + Vi Liq
(4.24)
LIQ ViIlliq = max Vi − i , 0 2
(4.25)
LIQi ViLiq = minVi , 2
(4.26)
Taking into account the whole set of collateral
V1 , V2 , ..., Vn
deposited by a participant,
the clearinghouse considers as illiquid and liquid, respectively, the portions: n
V Illiq = ∑ViIlliq
n
and
i =1
(b)
V Liq = ∑Vi Liq
(4.27)
i =1
Liquidity rating for collateral made up of dollars and U.S. Treasury bonds The liquid and illiquid portions of collateral consisting of U.S. Treasury bonds and dollars are determined jointly, due to the fact that monetization of U.S. Treasury bonds in local currency ultimately depends on the limits of the transaction to buy and sell dollars. The portion of collateral made up of U.S. Treasury bonds that cannot be readily monetized in Iliq
dollars, namely VUST , is given by the value of the bonds posted as collateral that exceeds half of the value of the liquidity facilities in dollars available for such an asset. To the extent that portion
Iliq VUST
cannot be readily monetized in dollars, it cannot be readily monetized in local
currency either, being therefore considered illiquid.
LIQ Illiq VUST = max VUST − UST , 0 2
(4.28)
The portion of collateral consisting of U.S. Treasury bonds that can be readily monetized in dollars is given by:
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Liq Illiq VUST = VUST −VUST
(4.29)
From the standpoint of the collateral monetization process, that portion is handled just like the dollars posted as collateral, meaning that the monetization thereof in local currency depends only on the sale transaction of the dollars. The portion of U.S. dollars and U.S. Treasury bonds considered illiquid, namely
Illiq VUSD , is given by:
LIQ Illiq Liq VUSD = max VUSD + VUST − USD , 0 2 Therefore the sum of terms
Illiq VUSD
and
Illiq VUST
(4.30)
represents the portion of the total amount of
collateral deposited in New York City, in the form of dollars and/or U.S. Treasury bonds, that cannot be monetized in the clearinghouse settlement window timeframe, thus being characterized as illiquid. (c)
Liquidity rating for the total collateral posted by a participant The total amount of illiquid collateral deposited by the participant is given by: Illiq Illiq Illiq VTotal = V Illiq + VUST + VUSD
(4.31)
In the event of a settlement failure, that value cannot be readily monetized, being then borne by the BM&FBOVESPA cash. In case of a settlement failure by a participant whose positions are covered by illiquid collateral only, cash funds may be used by the clearinghouse to make the payments due by the clearinghouse in the settlement window, with the funds that were drawn upon being returned after completion of the collateral liquidation process under the responsibility of the defaulter. For a proper control of liquidity risk, the clearinghouse sets a fraction of the available cash as utilization limit for illiquid collateral, with the amount of illiquid collateral considered for margin and other collateral requirements coverage being given by:
Illiquid Collateral Amt Illiq 1 = minVTotal , ×VClrgh cash Margin coverage N where
N
(4.32)
is a parameter defined by the BM&FBOVESPA Market Risk Technical Committee
at a value greater than or equal to 2, and
VClrgh cash is the cash available to the clearinghouse.
Participants are allowed to post illiquid collateral in excess of the amount of the limit, but excess amounts will not be used to cover margin.
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Given the criteria for determining both the liquid and the illiquid portion of collateral posted by the participant, the amount of collateral to be considered by the clearinghouse to meet margin requirements is:
Total Collateral Amt Liq Illiq 1 = VTotal + minVTotal , ×VClrgh cash Margin coverage N
(4.33)
The clearinghouse publishes, on a regular basis, a list of collateral considered liquid and collateral considered illiquid, as well as the financial limits from which illiquid collateral is considered liquid due to specific monetization agreements in place.
4.3.5
Acceptance limits for other assets BM&FBOVESPA reserves the right to establish acceptance limits for any other assets eligible to be accepted as collateral.
4.4
Monitoring and meeting collateral calls
4.4.1
Frequency of collateral calls
4.4.1.1 Daily calls The following calls occur on a daily basis according to the previous day’s closing positions, that is, after allocation of all the executed trades: (i)
Margin calls, that is, those associated with the amounts required to be posted as collateral for or by investors, for the purpose of covering transactions;
(ii)
Collateral calls to meet the minimun nonoperating collateral, due to a negative price fluctuation of the assets deposited with that purpose. and
(iii)
Collateral calls to meet the fixed contributions required to the settlement fund, due to a negative price fluctuation of the assets deposited with that purpose.
Margin calls are announced to full trading participants and settlement participants by the clearinghouse. The relevant notices include the amounts required of each investor under the responsibility of the participant. Each full trading participant is notified of the amount required as minimun nonoperating collateral. Each clearing member is notified of the amount required as minimun nonoperating collateral and as its fixed contribution to the settlement fund. Notifications occur via SPB messaging (LDL1001 message), file, report and query to the clearinghouse collateral management system.
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4.4.1.2 Undefined frequency calls Participants may be required to deposit margin or other collateral at any time of the day, as a result of a possible increase in the clearinghouse risk exposure identified by the intraday risk monitoring activities. The amounts that must be posted are announced by the clearinghouse to full trading participants, settlement participants and their respective clearing members through the intraday risk system. Concerning the minimun nonoperating collateral, the relevant deposits must be made: (i)
During the participant qualification process;
(ii)
Whenever the value of the minimun nonoperating collateral is increased; and
(iii) During the sequence of use of collateral as function of settlement failure. Concerning the fixed contributions to the settlement fund, the relevant deposits must be made: (i)
During the participant qualification process;
(ii)
Whenever the value of the fixed contribution is increased; and
(iii) During the settlement fund replenishment process. The collateral required of a guarantee issuing bank must be posted whenever participants need to constitute collateral issued by such bank at the same amount of the violation of the limits assigned by BM&FBOVESPA to the bank. The clearinghouse notifies guarantee issuing banks of the required amounts by telephone contact.
4.4.2
Schedule for moving collateral The time frame for moving collateral (deposits, withdrawals, distributions and transfers) extends from 7:30 AM to 6:30 PM, with restrictions associated with the timetables of other institutions engaged in moving collateral, such as central depositories and the BM&FBOVESPA Bank. The following table shows the time grid for moving collateral (Brasilia time).
Hour
Event Start of period for moving collateral.
7:30 AM
Start of compliance monitoring by the clearinghouse in connection with margin and other collateral calls. End of period for collateral posting to meet collateral calls for the current day.
1:00 PM
End of period for withdrawing collateral made up of selected investment fund shares or local currency in the settlement window.
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Hour
Event End of period for moving collateral made up of selected investment fund shares
4:00 PM
via the BM&FBOVESPA Bank. End of period for moving collateral made up of local currency.
5:00 PM
End of period for moving collateral of nonresident investors under CMN Resolution #2687.
6:30 PM
End of period for moving collateral of investors other than nonresident investors under CMN Resolution #2687. Table 4.3 - Time grid for moving collateral
Collateral posting earmarked to adjust the operating balance levels of full trading participants or settlement participants, as required by the clearinghouse through its intraday risk monitoring activities, must occur within the specific time periods defined by BM&FBOVESPA in each case. The following aspects must be observed: (a)
Margin calls (investors’ collateral for layer 1 of the safeguard structure) When margin calls are not met within the time frames established by the clearinghouse, the amount of pending margin (that is, the amount not deposited within regular time frames) is entered as a debit, for settlement on the same day, to the multilateral net balance (MNB), in local currency, of the clearing member responsible for the full trading participant or settlement participant responsible for the failing investor.
(b)
Minumum nonoperating collateral Regarding the minimum nonoperating collateral required of full trading participants and clearing members, which must be posted on date
D, the value V
, if positive, is entered as
a debit to its multilateral net balance, in local currency, for settlement on date
V = Call − G
D: (4.34a)
where
Call :
the value of minimum nonoperating collateral call for the concerned participant which must be posted on date
G
:
D ; and
the amount of collateral posted by the participant for the minimum nonoperating collateral until 1:00 PM of date
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D
(c)
Settlement fund For collateral required of the clearing member as contribution to the settlement fund, which must be posted on date
D , the value V
, if positive, is entered as a debit to its multilateral
net balance, in local currency, for settlement on date
D:
V = Call −CCash
(4.34)
Where:
Call :
the value of settlement fund contribution call for the clearing member, to be met on date
CCash :
D ; and
the amount of collateral posted until 1:00 PM of date
4.5
Procedures for posting and withdrawing collateral
4.5.1
Collateral posting
D.
The procedures for depositing any of the assets acceptable as collateral consist of three steps, namely: collateral posting request, collateral posting request review and, upon approval of a request, actual collateral posting.
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CLEARINGHOUSE Collateral management system (NGA) 2
5
Review of criteria for posting asset A as collateral
Actual deposit, with collateral balance update
1
4
Request for asset A to be posted as collateral
Confirmation of asset A’s transfer to the clearinghouse
CENTRAL DEPOSITORY 3 When clearinghouse criteria for accepting asset A’s deposit are met, asset A is transferred to the clearinghouse account (this step occurs at different times, depending on the asset involved)
6 Confirmation of asset A’s deposit as collateral
FTP, SP, CM Figure 4.1 - Collateral posting process
4.5.1.1 Collateral deposit request A collateral posting request consists of the input of the characteristics of the asset desired to be posted as collateral into the clearinghouse collateral management system by full trading participants, settlement participants, clearing members and guarantee issuing banks, as the case may be. Full trading participants and settlement participants must register collateral posting requests for proprietary collateral and for collateral of investors under their responsibility, that is, collateral earmarked for layer 1 of the safeguard structure. Clearing members must register collateral posting requests for proprietary collateral earmarked for layers 1 and 2 (settlement fund). In the case of layer 1 collateral for the purpose of adjusting the operating balance levels of full trading participants and settlement participants under their responsibility, clearing members must name, through the clearinghouse collateral management system, the full trading participants and settlement
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participants collateral is intended to, so that the aforementioned purpose can be met by such collateral. Guarantee issuing banks must register collateral posting requests for proprietary collateral, that is, collateral they are required to post in order to adjust the volume of collateral of their issuance, posted by participants, to the acceptance limits assigned to each bank by BM&FBOVESPA. Such requests must be registered in the clearinghouse collateral management system: (i)
By the guarantee issuing bank itself, whenever it acts in the capacity of a participant with access to that system; or otherwise,
(ii)
By the clearinghouse, upon instruction from the guarantee issuing bank.
Gold refiners must submit collateral posting requests for proprietary collateral, that is, collateral required for their qualification as participants in the BM&FBOVESPA custody system. Their requests are registered by the clearinghouse in its collateral management system, upon instruction from the relevant gold refiner.
4.5.1.2 Collateral posting request review After a collateral posting request is registered, the clearinghouse proceeds to review the relevant request. As a result, the request will be accepted or rejected. The clearinghouse reviews the characteristics of the asset to be posted, the attributes of the participants involved (collateral holder, participants responsible for the positions that collateral is aimed to cover, and collateral issuers) and the impacts of that collateral posting on the clearinghouse risk exposure. A collateral posting request is rejected whenever it implies the violation of the limits and restrictions defined by BM&FBOVESPA and applicable to, or associated with the participants involved.
4.5.1.3 Collateral posting In general, collateral whose deposit requests are accepted by the clearinghouse are posted by transferring the corresponding assets to BM&FBOVESPA. The procedures applicable to each asset type are shown below. Federal government bonds Federal government bonds are deposited as collateral through the transfer of the relevant securities (stated in the collateral posting request registered in the collateral management system) to the clearinghouse account with BCB-SELIC. The bonds are transferred by way of an instruction from both the relevant custodian and the clearinghouse to BCB-SELIC. After the transfer is made and no information is pending registration or confirmation in the BCB-SELIC environment, the relevant deposit is completed for collateral purposes, meaning that the deposited balance is effected in the clearinghouse collateral management system.
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Shares of stocks, ETF shares, certificates of deposit of shares (units) and gold Shares of stocks, ETF shares, units and gold are deposited as collateral through the transfer of the relevant assets (stated in the request registered in the collateral management system) to the BM&FBOVESPA collateral portfolio held by the custody agent with the BM&FBOVESPA central depository, pursuant to the provisions set forth in its operating procedures manual. The number of said transfer (instruction number) in the BM&FBOVESPA central depository must be registered in the clearinghouse collateral management system by the participant upon registration of the collateral posting request. Bank certificates of deposit (CDs) Bank CDs are deposited as collateral by linking the relevant certificates to the clearinghouse account with the corresponding registration system. Linking is made through dual command in the registration system (by the custodian and the clearinghouse). The collateral posting is completed upon confirmation of the linking process execution by the registration system to clearinghouse collateral management system. Bank letters of credit Bank LCs are deposited as collateral against the receipt and acceptance of the hard copy of the letters by the clearinghouse, as well as the electronic confirmation of the issuance thereof by the guarantee issuing bank. Selected investment fund shares Upon the acquisition of selected investment fund shares, said shares are automatically pledged in favor of the clearinghouse. In the case of investment funds managed by BM&FBOVESPA, the purchase of shares occurs according to the following steps: (1)
Cash funds are transferred to the clearinghouse account with the BM&FBOVESPA Bank. This transfer is made by the full trading participant or settlement participant responsible for the investor to whom/which collateral is intended; said investor must be properly registered with the bank and qualified to acquire fund shares;
(2)
The BM&FBOVESPA Bank inputs into the clearinghouse collateral management system the amount that was credited to the clearinghouse account, and the full trading participant or settlement participant indicates, in that same system, that the cash funds must be used to acquire fund shares; and
(3)
The clearinghouse instructs the BM&FBOVESPA Bank to purchase fund shares for the investor indicated in the clearinghouse collateral management system by the full trading participant or settlement participant.
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Rural product notes (CPRs) CPRs are deposited as collateral upon blocking the relevant notes (identified in the collateral posting request by their registration numbers in the RTA system) in favor of the clearinghouse. The deposit thereof is completed upon confirmation, by the RTA system, that the CPRs are available and blocked. Cash funds – local currency The
clearinghouse
provides
three
collateral
posting
options,
namely:
through
the
BM&FBOVESPA Bank, in the settlement window, or via SPB messaging. Through the BM&FBOVESPA Bank, cash funds must be transferred by the participant to the clearinghouse account with said bank. Upon completion of the transfer, such deposit information is relayed electronically to the clearinghouse collateral management system, after which the participant must indicate, in the same system, how the funds are to be distributed among their respective purposes. The aforementioned participant may be: (i)
A full trading participant or settlement participant, in the case of funds intended to constitute collateral required of either that participant or of investors; or
(ii)
A clearing member, in the case of funds intended to constitute collateral required of any such member.
In the settlement window, cash funds value is entered as a debit to the multilateral net balances of the participants involved, in order to be settled: (i)
On the same day, for collateral posting requests registered by 1:00 PM; or
(ii)
On the following business day, for collateral posting requests registered after 1:00 PM.
Via SPB messaging, via the clearinghouse collateral management system, the full trading participant, settlement participant, or clearing member requests message LDL0013 to be sent, whereby the settlement agent of the relevant clearing member is requested to transfer the funds to the clearinghouse settlement account. The participants whose MNBs are debited are: (i)
The investor and the corresponding full trading participant, or settlement participant, and clearing member, in the case of collateral earmarked for the purpose of covering transactions;
(ii)
The full trading participant, or settlement participant, and the corresponding clearing member, in the case of collateral posted by them on layer 1 for the applicable purposes; and
(iii)
The clearing member, in the case of collateral posted by it on layers 1 and 2 for the applicable purposes.
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Collateral posting of cash is effected upon confirmation of the funds transfer in the settlement window by the clearing member responsible for the participant(s) involved, in favor of the clearinghouse account with its settlement agent. Cash funds – dollars Dollars are deposited as collateral through the transfer of the relevant dollars to the BM&FBOVESPA account with the bank it engages abroad to that end. The deposit thereof is completed for collateral purposes upon confirmation of the credit of the dollars to the aforementioned account. U.S. Treasury bonds U.S. Treasury bonds are deposited as collateral through the transfer of the relevant securities to the clearinghouse collateral account with the central depository where they are being held in custody. Said transfer must follow the procedures of the relevant central depository and be performed by the bond custodian in favor of BM&FBOVESPA. The deposit is completed for collateral purposes in the clearinghouse collateral management system upon confirmation of the credit of the relevant bonds to the BM&FBOVESPA account.
4.5.2
Collateral withdrawal The withdrawal of collateral is the reverse procedure to the collateral posting, i.e. whereby a given asset ceases to constitute collateral at the clearinghouse. The procedure for withdrawing collateral consists of three steps, namely: withdrawal request, withdrawal request review and, upon approval of a request, actual withdrawal.
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CLEARINGHOUSE Collateral management system (NGA) 2
5
Review of criteria for withdrawing asset A from collateral
Actual withdrawal, with collateral balance update
1
4
Request for asset A to be withdrawn from collateral
Confirmation of asset A’s transfer to its custodian
CENTRAL DEPOSITORY 3 When clearinghouse criteria for withdrawing asset A’s from collateral are met, asset A is transferred to the account of the asset’s custodian (this step occurs at different times, depending on the asset involved)
6 Confirmation of asset A’s withdrawal from collateral
FTP, SP, CM
Figure 4.2 - Collateral withdrawing process
4.5.2.1 Collateral withdrawal request A withdrawal request is submitted through registration, in the collateral management system, of the identification of the asset to be removed. Withdrawal requests may be registered by full trading participants, settlement participants, clearing members and guarantee issuing banks, according to the purposes of collateral to be removed, as follows: Full trading participants and settlement participants must register withdrawal requests for proprietary collateral and for collateral of investors under their responsibility, meaning collateral deposited on layer 1 of the safeguard structure; in the case of collateral posted on layer 1 by or for investors (meaning collateral deposited with the purpose of covering transactions), a withdrawal request involving a given collateral must be submitted by the same participant that posted it, that is, the same participant that registered the corresponding deposit request, even if the financial value of such collateral has been distributed over time, in order to cover transactions under the responsibility of other full trading participants or settlement participants.
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Clearing members must register withdrawal requests for proprietary collateral, meaning collateral deposited for the settlement fund, for making up minimum nonoperating collateral and for adjusting the operating balance levels of full trading participants and settlement participants under their responsibility. The guarantee issuing bank must request the withdrawal of proprietary collateral, that is, collateral it deposited to adjust the volume of collateral of its issuance, which is deposited by participants, to the acceptance limits assigned to it by BM&FBOVESPA. Such requests must be registered in the clearinghouse collateral management system: (i)
By the guarantee issuing bank itself, whenever it acts in the capacity of a participant with access to that system; or otherwise,
(ii)
By the clearinghouse, upon instruction from the guarantee issuing bank.
Gold refiners must submit requests to withdraw proprietary collateral, that is, collateral required for their qualification as participants in the BM&FBOVESPA custody system. Their requests are registered by the clearinghouse in its collateral management system, upon instruction from the relevant gold refiner. Any and all collateral withdrawal requests must comply with the timetable established by the clearinghouse for moving collateral, the hours of operation of the corresponding central depository as well as the hours of operation of banks, should any bank participate in the withdrawal process.
4.5.2.2 Collateral withdrawal request review – criteria for releasing collateral All the collateral withdrawal requests are reviewed by the clearinghouse. The criteria to release collateral is based on the evaluation of portfolios of positions and collateral held by investors, full trading participants, settlement participants, clearing members and guarantee issuing banks, according to the purpose of collateral underlying a withdrawal request. The clearinghouse may reject a withdrawal request: (i)
Whenever collateral desired to be withdrawn is blocked; or
(ii)
In the absence of a free balance of collateral, which is a function of the multilateral net balance due and also of required, posted and blocked collateral associated with the participant to which collateral underlying a withdrawal request is assigned; or
(iii)
Whenever the withdrawal implies the violation of any limits or restrictions established by BM&FBOVESPA.
The term “blocked collateral” refers to collateral posted by a participant but which cannot be moved by said participant, as a result of a court order received by the clearinghouse, of an ongoing
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process for handling a settlement failure, or of the clearinghouse perception that the credit risk of the participant has deteriorated. As referred to in chapter 2 (Procedures in the event of default) of this manual, collateral associated with participants declared as defaulters or characterized as operational defaulters by the clearinghouse will remain blocked for as long as there are positions and obligations to be settled by such participants. Blocked collateral may not be withdrawn, transferred, or distributed. Regarding the requests approved by the clearinghouse, the withdrawable amount is limited to the value of collateral made up of the asset desired to be withdrawn and to the criteria presented in the following paragraphs. Through the clearinghouse collateral management system, participants can simulate collateral withdrawals and, based on simulation results, which indicate the status of the portfolios that will result from a withdrawal, decide on whether or not to submit a request. (a)
Releasing investors’ collateral (collateral posted on layer 1) The free balance of collateral posted to cover the transactions registered in account
C of a
given investor, under the responsibility of full trading participant or settlement participant
P and clearing member CM , is given by: FBC ( D ) = min ( BDC −1 , BDC ) + min ( MNBDC , 0 ) − Blocked Coll C
(4.35)
Where:
BDC−1 :
the deficit ( BD−1 < 0 ) or surplus ( BD−1 ≥ 0 ) of collateral to cover the C
C
transactions registered in account
C under the responsibility of P and
CM , calculated according to the CORE methodology, as described in chapter 5 (Risk calculation) of this manual, by considering (i) the closing positions registered in account deposited in account date
C;
D −1
and (ii) the collateral
C at the time the free balance is calculated on
D ; for the purposes of rule 1 described below, this value does not
include collateral underlying the withdrawal request from layer 1; for the purposes of rule 2 described below, this value includes collateral underlying the withdrawal request from layer 1;
BDC :
the deficit ( BD 0
D;
if credit balance, and
if there is no balance to be settled, or if the free balance is
calculated after the end of the settlement window; and
Blocked CollC :
the amount of collateral blocked by the clearinghouse, made up of the asset underlying the withdrawal request and posted to cover the transactions registered in account
Denote by WV
C*
( D, A )
C.
the amount of collateral available for withdrawal, on date
D , made
up of asset A posted, for the purpose of covering transactions, , in account C ∗ of a given investor, under the responsibility of full trading participant or settlement participant P ∗ and clearing member CM ∗ . The criteria to release investor’s collateral posted on layer 1 consist of the following rules: Rule 1:
The clearinghouse does not allow collateral to be withdrawn whenever the free balance of collateral in any of the investor’s accounts, under any full trading participant, or settlement participant, and any clearing member, is negative, that is: C WV C ( D , A ) = 0 , if FB ( D ) < 0 for any account C held by the investor *
(4.36) Rule 2:
The clearinghouse does not allow collateral made up of cash funds (local currency), or selected investment fund shares to be withdrawn via the BM&FBOVESPA Bank whenever the multilateral net balance of full trading participant or settlement participant P ∗ ,
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*
MNBDP , is negative (debit) on the date
of withdrawal, meaning that, for A consisting of local currency or selected investment fund shares:
WV C ( D , A ) = 0 if MNBDP < 0 *
*
Rule 3:
(4.37)
If the clearinghouse allows collateral to be withdrawn, then the amount withdrawable from account C ∗ is limited to the free balance value of collateral in such account, if positive, that is:
(
WV C ( D, A) = max FBC ( D) , 0 *
(b)
*
)
(4.38)
Releasing collateral posted by full trading participants and settlement participants (b.1) Free balance, on date
D , of collateral deposited for operating balance adjustment
purposes The free balance, on date settlement participant
P,
D,
of collateral posted by full trading participant or
under the responsibility of clearing member
CM ,
for
operating balance adjustment purposes is given by: P FBOB ( D ) = min ( Posted CollOBP , B ) + min ( MNBDP , 0 ) − Blocked CollOBP (4.39)
P P,CM P B = Posted CollOB + Posted CollOB − Required CollOB
(4.40)
Where: P Posted CollOB :
the amount of collateral posted for operating balance adjustment purposes by the full trading participant or settlement participant
P
at the time the free balance is
calculated; for the purposes of rule 1 described below, this value does not include collateral underlying the withdrawal; for the purposes of rules 2 and 3 described below, this value includes collateral underlying the withdrawal; P,CM Posted CollOB :
the amount of collateral posted by the clearing member
CM
to adjust the operating balance level of full trading participant or settlement participant calculated;
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P at
the time the free balance is
P Required CollOB :
the amount of collateral required of full trading participant or settlement participant
P for
operating balance adjustment
purposes at the time the free balance is calculated; P Blocked CollOB :
the amount, on date
D,
of collateral blocked by the
clearinghouse, made up of the same asset that constitutes collateral underlying the withdrawal and posted by
P for
its
operating balance adjustment purposes; and
MNBDP :
the multilateral net balance of participant the settlement window of date negative,
P to be settled in
D ; MNBDP < 0
if balance is
MNBDP > 0 if credit balance, and MNBDP = 0 if there
is no balance to be settled, or if the free balance is calculated after the end of the settlement window. (b.2) Free balance, on date
D , of collateral deposited as minimum nonoperating collateral
by the full trading participant P P P P FBMNOC − Required AmtMNOC − Blocked CollMNOC ( D) = Posted CollMNOC
(4.41)
Where: P Posted CollMNOC :
the amount of collateral posted as minimum nonoperating collateral by full trading participant
P at the time the free
balance is calculated; for the purposes of rule 1 described below, this value does not include collateral underlying the withdrawal; for the purposes of rules 2 and 3 described below, this value includes collateral underlying the withdrawal; P Required AmtMNOC :
the amount of collateral required of full trading participant
P as minimum nonoperating collateral at the time the free balance is calculated; and P Blocked CollMNOC :
the amount, on date
D,
of collateral blocked by the
clearinghouse, made up of the same asset that constitutes collateral underlying the withdrawal and posted by full trading participant
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P as minimum nonoperating collateral.
Consider collateral made up of asset A, deposited by a given full trading participant or settlement participant P ∗ . Let WV withdrawal on date Rule 1:
P*
( D, A )
be the amount of that collateral available for
D . The following rules comprise the criteria to release collateral:
The clearinghouse does not allow collateral to be withdrawn whenever the balance of collateral posted by participant P ∗ for any purpose is negative, that is: P FBOB ( D ) < 0 or * ∗ P* WV P ( D , A ) = 0 if FBMNOC ( D ) < 0 or , for P as a full trading participant C FB ( D ) < 0 *
(4.42) P FBOB (D ) < 0 WV P ( D , A ) = 0 if or , for P ∗ as a settlement participant FBC D < 0 ( ) *
*
Where
FBC ( D)
(4.43)
is calculated according to equation (4.35) of paragraph (a) and
C
indicates any proprietary account held by participant P ∗ , that is, in the capacity of investor, regardless of the full trading participant or settlement participant responsible for said account. Rule 2:
The clearinghouse does not allow collateral made up of cash funds (local currency), or selected investment fund shares to be withdrawn via the BM&FBOVESPA Bank whenever the multilateral net balance of full trading participant or settlement participant P ∗ is a debit on the date of withdrawal, meaning that, for A consisting of local currency or selected investment fund shares:
WV P ( D , A ) = 0 if MNBDP < 0 *
*
Rule 3:
(4.44)
If the clearinghouse allows collateral to be withdrawn, then the withdrawable amount of collateral is limited to the free balance value of collateral posted by participant P ∗ for the relevant purpose, that is:
(
P WVOB ( D , A ) = max FBOBP ( D ) , 0 *
*
(
)
P P WVMNOC ( D , A ) = max FBMNOC (D ) , 0 *
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*
)
(4.45)
(c)
Releasing collateral posted by clearing members Consider the following purposes to which collateral posted by any clearing member can be allocated: (i)
Fixed contribution to the settlement fund;
(ii)
Operating balance adjustment; and
(iii)
Minimum nonoperating collateral.
The free balances of clearing member
CM
associated with the aforementioned purposes
are defined as follows: (c.1) Free balance, on date
D,
of collateral deposited as fixed contribution to the
settlement fund
FBFCCM ( D) = Posted CollFCCM − Required AmtFC − Blocked CollFCCM
(4.46)
Where:
Posted CollFCCM :
the amount of collateral posted by clearing member
CM
as its
fixed contribution to the settlement fund at the time the free balance is calculated on date
D ; for the purposes of rules 1 and 2 described
below, this value does not include collateral underlying the withdrawal; for the purposes of rule 3 described below, this value includes collateral underlying the withdrawal;
Required AmtFC : the
amount required by BM&FBOVESPA as the fixed clearing
member contribution to the settlement fund; and
Blocked CollFCCM :
the amount, on date
D,
of collateral blocked by the
clearinghouse, made up of the same asset that constitutes collateral underlying the withdrawal and posted by clearing member (c.2) Free balance, on date
CM
as its fixed contribution to the settlement fund.
D , of collateral deposited for operating balance adjustment
purposes Collateral deposited by clearing member for the purpose of adjusting the operating balance levels of full trading participants and settlement participants under its responsibility is distributed or allocated among those participants, at the discretion of clearing member. Only the portion of undistributed collateral is liable to be withdrawn, meaning that the withdrawal of any allocated portion can only occur after the relevant
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allocation is cancelled. The cancellation of an allocation to a given participant is subject to the same criteria for the withdrawal of collateral posted by full trading participants or settlement participants for operating balance adjustment purposes. The free balance of clearing member collateral deposited for operating balance adjustment purposes is, then, given by: CM OB
FB
N
( D ) = Posted Coll
CM OB
CM ,Pi CM − ∑Used CollOB − Blocked CollOB
(4.47)
i =1
Where: CM Posted CollOB :
the amount of collateral posted by clearing member
CM
for
operating balance adjustment purposes at the time the free balance is calculated, irrespective of whether said collateral is allocated to participants under its responsibility, not including collateral underlying the withdrawal if the purpose thereof is operating balance adjustment; for the purposes of rules 1 and 2 described below, this value does not include collateral underlying the withdrawal; for the purposes of rule 3 described below, this value includes collateral underlying the withdrawal;
N:
the number of full trading participants or settlement participants under the responsibility of clearing member
CM,Pi Used CollOB :
CM ;
the value of the portion of collateral posted by clearing member
CM the
for operating balance adjustment purposes and allocated to
i - th full trading participant or settlement participant under
its responsibility; and CM Blocked CollOB :
the amount, on date
D,
of collateral blocked by the
clearinghouse, made up of the same asset that constitutes collateral underlying the withdrawal and posted by clearing member (c.3) Free balance, on date
CM
for operating balance adjustment purposes.
D , of collateral deposited as minimum nonoperating collateral
CM CM CM FBMNOC − Required AmtMNOC − Blocked CollMNOC ( D) = Posted CollMNOC
Where:
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(4.48)
CM Posted CollMNOC :
the amount of collateral posted by clearing member
CM
as
minimum nonoperating collateral at the time the free balance is calculated on date
D;
for the purposes of rules 1 and 2
described below, this value does not include collateral underlying the withdrawal; for the purposes of rule 3 described below, this value includes collateral underlying the withdrawal;
Required AmtMNOC :
the
amount
required
by
BM&FBOVESPA
as
minimum
nonoperating collateral; and CM Blocked CollMNOC :
D,
the amount, on date
of collateral blocked by the
clearinghouse, made up of the same asset that constitutes collateral underlying the withdrawal and posted by clearing member
CM
as minimum nonoperating collateral.
Consider collateral made up of asset A, posted by clearing member CM ∗ for purpose f , CM*
from among purposes (i), (ii) and (iii) above. Let wv f available for withdrawal on date
D.
( D, A )
be the amount of collateral
The following rules comprise the criteria to release
collateral allocated for such purposes: Rule 1:
The clearinghouse does not allow collateral to be withdrawn whenever the balance of collateral posted by clearing member CM ∗ for purpose (i), (ii), or (iii) is not positive, that is:
FBFCCM ( D ) < 0 or CM* FB * ( D ) < 0 or OB WVfCM ( D , A ) = 0 if * CM FBMNOC ( D ) < 0 or C FB ( D ) < 0 *
Where
FBC ( D)
(4.49)
is calculated according to equation (4.35) of paragraph (a) and
C
indicates any proprietary account held by clearing member CM ∗ , that is, in the capacity of investor, regardless of the full trading participant, or settlement participant, and clearing member responsible for said account. Rule 2:
The clearinghouse does not allow collateral to be withdrawn whenever the total free balance of collateral posted by clearing member CM ∗ is negative. By denoting the total free balance on date
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D
CM*
by Total FB
( D ) , then:
WVfCM ( D , A ) = 0 if Total FBCM ( D ) < 0 *
*
(4.50)
With:
(
CM CM Total FBCM ( D) = FBFCCM ( D) + FBOB ( D) + FBMNOC ( D) + min MNBDCM , 0 *
*
*
*
*
)
(4.51) *
Where
MNBDCM is the multilateral net balance of clearing member CM ∗ to be
D ; MNBDCM < 0 *
settled in the settlement window of date
if debit balance;
MNBDCM > 0 if credit balance, and MNBDCM = 0 there is no balance to be settled, *
*
or if the free balance is calculated after the end of the settlement window. Rule 3:
If the clearinghouse allows collateral to be withdrawn, then the withdrawable amount of collateral is limited to the free balance value of collateral posted by clearing member CM ∗ for the purpose f , that is:
( ( D , A ) = max ( FB ( D , A ) = max ( FB
) (D ) , 0)
CM WVFCCM ( D , A ) = max FBFC (D ) , 0 *
CM WVOB *
*
CM WVMNOC
(d)
*
CM* OB
CM* MNOC
(4.52)
(D ) , 0)
Releasing collateral posted by guarantee issuing banks for adherence to LCs and CDs acceptance limits The following rules comprise the criteria to release collateral posted by guarantee issuing banks to provide adherence of the assets of their issuance to the relevant acceptance limits: Rule 1:
The clearinghouse does not allow collateral to be withdrawn whenever the free balance of collateral posted by the guarantee issuing bank is either null or negative; and
Rule 2:
If the clearinghouse allows collateral to be withdrawn, then the withdrawable amount of collateral is limited to the free balance value of collateral posted by the guarantee issuing bank, if positive.
The free balance of collateral posted by the guarantee issuing bank is given by:
FBIB ( D) = Posted CollIB − Required Coll IB − Blocked Coll IB Where:
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(4.53)
Posted Coll IB :
the total amount of collateral posted by the guarantee issuing bank at the time the withdrawal request is reviewed, in order to provide adherence of the assets of its issuance to the relevant acceptance limits;
Required CollIB :
the amount of collateral required of the guarantee issuing bank at the time the balance is calculated, in order to provide adherence of the assets of its issuance to the relevant acceptance limits as given by equations (4.11) and (4.15); and
Blocked Coll IB : the amount, on date
D , of collateral blocked by the clearinghouse,
made up of the same asset that constitutes collateral underlying the withdrawal and posted by the guarantee issuing bank.
4.5.2.3 Collateral withdrawal In general, collateral whose withdrawal requests are accepted by the clearinghouse are withdrawn by transferring the relevant assets to participants or guarantee issuing banks, as the case may be. The procedures applicable to each asset type are presented below. Federal government bonds Federal government bonds are withdrawn by transferring the relevant securities from the clearinghouse account with BCB-SELIC to the corresponding participant’s account. The command number of the transfer is relayed by the clearinghouse collateral management system to the participant that registered the withdrawal request, and it must be used by the custodian of the bonds’ owner to complete the transfer thereof in the BCB-SELIC environment. Shares of stocks, ETF shares, certificates of deposit of shares (units) and gold Shares of stocks, ETF shares, units and gold are withdrawn by transferring the relevant assets from the clearinghouse collateral portfolio to the free portfolio of the custody agent of the assets’ owner. The custody agent of the assets’ owner must instruct the BM&FBOVESPA central depository to provide the transfer thereof, pursuant to that central depository operating procedures manual. The number of said transfer (instruction number) in the BM&FBOVESPA central depository must be registered by the participant in clearinghouse collateral management system upon registration of the withdrawal request. Bank certificates of deposit (CDs) Bank CDs are withdrawn when the clearinghouse unlinks the relevant certificates from its account with the CD registration system. The command number of the unlinking process is relayed by the clearinghouse collateral management system to the participant that registered the withdrawal
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request, and it must be used by the custodian of the CDs’ owner to complete the unlinking thereof in the registration system. Bank letters of credit (LCs) After a withdrawal request is accepted, bank LCs are withdrawn upon cancellation of the registration thereof in the clearinghouse collateral management system. As of the first business day following an LC registration cancellation, the clearinghouse issues a “notice of cancellation” for the cancelled LCs and the hard copy thereof remains available for withdrawal by the guarantee issuing bank or by the participant responsible for the LCs’ beneficiary. Selected investment fund shares After a withdrawal request is accepted, selected investment fund shares are withdrawn by the clearinghouse collateral management system and the redeemed amount is credited in cash via the BM&FBOVESPA Bank or in the settlement window. Via the BM&FBOVESPA Bank, the redeemed amount is deposited in the bank/account indicated by the participant that registered the withdrawal request. In the settlement window, the redeemed amount is entered as a credit to the multilateral net balances of the participants involved (the investor to whom/which collateral underlying the withdrawal is intended, if applicable, the full trading participant, or settlement participant, and the clearing member), in order to be settled on the same day. The participants whose MNBs are credited are: (i)
The investor and the corresponding full trading participant, or settlement participant, and clearing member, in the case of withdrawal of collateral posted for the purpose of covering transactions;
(ii)
The full trading participant, or settlement participant, and the corresponding clearing member, in the case of withdrawal of collateral posted by the full trading participant or settlement participant on layer 1; and
(iii)
The clearing member, in the case of withdrawal of collateral posted by the relevant clearing member on layers 1 and 2.
Rural product notes (CPRs) CPRs are withdrawn by unblocking the relevant notes in the RTA system through the registration numbers thereof, as indicated in the collateral withdrawal request. Upon acceptance of a collateral withdrawal request, unblocking is automatically requested by the clearinghouse collateral management system to the RTA system. Cash funds – local currency
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Local currency is withdrawn via the BM&FBOVESPA Bank, in the settlement window, or via SPB messaging. Via the BM&FBOVESPA Bank, cash funds are deposited in the bank/account indicated by the participant that registered the withdrawal request in the clearinghouse collateral management system. In the settlement window, cash funds are entered as a credit to the multilateral net balances of the participants involved (the investor to whom/which collateral underlying the withdrawal is intended, if applicable, the full trading participant, or settlement participant, and the clearing member), in order to be settled on the same day. The participants whose MNBs are credited are: (i)
The investor and the corresponding full trading participant, or settlement participant, and clearing member, in the case of withdrawal of said investor’s collateral posted on layer 1 of the safeguard structure;
(ii)
The full trading participant, or settlement participant, and the corresponding clearing member, in the case of withdrawal of collateral posted by the full trading participant or settlement participant on layer 1 of the safeguard structure; and
(iii)
The clearing member, in the case of withdrawal of collateral posted by the relevant clearing member on layers 1 and 2 of the safeguard structure.
Cash collateral is withdrawn upon confirmation of the relevant payment in the settlement window by the clearinghouse, in favor of the settlement agent of the clearing member responsible for the participant(s) involved. Via SPB messaging, the full trading participant, settlement participant, or clearing member requests, via the clearinghouse collateral management system, message LDL0015 to be sent in order to transfer the funds to the Settlement account or Bank Reserves account of the settlement agent of the relevant clearing member. Cash funds – dollars Dollars are withdrawn by depositing the relevant dollars to the participant. Said deposit may be made via the bank engaged by BM&FBOVESPA abroad to that end, or in the settlement window, which is intended for the cases whereby funds are used to settle participant obligations. In either case, credit is made in dollars. Via the bank engaged by BM&FBOVESPA abroad, cash funds are deposited in the participant’s foreign bank/account indicated in the BM&FBOVESPA participant registration system.
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In the settlement window, cash funds are transferred to the clearinghouse settlement account with the bank engaged by BM&FBOVESPA abroad. The amount credited to that account is used by the clearinghouse in the settlement process and any balance is: (i)
Returned to the collateral account held by the clearinghouse with the bank engaged abroad, requiring the participant to register the corresponding collateral posting request in the clearinghouse collateral management system; or
(ii)
Credited to the participant’s foreign bank/account indicated in the BM&FBOVESPA participant registration system.
U.S. Treasury bonds U.S. Treasury bonds are withdrawn (i) by transferring the relevant securities from the clearinghouse account to the participant account indicated in the withdrawal request, said transfer being instructed by the clearinghouse in the central depository where the bonds are held in custody; and (ii) upon confirmation of the transfer by the participant’s custodian.
4.6
Procedures for transferring collateral A collateral transfer is characterized by the movement of collateral between accounts of the same investor and, therefore, applies only to collateral posted on layer 1 of the clearinghouse safeguard structure for the purpose of covering transactions. In the case of corporate events (mergers, acquisitions, or spin-offs), collateral is transferred between the accounts of different participants—the existing investor involved in the corporate event and the investor resulting from the corporate event—but only after BM&FBOVESPA receives the documentation supporting the corporate event and also the accounts identification for the investor that will receive the collateral underlying the transfer in the corresponding central depositories and banks. Collateral transfers are processed between 9:00 AM and 4:00 PM, and are subject to the hours of operation of the corresponding central depositories and/or banks, in addition to the clearinghouse timetable for position transfers, when applicable. Participants can simulate collateral transfers through the clearinghouse collateral management system.
4.6.1
Transferring an investor’s collateral The transfer of an investor’s collateral posted on layer 1 of the clearinghouse safeguard structure involves: (i)
The movement of collateral between different accounts of the same investor; or
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(ii)
In the case of a corporate event, the movement of collateral between the accounts of the investors directly involved in the event.
Let
(C , P ,CM )Layer 1 be the identification, for a given collateral, of account C held by that investor
under the responsibility of full trading participant or participant settlement member and
P and
clearing
CM , and whose positions are covered by such collateral By considering ( C , P ,CM )Layer 1
(C ′, P′,CM′)Layer 1 as the origin and destination accounts, respectively, the following transfers
are permitted: 1.
Between the investor’s accounts under the same full trading participant or participant settlement and under the same clearing member, that is, collateral is transferred from
(C , P ,CM )Layer 1 to (C′,P,CM)Layer 1 ; 2.
Between the investor’s accounts under different full trading participants or settlement participants, but under the same clearing member, that is, collateral is transferred from
(C , P ,CM )Layer 1 to (C′,P′,CM)Layer 1 ; 3.
Between the investor’s accounts under the same full trading participant or participant settlement, but under different clearing members, that is, collateral is transferred from
(C , P ,CM )Layer 1 to (C′,P,CM′)Layer 1 ; and 4.
Between the investor’s accounts under different full trading participants or settlement participants, and also under different clearing members, that is, collateral is transferred from
(C , P ,CM )Layer 1 to (C ′, P′,CM′)Layer 1 . In all the above cases, transfers may be carried out jointly with, or separately from the corresponding positions (open contracts and obligations to be settled). Transferring collateral but not the corresponding positions The transfer of collateral without the transfer of the corresponding positions consists of the following steps: 1.
The transfer request must be registered by the full trading participant or settlement participant of origin ( P) in the clearinghouse collateral management system, stating the amount to be transferred, the full trading participant or settlement participant of destination ( P or
P ′ ),
the clearing member of destination ( CM or
destination account of the investor ( C ′ );
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CM′ ) and the
2.
The intention to receive the collateral underlying the transfer must be confirmed by the full trading participant or settlement participant of destination, also through the collateral management system;
3.
The clearinghouse reviews the request, according to the same criteria for collateral withdrawal; and
4.
In case the clearinghouse review does not indicate any violation of risk or of other restrictions, collateral is transferred.
Transferring collateral and positions simultaneously The transfer of collateral with the simultaneous transfer of the corresponding positions consists of the following steps: 1.
The position transfer request must be registered by the full trading participant or settlement participant of origin ( P), according to the procedures provided in the clearinghouse operating procedures manual;
2.
The collateral transfer request must be registered by the full trading participant or settlement participant of origin ( P) in the clearinghouse collateral management system, stating the position transfer code obtained in the previous step;
3.
The intention to receive the collateral underlying the transfer must be confirmed by the full trading participant or settlement participant of destination, also through the collateral management system;
4.
The clearinghouse reviews the requests, according to the same criteria for collateral withdrawal and for risk; and
5.
In case the clearinghouse review does not indicate any violation of risk or of other restrictions, both transfers are completed.
Collateral deposited on layer 1 by full trading participants, settlement participants, or clearing members, when acting in the capacity of investors (that is, collateral for the purpose of covering transactions), cannot be transferred for any other purposes.
4.7
Handling events associated with assets that constitute collateral Events associated with assets may be paid in cash and/or assets. Events are paid in cash when interest or income is paid to the asset holder, whereas events paid in assets involve changing the amount of assets held by each individual. Among the assets eligible to be accepted as collateral, the following may be subject to events payable in cash or assets: shares of stocks, units, federal government bonds and foreign bonds.
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4.7.1
Events payable in cash The events that may be paid in cash involve interest payments, dividend payments and other distributions of cash by the issuer of the assets to the holders thereof. Federal government bonds The amount corresponding to the payment of interest on a given federal government bond posted as collateral is transferred to the clearinghouse by BCB-SELIC on the day of the event. The amount received by the clearinghouse, corresponding to all the bond units registered in its accounts with BCB-SELIC, is transferred to all those who hold the same bond units deposited as collateral, that is: (i) to participants, by entering the relevant credit to their respective multilateral net balances; (ii) to guarantee issuing banks, by transferring the relevant funds to their respective settlement agents via STR; and (iii) to financial institutions whose bonds make up third-party collateral, either by entering the relevant credit to their respective multilateral net balances or by transferring the relevant funds to their respective settlement agents via STR, as the case may be. The clearinghouse collateral management system provides participants with a query interface for locating participants under their responsibility that were transferred interest payments by the clearinghouse.
Foreign bonds Prior to any interest payments, foreign bonds constituting collateral must be replaced with other assets by the participants holding thereof. If said replacement does not take place and interest is paid to the clearinghouse, participants must submit a formal request, by letter, to receive the transfer of the funds they were assigned, bearing the costs arising out of such a transfer. Shares of stocks and certificates of deposit of shares (units) The funds associated with payments of dividends, interest on equity and other cash distributions on shares of stocks or on units posted as collateral are transferred to the participants holding the relevant stocks or units by entering a credit to their respective multilateral net balances. Thus, the transfer of such funds is subject to the criteria applicable to collateral withdrawal.
4.7.2
Events payable in assets Events may be paid in assets whenever there is an increase or decrease in the number of shares issued by a certain company. Such events may involve: share splitting, share grouping, bonus shares, mergers, spin-offs, and changes of legal form. Among the assets eligible to be accepted as collateral, the aforementioned events may change the number of shares of stocks, of ETF shares and of units. Adjustments resulting from any such events are processed by the BM&FBOVESPA central depository and are automatically reflected in the
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clearinghouse collateral management system on D+3 of the date of the event, requiring no participant intervention.
4.8
Monetizing collateral not linked to events of default The monetization of collateral not linked to events of default consists of the conversion of assets posted as collateral by a given nondefaulting participant into cash and the utilization of the proceeds thereof in the settlement of said participant’s obligations. This process of monetization requires clearinghouse permission and covers solely collateral posted by investors on layer 1 of the safeguard structure, except bank letters of credit and assets posted by financial institutions for third parties, which only admit liquidation in case of default. The monetization process comprises the following steps: 1.
The full trading participant or settlement participant responsible for the transactions to which collateral to be monetized is intended must submit a “request letter for collateral monetization” to the clearinghouse. That letter must contain information on the asset to be monetized and on the investor that owns the asset, exactly as registered in the clearinghouse collateral management system, and it must be signed and notarized (i) by two duly authorized representatives of the full trading participant or settlement participant, and (ii) by the investor;
2.
The clearinghouse reviews the request by assessing, among others, the reasons why the monetization mechanism is being required (which reasons must be of an operational nature but not recurrent, being such a characterization exclusively incumbent on the clearinghouse) and how much time there is for carrying out all the process stages, until completion of the settlement obligations;
3.
If the request is approved by the clearinghouse, it will provide the monetization of the assets specified in the request and receive the proceeds resulting therefrom; for each asset, the deadline for the receipt of funds is contingent on the date on which the sale transaction was effected and on the settlement cycle of the asset;
4.
After receiving the proceeds, the relevant funds are registered in the collateral management system as cash collateral and entered into the same investor’s account where the monetized asset was registered; and
5.
The funds registered in the previous step are withdrawn by the full trading participant or settlement participant, limited to the amount of the balance of available collateral, if positive, and provided that all the criteria for collateral withdrawal from the concerned account are met.
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Chapter 5 - Risk calculation
5.1
Introduction to the CORE methodology The CORE (Closeout Risk Evaluation) methodology is a set of calculation procedures developed for the calculation of risk measures inherent in the BM&FBOVESPA central counterparty activities for a multimarket and multi-asset environment. As referred to in the Introduction to this manual, the issue of risk management for a central counterparty in the event of default by one or more participants resides in its ability to have both the resources and the liquidity necessary to close out the positions held by the defaulters under prevailing market conditions over a limited time horizon. The most important feature of the methodology is its ability to recognize that closing out a portfolio is a dynamic process, whereby risk profiles change as positions are closed out over time. Recognizing this dynamism when handling a participant’s failure allows for the methodology to establish an optimal closeout strategy, which is based on trading, settlement and liquidity restrictions. Thus, by realistically representing the issue of risk management for a central counterparty, the CORE methodology provides efficiencies that are robust by construction. In addition to responding directly to the challenges posed by the activities of a central counterparty, the CORE methodology also presents itself as an efficient instrument for risk management in a more general way, by providing an approach and mathematical tools both suitable for recognizing the differences between asset classes and markets, whose highlights are: Providing not only a risk measure, but also a practical rule for the closeout of contracts and assets consistent with such risk measure; Distinguishing properly market risk from the cash flow risk of positions, that is, the possibility of financial mismatches occurring along the position closeout process; Incorporating into risk calculation, in a robust manner, the natural hedges that exist between the various instruments; Incorporating into risk calculation the restrictions imposed by the liquidity conditions of each contract and asset to the position closeout process; Not incurring in rounding errors which arise out of mapping techniques, thus adequately handling nonlinear instruments; and Allowing for efficient and scalable computational implementation, which enables the calculation of risk for thousands of portfolios in quasi-real time. The aforementioned attributes refer to the functional or technical qualities of the methodology. The CORE methodology was also designed to enhance nonfunctional aspects, such as speed and scalability, by possessing a robust computational implementation. The configuration of the CORE
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methodology allows it to be implemented in infrastructures capable of performing calculations in quasireal time (near-time evaluations). Furthermore, the methodology is flexible not only to the size and composition of the portfolio (vertical scalability), but also to the number of portfolios handled simultaneously (horizontal scalability).
5.2
Defining the main calculation components The CORE methodology can be characterized from three major components: (i) determining the optimal closeout strategy for the concerned portfolio; (ii) assessment of the potential losses and gains of the strategy under risk scenarios; and (iii) the definition of risk measures subject to collateralization, permanent loss and transient loss. The following figure illustrates the operation of each component.
The first component determines the closeout strategy which, by respecting the constraints associated with each class of assets and contracts under consideration, minimizes the risk of loss associated with the portfolio closeout process. In this sense, the selected closeout strategy seeks to preserve any protection strategies (hedges) in place considering the different assets, contracts and collateral included in the portfolio. This step results in a temporal dynamics that reflects the evolution of the portfolio composition during the closeout process, that is, between D+0 and D+T, where D+0 indicates the beginning of the closeout process (original portfolio) and D+T indicates the end of the closeout process (closed out portfolio). The second component—the risk assessment step—consists of the calculation of the potential changes in the portfolio value by taking into account jointly the portfolio evolution along the closeout process and the dynamics associated with its primitive risk factors (PRFs). The PRFs of an asset or contract are the relevant financial variables that influence the price or value thereof. When determining
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the value of an asset or contract through a well-defined mathematical relationship involving a set of economic variables, such as the one that results from the assumption of the no-arbitrage principle, those variables are defined so as to represent the primitive risk factors of the asset or contract. The dynamics associated with the primitive risk factors are represented by risk scenarios which, as a whole, reflect extreme but plausible market conditions. The third component transforms the potential changes, as calculated in the previous step for each risk scenario, into sets of cash flows (gains and losses) along the portfolio closeout process. The form of cash flow aggregation determines the type of potential loss to be considered: permanent or transient. The permanent loss measures the end result of the closeout process. As its complement, the transient loss quantifies the additional need, which is primarily generated by the mismatch of financial flows, for funds during execution of the closeout strategy. The following subsections present the operation of each of the aforementioned steps, but maintaining a level of detail that emphasizes understanding of the main features of the CORE methodology. The full specification of the model lies in appendix 3 of this manual. Before discussing each component, some definitions are introduced.
5.2.1
Portfolio of positions and collateral to be settled From a semantic point of view, a portfolio is simply a collection of financial instruments I, consisting of different assets, contracts and collateral. From an algebraic point of view, it may be represented by the I -tuple
Q0 = (Q1,0 ,Q2,0 ,...,QI ,0 ) , where Qi ,0
expresses the total amount of instrument i assessed
at original time D+0. Long positions in such instruments are expressed with a positive sign, while short positions receive a negative sign. Under the CORE methodology, the set of instruments that make up a portfolio comprises not only the assets and contracts available for trading in the BM&FBOVESPA markets, but also the collateral posted by participants for risk colateralization at the clearinghouse. The jointly handling of positions and collateral allows BM&FBOVESPA to explore to the maximum the benefits of diversification, and the natural hedges that exist between instruments, providing a more robust risk measure for the participants’ portfolios.
5.2.2
Closeout strategy A closeout strategy represents a potential structure to close out a portfolio. This structure varies according to its goals, and it can be as simple as settling all the instruments in the portfolio as soon as possible—the naive strategy—or it can produce a more complex shape, by following a number of rules that the strategy must follow. The closer the strategy is to achieve its goals, the better the situation, with the best of the sets available being defined as the optimal closeout strategy.
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In addition to financial instruments I, another relevant aspect for the characterization of a closeout strategy is the holding period that encompasses it. The holding period designates the time frame required to achieve the closing out of all the positions in the portfolio, with the relevant structure and duration contingent on the portfolio composition. Under the CORE methodology, the holding period is given by discrete set by a matrix
T = {1,2,...,T} . Under this formulation, a closeout strategy can be characterized
QIxT , with each element Qi ,τ representing the amount of asset i settled at time D+τ :
Q IxT
Q1,1 Q2,1 = ... QI ,1
Q1,2 Q1,3 ... Q1,T Q2,2 Q2,3 ... Q2,T ... ... ... ... QI ,2 QI ,3 ... QI ,T
In some of the steps of calculation, instead of working with integer quantities of instruments, there can be a conversion into relative values, in order to facilitate processing. This transformation is made by the simple formulation
qi ,τ = Qi ,τ Qi ,0
, from which the matrix of relative quantities,
qIxT , is obtained,
representing the closeout strategy.
5.2.3
Closeout process restrictions The determination of a closeout strategy is subject to compliance with a set of rules that define the ultimate goal of the closeout strategy. In general, such rules can be classified into two major groups, the first concerning the functional attributes associated with the operational characteristics of instruments, and the second concerning liquidity attributes, reflecting the trading characteristics of instruments. In order to formalize those rules, restrictions are defined for matrix for
QIxT , or equivalently
qIxT , as shown below.
Restriction 1 The sum of the relative quantities of an instrument settled during the portfolio closeout process must be equal to one unit, determining that every position in the instrument is to be closed out by no later than
τ =T : T
q τ =1 ∑ τ i,
=1
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(5.1)
Restriction 2 The relative quantities of an instrument settled at each point in the holding period must be greater than or equal to zero, and less than or equal to one, not allowing the strategy to create positions or increase existing positions:
0 ≤ qi ,τ ≤ 1
(5.2)
Restriction 3 The relative quantity of a given instrument with particular features is always equal to one at some point in the holding period,
τ i , since this instrument does not allow for fractionated closeouts, and the
position is closed out all at once:
1 if τ = τ i q i ,τ = 0 otherwise
(5.3)
Restriction 4 There is a minimum time during the holding period, τ i , by which the relative quantities of the instrument cannot assume values other than zero, given that each position requires a minimum time before the closeout process can begin:
qi ,τ = 0, if 0 ≤τ
