Robust systems make BM&FBOVESPA a globally unique trading environment
BM&FBOVESPA has today one of the most complete post-trade and risk administration structures in the world. This complex network of systems, which ensures market stability, was developed to address the strict regulatory environment under which the Brazilian market operates and also the best international practices communicated by international agencies dedicated to this subject.
At times criticized for rigorously controlling all transactions and providing total transparency to negotiations, BM&FBOVESPA had its efficiency put to test in the second half of 2008 and the first quarter of 2009, when it demonstrated a high level of reliability of its structure and, subsequently, made significant contribution to the recovery of the market, ensuring the security of the trade environment for equities in Brazil.
These robust risk management systems available to investors and participants created a trade environment in Brazil that is unique in the world. In the country, 80% of the derivative contracts and 100% of the shares of publicly traded companies are negotiated at BM&FBOVESPA. This is a reflex of the credibility and trust that the market places in the trade environment and its corresponding guarantee and risk management systems.
After the merger, a process to integrate the highly complex BM&F and Bovespa structures was initiated. In 2009, a study was made to determine the operation and the possible improvements to the systems, and this process should be continued in 2010, when this diagnostic will be expanded through a series of consultations to the market aiming at understanding the expectations of users about the post-trade environment at BM&FBOVESPA.
Central Securities Depository (CSD)
This depository provides a centralized safekeeping of securities traded in the BM&FBOVESPA environment and allows the processing of financial transactions through electronic records. In addition to the traditional safeguarding services and updating of securities – in cases of corporate events – , CSD can also incorporate the functions of comparing records of operations, clearing and settlement. The system is also an important tool for transparency, since it registers the securities in the name of the investor.
Securities Settlement Systems (SSS)
BM&FBOVESPA has put in place settlement systems and processes of the highest caliber, compliant with prevailing international standards and thus providing market participants with reliable and secure transaction settlement. BM&FBOVESPA directly controls both the movement of funds and related securities without the use of intermediaries in the process. The only exception is the FX Clearinghouse which settles USD through settlement banks in the USA.
Central Counterparty (CCP)
One of the main instruments for risk mitigation at BM&FBOVESPA, the CCP acts as intermediary in all transactions and contracts, placing itself as a buyer for all sellers and a seller for all buyers. This mechanism provides a reduction of credit risk for the transactions, since CCP replaces the participants as bilateral counterparties in the transactions, through a single structure, with high-quality and large payment capacity. As such, it is possible to perform trades with greater financial volume and clearer guarantees.
The Central Counterparty system further provides a highly efficient mechanism against systemic risks, since it controls part of the distribution of liquidity to the market by maintaining an adequate combination of margin levels and volume of resources, which allows a quick stop to eventual losses.
Challenges to the post-trade
The year of 2010 should have intense propositions and improvements in the post-trade structure at BM&FBOVESPA. From the integration of the two exchanges, it was possible to clearly and completely observe the degree of exposure to risk by the participants in the market – which was previously analyzed separately by the two companies. With this new vision, a series of improvement opportunities unveils, as a result of the integration of the systems and which may result in significant gains in efficiency – and reduction in risks – for the market and its participants.
Among the actions already identified, we can name the possibility of creating a system that allows the unification of risks from the portfolio of each participant, in order to improve the monitoring and risk management activities by brokerages and investors. Another important project is the adoption of a common risk management for all systems, which contemplates all transactions under the responsibility of the central counterparties at BM&FBOVESPA, providing greater harmony in risk management of the markets. There is also the possibility to unify one or more settlement windows - currently, the chambers in which these transactions are settled operate on different schedules.
These opportunities, nevertheless, will be subject to extensive discussion which should occur within the Work Group created in March 2010, specifically for the subject, and is comprised of representatives from the regulatory authorities (Central Bank and Securities and Exchange Commission) and institutions performing in the segments of custody, settlement and risk management.