How is the CBLC constituted and what are its roles?
The CBLC is organised as a for-profit corporation primarily owned by market participants, which are mainly brokers and bankers. We have been independent of the stock exchange, Bovespa, since 1997 and we have an independent board. Bovespa still has a stake in us of some 20%.
We offer a wide range of services. Not only do we work as a securities settlement system; we also act as the central securities depository (CSD), and a central counterparty (CCP) for equities, equity derivatives and fixed-income instruments for Bovespa.
How does CBLC handle clearing and settlement of trades?
Bovespa adopted an electronic system many years ago that has proved very successful. It covers all trades and there is no open outcry. We are totally dematerialised. We dont have any certificates although we have retained the book entry format. That has enabled us to gain efficiency in execution, and transparency with real-time price dissemination. Trades are posted for investors to see through our own network and that of the major news agencies.
We have two settlement systems. We use a netting system for the daily trading of equities with settlement taking place on a T+3 basis. We also provide cross-settlement for fixed-income bonds issued by private companies. This cross-settlement is also employed for companies when carrying out Initial Public Offerings (IPOs).
Its important to note that all the securities are registered to the beneficial owners. We have around 200 custodians in the market, although within international markets we have far less at between 10-15, which is comparable to the US. These custodians link in to our system. Brazilian law obliges them to identify their final customers. Our accounting system records the name of the owner, which is a significant factor in ensuring that we have strong know-your-customer (KYC) standards. It also enables us to issue a monthly statement directly to the beneficial owner. The process of supplying a monthly statement started in 1989. About five years ago, we introduced a compulsory registration system that gives investors direct access to statements over the Internet.
This all points to the sound legal basis of investment in Brazil. All our activities are very well covered by legislation, not just in the key areas of money laundering and KYC rules. In the past people said we were excessively rule-bound, but now those same people that said we were too inflexible are embarrassed because we are recognised as a front-runner. Because we can track each trade to its beneficial owner we can send an aggregated report of shareholders on a daily basis to issuers. We share trading information with Bovespa and they can see exactly what investors are doing.
In another difference from many other markets in the world, we are linked directly and automatically to the exchange. There is no matching process as all trades come ready matched. The intervention of participants in the electronic trading system is minimised and we have been developing this for 10 years. There is a big debate globally about who owns what over a certain period of time in the trading and settlement cycle. In some systems in Europe it is not clear who owns what at certain times because custodians link to exchanges and there is a lag in information to the depository. That is dangerous in the event of a default. In the Brazilian case, the custodians must be linked straight to the CDS and report their end customers to us.
What are the most unique features of your systems?
The market provides great transparency and guarantees for foreign investors and issuers. Bovespa invested heavily in a very advanced settlement and trading system and high corporate governance standards. We inherited that.
One interesting feature of the market is the different roles borne by us in our key role as the CCP. These include credit risk and delivery versus payment. To deal with this, we have a very sophisticated, safe and well-tested infrastructure. We set trading limits for all parties and control it on a real-time basis. That is supported by collateralization, marked-to-market on a daily basis. We also manage a clearing fund composed by clearing members contributions that are in line with the share of risk. And in our settlement system it doesnt matter if trades are being settled through netting or cross, we have delivery versus payment, that is simultaneous final and irrevocable. We also carry out very strong risk analysis, looking for example at risk concentration.
We handle a lot of additional services in a very safe way across the market. If there is a dividend payment, CBLC receives the money and distributes the money through custodians to investors likewise if there is a subscription, investors pay us and we pay the issuer. We check the information.
The combination of all this has created the boom market that we see today. This trust from investors has enabled us critically to keep IPOs within the local market. It has also enabled the strong growth in secondary trading. We are recognised as a safe environment for international investment.
What are the main features of transparency and dissemination policies?
There is a list of information that it is mandatory to deliver to the market which is controlled by Brazilian law.
As far as issuer dissemination is concerned, we have a very strong regulatory framework in Brazil. It is compulsory for companies to deliver detailed information to the securities commission and exchange. The Comissão does Valores Mobiliários, and Bovespa have specialised people that track the information that companies release. If the information is not clear, they can go back to the company and ask for more information. They developed a system to input that information and share it. The CBLC has an agreement with Bovespa to pick up information and this allows us to keep users up to date with company actions, such as dividends and subscriptions. This system can be accessed by anyone through the Bovespa site. The information is put straight on the site to make it fair to all investors and delivered to news vendors at the same time. Its a very efficient and consolidated system.
Other important sources of investor contact are custodians, brokers and banks. We implemented a value added service for the custodian, called Radar that compliments and deepens information revealed in the company release. This enrichment provides historical information on dividends and other corporate actions, for example, the exact date of dividend payments throughout the year.
Its very easy to integrate the output of our system to the proprietary system of custodians. When we analysed our counterparts in other countries, we couldnt understand why so many depositories have such huge claims department to cover tax and other corporate action claims. This points to their reconciliation of payments difficulties. The fact that we dont have a claim department shows that we distribute information to investors in a fair and even-handed way.
Do you envisage moving to a shorter settlement cycle?
We dont have plans to shorten our settlement cycle. Its not because its not possible for us. Here in Brazil, people are used to settling very quickly. The problem is that the international financial system is not yet prepared. To do that, we need a better international forex clearing system that works with all currencies efficiently.
Another issue is that we have investors from all different time-zones all over the world. They are mainly from the United States but we also have clients based in Australia, Asia and Europe. The current T+3 cycle already poses a problem on occasions. If you have an investor in Australia, using a global custodian is in the US and an asset manager is in the UK, T+3 settlement is already difficult. These two areas outside of our control make it difficult for us to shorten transaction times.
What is your investor profile?
Nowadays we are very happy with the distribution of investors. Its well balanced between foreign, institutional and retail funds. We would like to increase the participation of pension funds, of course, but they are growing fast.
The programme Bovespa vai até você (Bovespa goes where you are) has worked to spread the profile of investors and to attract in individual investors. It promotes the exchange and has been making access easier. Long-term programmes such as that have attracted retail investors and are reaping rewards. Retail participation has been vital in improving politicians perception of Bovespa. Congress increasingly recognises that the stock market is a good for the economy and is not a speculative tool used only by foreigners. They see that capital markets are important for the overall economy.
How do you interact with your counterparts around the world?
We have deep relationships with similar organisations around the world, including most of the main CDS and CCPs (Amarílis was formerly the chairperson for the Americas Central Securities Depositories Association and is the current chair for CCP-12, an informal group that is made up of the worlds main central counterparties such as Clearnet). These fora enable us to exchange experiences and learn about best practices within institutional relationships. We take a very proactive role in all relevant initiatives. We meet counterparts in other markets frequently, at least four times a year, and speak at least every week. This allows us to exchange information on a wide range of best practice areas.
Until recently, Brazilian pension funds couldnt invest overseas. Recently, this has been loosened and they can invest some 10% overseas. We are looking to facilitate overseas investments by institutions in certain markets. Mexico is our pilot project. The idea is to facilitate investment by Brazilian investors in Mexico and vice versa. Its important to note that we are not seeking to compete with the Mexican market but introduce reciprocity so that investors in both countries can access each others markets more easily. For our part, we provide information on Mexican companies and produce guides on how to invest in the market. We have been discussing with our Mexican counterparts how we can facilitate the settlement of trades and disseminate information on corporate actions. We are also in talks with Colombia for a similar deal. The exchange has a similar identification of beneficial owner that makes it easier to cooperate.
The BEST initiative
The Brazil: Excellence in Securities Transactions (BEST) initiative is rare in bringing together governmental (Banco Central do Brasil and the National Treasury); market participants (CVM, Bovespa, CBLC and the Brazilian Mercantile & Futures Exchange); and an association, (ANBID, the National Association of Investment Banks). This diverse range of institutions has clubbed together to promote Brazils capital markets to foreigners.
The idea kicked off in 2004. A programme of road-shows since has seen senior management from these organisations visit New York, London, Frankfurt, Singapore and Hong Kong over the last three years with attendees at the New York programme increasing from 105 to 194 between 2004 and 2006. The initiative seeks to highlight Brazils advantages for investors: a robust legislative framework, legislation passed over the last two years to lighten the tax burden on foreign investors, watertight trading and securities settlement, strong corporate governance through the Novo Mercado, and the countrys macroeconomic stability and improving debt profile.
Recent trends have been to target European and Asian investors in particular as US investors are already a significant presence in the Brazilian capital markets, representing 58% of foreign investment compared to Europes 21%, for example. The BEST initiative also works on coordination of documentation, in English, of good quality information on how to invest in Brazilian markets. The very high quality of participants working together has really improved the image of the country abroad, says Gilberto Mifano, General Manager of Bovespa and Managing Director of the CBLC. It probably doesnt hurt that the market has gone up some 150% in dollar terms over the last three years.