Spot, forward, futures, options and swaps contracts are traded in BM&FBOVESPA. The main contracts are referenced to interest rates, exchange rates, price indices, and stock market indexes. The financial obligations related to these contracts are settled through the BM&FBOVESPA Clearinghouse, operated by BM&FBOVESPA. This clearing is a deferred netting system (DNS), with settlement occurring in D+1 through the STR using bank reserve accounts, and the BM&FBOVESPA Clearinghouse acting as central counterparty.
The direct participants of the BM&FBOVESPA Clearinghouse are clearing members1, participants with direct settlement (PLD)2 and participants of special liquidation (PLE)3 . Banks and brokerages that meet the requirements established in the system rules (foremost among them the minimum capital requirement and the need of evidences of managerial, organizational and operational capacity) can act as clearing members and participants with direct settlement.
The chain of responsibilities specifies the relationship between the various participants regarding the settlement of financial obligations. Thus, each broker is responsible for the positions of its end customers, each clearing member is responsible for its positions and positions of the brokers and others related to it, as well as positions of end customers that operate directly with it. The BM&FBOVESPA Clearinghouse is responsible for the consolidated positions of clearing members and PLDs, that is, mitigate the settlement risk among the direct participants of the clearing.
The clearinghouse also records derivative transactions conducted in the over-the-counter market, leaving it to the parties to decide whether to use the clearing as a central counterparty (CCP) or not. If they do not opt for the use of CCP services, the transactions are settled bilaterally by the parties, with or without the intermediation of the clearing.
To ensure the settlement of the transactions, besides the use of operational limits and intraday margin calls, the clearinghouse also has three settlement funds. When there is physical delivery, the principle of delivery versus payment is guaranteed, that is, the delivery of the goods or assets is subject to the effective payment. The clearinghouse has the operational capacity to carry out intraday margin calls, always using marked-to-market prices and applying a discount proportional to the credit and liquidity risk of each asset. The clearinghouse calculates the risk of the transactions in two steps: i) on the same day the transaction was done (T), in real time, based on net positions of the clearing members, ii) within days of contracting (T + n , with n > 0) in gross basis, that is, the risk is managed client to client.
A margin call, either initial or additional, is met mainly using government securities as collateral, but the clearing also accepts cash deposit, letters of credit, stocks, certificates of deposit, and gold certificates held in custody at BM&FBOVESPA itself. Since the Resolution 3,915 of October 20, 2010, it is prohibited for non-resident participants to deposit guarantees from third parties, such as letters of credit. Normally, a margin call is answered in D+1, but the clearing has, by regulation, the prerogative to call additional intraday margin, if and when deemed necessary. Also, in order to manage its exposure to settlement risk, BM&FBOVESPA fixes limits of open positions and price fluctuation.
The risk management systems are developed internally. To measure the risk of each contract, the clearing breaks it down into primitive risk factors. Measured risks are aggregated on the concept of portfolio, and the observed correlations between the prices of various financial assets contribute to reduce collateral requirements while keeping the same level of protection. Also, stress scenarios are used to calculate the necessity of collateral.
The process of evaluating the risk associated with a certain portfolio comprises four steps:
· Breakdown of the contract’s primitive risk factors;
· Establishment of a set of stress scenarios for each risk factor;
· Calculation of the risk for various combinations of factors, and
· Choose the worst combination.
In case of default, triggered by the non-compliance with margin call or by the default on variation margin required by BM&FBOVESPA, the clearinghouse closes out the participant's positions. If there is a net loss, the clearinghouse uses the collateral deposited by the participant. If this collateral proves insufficient to cover the participant’s loss, the clearinghouse uses other available resources in different funds established for that purpose as well as resources of brokers, clearing members and the clearing itself. If, nonetheless, the resources are insufficient, the clearinghouse may require new capital contribution to its participants and, ultimately, use its own capital.