BM&FBOVESPA Derivatives Clearinghouse (Câmara de Derivativos)
Spot, forward, futures, options and swaps contracts are traded at BM&FBOVESPA. They are mostly referred to interest rates, foreign exchange rates, and price and stock indices. Related obligations are settled on T+1, by means of STR, at accounts held at the Banco Central do Brasil. BM&FBOVESPA acts as central counterparty and guarantees the settlement of clearing members’ multilateral net positions. To ensure settlement of transactions, besides mechanisms of protection based on transactional limits and daily margin calls, the clearinghouse maintains three settlement funds. The clearinghouse also registers OTC derivatives, whose settlement can or cannot be guaranteed according to contracting parties’ option. For guaranteed transactions, the clearinghouse also acts as central counterparty.
The clearinghouse operates with two processing centers located in Sao Paulo. The secondary center works in hot standby and, in case of failure of the primary center, operation can be retaken in the secondary center in less than two hours. To communicate with BM&FBOVESPA, participants can use either the BM&FBOVESPA communication network or RSFN. The latter is also used for settling net positions through STR, which is mandatory in this case.
Clearing members1, settling banks and direct settlement participants 2 are the main direct participants. Banks and brokers complying with the requirements set in the system’s regulation – including minimum capital requirement and proof of managerial, organizational and operational capability – can act as clearing member, or as direct settlement participant. To settle its positions, it is mandatory for the non-bank clearing member to maintain an agreement with an institution holding account at the Banco Central do Brasil. The clearinghouse comprises 79 clearing members and 29 direct settlement participants (September, 2009).
In the spot market, DVP is observed. In the derivatives market, the clearinghouse processes daily margin calls, always marking to market the collateral and applying haircut, larger or smaller according to credit and liquidity risk of each asset. The risk monitoring comprises two phases: on the trade day (T), on a real-time basis, based on the net positions of clearing members; on the following days (T+n, with n > 0), on a gross basis, i.e., risk is managed client by client.
Cash deposit, pledge of high-liquidity assets – specially federal government securities –, stocks of the theoretical portfolio of Ibovespa (BM&FBOVESPA Index), certificates of bank deposits, certificates of gold posted in custody at BM&FBOVESPA, among others, are accepted for margin calls, either initial or additional. Normally, the margin call is met on T+1, but the clearinghouse has, under its regulation, the right to call additional intraday margin if, and when, it judges necessary. BM&FBOVESPA also sets limits on open positions and prices oscillation to manage its liquidity risks exposure.
To assess its risk exposure, the clearinghouse:
· analyzes the contracts as risk primitive factors
· establishes a set of stress sceneries for each risk factor
· calculates the risk for different sets of risk factors;
· chooses the worst combination
In case of default, i.e. when a collateral call is not met or a daily adjustment is not paid, the defaulting participant's positions are closed. If, after contracts are cleared, net debt position is observed, the system will use resources from different settlement funds, which are formed with contributions made by brokers, clearing members and BM&FBOVESPA itself, and, as a last resource, BM&FBOVESPA's assets can be used.
1Typically a broker settling transactions either on behalf of its own or on behalf of clients.
2A clearing member that settles its own transactions only, or transactions relating to some special investors.