Brazilian exchange BM&FBovespa began operations at its new clearinghouse last week.
By combining four separate clearing houses the exchange group has created a single platform for clearing exchange-traded and OTC derivatives, spot FX, equities, corporate bonds and federal government bonds.
The new clearinghouse will use a Closeout Risk Evaluation (Core) risk management system and help make Brazil’s financial markets more robust and competitive, says BM&FBovespa.
“Sometimes the market goes for several years without any changes. In this case we’ll leap forward several years in a single day,” says Edemir Pinto, BM&FBovespa CEO.
“The single clearinghouse and Core represent a revolution in modernity, security and efficiency in central counterparty and risk management services. As was the case with the Brazilian Payment System (SPB), the market will be divided into before and after the new clearinghouse and Core,” adds Pinto.
Technology provider Cinnober, which supplies BM&FBovespa’s clearing system, says that the Core system proposes the optimal way to liquidate a portfolio and estimates the worst potential cash flow scenario, as opposed to more traditional models which primarily aim at closing a defaulted portfolio as quickly as possible.
BM&FBovespa reportedly expects the Core system to be of interest to other CCPs in the future and could look to license out the technology.
The first phase of the Project for the Integration of the Clearinghouses (IPN) is migration of the financial and commodity derivatives markets to the new clearinghouse. Derivatives were chosen to be the first to migrate because they are seen as the least interdependent. Unlike many other countries, the majority of inter-dealer derivatives trading in Brazil occurs on exchange.
After the migration of the other markets is concluded, the exchange will have brought together into its new clearinghouse the registration, position control, settlement and risk management processes of the trades executed in its several market segments.
As one source in Sao Paulo explains, since the merger between Bovespa and BM&F in 2008 the exchange has been managing four separate sets of rules and procedures, four separate risk management systems, four collateral pools that do not communicate with each other and four distinct IT environments that require constant maintenance.
By integrating these post-trade structures the exchange can now offer a number of benefits. For example, the CCP will offer a new margin calculation model that will allow risk to be offset across different asset classes and provide new capital efficiencies to help meet intraday liquidity requirements.
The IPN actually began in 2010 with the publication of initial studies on the project. Since then more than 300 professionals from several areas of the exchange and several suppliers have been working full time on the project.
According to Cícero Vieira, BM&FBovespa’s COO, “this pioneering project will result in one of the most secure and sophisticated clearing systems in the world. The new clearinghouse will reduce the market’s back-office costs and make trade settlement and the allocation of collateral more efficient.
“It will also bring greater flexibility and reduce time frames for the launch of new products. The new technological infrastructure that has been installed will support growing volumes in Brazil’s financial and capital markets for the next 20 years.”