Segregation and Protection of Investor s Assets in the Brazilian Market

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Geraldine Norman
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1 5th ACSDA International Seminar Cartagena de Indias,, Colombia - November 25-26, 26, 2004 Segregation and Protection of Investor s Assets in the Brazilian Market Margarida Baptista November 24th, 2004

2 Investor Protection: two fundamental and interconnected dimensions Operational reliability: Legal: Business model Minimization of operational risks Routines and controls Contingency plan and back-up facilities Laws and regulations Enforcement of contracts

3 Main international recommendations on Investor Protection ISSA (2000) 8. Legal Infrastructure: Local laws and regulations should ensure that there is segregation of clients assets from the principal assets of their custodian; and no possible claim on client assets in the event of custodian bankruptcy or a similar event. CPSS-IOSCO (2001) 12. Protection of customers securities: Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers securities. It is essential that customers securities be protected against the claims of a custodian s creditors. ( ) Thus, entities that hold securities in custody (or maintain records rds of balances of securities) should reconcile their records regularly to keep them current and accurate.

4 Main international recommendations on Investor Protection G-30 (2003) 15. Advance legal certainty over rights to securities, cash, or collateral: Market participants must be able to determine, with certainty and a reasonable cost and effort, what law defines and governs their rights to securities, cash, or collateral in a clearing and settlement system or other intermediary, iary, what those rights are, and how to perfect and enforce them Assurance of Rights Over Securities, Cash and Collaterals

5 Main international recommendations on Investor Protection ISSA (2000) 2. Technology: core processing: Securities Systems must allow the option of network access on an interactive basis. They should cope with peak capacity without any service degradation, and have sufficient standby capacities acities to recover operations in a reasonably short period within each processing day. CPSS-IOSCO (2001) 11. Operational reliability: Sources of operational risk arising in the clearing and settlement process should be identified and minimised through the development of appropriate systems, controls and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Contingency plans and backup facilities should be established to allow for timely t recovery of operations and completion of the settlement process.

6 Main international recommendations on Investor Protection G-30 (2003) 12. Ensure effective business continuity and disaster recovery planning: All market participants should, and all systemically important institutions must, regularly review, update, and test their business continuity and disaster recovery plans, including evaluation of reliance on third parties, to ensure with reasonable certainty that critical operations will continue with a high level of integrity and sufficient capacity following a disruption or disaster. ster.

7 International Recommendations: how to comply? Segregation of accounts Finality of settlements Reconciliation Contingency plan and site back-up Appropriate Legal Basis

8 Brazilian Legal Framework Regulators and legal instruments Congress - Laws National Monetary Council (CMN) - Resolutions Brazilian Central Bank (BC) Circulars Securities & Exchange Commission (CVM) Instructions CBLC environment By-laws Operational Regulations CBLC: Self-Regulatory Organization Operational Procedures Contracts between CBLC and Clearing Agents, Custodians and Issuers. CBLC circular letters

9 How CBLC protects the investors Segregation of accounts Finality of Settlements Reconciliation Contingency Plan and Backup site

10 ACCOUNT STRUCTURE CBLC Indirect Account Holding System Custodian Custodian s Account Beneficial Owners Accounts Allow the direct communication with final beneficial owners

11 INTERNET Custodian s Code Beneficial Owner s Account Code

12 INTERNET Beneficial Owner s Password

13 Account Structure CBLC Custodian Permits the tracking of property rights in the event of a custodian s s insolvency or bankruptcy Custodian s Account Beneficial Owners Accounts

14 Segregation of collateral accounts in the derivatives market In the Brazilian market risks and collaterals in the derivatives market are segregated and controlled at the level of the beneficial owner In the case of a default by the Clearing Agent and/or the Brokerage House, the positions and respective collateral of the non-defaulting investors are transferred to a non-defaulting Clearing Agent and/or Brokerage House

15 Legal Basis Corporate Law governs the legal basis for account segregation and identification of beneficial owners CBLC Regulations determines the segregation of securities posted as collaterals in the derivatives markets and in the securities lending service on the level of the beneficial owner No possible claims on client assets in the event of custodian bankruptcy

16 Furthermore: Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary UNIDROIT initiative on Harmonized Substantive Rules Regarding Securities Held With an Intermediary CBLC: deeply involved in both initiatives

17 How CBLC protects the investors Segregation of accounts Finality of Settlements Reconciliation Contingency Plan and Backup site

18 Finality of Settlements SFI-DVP Settlement in central bank money Legal Framework: National Monetary Council Resolution 2882 Central Bank Circular 3057 Basis: Law /2001 Appropriate legal basis for the finality of payments and delivery of securities in settlement system

19 How CBLC protects the investors Segregation of accounts Finality of Settlements Reconciliation Contingency Plan and Backup site

20 Daily Reconciliation Reconciliation of the number of securities registered under the CBLC s fiduciary ownership in the issuer s book and the number of securities registered at CBLC systems Daily Basis = Issuer s book CBLC Depository Service Legal Basis for Fiduciary Ownership: CVM Instruction 115

21 How CBLC protects the investors Segregation of accounts Finality of Settlements Reconciliation Contingency Plan and Backup site

22 CONTINGENCY PLAN CBLC has a contingency plan that comprises: a series of procedures/routines that must be put in place to ensure the operational resilience of critical operations in an event of a disaster scenario and interruption Back-up facilities, which may be used in the event of flaws in the original system or any other contingencies Regularly reviewed, updated and tested by internal auditing and by the Brazilian Central Bank

23 HOT BACK-UP SITE Time of recovery: 15 minutes Linked to the main site through two fiber optic cables, laid along different routes, allowing real time communication Similar systems Linked to the CBLC s participants by two communication lines, supported by different providers Energy from different sources Determined by Central Bank Circular 3057 and CMN Resolution 2882

National Securities Depository Limited Principles for Financial Market Infrastructure Disclosure

National Securities Depository Limited Principles for Financial Market Infrastructure Disclosure Page 1 of 38 Table of Contents I. Executive Summary... 3 II. Summary of Major Changes since the Last Update