Management Report 2010

Transcription

1 Management Report 2010

2 Executive Summary Financial Information Operating Income Operating Profit Net Profit EBITDA* Assets Liabilities Shareholders Equity Operating Margin Net Margin EBITDA Margin ROE ROA 51% 40% 55% 38% 29% 40% 49% 45% 32% 26% 7% 21% 38% 12% 11% 28% 34% 44% 19% 16% 43% 39% 49% 23% 20% COP$ Millions P&L (COP$ Millions) Balance (COP$ Millions) $ $ $ $ $ $ $ $ Operating Revenues Operating Profits Net Profits EBITDA* $ $ $ $ $ $ $ Assets Liabilities Shareholders' Equity Multiples EV / EBITDA P / E P / BV EV / VENTAS 13 Revenues Distribution 3% 13% 6% 0% 53% 24% 3% 19% 13% 1% 42% 22% 3% 18% 7% 8% 2% 35% 27% Equity Fixed Income - (Transc & OTC) Derivatives Terminals Market Data - SAE Listing Services Education & Others 2% 20% 6% 6% 4% 34% 27% 3% 20% 6% 6% 4% 27% 34%

3 Markets Market Capitalization (COP$ Billions) Derivatives (COP$ Billions) $ 450 $ 60 $ 400 $ $ $ 300 $ $ $ 200 $ 150 $ 100 $ 50 $ $ 30 $ 20 $ $ Includes Futures: TES, TRM, Shares and NDF's Equity Market (COP$ Billions) Foreign Currency (USD$ Billions) $ 60 $ 50 $ 40 $ 30 $ 20 0, , ,58 0, , ,80 0,70 0,60 0,50 0,40 0,30 $ 300 $ 250 $ 200 $ 150 $ 100 0, , , , , ,5 0,4 0,4 0,3 0,3 0,2 0,2 $ 10 0,20 0,10 $ 50 0,1 0,1 $ ,00 $ ,0 Traded Volume (COP Billions) Number of Transactions (Millions) Traded Volume (USD Billions) *Through the affiliate: SET-FX Number of Transactions (Millions) BVC Indices Evolution Fixed Income (COP$ Billions) $ $ $ $ , ,20 1,05 1, , ,60 1, Index COLCAP IGBC COL20 % Return % 30% 28% $ $ 900 $ 600 $ 300 $ Traded Volume (COP Billions) Number of Transactions (Millions) 0,80 0,40 0, jan-10 feb-10 *Base 100 January 2010 mar-10 mar-10 apr-10 may-10 jun-10 jun-10 aug-10 sep-10 IGBC COLCAP COL20 oct-10 nov-10 nov-10 dec-10

4 BVC Stock Evolution Behavior of BVC share was outstanding both, regarding appreciation, and liquidity increase. At year closing the price per share amounted to COP$43, which meant a 46% increase with regard to former year s closing. Annual trades volume reached COP $ million with a daily average of COP $1.869 million and monthly average of COP $ million. The turnover growth with regard to 2009 was 74%. Performance in terms of volume allowed it to be classified as a high liquidity share during the year. $ $ $ $ $ $ $ $ $ $ $ 0 29, jan-10 33, feb-10 $ 50 45,2 39,7 42,6 43,0 $ 45 38,2 36,9 34,3 35,8 36,8 38,1 $ mar apr may jun-10 jul-10 aug-10 Traded Volume (COP Millions) At year end the Company reported a market capitalization of COP $ million, which represents a 43% annual increase sep oct nov dec-10 BVC Stock Price $ 35 $ 30 $ 25 $ 20 $ 15 $ 10 $ 5 $ 0 BVC Shareholders Distribution.Dic No. of Shareholders % Shareholders % Shares Less than 1% ,5% 30,4% Between 1% - 5% 24 1,3% 48,3% Between 5% - 10% 3 0,2% 21,3% Total ,0% 100,0% *Data as of December 31, 2010 As statutorily provided (Law 510/1999), no shareholder may be beneficial owner of more than 10% of BVC s outstanding shares. Foreign funds equity interest in BVC increased by more than 6%, passing from 16% in 2009 to 22.5%. INVESTMENT FUNDS: 1,1% UNIVERSITIES: 6,7% OTHER COMPANIES: 14,7% FOREIGN INVESTMENT FUNDS: 22,5% INDIVIDUALS: 6,6% PENSION FUNDS: 17,5% BROKERAGE FIRMS: 30,9% $ $ $ $ $ $ $ $ $ During the year the Exchange took care of foreign fund investors request from the United States, the United Kingdom, Canada Singapore and the Middle East, on an ongoing basis, which evidences the interest of the international investor community in BVC as a Colombian securities market benchmark, and as an issuer. $ 0 jan-10 feb-10 mar-10 apr-10 may-10 jun-10 jul-10 aug-10 sep-10 oct-10 nov-10 dec-10 In the last year, the Company increased the number of shareholders by more than 600, reaching a historical figure of In accordance with its interest on the total shares outstanding, the holders distribution is the following: As part of the Company s promotion management, non deal road shows were made in New York and London, with active participation in panels in those cities. The purpose was to show the investment opportunities offered by the Colombian market as well as introducing the Integrated Market with Chile and Peru, (MILA), and the new technological products and services of the Exchange.

5 Management Report 2010

6 BVC S Administration BOARD OF DIRECTORS Members not considered independent Rafael Aparicio Escallón (Chairman of the Board) Néstor Hincapie Vargas Diego Jiménez Posada Emilio Echavarría Soto Rodrigo Jaramillo Correa Germán Salazar Castro Independent members Sergio Clavijo Vergara Carlos Eduardo Jaimes Jaimes Roberto Junguito Bonnet Santiago Montenegro Trujillo Javier Jaramillo Velásquez Bernardo Guzmán Reyes Juan Camilo Vallejo Arango 2 BVC S Administration PRESIDENT OF THE STOCK EXCHANGE Juan Pablo Córdoba Garcés DIRECTIVE TEAM Alberto Velandia Rodríguez - Legal Vicepresident Ángela Valderrama Guzmán - Marketing and Products Vicepresident María José Ramírez Botero - Commercial and Issuers Vicepresident Jitendra Puri - IT Vicepresident AUDITOR Mauricio Bejarano Herrán EXTERNAL AUDITOR Delloitte & Touche Ltda.

7 Letter From the BVC President to the Shareholders Dear Shareholders: I am pleased to present BVC corporate report for 2010, an outstanding year due to the strategic progress of the Company, the notorious growth of the Colombian capitals market, and the outstanding financial results of the Exchange in the midst of contrasts between the international and domestic economic outlook. During 2010 the global economy developed despite enormous turbulence resulting from instability in the Greek and Portuguese markets, accompanied by periods of great uncertainty that in the end directed the global capital flow towards emerging economies. Consequently, Colombia was one of the main destinations for foreign investment, which made the resources of the portfolio return to historical levels. These market conditions also benefited from regulatory changes made by the National Government which furthermore, at the end of the year promoted Equity Market appreciation and considerably increased its liquidity. As a result of this behavior, 2010 was an unprecedented year in matters of equity trades reaching the sum of COP $53,51 billion for transactions of this type of assets, an amount which was also driven by the entry of new issuers such as Canacol, Conconcreto and Davivienda, as well as by high trading of stock certificates by the oil company Pacific Rubiales and Ecopetrol, among others. On the other hand, the expansive monetary policy allowed low interest rates to be maintained and this encouraged for the second consecutive year the placing of corporate debt, leading to a record year for the Fixed Income segment in matters of primary issues. Issuers placed securities for COP $13,8 billion. This year was characterized by a trend of peso appreciation vis-à-vis the Dollar, in line with what occurred in emerging markets. This led the Central Bank to resume interventions in the Exchange market, resulting in a degree of volatility. The traded turnover grew 4% and, on average, USD $1.250 million dollars a day were traded. Towards the end of 2010 we were able to move the NDF s tradings towards the TRM Futures market which, together with the market creators program for the TES Futures, generated greater dynamics for our standardized Derivatives market. We closed the year with a daily average of contracts which is equivalent to a nominal value of approximately COP $ billion. This volume amounted to contracts on average in December. In terms of strategy during the last twelve months, the Exchange focused its efforts on building the basis of a company with a global perspective, which in turn benefited from momentum in the emerging economies, in particular those of Latin America. For this reason, action was concentrated on the creation of the first Latin American Integrated Market (MILA, its initials in Spanish), which seeks to unite the Stock Exchange markets of Lima and the Trade Market of Letter From the BVC President to the Shareholders 3

8 4 Letter From the BVC President to the Shareholders Santiago, with that of Colombia, thereby strengthening the regional presence of the combined markets, together with their relations throughout the hemisphere. With this focus, and after twelve months of dedicated work with supervisors, the deposits and the stock exchanges of the three countries became a viable entity as the largest equity market operation of the region due to the number of issuers, - the second most important according to listed capitalization and the third most relevant with respect to transactions turnover. At present, the Company is working on starting trading operations as soon as possible. We are aware of the fact that this project is very promising and what is most encouraging is the enthusiasm with which the Brokers and Issuers of the three nations have supported the initiative. Furthermore and given the strategic similarities of the Colombian and Peruvian markets, we wished to explore the benefits of corporate integration with the Lima Stock Exchange, which in turn will lead to faster growth and better market penetration, given the economies of scale, which in itself will provide business growth in relatively small local markets. This project which we are submitting for your consideration seeks to strengthen the two Exchanges with a single strategy to benefit from the human talent and knowledge of each organization. International experience shows the significant impact of such actions and confirms the position of the Stock Exchange as a leader in the region. Finally, 2010 has been a financially positive year for BVC, increasing net profits by 29%, reaching COP $ million, and this can largely be attributed to the diversification of income and to the strong presence of the Company throughout the market value chain. The closing of this business year has reaffirmed our commitment to maintaining a permanent equilibrium and control of administrative expenses (1% growth), as well as maintaining efficient investment and products profitability. The most important contributors to our financial performance were the Equity Market (34%), the Fixed Income Market (26%), the listing and maintenance of securities (15%,) and 25% from new products and services within which the Derivatives Market contributed around 3% of the revenues. For the coming year, the BVC will progress with determination towards its corporate goal of becoming a World Class Stock Exchange, exploiting its management capacity to the full in order to consolidate and benefit from the results of those projects that are currently under way. Finally, I would like to thank you the Shareholders, the Board of Directors and all of BVC s collaborators, for the good annual results which are the fruit of the trust that each one of you has placed in this organization and in the projects that support its future development. Thank you very much, Juan Pablo Córdoba Garcés, President

9 Index BVC S ADMINISTRATION LETTER FROM THE BVC PRESIDENT TO THE SHAREHOLDERS BOLSA DE VALORES DE COLOMBIA AND ITS VISION OF THE FUTURE MARKET DEVELOPMENT International Environment National Environment Markets Fixed Income Market Equity Market Standardized Derivatives Market New Products Issuers Management Commercial Management MARKET DEVELOPMENT Regulatory Developments Technological Evolution New Products Market Data Colombian Capital Corporate Governace Securities Market Promotion CORPORATE GOVERNANCE Report on Corporate Governance Practices The Board of Directors Adoption of Country Code Recommendations BVC s Governance Structure Shareholders Rights Basic activities of the Exchange s Administration and Management Stakeholders Good Governance Code Reports THE BUSINESS Management Measurement Through the Balanced Score Card (BSC) Investments And Strategic Alliances Permanent Investments Strategic Alliances THE COMPANY Human Capital Internal Control Management Independent evaluation Control System (ICS) SOCIAL RESPONSIBILITY GLOSARY Index

10 Bolsa de Valores de Colombia and its Vision of the Future.

11 Profile of the Company The Colombian Stock Exchange BVC- is the main trading forum of the country representing more than half of the local capitals market volume and it is consolidated as the fourth most important capital market of Latin America. The Company is listed in the Exchange since 2007 and at present it has over shareholders, of whom 22,5% are foreign. In 2010 it was designated the number 24 company in the list of Best Enterprises to work with in Colombia, according to the Great Place To Work Institute. In this year it renewed its Processes Quality and Standardization Certificates according to the worldwide standard ISO 9001, version 2000, and obtained acknowledgement of Excellency in Quality Management awarded by ICONTEC. At present, it is the administrator of trading platforms in Fixed Income, Equities and Standardized Derivatives. In addition, it created the first Commodities in energy in the region -DERIVEX, with a local markets expert firm XM. The Exchange continues investing in all the value chain of the capitals market and is trying to expand its operation to Peru, through Corporate Integration of the Exchanges. The BVC is an active member of the FIAB and the WFE and, together with the Exchange of Santiago and of Lima is the leader of equity market integration, into what has been called Latin American Integrated Market, MILA. 7 Bolsa de Valores de Colombia and its Vision of the Future.

12 Strategic Planning of the Company 2010 Strategy 8 Bolsa de Valores de Colombia and its Vision of the Future. The Exchange incorporated new Strategic Planning challenges with a new and more ample vision of the businesses future, in line with the internationalization purposes of the securities market, the value chain development, and the objective of being an admired Company with loyal and personal relations with its clients. Vision For 2015 the BVC will be one of the three main trading fórum in Latin America, maintaining its leadership within domestic scope, and being acknowledged by enterprises as a real option to finance their growth and by its shareholders as a profitable company. Mission To contribute to the growth and development of the capitals market, positioning the Exchange and its affiliates as a capital/financial center in the region to provide overall solutions. The Exchange is reliable, transparent, efficient, and admired for its innovation capabilities, connection with its clients, and learning ability. In the latest years, the Exchange has concentrated its strategic efforts in strengthening the basis for its growth, and in deepening the local capitals market. To achieve this, it undertook the task of completing the market infrastructure, diversifying the products portfolio and adjusting the regulatory framework. Concurrently, it has been seeking to increase the number of participants, developing liquidity mechanisms, and strengthening its position in the market. Consequently, in 2010 the internationalization strategies that were being developed since 2008 were achieved and foreign investment continued to be attracted. The strategic progress achieved in the year allowed progressing at a higher speed seeking efficiency, diversification of income, creation of competitive advantages, and insertion into global markets. First of all, the Exchange focused its efforts in leading the creation of the first equity interconnection market

13 in the region, called Latin American Integrated Market (MILA). It will be the first Equity Market in the region due to the number of issuers; it will rank second in market capitalization size; and third in trading volume. Likewise, MILA will offer a complete universe of issuers, including the mining, energy, financial and industrial sectors. All these conditions make of MILA a global and extended more liquid and diversified market, position that benefits development of the participating exchanges. The MILA effect made a real approach between the nations and marked an important milestone, going beyond the securities market. Regulators and authorities of the three countries showed that it is possible to work jointly in order to generate regional development and growth. The new projected regulations for the integration allowed listing of securities in foreign quoting systems through integration agreements entered into with exchanges, and authorized the creation of accounts without disaggregating the beneficial owner in the clearing houses. Likewise, in 2010 the Exchange strengthened its foreign securities trading. The year ended with two foreign issuers listed in the National Registry of Securities and Issuers (RNVE) and at the BVC, the securities of which had an outstanding performance, and fostered liquidity in the main equity market. Likewise, on December 15, the Colombian Global Market (CGM) was inaugurated, making it possible for foreign issuers to trade foreign assets issued by domestic or foreign issuers under the regulation of a foreign country, and which do not require listing at the RNVE. In this latter market, every issuer has the sponsorship of a SCB, and receives support to develop the regulatory framework, harmonizing local standards with international standards. In the same direction, the BVC added to its strategic achievement of the year, the determination of the conditions that will allow the corporate merger between the BVC and the Lima Stock Exchange (BVL). The Memorandum of Understanding containing the agreement was executed on January 19, This merger, which is the first one of this type in Latin Bolsa de Valores de Colombia and its Vision of the Future. 9

14 10 Bolsa de Valores de Colombia and its Vision of the Future. America, creates value for the shareholders, leverages the growth of the companies, and brings forth multiple merits and advantages for the market and their participants. Among other, a better position will be achieved with greater international relevance; the MILA market will be strengthened; liquidity will be increased; a diversified market will be consolidated; and the bonds between the two countries will be enhanced. The new company will be able to consolidate efficiently and to improve competitiveness in the joint market, giving room for synergies at all levels; technology, innovation, cost optimization; transfer of know-how, and corporate governance, among others, are included in such benefits. Supplementing the aforesaid progress, in order to materially foster foreign investment growth, the Exchange promoted the issuance of regulations that streamline the General Regime of Foreign Capital Investments in Colombia and the Investments of Colombian Capital Abroad. The new regulations will facilitate access to the portfolio, making investments feasible. On the other hand, regarding its internal strengthening, and in order to continue improving relations with clients, in 2010 the Stock Exchange continued with the transformation towards a customer-centered company. This process created differential competitive advantages, ensuring that the entire organization will follow the necessary steps to generate a unique and positive experience for the customers, yielding them value and securing their satisfaction and loyalty. The processes map and the organzation chart of the Company was redesigned with specialized areas. Concurrrently, we began to incorporate high performance interaction as a management culture, and the foundations were established to implement businessoriented marketing. In 2011 the main objective will be to strengthen the Company s internationalization, consolidating the merger with BVL, as well as commissioning the MILA. Likewise, the Exchange shall continue with the customers approach process, promoting a suitable organizational culture, strengthening processes and developing human capital in the Company. Evolution of the Markets In 2010 The evolution of the BVC markets corroborated in 2010 the internationalization strategy and the offer of innovation value proposals, as well as the correct direction to expand the business, grow the market, and generate value for the shareholders of the Company. The market traded COP $2.274 billion during the year, 5,97% above the COP $2.146 billion of the previous year. This behavior was materially evidenced in the Equity Market where the international context, the consolidation of new foreign stock listing, such as Pacific Rubiales and Canacol, and the leadership of the BVC to drive the equity markets integration project with Peru and Chile (MILA), aligned the conditions to yield a daily average volume of COP $ million, and a total annual turnover of COP $53,51 billion. This volume is the greatest historical traded amount in the equity market, and meant a 36.37% increase over the volume transacted in the preceding year.

15 On the other hand, BVC s Fixed Income market grew 5% and mobilized funds for COP $2.214 billion, within a low interest rate context, benefiting both, the investors, and the issuers. Although the TES securities continued being the most transacted asset with a 76.5% market share, trading of private debt increased by 14% with total transactions for COP $163 billion. The primary debt issue exceeded the volume placed in 2009 by 2.9%; 35 issuers raised funds amounting to COP $13,8 billion, with an average demand of 200% per issue. In the Derivatives Market there was a 1.830% growth in the traded volume, mobilizing operations for an amount of COP $25,15 billion. The promotion of the existing products, the launching of new products and the development of an intensive training plan for traders supported this growth. During 2010 the TES Futures Program for Market Creators was implemented; futures were launched on ECOPETROL s individual shares and PFBCOLOM s shares, and an exchange rate futures minicontract was entered into, which facilitated the NDF s market migration to the standardized derivatives market. Furthermore, during the year the growth of the market was benefited with the launching of new SAE services for back office processes and information dissemination. The SAE services supplement large electronic platforms, through electronic access facilities with the same technical standards, and facilitate reaching the trades infrastructure, allowing automatic trading through computational algorithms, among other. Lastly, but not being less important, we highlight the new scope of the educational programs offered by the Exchange; historical goals were achieved in the Bolsa Millonaria contest and in the equity and foreign currency trading contests; new agreements were entered into with universities; and two new BVC Points were created, whereby the market, investment, and commercial offers of the SCBs are promoted. Bolsa de Valores de Colombia and its Vision of the Future. 11

16 Chapter 1 Market Development

17 International Environment After suffering the greatest economic activity drop of the last eight decades ( ), there was a 5% global economic growth in 2010 according to the IMF figures, slightly above its long-term trend. Notwithstanding, recovery was not homogeneous; in high-income countries, where the effects of the 2008 crisis were severe and straightforward, there were growth rates under those of developing countries. The divergence of the macroeconomic cycles between regions brought forth concern about the recovery sustainability and the capacity of certain nations to finance their ever increasing fiscal deficits. As a consequence of this uncertainty, 13 15,0 10,0 5,0 Growth from one quarter to another, by regions (%) Market Development 0,0-5,0-10,0 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 World Developed Economies Emerging Markets Source: International Monetary Fund

18 the level of the agent s risk aversion changed abruptly throughout the years, provoking high volatility episodes in the price of financial assets, although in general such assets reflected better economic conditions Quarterly change in actual gross investment, by economy type Since there was no direct spreading of the crisis, the financial systems in emerging markets contributed to a fast recovery of private demand. In turn, the better perspective of these nations attracted the necessary foreign investment flows in order for their economies to grow above 7% on average 1. The foreign investment flow and the good economic performance of these countries had a positive effect on the value of their equity markets and on the price of commodities, mainly pulled by Chinese demand. The MSCI-EM index, which replicates the equity behavior of emerging markets grew 16,4% 2 and the Commodities Index CRY grew 17,4% in Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Developed Economies Emerging Markets Quarterly change of private consumption, by economy type (Annual %) Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Source: International Monetary Fund Developed Economies y Emerging Markets 14 Developed economies also experienced slight recovery of private demand, although more moderately. Their average economic growth was 3%. Market Development 20% 10% 0% -10% -20% -30% Equity and Commodities Indices Behavior Commodities Emergentes EEUU Mundo Japón Europa Post-Crisis Return 2010 return 1 Source: International Monetary Fund, average adjusted by PPP. 2 Source MSCI-BARRA and Bloomberg, BVC estimates.

19 jan - 08 mar - 08 may - 08 jul - 08 Source: Bloomberg and International Monetary Fund US Labor Market and Housing Prices Behavior Case Shiller Housing Prices Index sep - 08 nov - 08 jan - 09 mar - 09 may - 09 jul - 09 sep - 09 nov- 09 jan- 10 mar- 10 may- 10 Unemployment jul- 10 sep- 10 Employment Growth in Developed Economies (3 Months Average %) nov m1 2008m2 2008m3 2008m4 2008m5 2008m6 2008m7 2008m8 2008m9 2008m m m m1 2009m2 2009m3 2009m4 2009m5 2009m6 2009m7 2009m8 2009m9 2009m m m m1 2010m2 2010m3 2010m4 2010m5 2010m6 2010m7 2010m8 2010m9 2010m m11 15 Source: Bloomberg and International Monetary Fund Indeed, the absence of positive signals in the real estate market, the weakness of the financial sector and the slow recovery of the labor market, in particular in the United States, did not allow a greater reactivation of private demand. To face the weakness of the financial and private sectors, most of the administrations of developed economies decided to extend fiscal and monetary encouragement that had began at the end of 2008 and at the beginning of Hence, the fiscal deficit of these nations and their debt ratio with regard to the GDP continued growing. Market Development

20 Public Debt as GDP % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% EEUU EUROZONE Source: Bloomberg 16 Market Development Public debt as GDP percentage in the United States, which was historically located around 40%, in 2010 closed at 65%, with projections of levels nearby 80% for In the Euro Zone, this variable passed from 70% to 80%, although for many member countries it exceeded 100%. These circumstances brought concern to the market and to the credit rating firms about the capacity of developed nations to repay their debt, mainly in the Euro Zone. In April, the Greek debt was rated by Standard & Poor s under the investment grade category and the interest rate for certain maturities increased more than one thousand basic points. Facing the refinancing impossibility at a reasonable cost in the capitals market, Greece received a EUR $ million loan from the IMF. The measure applied by the Fund and the commitment of the European Union to support those nations under difficulties were able to temporarily revert the drop of the Euro value and the increase in agents risk aversion in the market. Notwithstanding, in August Ireland s and Portugal s indebtedness costs drastically increased. In mid- November, before the European Union granted a loan to Ireland to recapitalize its financial system, the indebtedness cost of Spain and Italy had already caught up such situation. Things began to get back to normal when the members of the area agreed to create a stability fund for a value of around one billion euros.

21 Equity and Euro Market Risk Aversion Behavior Greece Rescue Ireland Rescue 1,50 1,45 1, , , ,25 1,20 0 1,15 VIX Index EURO Greece Rescue Ireland Rescue / / / / / / / / / / / / / / / / / / / / / / / / / /2011 CDS Behavior by Country (Basic Points) Source: Bloomberg Greece Ireland Portugal Spain Italy In the United States, the indebtedness increase generated an ample discussion within the local political scope, particularly after the Republican Party attained majority in the Parliamentary elections at the end of the year. However, it was the decision of the Federal Reserve of increasing its balance through the purchase of Treasuries for a value of USD $ million, measure which was called QE2, which most impacted the local and international capitals market. The FED decision not only affected the Treasuries market which experienced high volatility and a curve ascending increase, but that also resulted in a dollar value loss visà-vis most of the world currencies. Likewise, it generated a lesser funding cost in dollars that encouraged the use of carry strategies and the purchase of risky assets, favoring the equity market and the credit margins 3. For this reason, the equity market in the United States had an outstanding performance; the SPX grew 12,8% with a report of better profits than expected by the majority of the companies listed in the index. The economic recovery is expected to finally consolidate in Notwithstanding, the countries in developed economies must correct their fiscal imbalances, without affecting the private demand recovery, and the emerging 17 Market Development 3 The price of commodities also increased facing the QE2 since they are used by the market as a hedge or speculation instrument to cope with dollar depreciation.

22 Treasuries and Dollar Value Index Behavior 4, ,50 3,00 QE2 Announcement Ireland Sovereign Crisis ,50 2,00 Greece Sovereign Crisis ,50 jan - 10 feb - 10 mar - 10 apr - 10 may - 10 jun - 10 jul - 10 aug - 10 sep - 10 oct - 10 nov - 10 dec years treasury rate Dollar Value Index Source: International Monetary Fund Suplus / Deficit in the current account as % of the world GDP ,5-1 -0,5 0-0,5 1-1,5 economies must control the incipient inflationary booms derived from the full use of productive factors. In the global scope, the nations must coordinate their efforts to correct commercial imbalances and possible tensions derived from divergence in economic cycles between emerging countries and developed countries. 18 Market Development EEUU Oil Exporting Germany + Japan China + Asia Emerging Markets National Environment The same as the rest of the world, in 2010 Colombia evidenced an economic growth exceeding what was expected, and according to Government projections, the actual growth was 4,5%. Monetary and fiscal measures adopted to mitigate the effects of international crisis, which were started in 2009 and extended to 2010, promoted economic activity and permitted a rapid recovery of the private sector trust indicator. In this context of macroeconomic stability, the local financial market had great dynamism and in certain markets there were unprecedented appreciations and activity levels. Source: Bloomberg

23 During the first semester of the year, the monetary measures developed in 2009 were continued. The Central Bank decreased the intervention rate by 50 basic points on April 30, while the growth of the public expense was maintained above the growth of the economy Central Bank Reference Rate (%) Behavior In the second half of the year, the intervention interest rate was kept stable but the fiscal expense share 02-jan mar may jul sep nov jan mar may jul sep nov jan-11 in the economy decreased, being consistent with the commitments established in the midterm fiscal framework. When the new Administration took office Source: Central Bank in August, it focused on carrying out an ambitious legislative agenda, which gave outstanding results such as the approval in the first round, of the fiscal and royalties sustainability act, (constitutional amendment) and the promotion of the 4-year economic plan, the main axes of which are the encouragement of the housing, transportation, farming, science and technology sectors. As opposed to what happened in other nations of the world, the monetary and fiscal promotion was accomplished without adversely affecting the Central Bank s inflation goal, or the macroeconomic stability. During most part of the year total inflation was maintained in the inferior limit of the band established by the Central Bank and only as of October, time when the effects of winter began to affect the food prices-, it began to show a bullish trend. On the fiscal side, according to preliminary information, the Government was able to comply with the COP $70 billion goal of tax collection and the financing plan was completed without altering the funding cost of all other economy agents. Goverment Consumption (Annual Percent change) 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q Q Q Q Q Q Q Source: Fedesarrollo y DANE (National Statistics Department) 19 Market Development

24 Inflation Bahavior During ,50% 4,00% 1,50% 3,00% 1,50% 2,00% 1,50% 1,00% January February March April May June July August September October November December Annual Inflation Lower Range Higher Range Source: DANE In this favorable macroeconomic context, trust and demand of the private sector increased substantially. The greatest dynamism in households spending and investment was in turn reflected in the growth of consumption, commercial and mortgage funds. In the Fixed Income market, the TES curve displaced downwards and considerably decreased the upturn with which it began in Decrease in the funding cost encouraged private debt placement, which reached 20 Market Development Direct foreign investment amounted to USD $9.485 million, with an 84% share in the petroleum and mining sectors. On the other hand, portfolio foreign investment, which had been negative in 2009, increased to USD $2.349 million. External trust in Colombian economy was also reflected in the external indebtedness cost decrease. The credit margin of the 5-year Colombian debt decreased 21%, reaching 112 basic points. Good performance of local economy fostered markets performance. The Equity Market had an outstanding performance. The main equity indexes of the country reached unprecedented values with growth above the main indexes of the world and of the region. Interest Rate Behavoir 9,00% 8,00% 7,00% 6,00% 5,00% 4,00% 3,00% 2,00% TES2014 IBR Overnight DTF-90 Tasa Banrep Source: Central Bank

25 COP $13,8 billion. For the end of the year, the greatest inflation expectations forced a slight correction in the discount rates of instruments issued by the Government, especially in the long segment of the yield s curve. In the Exchange Market, the Colombian Peso (COP) evidenced a 6,92% appreciation. The greater entry of external flows and the dollar global trend encouraged such behavior. As a fast response to peso appreciation, the issuer purchased USD $3.060 million throughout the year, of which USD $420 million were obtained through direct auction. In the meantime the Government adopted a series of tax and re-organization measures in its funding strategy for 2010 and It is expected that in 2011 the Government will develop an aggressive investment program to offset the negative effects caused by La Niña phenomenon in the country s % nov-08 feb-09 may-09 aug-09 nov-09 feb-10 may-10 aug-10 nov-10 Source: Fedesarrollo 12,00 10,00 8,00 6,00 4,00 2,00 0,00-2,00-4,00 Source: Bloomberg Confidence Indicators (Fedesarrollo) Household Consumption Consumer Confidence Commerce Confidence Industry Confidence Household s Consumption Behavior and Investment Q Q Q Q Q Q Q Gross Capital Formation 21 Loans Annual Growth Private Debt Raised (COP Billions) 60% 50% 40% 30% 20% 10% 0% -10% Market Development feb-06 apr-06 jun-06 aug-06 oct-06 dec-06 feb-07 apr-07 jun-07 aug-07 oct-07 dec-07 feb-08 apr-08 jun-08 aug-08 oct-08 dec-08 feb-09 apr-09 jun-09 aug-09 oct-09 dec-09 feb-10 apr-10 jun-10 ago-10 oct-10 Total Commercial Consumption Housing Source: Financial Superintendence and BVC.

26 Curve Inclination (Basic Points) Q Q Q Q Source: Bloomberg, curved generated through logarithmic interpolation. TES Yield Curve Behavior in Market Development Source: Bloomberg, curved generated through logarithmic interpolation. T T T T infrastructure and in the general economy. On the monetary side, the Central Bank will possibly increase the intervention rate in the second semester, gradually neutralizing the expansive monetary policy implemented in the last two years. With regard to the external sector, it is expected that the global economic recovery will have a positive impact on the price of commodities and on the country s exchange terms. With this in mind, it is particularly relevant for

27 Behavior of the equity indices in local currency (standardized series, base 01/01/2010) 150,00 140,00 130,00 120,00 110,00 100,00 90,00 80,00 01/ / / / / / / / / / / / / / / / / / / / / / / / / / /2010 COLCAP Bovespa IPC-Mexico Standard and Poor s FTSE NIkkei 225 Source: Bloomberg Foreign currency return vis-á-vis USD in 2010 Source: Bloomberg Suize Frank Sterline Pound Yen Euro Candian Dollar Dollar Index Peruvian Peso Chilian Peso Real Colombian peso -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 20,00% 23 Market Development the Government to continue with the adoption of the fiscal rule, which will allow the country assuring that the mining-energetic boom generates the necessary funds, not only to finance the development plan, but also to obtain the necessary fiscal indicators to recover the investment grade lost during the 90s.

28 Markets Fixed Income Market 0% 10% Trading Distribution 20% 30% 40% 50% 60% 70% 80% 90% 100% In 2010 the fixed income traded volume at the BVC grew 5,34%, reaching COP $2.214,05 billion. This behavior jan-08 mar-08 took place in a year where the interest rate continued jul-08 low and economy performance was above expectations. sep-08 Such economic climate favored both, the issuers, and nov-08 the investors. jan-09 Of all the negotiations carried out throughout the year, the TES continued being the most transacted Fixed Income securities, with a 76,43% share, followed by private debt with 19,04%, and public debt different from TES with 4,53%. mar-09 jul-09 sep-09 nov-09 jan-10 mar-10 TES Market jul-10 With regard to the previous year, the total TES Market sep value, including transactions effected at the MEC and SEN, decreased 18,41%, reaching COP $3.018,81 billion nov-10 Transactional Listing in The drop took place in the trades volume of the Market Development Fixed Income Market Traded Volume (COP Billions) Source: BVC (jun-dec)

29 TES Volumes per Market (COP Billions) 2.500, , , ,00 500, Source: BVC and Central Bank MEC SEN SEN system, which decreased 40%. In contracts, the BVC increased its transactions volume by 2,12% and its share in this market reached 54,7%. Private Debt In the private debt secondary market, securities were transacted for COP $163,15 billion, which exceeded by 13,96% the amount registered in To this date, this is the largest annual traded volume ever seen at the BVC for such securities. In the primary market, the bullish trend in amounts placed was maintained, showing a 2,83% growth with regard to previous year. The supply of securities in the primary market evidenced an average excess demand through auction of 2,06 times. Of the total issues, 48% of the securities were indexed to the CPI, 12% to the DTF, 8% to the IBR, and the remaining 31% were fixed rate securities. For 2011 it is expected that Fixed Income market maintains the current transaction volumes. In addition, as promoter of the securities market, the BVC will implement a strategy to increase liquidity in the transactional system. The fundamental pillar of this strategy is the development of new products. In addition, the Exchange, in alliance with the National Government, will seek enhancement of the regulatory framework for the existing Fixed Income transactions. 25 Market Development

30 Equity Market Private debt primary market $ ,10 The favorable conditions of the local market, the presence $ ,05 of new issuers, the greater appetite of international investors, as well as the changes in the equity transaction model and the streamlining of the transactions systems accomplished in 2009, materially fostered the increase of Equity Market volumes in COP Millions $ $ $ $ ,00 1,95 1,90 1, ,80 This dynamics was consolidated in the second half of the year with a change in the trend of the monthly amount dealt with, in such a way that during the last quarter a monthly average of COP $4,56 billion was reached. The daily transactions average was COP $ million, representing a 32% increase with regard to Likewise, the total transacted in the year was considered the maximum annual historic figure ever attained, and amounted to COP $37,1 billion, representing a 33,9% increase vis-à-vis the COP$ 27,7 billion transacted in the preceding year. Total Raised Total Demanded Bid to Over Source: BVC The COLCAP index started with a value of units, and ended the year in 1.824; the appreciation evidenced was 33,4%. The behavior of the stock prices, added to the primary issuance of Davivienda s preferred stock and the listing in the market of Pacific Rubiales and Canacol, among other, explains the market capitalization behavior. It increased 46,5% compared to 2009 closing, ending the year with a value of COP$ 417 billion. 26 Equity Market Monthly Trading in 2010 Market Development jan-10 feb-10 mar-10 apr-10 may-10 jun-10 jul-10 aug-10 sep-10 oct-10 nov-10 dec-10 COP Billions Source: BVC

31 The presence of foreign stock issuers at the BVC was consolidated with the listing of Pacific Rubiales Energy as the first foreign issuer of Equity on December 22, This share showed high liquidity and had a 109% appreciation. Furthermore, as of the second quarter of the year it made part of the basket that makes up COLCAP capitalization index Market capitalization In this same line, transactions of Canacol Energy s common share began since August. This share showed a 58% appreciation with a maximum transacted volume in October. Source: BVC BB COP Daily Trading Average COLCAP Index COP Millions /12/ /03/ /06/ /09/ /12/ Source: BVC Source: BVC

32 In September the market received preferred stock from Banco Davivienda, which evidenced an appreciation Pacific Rubiales Energy of 42% and their volume of transactions was nearby COP $1 billion. Furthermore, in December the Building Company Conconcreto increased its floating with a new primary issuance, which underwent a 28% appreciation. Amount Raised (COP Millions) COP$ On the other hand, the distribution of investors in the secondary market on equities presented considerable changes during The participation of foreigners amounted to 6,3% of the market with a 84% increase in the transacted volume. In the same way, the segment of individuals increased the transactions volume by 50% during the year Source: BVC 01/12/ /12/ /12/ /12/ /12/2009 Volume Price Market Development Finally, as a result of its good performance, the market provided income for COP $ million, with a 45% increase vis-à-vis the revenues obtained in For 2011, the BVC will continue with the process of strengthening the Equity Market through the offer of new products, the consolidation of the MILA Market and the CGM, and the formalization of corporate integration with the BVL. Standardized Derivatives Market The BVC continued its strategy of consolidating and strengthening the Derivatives Market through the promotion of existing products, the creation of new ones and the implementation of an intensive training and educational program. The transacted volume was represented in contracts, with a 1.830% increase over Revenues received from the Standardized Derivatives Market amounted to COP $1.633 million. New members and investors had joined this market. COP$ Source: BVC COP Billions 35,0 30,0 25,0 20,0 15,0 10,0 5,0 _ Source: BVC 01/07/ /08/ /09/ /10/ /11/ /12/2010 Individuals Volume Canacol Energy Industry Sector Price Institutionals Intermediaries Traded Volume per Investor Type on Equities Non - Residents Number of Shares

33 FOTO DERIVADOS FELIPE TRUJILLO Performance Evolution of Existing Products The volume of TES futures represented 54% of the total transactions during 2010, with a daily average of COP $ million, equivalent to 202 contracts. This behavior was supported in the implementation of the Market Creators Program, which resulted in an important liquidity increase, promoting the annual turnover increase in 321,33% and the participation of non market creator entities, which represented 24%. On the other hand, the volume of exchange rate futures represented 45% of the total transactions with a daily average of COP $ million, equivalent to 599 contracts. These amounts increased the trades by 1.025% vis-à-vis the preceding year. The result is explained by the final migration of the NDF s market to the futures market. Consequently, at year closing the NDF s totalized a volume of COP $27,64 billion, showing a 32,7% decrease with regard to the former year. The revenues received by this market amounted to COP $925 million. Traded volume COP Millions Market Development Source: BVC

34 New Products ECOPETROL s Shares Futures and BANCOLOMBIA s Likewise, as a response to the need of offering new Preferred Stock were introduced to the futures market investment and hedge tools on exchange rate, the mini- in February. The trades turnover of these instruments futures contract on TRM was launched in November. The amounted to COP $385 million, representing 1,53% amount traded with this instrument since its entry to the of the total trades. The accrued daily average passed market represented 0,96% of the total trades, volume from 13 contracts in April to 430 in December. The new equivalent to COP $ million. stock futures evidenced a slow development but allowed progressing in the entities readiness. Training Program The consolidation of new and existing products was materially supported by the implementation of our training Volume Distribution per Instrument Type program addressed to direct traders of the market, through seminars offered by the BVC to each one of the trading desks. To supplement this, international conferences on different derivative products trading were held with the additional participation of financial curricula professors of the main universities. A total of 624 persons were trained and the largest covered group was the traders, with 56% Participants The number of participants increased during the year, engaging four new entities as members of the market, and there was an increase in the number of active trading entities, which passed from 19 a 25. The BVC accompanied the new entities both, in the process to get ready, as well as in the entry to the Market. Market Development % 10% 20% 30% 50% 60% 70% 80% 90% 100% 40% The Market evidenced diversification, by type of participant. While in 2009, 80% of the traded volume was accomplished by SCBs, in 2010 such participation was reduced to 54% (see Graph No 5). For all other entities a participation increase is observed, pointing out the amount traded by Banks, which passed from 13% in - Source: BVC USD Gov. Bonds Shares 2009 to 33% in 2010; furthermore, the nominal traded volume by all entities increased on average 17 times with respect to the previous year.

35 On the other hand, in 2010 the Derivatives Market evidenced an increase in traded volume by clients, which amounted to 18,42%, as compared to 6,35% of the previous year. The traded volume by clients increased due to the new use of derivative products in investment structures of SCB s clients. The house trading desks operated 81,5% under this figure. Attendance per Agent Type 6% 4% 2% Traders Risk teams 7% Commercial & distribution 11% 56% Students Teachers Managers 14% Others Source: BVC The derivatives operations were mainly accomplished through the trading terminal provided by the BVC. Notwithstanding, the use of routing systems represented 9% of the traded volume during the year, with an amount of COP $8,2 billion. This figure is equivalent to three times the one recorded in During the year a material increase in the listing volume was evidenced. Market share of this segment reached 41% over total trading, as compared to 3% achieved in 2,7% 0,2% 9,8% 0,9% 5,7% 0,1% 13,5% 54,4% 79,8% ,0% Banks Brokerage firms Financial Corp. Pension Funds Others Such increase was explained by the dynamics of the Exchange Rate Futures market that maintained the NDF s operating in the migration process. Finally, actions conducted by the BVC before the competent authorities allowed approval of regulatory amendments at the end of 2010, which created better Market access conditions for foreign investment in derivative products and a fiscal treatment more in line with the market needs concerning investment in liquidity indexes derivatives. Market Share per Entity - Type Number of Members per Entity Source: BVC Brokerage Firms Pension Funds Banks Financial Corp. Trust Companies Leasing Companies 31 Market Development

36 In 2011 the BVC shall continue with the promotion and development of its strategy in the Derivatives Market in three fundamental aspects: consolidation of the existing products with the implementation of new liquidity schemes, training sessions to the Market and the expansion of products supply on local and regional Volume by Trading Account 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: BVC Third Parties Prop. 32 underlying items. All the above, given the importance of the Derivatives Market internationalization process expected to take place in 2011 with the corporate integration of the Colombian and Peruvian Exchanges, as well as with the MILA launching. Market Development 120% 100% 80% Volume Distribution per Transaction Origin 97% 60% 40% 41% 59% 20% 0% 3% OTC Electronic Source: BVC

37 Issuers Management The main management objective with local and foreign issuers is to contribute to the growth and development of the capitals market by channeling savings towards productive investment, seeking new Fixed Income and Equity issuers and giving more potential to the current ones. In 2010, the market promotion made by BVC brought forth the listing of 14 new securities issuers, of which 10 corresponded to debt, and 4 to equities. In addition, the launching of the Colombian Global Market (CGM) is highlighted, where 21 foreign stock were registered in an independent trading board. With regard to services provided to issuers, the BVC worked in continuous improvement entering into and executing special operations which, is reflected in the excellent results obtained in the service satisfaction individual surveys, as well as in the provided services global survey. To conclude, it is pointed out that billing for listing and maintenance fees of securities issuers represented 15,80% of the Company s total operating income. Issuers Committee The Issuers Committee is a discussion body of representatives from securities issuer entities listed at the BVC that studies the most relevant topics of the market to feedback different authorities with its experience. Such committee was created in 2009 and it continued in Likewise, it studies and discusses topics of interest for the issuers and assesses regulations proposals that may have an impact on their entities, in order to submit concrete motions to the Financial Superintendence, the Ministry of Finance and any other regulatory or legislatives entities, if required. Historic Issuer Evolution Fixed income Equity Market Market Development Source: BVC Number of issuers

38 The Committee is comprised by ten securities issuer companies who designated a principal member and an alternate member to act as spokesmen in the discussion and study of different topics. Furthermore, the Committee has a chairman designated by the other members, who is in charge of ensuring correct development of the tasks and leads the different discussions, proposals and commitments acquired in furtherance of the quarterly and annual sessions. The Issuers Committee is supported by the Exchange throughout development of its different sessions and in line with the above it led the organization of the Annual Issuers Meeting held on November 30th. Topics dealt with in 2010 were debated in such meeting and attendants had the opportunity to state the issues they deemed relevant to be studied and discussed by the Committee in Fixed Income It is worth mentioning that in 2010 the BVC was a strategic ally in the growth of Colombian companies. In this year 35 companies, 10 of which were recently incorporated, obtained financing for their projects issuing debt securities. Throughout the year such issuers performed 53 Dutch Auctions or final demands, and in total obtained funds in the capitals market amounting to COP $13,79 billion, increasing by 2,9% the amount of debt placements through special trades accomplished at the BVC, as compared to Numbers of Auctions and Raised Volume 34 Market Development Raised volume (COP Millions) $ $ $ $ $ $ $ $ $ Raised volume Source: BVC No. auctions

39 Tabla 1. Operaciones Especiales de Renta Fija Fixed Income Issuances Issuer No. of Transactions Security Amount Raised (COP Millones) Banco Bilbao Vizcaya Argentaria Colombia S.A. BBVA Colombia 1 Ordinary Bonds $ Banco Colpatria Multibanca Colpatria S.A. 1 Subordinated Bonds $ Banco Davivienda S.A. 3 Ordinary Bonds $ Banco de Bogotá S.A. 1 Subordinated Bonds $ Banco de Comercio Exterior de Colombia S.A. 1 Ordinary Bonds $ Banco de Occidente S.A. 1 Ordinary Bonds $ Banco Popular S.A. 3 Ordinary Bonds $ Banco Santander Colombia S.A. 1 Subordinated Bonds $ Bancolombia S.A. 1 Ordinary Bonds $ Carvajal Internacional S.A. 1 Ordinary Bonds $ Cementos Argos S.A. 2 Commercial Papers $ Citibank Colombia S.A. 2 Ordinary Bonds $ CMR Falabella S.A. 2 Ordinary Bonds $ Codensa S.A. E.S.P. 1 Ordinary Bonds $ Ecopetrol S.A. 1 Public Debt Bonds $ Emgesa S.A. E.S.P. 1 Commercial Papers $ Empresa de Energía del Pacífico S.A. E.S.P. 1 Ordinary Bonds $ Empresas Públicas de Medellín E.S.P. 1 Public Debt Bonds $ Fideicomiso No Concesionaria de Occidente 1 Ordinary Bonds $ Fideicomiso Titularización Inversiones Conconcreto S.A. 1 Credit Content Securities $ Financiera Andina S.A. Finandina 3 Ordinary Bonds $ Financiera de Desarrollo Territorial S.A. Findeter 3 CDTs $ Grupo de Inversiones Suramericana S.A. 1 Commercial Papers $ Helm Bank S.A. 1 Ordinary Bonds $ Interbolsa S.A. 1 Ordinary Bonds $ Isagen S.A. E.S.P. 1 Public Debt Bonds $ Leasing Bancolombia S.A. 2 Ordinary Bonds $ Leasing Corficolombiana S.A. 1 Ordinary Bonds $ Patrimonio Autónomo Grupo Financiero de Infraestructura Ordinary Bonds $ Patrimonio Autónomo Grupo Financiero de Infraestructura Ordinary Bonds $ Patrimonio Autónomo TDEX Credit Content Securities $ Patrimonio Autónomo Títulos Homecenter 1 Credit Content Securities $ Patrimonio Autónomo Transmilenio Fase III 2 Credit Content Securities $ Titularizadora Colombiana S.A. Hitos 6 Mortgage Securities $ UNE EPM Telecomunicaciones S.A. 1 Public Debt Bonds $ TOTAL 53 $ Source: BVC Furthermore, it is worthwhile highlighting the trust of investors in this market with sectors, such as Carvajal Internacional, Financiera Andina, Grupo Financiero de Infraestructura (Infrastructure Financial Group), Interbolsa and Isagén, Market Development three relevant facts. First, the issues demanded amount which is approximately COP $28,47 billion, corresponding to 2,06 times the total amount placed. Second, the success in securities rated AA+ issuances accomplished by companies of the real and financial which obtained 14,8% of the funds placed through debt issues in And a third aspect, the long placement terms, between 15 and 30 years, of companies such as EPSA, Isagén, Grupo Financiero de Infraestructura, EPM and Ecopetrol, which allows them a long-term financing, at attractive rates.

40 Equity Market Four new issuers of equities were listed in Canacol Energy became the second foreign issuer in having access to the market. Banco Davivienda and Proenergía Internacional followed the process, together with Fondo de Capital Privado Inmobiliario Grupo Interbolsa, which listed its equity securities. Within the special operations on equities accomplished, it is worthwhile pointing out the primary issues of Banco Davivienda preferred stock, and of Constructora Conconcreto s and Fogansa s common shares. Equity Issues Value Allocation Date Suscription Price per Share (COP) Number of total shares allocated Total Amount Allocated (COP) Total Amount demanded (COP) ISSUER BANCO DAVIVIENDA CONSTRUCTORA CONCONCRETO FOGANSA Preffered Shares with no voting rights Ordinary Shares Ordinary Shares September 20th, 2010 December 20th, 2010 December 30th, 2010 $ $ $ $ $ $ $ $ $ Source: BVC Equity Issue Allocation of Banco Davivienda by Investor Type Price Evolution of Banco Davivienda Stock (PFDAVVNDA) 36 Market Development COP Millions $ $ $ $ $ $ $ $ 0 Source: BVC Individuals Legal Entities Demanded Volume Allocated Volume Price (COP) _ 42,48% $ $ /10/ /12/2010 Regarding Shares Public Offerings (SPOs), three transactions were executed with a total awarded amount of COP $ million in securities of Compañía de Electricidad del Tuluá, Compañía Colombiana de Inversiones and Proenergía Internacional. In the last trading, Compañía de Petróleos de Chile COPECacquired the additional shares with which it became the beneficial owner of 56,15% of Proenergía Internacional s outstanding shares, acquiring control of the company.

41 Public Offers of Shares Issuer Result Publication Dates Raised Volume (COP Millions) Compañia de Electricidad de Tulúa S.A. E.S.P. 24/08/2010 $1.873 Compañia Colombiana de Inversiones S.A. E.S.P. 20/09/2010 Deserted Proenergía International S.A. 16/12/2010 $ Total $ Source: BVC Colombian Global Market (International Quotation System) The Colombian Global Market was launched last December 15. This made it possible to trade foreign securities at BVC, under the international quote modality. The CGM allows improving competitiveness among international markets; increases public offerings of securities, and allows brokers to increase their business opportunities. Such securities will be traded, cleared and settled through the systems currently managed by the BVC in an independent board or session and Deceval shall be the entity in charge of managing such securities through the omnibus account held with Deutsche Bank, in its capacity as international custodian. In addition, trading hours were expanded, homologating the time with the New York market trading system. The securities listed in the CGM are only addressed to professional investors, in the terms established in Decree 2555/2010. Furthermore, it is important to note that a securities listing application may only be made by 37 Issuers listed in 2010 in the Colombian Global Market (CGM) Sponsor (Brokerage Firms) Correval S.A. Interbolsa S.A. Valores Bancolombia S.A. Anadarko Petroleum Corp (APC) Amazon.com Inc (AMZN) Apple Inc (AAPL) Murphy Oil Corp (MUR) Barrick Gold Corp (ABX) Bank of America Corp (BAC) Citigroup Inc (C) Caterpillar Inc (CAT) General Electric Co (GE) Chevron Corp (CVX) Google Inc (GOOG) Exxon Mobil Corp (XOM) Gran Tierra Energy Inc (GTE) The Goldman Sachs Group Inc (GS) Pfizer Inc (PFE) Johnson & Johnson (JNJ) Research In Motion Ltd (RIM) JPMorgan Chase & Co (JPM) Schlumberger Ltd (SLB) The Procter & Gamble Co (PG) Wal-Mart Stores Inc (WMT) Market Development Source: BVC

42 38 Market Development Exchange Broker Firms (SCBs, for its initials in Spanish), who shall assume information responsibilities and the obligations contained in the mentioned Decree, as well as in BVC Regulations and Single Circular, in their capacity as Sponsors. COMMERCIAL MANAGEMENT Commercial management in 2010 was concentrated in promoting and selling new products and services, and in accompanying the listing of the Exchange Broker Firms (SCBs) for the new MILA market, and strengthening the building of loyal and personal relations with clients, thorough value generating interactions. Important changes have occurred in the services sale process. Clients have been invited to participate in the SAE Allies implementation of new services, by getting involved in a pioneers program that allows them participating since the developing and testing stage, until launching. Leadership of participating clients in the program has facilitated the implementation of the process and their acquaintance with the service, obtaining effective and efficient feedback in both directions. In the particular case of Fixed Income- SAE-, Interbolsa and Correval acted as pioneers, who at the end of the year were in the testing phase. SAE was positioned in the market as a product that provides competitive advantage in business development. During the year, entities related to the product increased, passing from 11 in 2009 to 21 in Herein below is a list of clients, by service: ENTITY TYPE PRODUCT BROKERAGE FIRM BANKS TRUST SELLER TOTAL Own data N.A. 19 Internal Routing External Routing 7 N.A. N.A. N.A. 7 E-trading Data 7 N.A. N.A. N.A. 7 Internal Data Back Office 6 N.A. N.A. N.A. 6 Distribution Data N.A. N.A. N.A. 2 2 Source: BVC

43 The PRIM Board promotion, a product launched in May as a result of the team work between the Exchange and the banking sector, was intensified through the commercial force in At the end of the year, COP $ million had been issued through the PRIM, with a monthly average of COP $ million. Ten direct issuers actively participated, and two were involved in the underwriting contract. This board provided income for COP $50.58 million during the year. The launching of the MILA market bought forth new challenges to BVC s commercial area. Increasingly, the importance of the Exchange participation in the clients readiness stages becomes evident, particularly in the case of MILA, to help understanding of the integration functional, commercial and operative model, and the immersion process of the three markets. BVC s commercial force assisted the SCBs in their approach to the Chilean and Peruvian markets. Visits were made to the Stock Exchange Markets of the two countries, with attendance of 68 Colombian clients. During such trip every delegation had the opportunity to know the regulators, the clearing houses and the main issuers, getting closely acquainted with the operation of the markets and organizing one-on- one encounters with the different brokers of the country. As a result, clients made approaches and entered into commercial alliances to support MILA s future operation. In November, commercial management was centered in the dissemination and organization of MILA s launching official event, in order to summon foreign investors, vendors, and other important actors of the international market, to promote and begin positioning the global trading accounts of this market. Likewise, during the year activities focused on building loyal and personal relations with clients. At the beginning of the year the event TRADERBVC was held for the first time, through which the Exchange acknowledged the efforts and management activities of those traders and entities that participated the most in such markets. Furthermore, the BVC managed the development and implementation of strategic activities addressed to provide tools to the SCBs to be more competitive with their clients; to attract new investors to the sector; and to acknowledge and give more feasibility to the brands. In this sense, the first syndicated type market research for the Stock Exchange sector, called Customer Satisfaction Level of the SCBs and Top of Mind was developed and co-financed with the participation of nine firms. The results allowed obtaining strategic information to optimize retention of clients, improve their service standards; generate strategic actions to achieve better recognition of their brands and improving their products portfolio. Also, the first advertising campaign of the Stock Exchange sector was launched, jointly with five SCBs. The campaign sought to promote investment in the Exchange and to increase feasibility for the participants brands. Finally, clients have acknowledged the management accomplished during the year through the rating granted to the Exchange in the annual customer satisfaction survey. Such survey reflected an increase in clients percentage with loyal and personal relations with the BVC, passing from 15% in 2008 to 31% in 2010, as well as in the total satisfaction indicator which passed from 4.1 to 4.3 in the same period. 39 Market Development

44 Chapter 2 MARKET DEVELOPMENT

45 41 Regulatory Developments The insertion of the Exchange in international markets in the integrated market, making it feasible to create was one of the pillars that guided the regulatory strategy. accounts without segregation of the beneficial owner in In this front, the Exchange promoted changes tending the clearing houses, taking into account all applicable to make feasible the integration of Equity Markets rules for the market integration to become a reality. managed at the Lima Stock Exchange, the Santiago The General Regime of Capital Investments from Trade Exchange and the Colombian Stock Exchange. Abroad in Colombia and of Colombian Capital Abroad As a result of this management, the National Government was streamlined. This change, particularly in the regime issued regulations that allow trading of cash equities applicable to portfolio investments, allowed: Market Development

46 42 Market Development Implementation of Securities Lending. Making payments through a manager, eliminating the obligation of establishing a foreign capital investment fund and Accomplishing monetary operations with derivatives financial instruments. Likewise, the establishment of guarantees required for such trades were expressly authorized.en ese mismo contexto, se eliminó la solidaridad que existía para los emisores por el cumplimiento de las obligaciones de registro de la inversión extranjera. In this same context, the existing solidarity for issuers regarding compliance with foreign investment registering obligations was eliminated. Concerning the Tax Reform that took place in the last month of 2010, the Exchange was able to match the existing tax treatment for profits obtained from the sale of stock, with the treatment for the trade of derivatives consisting in securities the underlying item of which is exclusively represented in shares listed in a Colombian securities exchange, or in indexes or interest in collective funds reflecting the behavior of such shares. In other fronts, the National Government, by means of Decree 2555 integrated into a single body of rules, those applicable to the financial, insurance, and the securities market, which significantly simplified its structure. In addition, during the year the BVC promoted and accompanied the updating of regulations that ended in the issuance of Decrees related with provision of prices to the market, the financial consumer protection regime, the liquidity creators, the multi-funds scheme, the external audit for entities supervised by the Financial Superintendence, the securities centralized clearing houses, cancellation of foreign shares listing, severance pay and pension funds investment regime, as well as the insurance companies technical reserves, materiality criteria applicable to capital investments accomplished through affiliates and subsidiaries of financial entities from abroad, requirements for the offering of securities issued by foreign entities, and the Exchange funds. Herein below there is a list of the amendments approved regarding the regulations of the transactional systems managed by BVC: BVC- Equity Market Implementation of Securities Lending. Colombian Global Market (system of foreign securities quotes) Trading of spot and simultaneous operations for BOCEAS MEC Fixed Income Creation for the Prim board Management of quotas whenever systems yielding value added are used. Orders router in the fixed income market Standardized Derivatives Adjustment to the trades annulment procedure Intellectual Property During 2010, the BVC accomplished actions tending to protect its brands and to monitor registration applications that had been filed. To that end, follow-up is made to the effectiveness of each of its brands, as well as to the new registration procedures that have to be submitted before the authorities. As a result of such function, the BVC obtained the regis-

47 tration of the brand Colombia Capital in classes 35 and 36. In addition, together with Depósito Centralizado de Valores S.A., it started the registration proceeding for the MILA Brand in classes35, 36 and 42. It also fully complied with the copyright regulations with regard to the installed software. The Administration has complied with the provisions of Section 57, Decree 2649/ TECHNOLOGICAL EVOLUTION In 2010 the Exchange successfully reinforced certain strategic pillars of its technological infrastructure, with the objective of supporting the new business needs expressed in interconnection of the new Integrated Market of the region (MILA) and opening the door to new possibilities of growth in the local market. The IT architectural design seeks to comply with the highest international standards, being ready to support the ongoing business increase, the development of innovating products, and the connectivity of brokers in the region. The challenge posed by the integration of the Colombian, Peruvian and Chilean Equity Markets demanded the implementation of multiple technologies, such as the adoption of the routing HUB to multiple destinations based on FIX protocol, to achieve functionalities such as: transnational entry of stock purchase-sale orders, brokers risk control, and multi-market trading screens. Likewise, the strengthening of the orders messenger and transportation infrastructure (EAS) was worked, and this will allow supporting the organic growth of trading volumes in the near future when having several countries connected to our trading system. The integrated functionality tests were started at the end of 2010 involving not only Exchanges, but also regulators and members of the market that wished to participate in the first White March. In the local strategic development plane, the Exchange worked in improvements to the service levels and in technical support for clients and third parties both, in their certification stage for involvement, and in maintenance. Care given by the Electronic Access Services (EAS) deserves highlighting. Likewise, through technological enhancements BVC seeks to raise the efficiency of transactional systems. With this in mind, the response times were reduced by 80% in electronic data delivery services through SAE. The midterm objective is to match the standards used in the large Exchanges of the world. The technological innovation processes were also applied to our issuer clients. The experience of the recent past in the sale of Ecopetrol s shares allowed us to automate the processing of clients massive requests in equity democratization processes, via E-form. This was the case of Banco Davivienda, where the platform was in capacity of processing up to requests per day. Increasingly the Exchange s technological innovation is more sophisticated, adopting best practices available in the market, with the philosophy of continuing to improve the experience of clients interaction with the Exchange. 43 Market Development

48 MILA Interconnection Conceptual Diagram ELEX Clients X-Stream Clients SEBRA Clients 1 GW FIX GW FIX GW FIX ELEX X-STREAM TELEPREGON New Products 44 Market Development Electronic Access Services (EAS) Within the channels development strategy, the BVC works so that the Access of the final client to the Exchange s systems becomes more efficient. This is why connectivity mechanisms are developed and implemented giving access to, and optimizing execution of joint procedures between the Exchange and the brokers. The Electronic Access Services (EAS) comply with these functions upon integrating the brokers applications with the BVC s systems. Hence, EAS provide benefits for the brokers, facilitating their clients access to the securities market and allowing automation of their internal processes. Access of local and foreign investors to the BVC s equity market, through external routing (E-trade) and the interconnection with the Peruvian and Chilean Exchanges in the Latin American Integrated Market frame (MILA), are two examples of the way in which EAS provides access to new participants in the local market. As a result of the implementation of the channels development strategy, the volume transacted through external routing increased 86%, passing from COP $1.85 billion in 2009 to COP $3.43 billion at year closing. Regarding the strategy to improve the market infrastructure, the Exchange placed two new services at

49 the disposal of the brokers (EAS Back Office and internal routing) and continued providing market information (EAS In house Information and EAS Market Information). EAS Back Office offers the brokers the possibility to accomplish the complementation and compliance process in an automated manner. Through these services, transactions or fractions were automatically completed throughout the year. The internal routing services allow brokers accomplishing transactions without need of using the BVC s screens. This characteristic grants the brokers the possibility of integrating their risk assessment systems with the LEO (Orders Electronic Book), decreasing the inherent operative risk of entering mistaken orders. Through internal routing, the traded volume amounted to COP $ million. In house Information EAS allows its users receiving information of the trades and orders accomplished by them. The number of entities subscribed to this service grew 100%, passing from 10 in 2009 to 20 at 2010 closing. Market Information EAS, provides its users with the necessary information to feed their E-trade applications and to create internal screens with tools suitable to their particular needs. The number of users of this service grew 133%, passing from 3 in 2009 to 7 in The addition of these factors made it possible for the Exchange at the end of the year to obtain revenues from this product for COP $532 million, which implies a 265% increase with regard to the COP $146 million obtained in the preceding year. Infoval Although Colombian market has deepened its liquidity in the last years, certain private debt references continue being inconvenient upon estimating valuation prices due to the marginal number of businesses observed. Infoval, jointly with the Inter-American Development Bank (IDB), consulted alternatives leading to valuation methodologies that improve a fair exchange pricing estimate. During such research, different agents gave their feedback, covering several aspects deemed important in determining prices. In this same line, methodological changes were accomplished in the estimate of the zero coupon curve, achieving a better adjustment in the estimated rates for terms under 365 days to maturity. On the other hand, on March 25 the National Government issued Decree 985 regulating the pricing activity in the Colombian market and the investment pricing of entities subject to inspection and supervision of the Financial Superintendence. Within the framework of these regulations there is an opportunity to give independence to the pricing activity and to offer alternatives for the brokers. The Decree provides a one year transition period within which BVC has been conducting activities leading to comply with the specification therein contained and to development of the strategy to face the new challenge. In addition, to cope with the expansion of the products portfolio offered by the BVC and its affiliates, and trying to facilitate brokers access to the necessary information to manage their portfolios, Infoval started to provide pricing of securities listed at the CGM and Derivex and is carrying out the necessary adjustments to provide MILA information. In 2010 Infoval received revenues for COP $1.551 million. 45 Market Development

50 Market Data were engaged in the testing phase. This task seeks to place information about the Colombian market at the disposal of more foreign actors. 46 Market Development The promotion and distribution of information support BVC s trading account at international level and the attraction of new investors in the local market. Therefore, the main purpose of IT and e-means management is to deliver efficient information through a reliable infrastructure that conforms to our clients needs. In line with this objective, in 2010 BVC worked in three fronts: the promotion of information through alliances with the media and information vendors; the expansion of their knowledge about the clients; and the improvement of the support and service provided to clients. Furthermore, the BVC focused its efforts on the maintenance and progress of relations with information vendors, strong allies in the internationalization and trading account strategy. This way, five companies of different countries (Chile, United States and England) Colombia Capital The Stock Exchange of Colombia is the executor of the agreement entered into with the Inter-American Development Bank (IDB) (effective since November, 2005), the main objective of which is to expand the depth of the capitals market in Colombia; it has nine local partners involved, including the National Association of Entrepreneurs (Andi), the Colombian Association of Severance Pay and Pensions Fund Administrators (Asofondos), Deceval, the Chambers of Commerce of Bogota, Medellin, Cali and Bucaramanga, Proexport, and the Financial Superintendence of Colombia (SFC). The activities accomplished in 2010 were developed as follows:

51 Component I, Issuers for the first time: As of this date, there are 46 companies involved in the Agreement, three of which have launched bond issues (Colombia (2), Alquería and Alpina), one stock issue (ECOPETROL) and one Securitization of Assets (Homecenter-Sodimac). Component II, Promotion to the Private Capital Industry: Through this component as of December 2010, 10 private capital funds have joined the Agreement: SEAF Colombia, Tribeca, LAEFM Forestal and LAEFM Hydrocarbons (I and II), Visión Capital Privado Internacional FdF, Aureos Capital, ALTRA I, Escala Capital and Mercantil Colpatria. Component III, Dissemination and Promotion Instruments: Component III, Dissemination and Promotion Instruments: during the year a compilation of three Corporate Governance Booklets was made, one Issuers booklet, six Case Studies prepared by Fedesarrollo, one guide for the Legal Representative of Bondholders, a guide for a Securities Clearance Agreement and a Fascimile Value Guide, the documents of which may be openly consulted through our web page where access can be currently attained through different social networks. 47 Market Development Also, there are 10 initiatives in process of being incorporated: ARCADIA Capital Partners, Progresa Capital, GEM Colombia, Palmfund, Promisión, Global Securities, TS Capital, Corficolombiana and Fairenergy.

52 48 Market Development Corporate Governace In order to support the implementation of corporate governance practices in 20 Colombian companies, in June, 2008 the BVC entered into a non-reimbursable technical cooperation agreement with Corporación Andina de Fomento CAF. At 2010 closing, the project had 16 enterprises, 11 of which joined in prior years. The related companies as of 2010 were: Masering, C.I. Disan, Instituto de Desarrollo de Antioquia -IDEA, Brío de Colombia, and BancoAgrario. In addition, two enterprises are now joining the process, and an additional one has shown interest in joining the project. Capital Markets Promotion Education The Exchange continues working in taking the Colombian Capitals Market to a broader mass of people and in approaching more and more the Securities Market to all Colombians. The main tool to achieve this objective is education, which is developed through three pillars: physical presence through the BVC Points, academic programs, and promotion of the market and its products. BVC Points During the year we continued expanding coverage nationwide by opening of two new BVC Points, allowing taking our brand and educational initiatives to 17 places in the main 10 cities of the country. BVC Points are used to develop activities focused on promoting the market, providing access to information in line and to educational programs, approaching stakeholders to the SCBs and to other entities sharing the market, such as the Financial Superintendence and the Self-regulator of the Securities market (AMV, for it initials in Spanish). Academic programs: The academic offer was strengthened by increasing the number of programs offered to learn to invest in stock and in foreign currency, and by providing general knowledge on the capitals market and its products. We offer academic programs through BVC Points and through an agreement with the universities. These programs also include two contests: BolsaMillonaria and Architects of the Market. The agreements with universities offer specialized topics on the securities market for pre-graduate students; they endorse specializations, and develop extension programs on topics related with investment and market knowledge. In 2010, 65 students participated in 14 cities, and agreements were strengthened with 25 universities nationwide. During the year, Colombians, including students, housewives, retirees and professionals participated in this initiative. In addition, the scope of the courses with conferences on the capitals market was supplemented in order to inform on the entities role, rights, duties and protection schemes for financial consumers, as well as to promote the market products and to facilitate approach of the firms to potential investors. Furthermore, the contest Bolsa Millonaria that was implemented nine years ago and is addressed to pre-

53 graduate and post graduate students reckoned with the participation of 7,630 students of 154 universities in 96 cities. The contest was also privately accomplished with a banking entity that used it as a tool to train 822 officers on Equity Market issues. The BVC, in agreement with AMV conducted the first version of the contest Architects of the Market, which through research, seeks to deepen the knowledge of pre-graduate and post-graduate university students on the Colombian capitals market. The papers of those who deserve acknowledgement are published and awarded prizes. 35 Articles were received during the first version of the contest. Promotion of the Market and its Products: Promotion of the Market and its Products: Promotion of the market is fulfilled with the delivery of information through booklets, electronic newspapers, fliers, virtual communities and the micro-site which in 2010 reached more than Colombians. Likewise, the Exchange and Corferias carried out the second specialized fair of the financial and stock Exchange sector, Expoinversión, with an attendance of more than persons. The educational front implied COP $1.167 million revenues for BVC. Markets In line with the massive strategy, the number of individuals that make trades operations during a year is increasing. During 2010, individuals purchased their sold shares, representing a 252% growth in the period Market Development

54 Chapter 3 Corporate Governance

55 Report on Corporate Governance Practices 51 The Stock Exchange has incorporated high governance standards in its corporate governance structure and has established good governance practices in its guidelines related to administration and management of the Company. The increasing dynamics of the Colombian capitals market, the projects within international scope, and the increasing number of shareholders of the Exchange, constitute factors that make it necessary for the BVC to consider the Corporate Governance Rules as a fundamental tool for good performance, growth, and creation of value. The Company has characterized for being a leader in the adoption and implementation of Corporate Governance practices in Colombia, raking first and second in the results of the survey Country Code in the two years where such survey was implemented, as may be evidenced in the results annually disclosed by the Financial Superintendence of Colombia regarding the best corporate practices survey, the purpose of which is to disclose compliance with corporate governance practices by Colombian issuers, and the adoption of the Country Code recommendations 4. Corporate Governance 4 The Recommendations Code of the Colombian Corporate Best Practices -Country Code-, issued through External Circular 028/2007 and amended by External Circular 056/ 2007, is a set of recommendations in matters of corporate governance, the adoption of which is voluntary, and the addressees are entities registered at, or having securities listed in the National Securities and Issuers Registry RNVE, excepting in the Nation; and the equity trusts; the collective funds referred to in Decree 2175/2007; the universities mentioned in Act 546/1999; the territorial entities referred to in Section 286 of the Political Constitution; the loan multilateral bodies; foreign governments and foreign public entities; branches of foreign companies and foreign entities.

56 52 Corporate Governance The BVC adopted its Good Governance Code in 2005, which has been amended from time to time to meet the growth demands and the increase in the number of shareholders and also due to the increasing international impact on the securities market. The purpose of the Good Governance Code is to establish parameters that, supplementing the applicable statutory and legal regulations, will orient the way in which the administration of the Exchange should manage its situation as a commercial company, and as an entity that exercises a public interest activity and promotes development of the capitals market, securities, derivatives, structured products, and foreign currency. The Code contains principles and standards aiming at guaranteeing the exercise of shareholders rights, and a correct administration of the Company, together with a sound management of relations with stakeholders including detection, prevention, and control of conflicts of interest, and the existence of a secure and transparent market, with adequate pricing in the systems managed by the Company or its subordinated companies. At present there is an organizational commitment of the Company that fosters and allows compliance with the provisions foreseen in the mentioned Code. Herein below we are listing the most relevant aspects in matters of Corporate Governance developed during the year. The Board of Directors The BVC s Board of Directors is the body that has been entrusted with compliance with the strategic and organization tasks of the Company, the maximization of value and profitability in the interest of the shareholders, as well as the development and operation of ordered, transparent, and secure markets, with adequate pricing. Likewise, the Board of Directors is to develop tasks to evidence the existence and efficacy of internal controls allowing adequate follow-up of the Company s operation 5. This body is made up by 13 principal members without alternate members, 7 of which are independent 6. This body is made up by 13 principal members without alternate members, 7 of which are independent. The General Shareholders Assembly at its meeting held on March 25, 2010 designated the following members: Board of directors period Indepenment Non Indepenment Sergio Clavijo Vergara Rafael Aparicio Escallón Bernardo Guzmán Reyes Emilio Echavarría Soto Carlos Eduardo Jaimes Jaimes Nestor Hincapié Vargas Javier Jaramillo Velászques Rodrigo Jaramillo Correa Roberto Junguito Bonnet Diego Jiménez Posada Santiago Montenegro Trujillo Germán Salazar Castro Juan Camilo Vallejo Arango 5 Article 46 of the Bylaws 6 In accordance with Section of Decree 2555/2010 and paragraph third of Article 47 of the Stock Exchange Bylaws, to be independent it is required not to have any relation whatsoever with the Exchange or with its subordinated companies [ ], entities shareholders of the Exchange, [ ] partners, shareholders, or capital contributors of entities shareholders of the Securities Exchange of Colombia [ ], entities or individuals that provide goods or services to the Exchange or its subordinated companies [ ], as well as with an employee, administrator, proxy, mandatary, agent, advisor, consultant, contractor or supplier of goods or services of the Exchange or its subordinated companies [ ], or with entities that receive donations or contributions from the Exchange [ ], or with public entities with regulation and supervision functions regarding the securities public market.

57 It is to highlight that those who are members of BVC s Board of Directors are well acknowledged executives with an excellent reputation. In order to ensure impartiality and independence, none of them have labor or commercial bonds with the Exchange or its affiliates. Adoption of Country Code Recommendations The BVC answered the survey on adoption of Country Code recommendations, as established by the Financial Superintendence. Such entity published the third annual report based on a statistical analysis accomplished on the data received from the surveys answered by issuers of the real and financial sectors. Such results assess the degree of implementation of the Corporate Governance Measures foreseen in Country Code by Securities Issuers during the period January to December, Concerning the observations made by the Financial Superintendence regarding the survey results dealing with corporate good governance practices at the BVC, we shall highlight the following: The Securities Exchange of Colombia, which complied with 90,24% of the measures suggested by the Code, continues being one of the entities that adopts most of the recommended measures. The Colombian Securities Exchange and Leasing Bolívar with % adoption of recommendations are the financial sector issuers that reported the greatest degree of compliance with the recommended measures. ( ) it is important to state that the Colombian Securities Exchange excludes 4 measures because they are nonapplicable. Due to the above, we may state that the BVC, in its capacity as Securities Issuer, maintains the leadership in the implementation of Corporate Governance Best Practices in the country, and shall continue working, jointly with the authorities, in proposals and initiatives required by the securities market in this respect. Report on Compliance with Standards and Codes (ROSC).World Bank In 2010 the World Bank, through the Financial Superintendence, sent to the different associations of issuers of the Colombian Securities Market, a survey based on the Organization s Corporate Governance Principles for Economic Development and Cooperation (OCDE) adopted in 1999 and amended in 2004, which constitute a global parameter of Corporate Governance practices. The BVC filled in the survey in question, and it is reported that the Company complied with 94% of the 51 applicable recommendations. The questions were related to a) protection to minority shareholders, b) remuneration and evaluation of administrators and members of the Board of Directors, c) functions of the Board of Directors and d) internal and external controls of the Company. 53 Corporate Governance

58 a. Main amendments to the Good Governance Code In order to maintain our Good Governance Code updated and in agreement with the new market trends and demands, in 2010 certain amendments were made with the purpose of accomplishing the relevant adjustments to include the Colombian Global Market as part of the markets managed by the BVC and the updating of the Ethics Code with regard to the risk systems, controls and mechanisms implemented by the BVC to identify and timely deal with the risks and anti-ethical or illegal conducts. b. Board of Directors and its Committees In accordance with the BVC s Good Governance Code and in order to facilitate development of functions and compliance with objectives of the Board of Directors and of assuring that in certain matters there should be separation and analysis prior to remittance to the Board of Directors, the following Committees were created: In order to assess the activities of the Board of Directors and its Committees, BVC s administration takes into account the following criteria: a) compliance with the meetings schedule, b) the number of sessions in which there was quorum to deliberate, c) attendance of each one of the members to the meetings; d) compliance with the scheduled agenda, and d) approval of the corresponding minutes. The following were the results corresponding to the period April 2010 December 2010: c. Self-Assessment of the Board of Directors The Good Governance Code of the Exchange contains the obligation of annually accomplishing an individual and a collective self-evaluation of the Board of Directors, 54 Corporate Governance Members Board of Director Regulation Committee Corporate Governance Committee Administration and Financial Committee Audit Committee Emilio Echavarría Soto 7/9 7/7 4/4 Diego Jiménez Posada 8/9 5/7 Néstor Hincapíe Vargas 3/9 1/4 Germán Salazar Castro 7/9 7/7 Rafael Aparicio Escallón 8/9 6/7 2/2 Roberto Junguito Bonnet 9/9 2/2 Bernardo Guzmán Reyes 6/9 1/3 Juan Camilo Vallejo Arango 6/9 5/7 4/4 Sergio Clavijo Vergara 7/9 7/7 Carlos Eduardo Jaimes Jaimes 9/9 4/4 3/3 Rodrigo Jaramillo Correa 9/9 2/2 3/4 Santiago Montenegro Trujillo 8/9 1/2 3/3 Javier Jaramillo Velásquez 8/9 2/2 Attendance% 66,4% 61,7% 90,0% 53,3% 58,3% Complaince with schedule % 100% 100% 100% 100% 100% No. of meetings with quorum to deliberate Compliance with agenda 95% 100% 100% 100% 92% % Approval of minutes 100% 100% 100% 100% 100%

59 in order to establish the efficiency and efficacy levels regarding compliance with duties and functions, achievement of objectives, and assumption by the Board members of the principles and responsibilities of the Board. The self-evaluation examines the individual participation of each member of the Board, the performance of the Board of Directors as a whole, and the relevance, depth, and frequency with which the different topics of the Board are to be discussed. d. Remuneration Policies for the Board of Directors and the President of the BVC The Good Governance Code provides that the Corporate Governance Committee has among its functions the determination of the Board of Directors remuneration policies. Furthermore, the Code provides that the Board of Directors shall define the remuneration of the BVC s President and prohibits payment of remuneration to the President in shares or other securities issued by the Company. Neither will the President have the option to acquire shares or other securities issued by the Exchange. The Good Governance Code of the Exchange contains the obligation of annually accomplishing an individual and collective self-evaluation of the Board of Directors, in order to establish the efficiency and efficacy levels regarding compliance with duties and functions, achievement of objectives of such body, and assumption of the Code principles by the members of the Board with their own accountability. Individual participation of every co-director is examined through self-evaluation, with the performance of the Board of Directors as a whole and the relevance and frequency with which the different topics are to be debated at the Board. e. Remuneration policies for the Board of Directors and the President of the BVC According to the Good Governance Code, the Corporate Governance Committee is to study the Board of Directors remunerations policy, among its functions. Likewise, the Code provides that the Board of Directors defines the remuneration of the BVC s President and prohibits payment in kind (shares or other securities issued by the Company as remuneration). Neither is the President allowed to receive incentives or options to acquire shares or other securities issued by the Exchange. f. Trades entered into with partners and administrators. During 2010 the Exchange did not enter into trades with its directors, administrators, main executives and legal representatives including their relatives, partners and related persons, different from labor relations. Likewise, commercial relations with its clients were framed within market terms and conditions. g. Legal Proceedings As of December 31, 2010, seven judicial proceedings have been filed against BVC, with claims amounting to COP$ The corresponding contingencies values are found in the respective contra-accounts and, acknowledging the rating of such contingencies, accounting provisions amount to around COP$ Shareholders Rights Subject to the legal provisions and to the Bylaws of the Company, BVC s Good Governance Code contains a space that establishes and develops BVC s shareholders rights related mainly to agenda topics that may be discussed at the General Shareholders Meetings, the information that 55 Corporate Governance

60 56 Corporate Governance shall be placed at the disposal of shareholders, and issues regarding prompt and sufficient access to information. It includes the possibility of requesting specialized audits, making recommendations to the Corporate Governance Committee. On the other hand, it establishes the right to discuss and solve differences arising between shareholders or administrators and the Company, as well as controversies arising among shareholders or between them and the administrators, and gives the possibility of presenting petitions, claims, or proposals to the Company and of obtaining a timely response thereto. Basic activities of the Exchange s Administration and Management a. General Shareholders Assembly In 2010 the Exchange s General Shareholders Assembly held its ordinary session on March 25, prior call made by the Administration. The Assembly was attended by shareholders that represented a total of 12,284,656,481 shares, equivalent to % of the outstanding shares. Likewise, Doctors Rafael Aparicio Escallón, Chairman of the Board of Directors of Bolsa de Valores de Colombia S.A.; Juan Pablo Córdoba Garcés, President of the Exchange, and Jairo Perdomo Mantilla, Principal External Auditor, member of the firm Deloitte &Touche Ltda., attended the meeting. The Assembly studied and analyzed the reports of the Board of Directors, the President of the Exchange and the External Auditor corresponding to the management developed during 2009; likewise, the Assembly approved the motion for the distribution of profits, the Financial Statements corresponding to business year from January 1st to December 31, 2009, accompanied by their respective notes and by the opinion issued by the External Auditor of the Exchange represented by the firm Deloitte & Touche Ltda., who was designated by the members of the Board to act for the period April 2010-March 2011 determining its fees and approving the relevant appropriation for such activity. It is to state that BVC s General Shareholders Assembly approved an amendment of Bylaws at its ordinary session, as follows: a. BVC s Corporate Purpose: Determine the manner in which the BVC may participate in the corporate capital of other companies, and the possibility to provide services to such companies. b. Duties of the Board of Directors: To include, within the functions of this management body, those duties that were not contemplated by BVC s corporate provisions in order to harmonize the Bylaws with Circular 038/2009 issued by the Financial Superintendence. c. Duties of the President: To include, within the President s duties, those tasks that were not specifically contemplated in BVC s corporate provisions in order to harmonize the Bylaws with Circular 038/2009 issued by the Financial Superintendence. Under this premise, it is important to state that the Exchange, complying with its Corporate Governance policies, placed at the disposal of its shareholders, within the term established for the purpose, the information and necessary documents for deliberation and decision-making. b. Assessment of the President of the Exchange The Corporate Governance Committee of the Board of Directors assessed the activity of the President of the Exchange corresponding to the 2010 period, for which it took into account compliance with the goals and indicators established in the Balanced ScoreCard and form provided for such purpose c. Annual report of the Audit Committee to the Board of Directors

61 Bogota D.C., February 23, 2011 Señores BOARD OF DIRECTORS Bolsa de Valores de Colombia S.A. Bogota Ref.: Annual Report of the Audit Committee to the Board of Directors Gentlemen: The Annual Report of the Audit Committee of the Board of Directors of Bolsa de Valores de Colombia S.A. (the Exchange), is presented based on what is established in on paragraphs and , Chapter IX of Accounting and Financial Basic Circular, abiding by the provisions of paragraph , Chapter 9, Title I of Legal Basic Circular, both provisions issued by the Colombian Financial Superintendence. Based on the above and on the provisions of paragraph 7, Section of the Exchange s Good Governance Code, in my capacity as Chairman of the Board of Directors Audit Committee, I shall present the report on the activities developed and the results obtained by the Committee during the period April 2010 February 2011: I. Composition of the Audit Committee According to paragraph f, Article 50 of the Exchange s Bylaws, the Audit Committee is made up by three members of the Board of Directors, who are independent. For the period doctors: Bernardo Guzmán, Santiago Montenegro and myself Carlos Eduardo Jaimes, were elected and I was designated Chairman of the Committee. II. Duties and powers According to the provisions of Section of the Exchange s Good Governance Code, the Audit Committee is a body that supports the duties of the Board of Directors concerning internal control follow-up of the entity and of the audit function. The specific duties of the Audit Committee are detailed in Section of the Exchange s Good Governance Code, abiding by the statements of the Legal Basic Circular concerning the role and functions of this body. III. New model of Institutional Internal Control The second stage of the Exchange s Internal Control System SCI adaptation to the guidelines established in External Circular 014/2009, as amended by Circular 038 of the Colombian Financial Superintendence was executed in Such process that started in 2009, allowed improving aspects of the system, identifying and managing gaps, and what is most important, incorporating good practices and highly acknowledged international standards in the institutional internal control. 57 Corporate Governance Based on a work plan and with the participation of all relevant actors, the Exchange developed several activities within which statutory amendments are highlighted, together with the approval

62 of amendments to the Good Governance Code, the definition of policies by the administration bodies, approval an anti-fraud program and of a new version of institutional Internal Control Manual, the implementation of several adaptations to procedures in different fields, development of dissemination and training events, and even the incorporation of new IT tools to support control management, such as the ERA Enterprise Risk Assessor application, implemented by Internal Audit in 2010 and in process of being adopted by the Quality and Risks Management for With the execution of the aforesaid tasks, the Exchange complied with the regulatory requirements established for 2010, and in particular it timely certified the required adjustment for the Exchange before the Colombian Financial Superintendence, concerning the following elements of the Internal Control System a) Risk Management. b) Information and Communication of Control Activities (Including the Internal Control System for Accounting Management and IT Management). c) Monitoring. d) Independent Assessment. Notwithstanding the tasks accomplished, the challenges of the Administration in the future regarding this matter are essentially the maintenance of the systems and their consolidation, due to which adequate risk management, self-assessment from time to time, and independent assessment by the control bodies, are of great importance to support control s continuous improvement. IV. Internal Control Policy of the Exchange 58 Corporate Governance Internal control policies approved by the Board of Directors on August 26, 2009 were fully effective in 2010 and did not undergo any amendments. Such guidelines are based o n self-regulation, self-control, and self-management principles, and encompass guidelines in all Internal Control System structural fields, i.e. environmental control, risk management, control activities, information and communication, monitoring and assessment. V. Committee s Operation Assessment According to the Exchange s Good Governance Code policies, and in order to assess the activities conducted by the Board of Directors Audit Committee, the following factors were taken into account: i) compliance with the schedule set for the meetings; ii) number of sessions where there was quorum to deliberate; iii) attendance of each one of the members to the meetings, iv) compliance with the scheduled agenda, and v) approval of the corresponding minutes. Within the analysis period, the Board of Directors Audit Committee has ordinarily met four (4) times, including the session where this Report was submitted for consideration. All meetings have had quorum to deliberate and decide. The agenda of every session, together with the presentations used at the meetings were placed at the disposal of the Committee members in BVC s web page. 24 of the 26 scheduled topics have been discussed in the past meetings, which means that 92% of the subjects initially proposed have been studied. Furthermore, the Committee approved 100% of the minutes, and on average, attendance of the members to the meetings held represent 58.3%.

63 VI. Assessment of the Internal Control System Effectiveness In order to obtain a complete overview to assess the institutional internal control system, the Committee addressed different topics for the period within each one of the system elements: Environmental Control 1. Review of the scope, work schedule and follow-up of implementation of External Circulars 014 and 038/2009 issued by the Financial Superintendence, regarding the internal control system, with emphasis in matters related to the administration bodies, and the following system elements: risk management, information and communication, control activities (includes accounting management and IT management Internal Control System), monitoring, and independent assessment. This task was accomplished in sessions held on May 25, and August 25, Review of the anti-fraud program proposed by the Administration at the session of May 25, Risk Management 1. Analysis of the evolution of the residual operative risk level (Audit Committee meetings held on November 22, 2010 and this session where this report is submitted for approval). This assessment was especially important since this Committee had proposed amendments to the operative risk management methodology in 2009, which were incorporated during the first semester of Review of the Business Continuity Plan (in session of November 2). 3. Review in all sessions, of the report on activities dealing with prevention and control of asset laundering and financing of terrorism at the Exchange. NOTE: Although the application of SARLAFT is not mandatory for the Exchange, the entity implemented, and maintains, its own control model on this matter. Information and Communication The Committee developed the following tasks in all its sessions: 1. Review of the intermediate (trial) balance sheets 2. Review of the financial, market, IT, and operation indicators. In addition, the Committee developed the following tasks related to the annual closing of the Exchange s financial statements (in this session where this report is being submitted for consideration): 59 Corporate Governance 1. Review of the individual and consolidated financial statements as of December 31, Review of the draft of the External Auditor s opinion on such financial statements. 3. Review of the results of the External Auditor selection process, as well as of his fees.

64 Control Activities Review of the plans and results related to IT controls evaluation developed through the special scope of systems audit under the charge of the External Auditor. Such analysis was made in all sessions of the Committee. Independent Assessment and Monitoring Review of the internal audit annual management report at this session of the Committee, including the evaluation of internal control systems status as of December 31, Effectiveness Conclusion Based on the above information, the Committee considered that the institutional internal control system has been adequate during the last year since it allows reasonable compliance with the following objectives: 1. To improve efficiency and efficacy in operations. 2. To prevent and mitigate occurrence of fraud originating both, inside the Company, and outside the Organization. 3. To accomplish adequate risk management. 4. To increase reliability and timeliness in Information to be presented 5. To comply with the applicable regulations and provisions. Finalmente, el comité considera fundamental cerrar las brechas detectadas en la evaluación independiente del Sistema ejecutado por la Auditoría Interna, en particular la implementación de la línea ética, asunto de importancia para el programa Anti fraude y las observaciones relevantes formuladas a los procesos de Gestión de Riesgos y Tecnología fundamentalmente. VII. Main Measures Adopted 60 Corporate Governance Although no material deficiencies were detected as a consequence of the preceding information analysis, the following principal measures were derived from the observations made by the control body and the opinions of the administrators: 1. Improvement of accounting and tax controls. 2. Risk management review/validation regarding operation, anti-fraud programs, and the Business Continuity Plan. 3. Closing of gaps in information security, and in particular, measures to improve compliance with requirements established in External Circular 052/2007 issued by the Financial Superintendence. 4. Execution of improvements in technology management processes related to the following domains: Incidents Management. Management of Changes Management of Availability Capacity Management Configuration Management. Service Desk Duties 5. Implementation of a new model and technological tool by Internal Audit. It is worthwhile stating that during the period there were no observations submitted by the supervision bodies, and no penalties were imposed.

65 VIII. Control Bodies Management Internal Audit and External Audit participated in all sessions informing on the progress of the respective action plans and, when pertinent, submitted relevant findings and recommendations. The Committee gave special care to the supervision of the activities of such bodies, making follow-up of efficacy and independence, as well as of the scope of their tasks in accordance with the control needs of the entity. For such purpose, the Committee discussed the following main issues: 1. Review and approval of the Internal Audit Annual Plan for 2011, as well as of the Budget required for the development of activities. Such tasks were accomplished at the Committee s session held on November 22, 2010, abiding by new provisions issued by the Financial Superintendence.The Internal Audit Work Plan for 2010 was approved at the Audit Committee meeting held on February 23, 2010, date which is not included within the period of this report. 2. Review and approval of the External Audit Annual Plan for Such approval was granted at session held on May Quarterly review of the report details and main findings and recommendations of such bodies. 4. Examination of the administration s progress regarding closing of the main findings or internal control observations posed. The review of the aforesaid points allowed concluding that the scope of the Internal Audit Plan contained the main business risks; that the audit tasks followed technical standards, and that the results meet the control needs of the entity. Likewise, the Committee could establish that the Internal Auditor accomplished his tasks with independence, objectivity, resources and information, without limitations affecting the audited scope. Furthermore, the Committee considers adequate the new Internal Audit organization focused on a risk based approach, which facilitates alignment with international standards, and allows maximization of efficiency. With regard to the External Audit elected by the General Shareholders Assembly held on March, 2010 it is concluded that he has exercised his duties according to the provisions of the Bylaws and the applicable regulations. IX. Framework of the Committees relations Upon approval of the annual report by the Audit Committee, it shall be submitted for the consideration of the Board of Directors, abiding by the provisions of paragraph 7, Section of the Good Governance Code, in order to disseminate its content and conclusions, and to allow such body to request any additional report deemed relevant. 61 Corporate Governance Furthermore, if approved, this Report will be submitted for the consideration of the General Shareholders Assembly as part of the information to be placed at their disposal for the exercise of the inspection right stated in Section 447 of the Code of Commerce and 43 of the Exchange s Bylaws. In matters of Senior Management, it is to note that all meetings of the Committee were attended by the President of the Exchange, the Vice-president and Secretary and the Internal Auditor,

66 which facilitated discussion of the topics, and promptness in commitments designation by the Committee to the Administration. Likewise, the External Auditor, who also performed the Exchange s system audit tasks, attended all Committee meetings. Coordialy yours, CARLOS EDUARDO JAIMES JAIMES Chairman of the Audit Committee Stakeholders a. Dividends Distribution Policy 62 The General Shareholders Assembly of Bolsa de Valores de Colombia S.A. (BVC), at its meeting held on March 25, 2010 approved the motion for the distribution of 2009 profits, in the following terms: Corporate Governance COP$ Profit before mandatory reserves: $ million Mandatory reserves Legal Reserve $211 million Reserve -Decree 2336/1995 (year 2009) $978 million Profit before occasional reserves $ million Partial release of Occasional Reserves 2007 $2.720 million Release Reserve -Decree 2336/1995 (2008) $535 million Profit before Occasional Reserves $ million Occasional Reserves $5.000 million Dividends Available for Distribution $ million Dividends to be distributed in cash $ million Dividends per share, in cash $0,830099

67 To this respect, it is important to mention that the dividends in cash were paid in three equal installments on April 23, June 23, and August 23 to those who were deemed to be shareholders at the time of payment, in accordance with Section 455 of the Code of Commerce. No dividends in shares were declared. Good Governance Code Reports a. Complaints, claims and proposals of the shareholders and other stakeholders b. Suppliers The relation of the Exchange with its suppliers is framed within high ethical and legal standards contained in the good and services procurement procedure, wherein the mechanisms to maintain transparency in selection of suppliers are determined and the criteria sought to foster the quality of goods and services acquired by the organization are established. This way, minimum criteria to be taken into account for the evaluation and selection of suppliers are included. In addition, the Exchange applies suppliers reassessment procedures from time to time, allowing to ensure quality and compliance of the service received. c. Authorities The Exchange is an entity subject to the supervision of the Financial Superintendence and therefore it must carefully observe and comply the applicable provisions. In addition, BVC must respond to the requisitions that such supervision authority issues in exercise of its legal duties. It should be pointed out that the Exchange has fully complied with the terms established by the Financial Superintendence to implement all provisions and standards issued by such entity. In accordance with the information filed at the Centralized Complaints System of the Company, it was evidenced that during the year 69 complaints and 17 claims were submitted before the Exchange, coming from different stakeholders. The average response time to the person presenting the complaint was twelve days. In 14 of the 86 mentioned cases the response time exceeded 15 days, which indicated that 83.7% cases were solved within the term provided in the Good Governance Code. b. Claims on compliance with Good Governance Code In 2010 there were no complaints on compliance with the Exchange s Good Governance Code. c. Illegal or Anti-ethical Acts The Vice-presidency Secretariat did not receive information from the administrators or employees of the Exchange or its related companies on facts that they know of and that, in their opinion, imply any form of non-compliance with ethical principles or conduct rules stated in the Ethics and Conduct Manual. 63 Corporate Governance

68 Chapter 4 THE BUSINESS

69 The Business During 2010 the BVC obtained outstanding financial results. This behavior is the result of strategies implementation focused on achieving diversification of income and profitable growth. Operating income amounted to COP $61,305 million; net profit was COP $ million, EBITDA of the organization amounted to COP $ million and the EBITDA margin was 49,05%. The business turnover accomplished through the BVC reached the sum of COP$ billion, which represents a 4,37% increase with regard to The equity market growth is highlighted with a volume increase of 31,94% and the derivatives market with 616,45%. The fixed income market also grew in 5,18%. In terms of operating income composition there is an important diversification vis-à-vis the concentration identified in The following is the share of the different markets in the generation of the COP$ million: equity market 34,00%, fixed income 26,94%, listing and maintenance 15,80%. Strengthening of new products, such as the derivatives market, sale of information, and special trades also contributed to the diversification of income. 65 The Business 7 Operating income in 2005 was concentrated 52.59% in fixed income market revenues.

70 Operating Income Distribution Modifications and Corrections 1,00% NDF 1,51% Others 1,90% Infoval 2,53% Derivatives 2,66% Publications and Susbscriptions 3,74% Especial Operations 4,01% Terminals 5,90% Inscription and Maintenance of Securities 15,80% Fixed Income 26,94% Equity Market 34,00% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00% 66 The Business The austerity policy implemented since 2006 has been reflected in the low growth of operating expenses. In 2010 expenses without amortizations and depreciations came up to COP$ million, showing an annual average growth of 1.00%. The amortization expense was reduced in COP $4.974 million as a consequence of the application of the balance reduction methods applied to expenses resulting from projects developed in previous years and that are being Operational Expenses Evolution amortized since Total expenses were reduced by 10% with regard to As a result of the operating income and expenses management, the company shows an EBITDA growth of 25.86% with regard to EBITDA represents 49,05% of operating income, growing 4,61% vis-à-vis the preceding year. Adequate accounting management and tax planning of the latest years allowed requesting in 2010 the reimbursement of taxes for an amount of $555 million before the National Customs and Tax Administration DIAN- and the tax rate was optimized in 1,36% vis-à-vis the 33% established by law (the rate came up to 31.64%). COP Millions On the other hand, the value of the Company s assets at 2010 closing was COP $ million. It shows a COP $4.279 million growth compared to the last year (3.76%) This appreciation is largely the result of an adequate investment portfolio management.

71 As a result of the EBITDA growth, the Exchange strengthened its equity by 5.39%, and accumulated growth in the last five years amounts to 46.96%. This behavior makes it possible to comply with the internationalization and growth challenges. MANAGEMENT MEASUREMENT THROUGH THE BALANCED SCORE CARD (BSC) Shareholders Equity To achieve alignment of the organization with the strategy defined in Mega 2015, the BVC adopted the BSC tool since Through this tool follow-up of the long-term strategy is made, using an annual measurement on punctual indicators COP Millions The Balanced Score Card conjugates the financial and nonfinancial indicators in perspective dealings with Finances, Markets or Clients, Processes, Strategic Capitals, or Internal Affairs The following Charts show the results of each one of the annual indicators defined for every perspective of the BSC in Financial Indicators Operational Revenues Operational Expenses without Amortizations and Depreciations Amortizations and Depreciations Total Expenses Operating Profits Net Profits Assets Liabilities Shareholders Equity EBITDA $ EBITDA % 55% 45% 38% 44% 49% ROA (Net Profits / Assets) 29% 26% 11% 16% 20% ROE (Net Profits / Shareholders Equity) 38% 32% 12% 19% 23% Soundness (Assets / Liabilities) 452% 518% 871% 717% 794% Indebtedness(Liabilities / Asstes) 22% 19% 11% 14% 13% The Business Figures in COP Millions

72 Financial Perspective The BVC creates value for its shareholders developing the securities market Indicator Unit Goal Definitions Minimum Maximun Exceed Expectations Actual 2010 EBITDA * $ mm Operational Expenses (with prepaid expenses) $ mm New Product Incomes $ mm Client Perspective... Being highly competitive with value proposals for our clients and working jointly with brokers and regulators Indicator BVC Transformation Focused on Clients Implementation Plan Unit Goal Definitions Minimum Maximun Exceed Expectations Actual 2010 % 90,0 95,0 100,0 93 Loyal Clients with personal relationship % The Business Internal or Processes Perspective... Executing reliable processes oriented to results and to continuous improvement Goal Definitions Indicator Unit Exceed Actual 2010 Minimum Maximun Expectations Operational Residual Risk level Reduction % 11,0 12,0 13,0 13,12 Project Advances % ,21

73 Strategic Capitals Perspective And having the persons and the organization with the necessary learning ability to achieve the MEGA Indicator Unit Goal Definitions Minimum Maximun Exceed Expectations Actual 2010 Human Capital Management: 50% Performance Management and 50% GPTW % ,50 Technology Enlistment Grade % 3,05 3,12 3,14 3,14 Investments And Strategic Alliances Permanent Investments In 2010 the BVC continued with its strategy of being the Latin American benchmark of the securities market for local and foreign investors, and this is why seeking to strengthen its position, soundness and competitiveness, the BVC continues consolidating its presence throughout the entire value chain infrastructure of the Colombian securities market through strategic investments in companies that make part of it, and that contribute to develop and strengthen market infrastructure. Herein below there is a summary of the equity interest and financial indicators of BVC s investments. 69 The Business AFFILIATES PERMANENT INVESTMENTS agora360 INVESBOLSA 54,85% 49,95% 54,99% 100% 22,89% 20,15% Cámara de Compensación 25% de Divisas de Colombia S.A.

74 Affiliates INTEGRADOS FX S.A. (SET FX) Integrados FX provides transactional, listing and spot market information systems and foreign currency forwards. SET FX leads the Colombian Exchange market operating 100% of the transactional market, being the foreign currency market benchmark in Colombia. In 2010 USD $257 billion were traded with SET FX, exceeding by 4% the traded volume in 2009, with trades. Financial indicators SET FX Revenues EBITDA Net profit Assets Liabilities Shareholders equity EBITDA margin 54% 62% Net margin 36% 42% ROE 69% 73% ROA 53% 57% COP $ Million * Information reported to the SFC Financial indicators Derivex 2010 Revenues 34 EBITDA -311 Net profit -349 Assets Liabilities 186 Shareholders equity EBITDA margin -916% Net margin % ROE -22% ROA -20% COP $ Million ÁGORA 360 S.A. The activities that BVC was accomplishing through its affiliate ÁGORA 360 S.A. to provide trade automation services to brokers has been restructured and this is why as of December 29, 2010 ÁGORA 360 S.A. entered into liquidation grounds that initially foresee reimbursement of contributions to shareholders 70 DERIVEX The Business On June 2, 2010 DERIVEX was incorporated, a company that manages the first standardized derivatives market of energy commodities. The BVC created this company in association with XM Compañía de Expertos en Mercados S.A. E.S.P. as a strategic ally. The first product launched was electricity futures. DERIVEX began operations in October 2010 negotiating a contract on the monthly electricity average of October, at a price of COP$ 120 per KW/h. At 2010 closing it had eight members and the technical committee of the market with the participation of all the established and energy sector brokers. Agora Financial indicators Revenues EBITDA Net profit Assets Liabilities Shareholders equity EBITDA margin -155% 22% Net margin -208% 5% ROE -8% 1% ROA -6% 0% COP $ Million

75 INVESBOLSA SAS INVESBOLSA was incorporated on March 10, 2010 and its main corporate purpose is the incorporation and participation in companies and entities directly related with the activities and services provided by the BVC, in order to facilitate, expand or supplement BVC s corporate purpose. The company may invest in the corporate capital of companies where BVC may invest according to its legal regime. Furthermore, it may accomplish any other economic activity in Colombia or abroad. Deceval Financial indicators Revenues EBITDA Net profit Assets Liabilities Shareholders equity EBITDA margin 60% 54% Net margin 39% 43% ROE 32% 32% ROA 25% 27% In Millions of COP $ *Information reported to the SFC Invesbolsa Financial indicators 2010 Revenues - EBITDA -0,0 Net profit 0,5 Assets 50,9 Liabilities 0,3 Shareholders equity 50,6 EBITDA margin - Net margin - ROE 1% ROA 1% In Millions o COP $ PERMANENT INVESTMENTS DECEVAL S.A. It manages and has the custody of securities and it records, clears and settles trades made at the BVC. In 2010 DECEVAL had the custody of securities amounting to COP $281,8 billion, with a 38% increase with regard to It also had the custody of equity securities for COP $189,1 billion and Fixed Income securities for COP $92,7 billion. The balance of dematerialized issues at 2010 closing amounted to COP $217,5 billion and securities for COP $79,8 billion were managed. CÁMARA DE RIESGO CENTRAL DE CONTRAPARTE S.A. (CRCC) The CRCC is in charge of clearance and settlement, acting as a clearing house, eliminating default risks in BVC s standardized derivatives obligations. CRCC Financial indicators Revenues EBITDA Net profit Assets Liabilities Shareholders equity EBITDA margin -118% -425% Net margin -226% -616% ROE -17% -19% ROA -16% -18% In Millions of COP $ *Information reported to SFC 71 The Business

76 72 In 2010 the CRCC cleared and settled a total of contracts, 1.674% above 2009, corresponding to trades made by 21 members of the Standardized Derivatives market. CÁMARA DE COMPENSACIÓN DE DIVISAS DE COLOMBIA S.A. (CCDC) The CCDC manages the clearing and settlement system of the spot trades between brokers of the Exchange market, CCDC Financial indicators Revenues EBITDA Net profit Assets Liabilities Shareholders equity EBITDA margin 17% 17% Net margin 8% 8% ROE 16% 20% ROA 14% 17% COP $ Millones *Información reportada a la SFC reducing risks associated to default of foreign currency trades, including liquidity, market, trading, and legal risks. In 2010 it accomplished trades for USD $302 Billion, 8% above Strategic Alliances MILA Latin American Integrated Market: 2010 gave rise to the MILA, -Latin American Integrated Market-, the main purpose of which is to create a single diversified, ample and attractive Equity Income Market for local and foreign investors, and to expand access to capital for current and potential issuers, providing greater liquidity and interest in our markets. MILA is the result of the consolidation of the stock market integration project managed by the BVC, the Lima Securities Exchange (BVL) and the Santiago Trade Exchange (BCS), under the model of Brokerage Routing with value added.

77 At operating level the MILA consists in the interconnection of transactional platforms under the standard communication protocol, allowing the brokers of the three countries access to information of securities listed at the Exchanges, sending purchase and sale orders directly to the market, prior agreement with local brokers. The merger will create a new more competitive actor to face the challenges of a global capitals market and will represent an opportunity for the Stock Exchange industry of both countries, increasing the value of the companies through operative synergies and the development of new products in both markets. During the year, the MILA Project progressed in the detailed definition of the integration model, the issue of the regulations that legally supported the development of the required application, the implementation of the agreed communication protocol, and the approach of the three countries brokers. All these efforts will end in 2011, giving rise to the new market. MILA has become a unique initiative that will serve as benchmark for future integrations worldwide. Important Events Occurred After Business Year Closing Merger BVC BVL EIn January 19, 2011 the Lima Securities Exchange BVL, and the Colombian Securities Exchange BVC signed a Memorandum of Understanding determining the first steps to be followed for the first corporate merger of this type between two securities Exchanges in Latin America, after approval by both General Shareholders Assemblies and authorization by the supervisors of Colombia and Peru. To carry out this operation, it has been agreed that the contribution of BVC and of BVL to the merged entity shall be 64% and 36%, respectively, where the clearing ratios for Class A and Class B shares issued by the BVL will be fixed with regard to the new Exchange common shares. Shareholders of both companies shall become the shareholders of the merged entity. Both BVC and BVL shall continue operating in their respective countries as they have been doing to this day, reporting to their Board of Directors and being supervised by the regulation authorities of their countries. SOFTVAL On January 13, 2011 Sociedad Comercial Softval S.A. was registered at the Bogotá Chamber of Commerce under No , Book IX, incorporated by means of Public Deed No 4163 executed before the 21st Notary Public of Bogotá on December 23, Its corporate purpose is the provision of pricing services for non-standardized financial instruments, specialized databases and financial estimates. 73 The Business

78 Chapter 5 The Company

79 Human Capital 75 In 2010 the Human Capital strategy: attract, retain, and develop the best human talent in key trading accounts ensuring achievement of the BVC strategy, was centered in the following aspects. The Exchange was selected as company No. 24 within the list of Best Companies to work with, according to the Great Place to Work Institute. This privileged ranking was attained thanks to the commissioning of the action plan to improve the labor environment, the unconditional support of leaders and the decisive commitment of each one of the employees. With the main actions that allowed consolidation of the labor environment at the Exchange, we point out the following: The creation of the program Human Promoters, with 18 voluntary leaders, represents every area of the organization; such promoters were trained to be ambassadors of the Human Capital Strategy in their areas. Today they are acknowledged as allies of the strategy, for they have been agents of the positive change by becoming more integral professionals. The Company

80 76 The Company Human capital policy was consolidated by searching internal equity, leveling the compensation delivered by BVC to 100% of its employees. Career paths were defined for 50% of the Exchange s population, enabling future direction of the employees within the organization. BVC s Human Capital management continues giving priority to filling vacancies by promoting internal employees. 58% of the vacancies were covered from inside. To continue with the Human Capital development, the ongoing training program was positioned through its most prominent programs: Stock Exchange Masters (120 employees trained in products and services offered by BVC); Training and Leadership Program (Training in Coaching, the Art of Trading, Service, Innovation and Creativity Orientation, Corporate Strategy and Human Capital); English, (training for 60 employees) and Training Abroad (a sponsored employee). In the second half of the year, taking into account the strategy of the Company centered in establishing loyal and personal relations with our clients, strategy revitalization workshops were accomplished, including Service Commitment and Customer Service Area Leaders, who were offered a course on Service Management with awarding of diplomas. BVC made a more thorough assessment of the profiles of 51 employees (President, Vice-president, Managers, Directors and Leaders (involved with the Clients project); and it applied the PPI (productivity indicator) test to 100% of the employees. With the information provided by these tools on the behavior styles, the employees and their leaders understand, manage, and efficiently encourage the work of employees and the design of relevant improvement plans. In addition, thanks to the consolidation of the Performance Management Integral System the employee progress process was reviewed in terms of the targeted results, development of conduct goals, abilities, and technical skills. Acknowledgment space was created within BVC Interaction, wherein 85 employees have been acknowledged for their commitment, effort, dedication and passion for their work. Likewise, this has been a space to interact and share relevant topics such as Strategy, Great Place to Work, Risks Culture and Quality.

81 This space has been institutionalized as a formal communication channel highly esteemed by all the organization. The Program Wellbeing completed its third year of effectiveness, allowing the employees and their families to enjoy spaces and activities for personal growth, amusement, integration and friendship. Internal Control Management The BVC and its subordinated companies developed different initiatives in 2010 focused on strengthening their Internal Control Systems, by developing better practices and complying with regulations and requirements established by the Financial Superintendence. Herein below we shall show the progress and achievements obtained in each one of the Internal Control Components: Environmental Control In development of the Client Project objectives and in order to optimize its processes, it redesigned its organizational structure and the authority and accountability levels in agreement with the mission, vision, and strategic objectives of the Company. On the other hand, the Exchange promoted compliance with its ethical values and principles and internal control policies by developing training and sensitization programs addressed to all employees. Likewise, document review mechanisms were established and documents update practices were implemented in areas already formalized. Risk Management The internal control system and its components were strengthened through the identification, assessment, and treatment of risks to which the Exchange is exposed to in furtherance of its operation. Risk management monitoring activities accomplished by the BVC allowed analyzing the risk events identifying their causes, defining the required corrective actions to decrease their probability of occurrence. Concurrently, work was performed to process the treatment measures for identified risks, and to optimize the processes, achieving a 13.12% reduction in the residual operative risk level, exceeding the 12.00% established goal. Regarding the Business Continuity Plan, three IT tests were performed for Fixed Income, Equity Securities, and Derivatives products, one of which had market involvement. Furthermore, weekly tests were made to processes backed at the Alternate Transactions Center. The execution of such tests allowed training the workteam and update the Plan. Business impact and risk analyses were updated in the methodology to manage Business Continuity, and the contingency events, notification, and escalation scheme were improved. This allowed speeding communication and decision-making internally, improving the quality and promptness of the messages sent to the market while such events are being taken care of. 77 The Company

82 ORGANIZATIONAL STRUCTURE Secretaria General: Legal - General Secretary VP Legal Manager 78 The Company PRESIDENCY Auditing Area Marketing and Products VP Commercial VP Operations and Client Corporate VP Project Manager IT VP Services Manager Architecture and Software Manager. Project Director Planning and Finance Manager Trading Director Intermediaries and Intistutions Manager. Fixed Income Market Manager Technical Architecture Director Project Management Area Administrative Director Clearing and Guarantees Area Commercial Director Equity Market Manager Apliccable Architecture Director Accountant and Taxes Director Especial Operations Director Commercial Area Equity Market Director Software Director Human Resources Manager Client Services Director Issuers Manager Derivatives Market Manager IT Services and Infraestructure Manager Human Resources Area Client Services Area Colombia Capital Manager Derivatives Market Area Infraestructure Director Risks and Quality Manager CIB: CIB Client Services Medellin Regional Director Marketing Manager IT Operations Director Risks and Quality Director Cali Regional Director Advertising Director Software Management Director Businnes Continuity Area Market Data Director Software Management Area Data Security Area Education Director Social Responsability Director Research and Analysis Director Media and Public Relations Director Research Ana Analysis Director Investor Relations Director Infoval Area

83 In addition, the BVC is working in the integration of its transactions risk management systems, business continuity, information security, asset laundering and financing of terrorism, in order to optimize administration and accomplish an integral management of the risks associated to transactions, projects management, the environment and technology. Control Activities To improve its control policies and procedures the Exchange made an integral review of the processes, validating their compliance with the instructions established by the Administration, regarding risks and control measures. On the other hand, forms were created to allow objective control evaluations and to identify gaps in order to improve efficacy. In addition, segregation of functions was strengthened together with detection controls through the implementation of the Anti-fraud Program and the Information Security Management System. Improvements were made to the accounting controls and processes in order to guarantee reliability of the financial statements and other reports that present the financial situation and results of the entity, seeing that they comply with the applicable provisions, principles and regulations. Among such improvements, the following are highlighted: Updating of the internal accounting policy with all the amendments and updates of local standards. Implementation of controls to guarantee quality, sufficiency, and timeliness of the financial information. Updating of the accounting and financial risks map. Information and Communication To optimize management of information used and transactions derived data, and in order to see that all security, quality, and compliance criteria are taken into account, the Exchange continued with the consolidation of the Information Security Management System (SGSI). The activities accomplished for such process included the following aspects: Definition of information security policy and scope Identification and classification of Information Implementation of the mechanisms to safeguard information security criteria, and to detect and correct errors in the provision and processing of information. In order to maintain an effective corporate communication, improvement was made in internal and external means established for the transmission of significant information to stakeholders. Furthermore, in 2011 the implementation of the Ethics Line as an independent channel that allows the employees to report possible frauds or non-ethical conducts was completed, thus contributing to effective risk management. Monitoring The Exchange reviewed the presence and operation of each one of the Internal Control components, through high level committees, ongoing monitoring activities, and self-evaluations. 79 The Company

84 High level follow-up was strengthened by establishing committees that analyze and monitor tactic and strategic activities development of the Company, and that issue reports addressed to the Administration for decisionmaking. As a supplement, monthly follow-up is made to action plans implemented by the ongoing improvement processes and management of actual and potential risks. The internal control system self-evaluation exercise was accomplished conducting a survey among the employees to know their perception on this system and to identify improvement opportunities for each one of the components. The results obtained reflect a satisfactory perception with regard to the progress achieved in the implementation of the Internal Control System. Subordinated Companies BVC made follow-up to the management of its subordinated companies for the implementation and maintenance of the internal control system and concluded that INTEGRADOS FX S.A. and DERIVEX S.A. have an effective system that complies with the regulation requirements established by the Financial Superintendence. In addition, AGORA 360 S.A. (in liquidation) and INVESBOLSA S.A.S., entities that are not supervised by the Financial Superintendence, accepted the policies and practices that according to their corporate purpose and development of activities are deemed applicable. Quality Management To continue strengthening the Quality Management System (SGC) and consolidating the institutional culture focused on operative excellence, as well as the satisfaction of clients needs, initiatives such as the copilots programs, the training plans, and the follow-up to continuous improvement activities for every process were developed. 80 Strategic Management The Company Client Needs Product Management Commercial Management Marketing Management Operation Client Service Management Clients Satisfaction Projects Management Legal & Regulatory Management IT Management Audit Corporate Governance Financial & Administrative Management Quality Management Risk Management Human Capital Management

85 The co-pilots program consisted in training 16 employees to support continuous improvement through leadership at meetings and improvement tools. The implementation of this program allowed every process to have a guideline for the definition of corrective, preventive, and optimization action plans. On the other hand, training plans were developed for the employees, together with sensitization activities addressed to all levels of the Company, and this was made through campaigns, messages, and spaces where the progress reached in continuous improvement was acknowledged. Development of these plans allowed strengthening the organizational culture, oriented towards operative excellence and clients satisfaction. Closing of audit findings, mitigation of operative risks, non-conforming products management, and optimization of transactions were all issues monitored through the Continuous Improvement indicator, which reflected 97% compliance at year end. In addition, the Exchange updated the processes map to focus the operation on the generation of value proposals for its clients, understanding their current and future needs, and complying with their requirements, in order to establish loyal, personal and long-term relations. Independent evaluation of the Internal Control System (ICS) In accordance with Legal Basic Circular of the Financial Superintendence, Title I, Chapter 9, paragraph , in addition to the permanent follow-up by the Senior Management and the self-evaluation of every area, it is necessary to accomplish a periodical assessment of the Internal Control System (ICS) under the charge of units or persons independent from the processes, i.e. internal auditors or external auditors, specially engaged for the purpose. To comply with the above, Internal Audit was given the task in 2010 to make an independent assessment of the ICS. Such assessment was carried out according to the scope and coverage defined in the regulations and the results were delivered to the Administration at year end. 81 General Considerations Implementation Scope Control Environment Risk System Management Control Activities Accounting CI IT CI Data Communication Monitoring Internal Control System Assessment 2010 The Company Calification (0-100%)

86 82 The Company As a main conclusion, it was informed that the ICS elements, meaning the control environment, risk management, control activities (included in the ICS special areas), information, communication and monitoring, evidenced during the year an efficacy average of 85,43%. Taking as basis the observations and recommendations made by Internal Audit, short-term plans were defined with the necessary actions to close the detected gaps. Finally, in compliance with the guidelines of External Circular 038/2009, a certification of the Chairman of the Board and the Legal Representative of the Exchange was issued on January 14, notifying the Financial Superintendence on full compliance with the requirements established for the ICS independent evaluation as of December 31, Internal Audit During the year Internal Audit ended the task of adapting this area according to the guidelines established by the Financial Superintendence and abiding by international standards. As a result of the above, it started the application of a new risk-based audit model with the support of a new technological tool. The main results of the work accomplished were the following: a. Construction of standard models to manage the following model types: Risk-based audits (evaluation of processes, risks, and controls). Quality Audits, based on ISO 9001:2008 standard Compliance Audits (assessment of compliance with legal or internal rules and management systems.) b. Definition of e-questionnaires regarding controls efficacy assessment (self-evaluation and/or audit evaluation). c. Definition of a systematic and documented mechanism for internal supervision of the audit work. d. Automatic generation of audit reports (proformas) and organization of working papers (planning, tests, execution activities, reports, follow-up records).

87 e. Contrast risk assessment (comparison of inherent or residual risk assessment of the process against the audit results). With support of the new model definitions that were incorporated throughout the year, the Audit area developed a work plan, duly approved by the Audit Committee that contained the following lines of action: a. Assessment of controls efficacy for the most relevant risks. Such assessment implied the review of the Financial, Human Management, Transactions, Legal Management and Innovation (projects) processes in 2010, with the new audit model. b. Evaluation of the Quality Management System, examining the Exchange s processes to determine their conformance with the planed provisions and with the requirements of ISO 9001:2008 standard, as well as with the requirements established by the organization, and their efficacy. Such revision implied execution of processes quality audits, accomplished through mixed audits in certain cases (including risk assessment), or independent audits in other cases. c. Review of the Exchange s corporate governance and risk systems efficacy. The above included an assessment of the Operative Risk Management System SARO, as well as of the provisions established by the Financial Superintendence regarding Information Security, compliance with the Corporate Governance Code and finally, the Independent Evaluation of the Internal Control System at the end of the year. d. Development of processes to check special transactions of the Exchange (Dutch auctions and stock public offerings), and technological contingency tests. e. Execution of certain ad-hoc control assessments on relevant matters upon request of the Senior Management regarding relevant matters. As a result of the mentioned Audit tasks, the respective report with the findings and recommendations was prepared and delivered, and the closing plans thereof were discussed with persons accountable for the 83 The Company

88 84 The Company respective areas. Likewise, the progress of such plans was reviewed quarterly, finding that as of December 31, the average progress was 86,98% for the total audit reports that had been officially delivered within at least three months. Activities developed by the Audit area, together with the important role played by the Board of Directors and the Audit Committee in the plan s follow-up and in the analysis and feedback of results, and the special dedication of the administration to close the detected findings, were all factors that undoubtedly contributed to strengthen the institutional internal control, which in the end is the central axis of the control bodies mission. It is important to stress that the Administration provided funds and information required to accomplish the Audit work without limitations and in independence conditions. The internal auditor submitted quarterly reports to teh Board of Directors and to the Audit Committee. Technology Audit As of 2009, the IT audit responsibilities of the Exchange have been entrusted to the same firm that provides External Audit services through a special scope. Development control of such responsibilities is to be made by Internal Audit. Based on the work plan determined for 2010, fundamental tasks related with the following aspects of IT management were developed: a. Evaluation of the IT general controls operative efficacy with emphasis in change control, transactions management and information security. b. Evaluation of the IT governance scheme: IT strategic planning and implementation efficacy of ITIL 8 methodology in the Exchange s Technological Area. 8 Information Technology Infrastructure Library

89 c. Accounting system s reliability analysis with emphasis in information integrity controls in interfaces between critical systems and the accounting system. Action plan progress, with the results, findings and recommendations of completed audits were quarterly submitted to the Audit Committee. In addition, situations detected within the improvement plans were incorporated in audited areas. 85 The Company

90 Chapter 6 Social Responsibility

91 The Exchange continued consolidating its Social Responsibility (SR) strategy by developing activities and initiatives aligned with the corporate objectives, where it engaged not only employees but allied companies and organizations. Some of the activities planned were strengthened or reoriented in order to provide a better economic, social, and environmental value for the country and the main stakeholders. This way the commitment to include social responsibility and sustainability within daily businesses and activities continued strengthening. A greater participation of employees and directors involved in different activities was achieved, together with a greater integration of the Company areas in the execution of initiatives. The activities accomplished are aligned with the 5 work axes defined in the SR Strategy. Entrepreneurial Development and Private Capital Funds We continued working in the development of an entrepreneurial growing environment for small and medium size companies Pymes-, by promoting the Private Capital Funds Industry (FCP), to facilitate access 87 Social Responsibility