Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 4

Each market must have clear rules assuring investor protection by safeguarding participants from the financial risks of failed settlement and ensuring that listed companies are required to follow sound policies on corporate governance, transfer of economic benefits and shareholder rights.

1.	Does the depository or the market have securities lending and borrowing schemes in place, and are these open to all market participants and their settlement agents?	CBLC has a Securities Lending Program for equities since 1997. It is now implementing the same service for corporate and government bonds instruments. Through the CBLC network, clearing agents and depository agents can access the Securities Lending Program, called BTC, and may place their bids/offers for borrowing and lending securities as well as register securities lending operations agreed bilaterally. CBLC is the central counterparty for all securities' lending contracts. Consequently, it is responsible for collecting collateral from the borrowers as well as for assuring to the lenders that the shares used in the transactions will be returned in accordance with the terms and conditions of the contract. CBLC is also responsible for the consolidation of the outstanding positions. Finally, it is worth pointing out that all investors holding positions in the depository service are eligible to participate as securities' lenders.
2.	Does the settlement system mark fail trades to market and collect margin from the failing counterparty to protect the innocent counterpart's interest?	CBLC allocates operational limits to its clearing agents who, for their turn, distribute those limits to their clients. Clearing agents' clients can be brokers or institutional investors, called qualified investors. The latter is qualified by the clearing agent itself according to their own credit analysis. Today, operational limits are established based on the participant's financial statements but with the introduction of CBLC new risk management systems, operational limits will be collateral based. Currently, in the equities market, CBLC has a risk based approach for risk measurement and limits utilization. In the cash market, limits utilization is still based on notional values. The plans are to extend the risk based approach for the cash market in equities as well as for the fixed income markets (public and private). Further, positions in derivatives in the equities market are fully collateralized. This also will be extended to all markets under CBLC responsibility. For the derivatives markets and securities lending contracts, CBLC evaluates on a daily basis the necessary guarantees needed to cover investors liabilities related to the settlement of trades in equities in the forward and options markets as well as of securities lending contracts. For this purpose, CBLC uses the risk management system CM-TIMS (Clearing Members - Theoretical Intermarket Margin System), devised by the Options Clearing Corporation (OCC) of Chicago. Amongst its advantages, the system: provides CBLC's Clearing Agents with the level of guarantees compatible with the risks of the investor's portfolio under the Agent's responsibility; for this the CM-TIMS uses statistical calculations and employs sophisticated pricing models; calculates the total margin required for the portfolio of an investor (position in options, forward market and securities borrowing); off-sets the position margins by class (positions relating the same underlying asset) or by product (asset classes which show a high degree of correlation); allows Clearing Agents to simulate margin requirements based on changes in investors' positions; and provides on-line information for all parameters used for calculating margin requirements. The guarantee system is completely automated as well as updating investors' positions on a real time basis. As of April 2001, CBLC will operate a new risk management model, following the Brazilian Payment System restructuring. The new risk management model can be considered a hybrid model based on defaulters pay and survivors pay principles. In order to implement the new model, CBLC acquired from Algorithmics a risk management software - RiskWatch, which is operating now in a preliminary phase, providing the Clearing Agents with complete risk information. a) Defaulters Pay The operational limits will be covered by collateral deposits under a 95% level of confidence. In the event a a participant fails to deliver or to pay, the guarantees posted as collateral by the defaulter participant are used to settle his positions. b) Survivors Pay CBLC will implement a stronger Settlement Fund based on survivors pay principle. See next section for more information on Survivors Pay.
3.	Does the market operate a guarantee fund or have an equivalent procedure to protect against the cost of failed transactions; and which sectors of the market does it cover?	Should a participant fail to deliver or to pay, up to the level of the guarantees posted as collateral by the defaulter participant, CBLC applies the defaulters pay principle. Beyond that, CBLC will use its Settlement Fund. After a period of studies on worldwide best practices regarding the constitution of a clearing fund, CBLC is right now implementing a stronger Settlement Fund based on survivors pay principle. CBLC Settlement Fund is intended to cover residual losses arising from a participant default that could not be covered by the defaulters collateral. The participants of the Fund will be CBLC clearing agents and their collateral contributions will be calculated based in the risk exposure of their positions. In order to stipulate the clearing agents contribution, CBLC calculates their risk exposure stressing the full portfolio (positions in derivatives, operations to be settled and collateral deposited to cover the risk exposure) at a level of 99% of confidence or stress scenarios (which one is worse). In case of new calls to make further contributions, the clearing agents liability is limited to their risk exposure and they can decide to fulfill the obligation or to reduce the risk exposure - caused by the operations to be settled under their responsibility - to the level of its current participation in the Fund. The clearing agents participation and the size of the Fund will be calculated monthly and the minimum size is estimated to be R$ 100 million.
4.	Are the stock transfer agents (share registrars) linked electronically to the depository?	Yes. All securities are dematerialized and held in CBLC Depository Service in the name of the beneficial owner. CBLC has a two-tiered account level structure allowing record keeping of securities ownership up to the beneficial owner level. As a result, from the companies standpoint, securities are recorded in the registrars in the name of CBLC as the fiduciary owner and it is the depository that records the actual ownership of securities. In order to transfer of securities from the registrar to CBLC, a depository agent, as a representative of the beneficial owner, requests the blockage of securities in the registrar. The depository agent will then effect the deposit in the beneficial owner account under its responsibility. Once the deposit was made, CBLC will inform the registrar who will transfer the securities from the name of the beneficial owner to CBLC. It is important to emphasize that CBLC is only the fiduciary owner of the securities. In order to transfer of securities from the CBLC to the registrar, the depository agent, as a representative of the beneficial owner, requests the withdrawal of the securities. CBLC will inform the registrar who will re-register the securities in the name of the beneficial owner.
5.	Is there a legal maximum time period to complete ownership transfers in the books of the issuer? If so, does market practice adhere to the deadline?	No, there is no legal maximum time period to complete ownership transfers. Nevertheless, as securities are totally dematerialized, CBLC provides the issuers, daily and electronically, with information on the ownership of securities (as mentioned, CBLC acts as a consolidated registrar) allowing the issuers to register transfer of ownership in the same day. Should an issuer take longer to accomplish any transfer of ownership, it is due to its own processing timeframes.
6.	Are investors entitled to all benefits arising on a security from the point of purchase; and how are any rules enforced?	Yes, investors are entitled to all rights approved by the General Meeting or by the Board of Directors Meeting. In most of the cases the EX date is the date of the approval of the rights. Nevertheless according to the law it is possible that the general meeting or the board of directors meeting can be established prior record date. When the securities are traded with the rights they are called COM (with rights) and after the record date they are called EX (without rights). When traded, securities are already COM or EX rights. The stock exchange is responsible qualifying the securities as COM or EX depending on the information received from the issuer. CBLC is responsible for the conciliation of positions as well as for processing all payments related to corporate actions.
7.	Is proxy voting permissible in the market and can such proxies be lodged by post or other remote delivery method?	Yes, proxy voting is permissible in the Brazilian market but no remote voting is possible. In Brazil, local custodians are responsible for rendering this service to foreign investors. Local custodians require powers of attorney to vote on a foreign investor's behalf. These documents must be renewed annually.
8.	Are there binding rules in the market stating the minimum and maximum lapsed time between the announcement and completion of key events, including registration, the calling of shareholder meetings, the payment of dividends or interest, rights issues, tender offers and other voluntary corporate actions?	Yes, binding rules in the market are provided for in Law 19550 (Companies Act), CNV registration requirements and BCBA stock-exchange listing requirements.
9.	Are all voluntary corporate actions advised through a central mechanism assuring consistent information to all investors?	The rules depend largely on the instrument and on the settlement cycle. For fixed income instruments, the revenues as well as their payment date are known in advance. Also for fixed income traded with a settlement cycle of 1 (one) day - T+1, securities start to be traded Ex rights 1 (one) day before the payment date. For those settled on T+0, they become EX rights on the payment date. For equities, calling shareholders meeting must be done with 8 days notice. For the payment of the dividends and interest, the companies establishes the date according to their convenience.
10.	Is information on corporate actions available electronically, and is the minimum lapsed time for responding to such actions sufficient to enable all domestic and foreign investors to respond in a timely and considered fashion?	Yes, CBLC as central securities depository not only advise all its depository agents about any corporate actions related to the securities held in its Depository Service but also centralises its processing, reconciliation as well as all payments related to them.