Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8

Market selection

Recommendation 5

The major risks in Securities Systems should be mitigated by five key measures:

• the implementation of real delivery versus payment
• the adoption of a trade date plus one settlement cycle in a form that does not increase operational risk.
• the minimisation of funding and liquidity constraints by enabling stock lending and borrowing, broad based cross collateralisation, the use of repos and netting as appropriate
• the enforcement of scrip-less settlement
• the establishment of mandatory trade matching and settlement performance measures.

1.	Does the market use DvP settlement procedures in accordance with one of the recognised BIS models? If so, which one? If the model is not BIS model 1, are there plans to move to this model?	Currently, CBLC has a DVP model 2. CBLC settle securities transfer instructions on a GROSS basis with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer instructions on a NET basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle. On T+2, securities are delivered on a provisional basis and remain blocked until payment is final and irrevocable on T+5. Only then securities are released. This long settlement lag is due to the fact that currently the Brazilian Payments System do not allow real time transfer of funds thus preventing same day finality of settlement. Also, today securities settlement systems do not have direct access to central bank money, depending on other settlement system for processing settlement. In concrete terms, although payment is instructed on T+3, finality of funds transfers in central bank money is only achieved on a Central Bank overnight batch processing on T+4. According to the current structure of the Brazilian Payment System, all payments corresponding to settlement obligations under CBLC's responsibility are carried out through CETIP's link to the Brazilian Central Bank. CETIP operates a private payment system (not guaranteed) through which the participants, such as banks and brokers, but also CSDs, such as CBLC, instruct payments. Each institution that is instructing payments and is not a settlement bank has to appoint one. On T+4, after the netting of all financial obligations under the responsibility of each settlement bank, CETIP issues a financial statement that have to be confirmed by the settlement banks in the system. In this same day, CETIP sends information to the Central Bank which will effect the correspondent movements with central bank money amongst settlement banks reserves accounts. Nevertheless, the Brazilian Central Bank is implementing a restructuring project in order to introduce RTGS capabilities in the Payments System. In April 2002, the RTGS system will be operational and all institutions that fulfil certain conditions will have a direct link to the Central Bank RTGS system. The introduction of RTGS facilities in the Brazilian Payment System will allow CBLC to coordinate a SFI-DVP - same day simultaneous, final and irrevocable delivery of securities against payment with central bank money. With the RTGS facilities : CBLC will have a direct link to the Central Bank with access to central bank money only for settlement purposes; Cash and securities will be settled on a net basis (DVP model 3); Cash and securities movements will be simultaneous without any settlement lag; Cash and securities transfers will be made through CBLC settlement accounts; Cash and securities transfers will have same day finality and irrevocability; and Payments will be made with central bank money and instructed directly by CBLC.
2.	Does the market have a rolling settlement cycle of T+3 or shorter for all exchange traded instruments?	For equities, CBLC has a rolling settlement cycle of 4 days (as explained in the previous question) and for corporate bonds, a rolling settlement cycle of 2 days (T+2) due to the same reasons explained above since the payments related to securities settlement is accomplished in the same fashion . As soon as the RTGS payment systems is in place, those cycles will migrate to T+3 and T+1, respectively. For the government bond market, in which CBLC will act as central counterparty also by April 2002, CBLC will have flexible rolling settlement cycles of T+0 and T+1. In regard to the international trend of reducing settlement cycles, CBLC is preparing its systems to accommodate this shortening as soon as the international players are ready to do so. This is already being done since CBLC is adapting its systems and business model to the changes in the settlement procedures resulting from the changes in the payments infra-structure.
3.	Could the market reduce the current settlement period to T+2 or below, without increasing fails rates? If so, how would this be achieved, and what plans are there to shorten the existing settlement cycle?	One concern related to this question is that more than 25% of trades settled within CBLC are from foreign investors and CBLC understands that the financial community is not ready to make this movement mainly in a cross-border scenario. It is worthwhile mentioning that in Brazil, we already had a T+2 settlement cycle (instruction of payment) from 1990 to 1994. Due to the increase in foreign investors participation in the market and the resulting increase in settlement fails arising from their difficulties in providing settlement instructions timely, CBLC extended to settlement cycle to T+3 (instruction of payment). From CBLC perspective there is no use in reducing the cycle if there is any risk of increasing settlement fails.
4.	Is matching of trade details achieved on trade date, at least for direct market participants; and by trade date plus one for indirect participants?	Trade matching occurs immediately after trade execution in all trading systems CBLC settles for. All trades registered in trading systems are already locked in for settlement and, as a result, there is no need to counterparties to enter trade details after trade execution. Matched trades are automatically registered in CBLC. At this point CBLC becomes central counterparty to the trade. According to the Brazilian Securities Commission legislation, trades must allocated to final investors. Allocation is made through CBLC network and occurs until T+1 in the cash markets and on T+0 in derivatives markets.
5.	Is the depository scrip-less, and, if not, is it working to enable scrip-less settlement?	In CBLC Depository Service, securities are totally dematerialized since early 90's.
6.	Does the market allow partial settlements?	Yes. Nevertheless, should a participant fail to deliver securities fully or partially until T+4, CBLC will issue, on T+5, a full or partial buy-in order on behalf of the buyer's broker. The latter has until T+8 to buy the shares and any price difference will be covered by the defaulter. In case the buyer do not succeed in buying back the shares, the trade will be reversed and any losses arising from the process will be on the expenses of the defaulter.
7.	Can the depository accommodate same day turnarounds?	Yes. Day trades represent an important share of total trades executed.

Bank of International Settlements (BIS) Settlement Models

Model 1:	Systems that settle transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment).
Model 2:	Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (delivery) occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle.
Model 3:	Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.