In Brazil, the majority of securities are held in book entry form, therefore dematerialized; companies that still issue certificated securities are usually state-owned.

Shareholder registry is legally kept by the company who issue shares; however, in case of dematerialized shares, this activity is performed by a registrar accredited at the CVM. When securities are immobilized in one of the Central Depositories (necessary for trading), transfer of ownership is performed either via book-entry on the accounts open in the central depository (for a detailed description of the relationship between company/registrar/ depository, please refer to question 4, section II.

Currently, there are two companies responsible for the clearing and settlement of trades performed on the Brazilian stock exchanges, and which also act as central depositories: CBLC - Companhia Brasileira de Liquidação e Custódia, which processes clearing and settlement for the São Paulo Stock Exchange (to which it is linked). All trades cleared through CBLC are matched by BOVESPA, on line and in real time, and all information regarding such trades is automatically sent to the clearing system through electronic links with the exchange.

The other depository is CLC - Câmara de Liquidação e Custódia, which processes clearing and settlement for the other 8 stock exchanges and for SOMA - Sociedade Operadora do Mercado de Acesso (an electronic trading system), and which is controlled by the Rio de Janeiro Stock Exchange (BVRJ).

In addition, the payment system used by CBLC and CLC for purposes of clearing among participants is provided by CETIP, which is also an electronic negotiation system for institutional investors, in which mainly bonds and debentures are traded and related settlement is provided).

The BM&F (Commodities & Futures Exchange) settles futures, options, forward, and spot contracts on different financial assets, as well as agricultural commodities and OTC transactions (swaps and flexible options) registered in its electronic systems. Unlike BVRJ and BOVESPA, the BM&F proceeds with clearing and settlement directly in house, but also utilizes CETIP systems for financial settlement.

The customers of the custody service (please refer to question 3 of this section) have direct electronic links with CBLC’s and CLC’s networks. All processes regarding deposit, withdrawals and transfer of securities may be done through such computer terminals, thus enabling customers to have full control over their custody accounts. Daily netting is performed between the two clearings, enabling day-trade operations in different exchanges.

Please note that in Brazil matching is performed by the stock exchanges at the moment trades are placed (please refer to section IV, question 2.a). Brazilian capital markets’ laws determine that listed securities may only be traded by a broker on the stock exchanges. In this sense, there is no trading activity over the counter for securities that are traded on the exchanges, except for private transactions, thus assuring that all trades placed by brokers on those securities will necessarily be subject to matching on the exchanges. Each clearing house that operates with stock lending or futures markets sets its own margin deposits.

There is no central securities depository in Brazil that congregates all different types of securities. CBLC and CLC are the depositories for equities traded on the Brazilian stock exchange system. CETIP performs custody services for fixed-income instruments and corporate bonds, and also registers swap contracts. . BM&F provides fungible custody for gold certificates.

In addition, several financial institutions are authorized by the CVM to perform registrar activities.

(a) Institutional investors such as brokers, banks, insurance companies, pension funds, foreign institutions (brokers, banks, pension funds, asset managers etc.), brokerage dealer firms, and corporations are allowed to have their own account. Other investors, such as individuals, have individual accounts under the financial institution they operate with. Nevertheless, the management of such account is centralized with CBLC and CLC, allowing perfect identification of beneficial owners.

(c) CBLC and CLC are allowed to immobilize securities.

(d) A wide range of optional services is offered to members, such as stock lending and acting as a local custodian of depositary receipts.

(e) They may hold custody accounts for participants which do not trade their securities. However, at the moment this customer trades, it is considered a market participant.

(f) As long as they register with the CVM, according to CVM Rule 89.

The figures below are for the year of 1997 only:

At brokers’ level, a sale of a security becomes a binding contract at the moment the trade is closed at the open outcry and brokers sign a card with all trades details (please refer to section IV, question 2.a). The same principle applies to the electronic trading system, where trades are closed based on bids and offers set by the brokers. Once a deal is closed, the trade is considered irrevocable, except in situations where market manipulation is perceived by the CVM or the stock exchange surveillance department. Should the customer fail to settle, the broker will be held responsible.

Oral contracts are binding and do exist within the open outcry system. Please notice that such trades are recognized by the exchange provided they are immediately reported to a stock exchange officer for proper registration (please refer to section IV, question 2.a). All trades are closed either on the open outcry or the electronic trading system, thus binding the parties as described above. In this sense, the electronic documents and the signatures on the back of the card used by open outcry systems are adequate to bind the parties to a sales contract for securities. Please notice that in both open outcry and the electronic trading system the names of the brokerage firms involved in the trade and their respective authorized traders are clearly identified.

Within CETIP, registration of the transfer of securities is performed electronically on T+0. Actual transfer of securities is made after verifying all system procedures (DVP).

CETIP accepts neither oral contracts for the sale of securities nor electronic signatures. Participants send cards containing authorized signatures, thus guaranteeing the safety of systems.

As a general rule, legal ownership of securities is transferred at the time of trade.

CBLC, CLC, and BM&F were designed to be the counterparty to all trades cleared through its clearing agents. The financial obligations of each clearing agent are calculated on a daily basis and the net balances must be tendered directly to CBLC/CLC/BM&F. Please note that, should the customer fail to comply with payment, the clearing agent (which usually has operational limits set by the clearing house) is responsible. Should the agent also fail, the clearing house will pay.

Therefore, under the self-regulatory environment (please refer to question 1, section III), the law recognizes the novation of an obligation from an original party to another party.

While analyzing stock property in Brazil, it is important to keep in mind that Law 8021/90 prohibited securities to be in the bearer or endorsable form. The legal obligation to maintain the ownership records, according to Law 6404/76, is with the companies. This law establishes that publicly held companies must keep several records concerning ownership:

1) Stock Registration Book, which must contain (a) stockholder’s name and quantity in possession, (b) initial payment made by the stockholder, (c) conversion of shares into another series or class, (d) redemption, refund, and amortization of shares or their acquisition by the own company, (e) changes resulting from the transferring of shares, and (f) pledge, lien, or any other encumbrance upon the shares that may hinder its negotiation.

2) Shares Transfer Book, for the purpose of recording shares transfers.

These books grant ownership rights especially for customers on scrip-based systems.

When a publicly held company issues dematerialized shares, it must hire a registrar, which must be registered with the CVM. Registration is granted upon a detailed analysis on the company systems’ reliability and safety. In addition, an independent auditor must annually certify that such systems is still reliable. This is established by CVM Rule 89/88, which also establishes that the contracting publicly held company is legally responsible for mistakes or errors originated from these systems, having, however, the right to sue the registrar.

Concerning shares immobilized in one of the Central Depositories (namely CBLC and CLC, detailed in question 2, section I), they are held on a fungible basis with a segregation of accounts at the end customer level, with the securities recorded in the name of the individual customers. At the registrar level, the central depository appears as the fiduciary stockholder. However, based on the principle of the clearing house acting as nominee for the securities issued by the listed companies, CBLC and CLC are fiduciary agents (trustees) solely for custodial purposes, without any ownership right over those assets. In addition, they do not render any custody or trust service for money or similar assets.

In order to the companies to maintain the legal records described in the beginning of this answer, the CVM establishes in Rule 115/90 that clearing houses must update companies’ records at least quarterly, or due to dividends, split-ups or subscriptions, or upon companies’ request. The same Rule also states that, while securities are immobilized in a central depository, their trustees are responsible for any losses caused by irregularities in services performed by custodians. In addition, this Rule also grants to the investor the right to participate in shareholders’ meetings, upon the presentation of a certificate issued by the central depository.

In summary, evidence of title of the security holder in most cases is a certificate issued by the clearing house (immobilized securities) or by the registrar (dematerialized securities). For companies which still adopt physical certificates, evidence is presented in the form of a registered certificate.

Financial institutions in Brazil are governed by Laws No. 4595 of December 31, 1964 (the Banking Law) and No. 4728 of July 14, 1965 (the Capital Market Law).

Private financial institutions include commercial banks, investment banks, credit, financing, and investment companies, securities dealerships, and brokerage companies.

The incorporation of private financial institutions is subject to certain restrictions, such as mandatory incorporation as a joint-stock company, and issuance of shares in registered form. In addition, all corporate documents, amendments to their bylaws, capital increases and other nonroutine corporate acts must be approved by the Central Bank of Brazil - as well as the CVM, when the financial institution acts in the Capital Market - according to Law Nº 6385 of December 7, 1976, and the National Monetary Council Resolution Nº 1655 of October 26, 1989.

There is a special legal regime governing the insolvency of financial institutions, established by the Law Nº 6024 of March 13, 1974, which were recently complemented by Law Nº 9447 of March 14, 1997. The insolvency procedure regarding financial institutions has an administrative nature and is conducted by the Central Bank of Brazil. On the other hand, the substantial rules are equivalent of those governing the bankruptcy applied to the other legal entities or individuals engaged in commercial activities.

According to Decree-law No. 7661 of June 21, 1945, bankruptcy is the failure of a debtor engaged in trade or business to honor its obligations when due, on account of insolvency. A bankrupt person is defined as a person engaged in trade or business which, without legal right, fails to pay a sum certain on the due date as evidenced by a document which entitles the holder to institute summary proceedings to enforce payment. There are other specific instances of bankruptcy referred to in the law, all of which involve the failure of the debtor to honor debts at maturity as a result of insolvency.

A debtor must petition for bankruptcy when, without legal justification, it fails to pay a sum certain at maturity; a sum certain is considered to be net when its amount has been established beyond any question, and there are no doubts as to its existence. If it does not make payment, its successors or creditors or any of its partners or shareholders may petition for bankruptcy.

As in the case of insolvency of a civil debtor, a commercial debtor may, within the time frame for presenting a defense, avoid bankruptcy by depositing the amount claimed before discussing the merits of the claim. Also as in insolvency, the court order of bankruptcy will, inter alia, appoint an administrator or trustee in bankruptcy - who has basically the same duties as the administrator in insolvency - and will set a time limit of not more than 20 days for the creditors to file their claims.

Foreign creditors participate in the distribution of the assets of the debtor on an equal footing with Brazilian creditors. It must be stressed, however, that foreign currency claims covered by a bankruptcy are converted into Brazilian currency at the rate of exchange in effect on the date the bankruptcy was decreed was ordered or processed, and it is only at the value so established that the claim will be considered.

A declaration of insolvency may be applied for by the debtor himself, by the administrator of his estate or by any ordinary creditor, and gives rise to the immediate maturing of his debts, the collection of all his pledgeable goods, including those which one may acquire during the course of the proceedings.

In addition, Law Nº 6404 of December 12, 1976 (The Corporation Law), prescribes some cases of bankruptcy, such as cases in which it may be declared by the shareholder’s meeting or when debentures are issued and not honored, and Law Nº 7492/86 states that it is a crime to present false claims or misappropriate assets of a bankrupting or under liquidation financial company.

Managers of a bankrupting company have restrictions to act in the securities markets, for instance, CVM Rule 82/88 states that such persons may not be accredited as portfolio managers with the CVM.

Once bankruptcy has been decreed, any actions and executions instituted against the debtor individually by the creditors will be stayed, except if the creditor is demanding an undefined credit. In this case, the action will continue against the estate until the credit has been clearly established.

After the bankruptcy proceedings to which all of the debtor's assets are subject - including those acquired during the proceedings - have been instituted, the debtor forfeits the right to dispose of its assets.

The bankrupt party may be required to undergo a judicial examination to establish facts and circumstances that may form the basis for criminal proceedings against it for a bankruptcy offense.

The discharge of the bankruptcy consists of realization of the assets and payment of the liabilities, or, in other words, the sale of the debtor's goods and the payment of its creditors from the sale proceeds.

Apart from the other methods of discharging debts referred to in the law, the debtor's liabilities are automatically extinguished five years after termination of the bankruptcy proceedings, provided that the debtor has not been convicted of any bankruptcy offense; if it has been so convicted, its liabilities are not discharged for ten years. The court order discharging the debtor authorizes it to carry on trade or business, unless it is found guilty of a bankruptcy offense, or is awaiting the outcome of proceedings brought as a result of such an offense.

There are no specific statutory rules designed to protect the integrity of the settlement process from a clearance and settlement system member’s insolvency but there are rules enacted by the Central Bank of Brazil and the clearing houses, under the supervision of CVM, in order to complete the settlement process in such a case.

Also the client funds, securities and positions are under the general protection of Law Nº 6024/74, in case of liquidation of investment firms. The property of client assets is not transferred to investment firms, and these institutions, which only intermediate their client’s investments, are required to segregate client assets on individual accounts, according to National Monetary Council Resolution 2451/97. Therefore, in case of insolvency of investment firms, client assets shall not be frozen by the trustee.

In order to prevent the failure of a participant, only accredited clearing members are accepted to participate in the clearing system. For instance, collateral is required for all transactions that bring risk to the clearing system, and the operational limits are set to all clearing members and active brokers. These operational limits are based on the financial situation of each member. Usually, there is a very conservative approach to collateral management, with only money or highly liquid securities or bonds being accepted as collateral. Also the clearing houses apply risk management techniques in examining and monitoring brokers’ positions and open contracts and the potential losses involved in carrying out these positions.

The bankruptcy and insolvency statutes provides that once the respective proceedings have been instituted, the debtor loses the right to administer and dispose of his assets. Nevertheless bilateral contracts previously formed are not affected, unless in case of a bankruptcy fraud. As a general rule the securities transactions are not subject to reversion by a trustee or the courts.

As described in the previous question, CVM Rule 115/90 states that the central depository is responsible for losses occurring in the custody process; errors occurring on non-deposited scrip certificates are of the issuing company’s responsibility. In addition, if an error occurs due to a broker’s fault (for instance, a misinterpretation on investor’s buying or selling orders), the investor has the right of seeking compensation to the Stock Exchange Guarantee Fund (right granted by CMN Resolution 1656/89).

There are provisions to protect end customers’ securities in the event of a broker’s default, bearing in mind the segregation of accounts practiced within the depository, at the end customer level, as determined by CVM regulation.

Yes, securities lending is permitted. The guidelines for securities lending operations have been established on two main regulations:

• Resolution no. 2268/96, issued by the National Monetary Council – CMN;
• CVM Rule 51/86;
• CVM Rule 249/96.

CVM Rule 51 deals with margin accounts, which allow (a) an investor to buy corporate shares with money borrowed from a stock broker or (b) stock brokers to lend corporate shares exclusively for purposes of selling them in the spot market. CVM Rule 51 establishes some conditions for the latter operation, such as:

• the proceeds of the sale of borrowed stocks are kept by the stock broker (as collateral);
• collateral must be complemented until it reaches 140% of the value of the operation (it may, thus, be added by other kinds of assets);
• stock brokerage firms may only conduct such operations up to the limit of 5 times their net worth;
• a stock broker, if not owning the corporate shares to be lent, must obtain prior authorization of the owners in order to lend them.

CVM Rule 249 allows authorized clearing houses to lend corporate shares under their custody, after authorization of the beneficial owner. Unlike lending made under CVM Rule 51 (borrowed stocks must be sold spot), an investor borrowing stocks under CVM Rule 249 may utilize them for any purpose, including short sales.

Collateral, which is calculated daily, for stock lending under CVM Rule 249 is set at 100% plus an additional amount calculated according to volatility. Also, clearing houses must disclose, daily, a list of all lent shares. Please note that, in practice, CVM Rule 249 is more widely used than CVM Rule 51.

Although securities that are not owned may not be sold in the spot market, the mechanisms of CVM Rules 51 and 249, described in the previous question, may be utilized to achieve short selling. That means borrowing the stock either from the broker or another customer. The main principle is that one must have collateral to perform such operations.

Short sale operations may also be performed through derivatives, following stock/futures/commodities exchange rules, as there is no specific CVM rule on derivatives since July 10, 1998, when CVM Rule 283 was passed delegating detailed derivatives rulemaking and supervision to self-regulation.

As a matter of fact, this operations are widely used in the derivatives markets, as it provides liquidity to them. These operations must also be followed by margin deposits, except for day-trade purposes. In the options markets, short positions must be adjusted in the maturity date, while in futures markets there is a daily financial adjustment (mark to market), meaning that, on falling markets , short salers will receive money and, on rising markets, they must pay.

National Monetary Council (CMN) Resolution no. 1656/89 established that clearing and settlement of stock exchange operations may only be performed by a corporation created uniquely for this purpose. Prior to that, this process had been conducted by the stock exchanges directly.

Therefore, Brazilian clearing houses (CBLC and CLC) were derived from corporate restructuring of the respective stock exchanges and have a CVM authorization to perform their activities.

Considering that Resolution no. 1656 also grants self-regulation for the stock exchanges, clearing houses may be also considered to operate in such environment. As a matter of fact, there is no specific rule for the registration process, which until now it is established on a case by case basis. There are no restrictions for the entry of new clearing houses in our market.

CETIP, as stated in its by-laws, is also a self-regulatory organization. Operations concerning debentures fall under CVM jurisdiction, all other products falling under the jurisdiction of the Central Bank.

BM&F is also a self-regulatory organization. Stock index futures, traded on the BM&F, fall under CVM jurisdiction, all other products falling under the jurisdiction of the Central Bank.

Please note that a new regulation concerning clearing house accreditation is currently being developed by the CVM.

(a)Yes.

(b)Yes. CVM Rule 252/96, imposes several reporting obligations to the clearing houses such as daily reports concerning all (un)settled transactions, arbitrage transactions between stock exchanges, open positions in the futures and derivatives markets and reports on risk management; there are also monthly reports on auditing control and reports on default, irregular or reversed transactions, operational defaults and the actions adopted to solve any of these problems. Also, CVM Rule 115 establishes that clearing houses must inform all account owners, within five working days, about modifications that occur on their account, such as sales/purchases in the spot markets, operations in the forward/option/futures markets, etc.

CETIP issues several daily reports containing financial and operational information, as well as custody standings. Such reports are made available to participants’ auditors. CETIP does not incur in any market risks.

(c) Although the clearing houses keep all data regarding customers accounts, there is no specific rule requiring clearing houses to do so. However, when considering that Rio de Janeiro Stock exchanges databank is linked to CLC´s, and São Paulo Stock Exchange and CLBC also have integrated databanks, the environment described below is sufficient to assure that all data regarding transaction and customer identification is kept.

Following the concept of self-regulation, CVM Rule 220/94 establishes that stock exchanges must develop rules concerning data kept by broker-dealers regarding their customers and their transactions in the securities markets. This rules shall follow probity principles and must first be sent to the CVM for review. Moreover, CVM Rule 220/94 establishes the minimum data that must be kept, namely:

Each individual operating with a broker-dealer must have a record containing the necessary information for customers identification, complemented with a copy of the ID card and the revenue department number. In addition, legal entities must provide a copy of their Articles of Incorporation or by-laws, and must also file the names of the individuals authorized to issue orders.

Even though CVM Rule 220/94 does not establish data other than the ones mentioned above to be stored by the broker-dealer, it defines that customers must be perfectly identified. Therefore, broker’s files usually consist of customer’s name, sex, date of birth, telephone, address, marital status, parents and consort names, identification card and revenue department registration number, profession and commercial address, and nationality. In addition, companies and institutional investors must provide additional data, such as date of incorporation, activities and, names of controllers.

Although broker information is not standardized, customers must be also registered in the stock exchange in a standard basis in order to issue orders. These records include, besides all information above, the date of the last operation and a customer’s code number. Each operation must be associated to this number, in a way that customer’s information can be easily retrieved by the CVM through stock exchange computer terminals. In addition, there is a policy to keep these records indeterminately.

Although CVM Rule 220/94 does not apply to futures exchanges, BM&F registers all its clients in its database. As for OTC markets, CVM Rule 42/85 states that all institutions of the distribution system must keep customers identification on each trade carried in OTC markets. These records must be available for the CVM or Central Bank inspection purposes.

CVM Rule 220/94 states that the stock exchanges must establish guidelines to be observed by broker-dealers in order to execute buying or selling orders diligently and to conduct their activities with probity, taking always into account the best interests of their customers and the integrity of the market. It is also stated that the broker-dealer must establish internal rules (following stock exchange regulation) concerning order execution procedures. These must specify receiving, registering, time limit, priority, execution, distribution, and canceling procedures.

In fact, Brazilian stock exchanges issued rules concerning broker’s probity principles and generic definitions on receiving and registering orders, providing brokers with the basis to prepare their own internal rules.

The practical consequences of these procedures are that each broker has to register each operation, either in written or electronic form, including the type of the order, the security’s type, quantity and price, the time at which the transaction is held, and the customer’s stock exchange number, through which all information concerning the previously described customer identification may easily be traced. It is also important to notice that the beneficial owner’s name is available two days after the operation is held.

In addition, stock exchanges keep daily records of operations, including the issuer and type of the securities traded, quantity and the time of trading, and the broker-dealer that conducted the purchase and the sale. The CVM can monitor this information instantly through stock exchange terminals. All this information must be kept for five years (CVM Rule 220/94).

As for OTC markets, CVM Rule 42/85 establishes that intermediaries must keep for each trade carried on these markets, the customers name, the type of the order, the security’s type, quantity and price, and the time at which the transaction is held. CETIP operations are sent, electronically, to the Central Bank every day.

CVM has authority to examine any record or information maintained by these facilities or by any other institution or individual in any matters related to the securities markets. For further information, please refer to question 3, item IV.

Please find herein the financial resources related to the CBLC as of June 30^th, 1998.

The CBLC has a settlement guarantee fund, which may be used as an insurance resource. The settlement fund’s net worth is R$ 1.357 as of June 30^th, 1998. This fund is part of Current Liabilities of CBLC.

CBLC does not have credit lines in use. Nevertheless, clearing agents may be requested to deposit collateral whenever deemed necessary, thus assuring the system’s settlement capability (please refer to section V, question 1).

CETIP does not require margin from its participants and does not provide credit lines or letters of credit. Systems are destined solely for custody and to process transfers and settlements.

In practice, the safety to guarantee settlement in stock and futures exchange operations is provided at different levels. Should the first one fail, the next will be used and so on. As a general rule, it works as follows: (a) the counterparty, (b) the clearing agent, using first the collateral and then its own assets, and (c) the clearing house, utilizing first the clearing asset seat, the clearing house guarantee fund, and its own net worth. Please find below the practical example of CLC:

At the Rio de Janeiro Stock Exchange, all operations are cleared, settled and guaranteed by the CLC - Câmara de Liquidação e Custódia S/A. When a deal is closed during a trading session, the electronic message detailing the transaction is transmitted to the CLC, which then initiates all settlement procedures.

In case of breach of contract during settlement, the CLC will have recourse progressively to six different levels of guarantee until the settlement process is completed:

Level 1 - the asset forming the subject of the operation. In the form of either shares, or options, forward or futures contracts, the position may be reversed, generating funds. Should a buyer fail to pay, the asset up for delivery may be sold. Should a seller fail to deliver the security, this may be bought on the market. In either case, Liquidity and Price Variation Risks are involved in reversal operations, and may lead to losses that cannot be covered at this level of guarantee.

Level 2 - Collateral deposited by the Client. In derivatives markets, the client deposits collateral in order to cover margin calls, available for use to cover losses left open by reversed positions. However, this collateral may not be sufficient, or — due to Collateral Risk — may have been assessed at a figure higher than the true market value, or may even prove not to be valid.

Level 3 - the Clearing Agent. Should any losses still remain outstanding after implementation of the first two guarantee levels, these should be covered by the Clearing Agent. At this level there is a Credit Risk, as the agent may be unable to cover these losses.

Level 4 - Guarantee Fund. The CLC has a Guarantee Fund which is brought into action should the Clearing Agent be unable to cover all outstanding losses.

Level 5 - Sum of Agent Guarantees. Each Clearing Agent puts up guarantees that are taken jointly to cover the losses of other agents. This level of guarantee is brought into action should losses still remain uncovered by the earlier levels.

Level 6 - CLC Equity. The final guarantee level is the registered corporate equity of the CLC.

On forward, futures and options markets, the CLC requires the deposit of additional guarantees, in proportion to the size of the position maintained by the client on an individual basis.

The risk for the set of positions maintained by a client on derivatives markets in general will be analyzed in an aggregate manner in order to obtain an overview of the true extent of the client’s exposure. Both the Report of the Group of 30 on derivatives and the BIS recommend that derivatives portfolios be analyzed as a whole.

In compliance with the recommendations of the Group of 30, the CLC has already implemented in-house a new margin calculation system called Real Analysis for Derivatives Aggregate Risk - RADAR, which it also making available to the market. In general terms, it complies with the following routines:

Margins requirements may be covered by cash, stocks, gold, letters of guarantee, bank certificates of deposit, and government bonds. These various types of collateral have liquidity as their principal characteristic, meaning that they can be turned into cash immediately. However, each of them offers Price and Credit Risks that demand individualized treatment.

Should a transaction fail due to a missexecution of customer’s orders, stock exchange guarantee fund may also be used. Pledge to this fund is made directly to the exchange, but should the exchange denies to accept the investors complaint, he/she may seek for CVM´s opinion, which may revert the exchange’s decision.

Yes. According to Brazilian law, shareholders are liable up to the value of their participation in the company’s capital. As for the clearing agents of CBLC, besides being shareholders of the corporation, they must present guarantees to the system in order to initiate their activities. In this sense, CBLC is able to assess its members up to the value corresponding to their shares of the company plus the pledged guarantees.

As for BM&F, is also counts on a clearing fund, which is composed by assets deposited by its clearing members to guarantee solely the settlement of transactions. In case of a default by a clearing member, BM&F will debit the corresponding amount from its account with the clearing fund. Each clearing member has joint and several liability for the default of other clearing members, limited to twice its share in the clearing fund.

Concerning CLC this is also possible, according to the mechanism described in item 4 of the previous question.

The matching of trades occurs at the moment a trade is closed. For trades placed on the open outcry, after the oral agreement is made, the selling trader must fill in a card stating all trade details. Then, the selling trader must sign the card on the back and pass it onto the buying trader. The latter, in turn, must check the details of the trade on the card, also sign it on the back and immediately hand it over to a stock exchange employee at the proper trading post. In this way, all deals closed are immediately recorded and confirmed by both parties through their signatures on the back of the card. Matching is therefore achieved, binding both parties involved in the trade.

In the electronic trading system, trades are matched as orders received from both parties are closed in accordance with the details entered by the traders. The recording of trades is automatic and there is no risk of either of the parties failing to confirm the deal. Matching is achieved, binding both parties involved.

The orders inputted are stored in the system and if the screens are not correctly filled they shall not be accepted by the system. This system files all orders received and verification is possible at any time. Please notice that after the closing of a trading session there is a period in which brokers are able to rectify any possible errors that could lead to mismatch of a trade. Thus, there are no unmatched trades.

The computers used by BOVESPA for matching and registration of trades creates a trade identification number (please refer to item c, question 2, section III), which is used by brokers to allocate the trades to their proper beneficial owners. Such numbers are used to feed the clearing and settlement system ran by CBLC, thus guaranteeing that all trades placed on BOVESPA are informed to the clearing house. As settlement and clearing activities are conducted by CBLC’s clearing agents, the latter are responsible for all matched trades, which are informed to CBLC.

All CETIP operation, custody, and settlement systems are fully integrated. Thus, registries performed in one particular day are processed in that same day, when custody is also updated, as well as the financial position of each participant for settlement on the following working day.

Matching is utilized in all transactions registered on CETIP systems (operation, custody, and settlement). Even in the financial settlement systems operated for the stock exchanges, through which transaction registration and custody control are performed within the exchanges themselves, the latter may take any measures in the event of default.

The unavailability of a security in the position of a seller or the absence of confirmation of a transaction by a buying party invalidate their existence to the systems. In the event of default, CETIP will reprocess the transactions of the preceding working day, reconstructing the custody position of the defaulting participant and of all those who have registered transactions with that participant.

According to market practice, trades are received and confirmed from the brokers to these institutional customers via fax – therefore an informal process. Each broker is responsible for establishing with their customers the modus operandi to be used for confirming such trades. Nonetheless, brokers are encouraged to use electronic trade confirmation systems, utilizing the batch method.

Within CETIP, the confirmation process is made automatically by the system, utilizing a batch routine, provided they have been entered by buyer and seller of a transaction. Mismatches are informed to participants, who must resolve them by the end of each day.

Securities cleared through the CBLC are not netted, being subject to settlement on a gross basis. In view of this, the questions concerning multilateral netting of securities, novation of obligations and respective financial exposure and fund obligations are not applicable.

The settlement of funds, however, is subject to a netting process calculated by clearing agent (members of CBLC). The process starts in the evening of T+2 when the system is able to calculate the values that must be tendered by each clearing agent on settlement date. The system evaluates all financial balances corresponding to the settlement of purchases and sales, plus any existing balances related to margin requirements or collateral that the agents are due to redeem or to place with CBLC.

A complete statement describing such amounts is made available to all clearing agents in the morning of T+3, which is the date in which payments are due.

Please note that in CLC, CBLC, and BM&F settlement for day-trade operations, only financial settlement is applicable.

Netting of securities or contracts already under CETIP custody is not permitted. For financial settlement of transactions, CETIP operates a net value clearing system. Multilateral clearing is utilized for the calculation of daily financial balances of each participant. The transferring of securities is processed via the concept of bilateral clearing.

CETIP processes the transfer of funds and of dematerialized securities at the same time, following the DVP concept.

In the BM&F, financial settlement is provided on T+1. In stock exchanges, the following procedures are adopted: securities settlement is performed overnight from T+2 to T+3 via book entry, directly at the beneficial owners account. Please note that at this time, these securities are blocked until the payment occurs and, therefore, are no longer accessible by the seller. On T+3, payment is carried out through CETIP.

Prior to the G-30 recommendation of settlement to be accomplished on T+3, settlement was provided in T+2.

A detailed description of CLC’s and CBLC’s clearing and settlement process follows.

Cash market transactions are settled on T+3, in effect from 20 December 1994 (T+2 was used before this date). The settler must lodge his securities in his custody position no later than by the end of T+2, in order to allow night processing. Financial settlement is executed during T+3, in next day funds.

T

â

T+2

â

T+3

In the event securities are not delivered on time, special rules apply. Securities not deposited by T+2 are allowed a late delivery tolerance until T+4, incurring a fine of 1% a day over the total transaction value. If by the end of T+4 delivery is still pending, the CLC issues a repurchase order on T+5 to the original buyer’s broker which can be freely executed in the market up until T+7. If by the closing of the market in T+7 the repurchase order has not been executed, the CLC will proceed to offset the transaction by closing the position at the last available market price. Statistically, the occurrence of repurchase operations is negligible, at less than 0.005% of daily volumes.

Sellers with late delivery are responsible for the difference in price plus the penalties imposed for repurchase or reversal, with the purchaser receiving part of the fines imposed for the delay, should the operation be reversed. Obviously, the losses must be borne by the client, which, if it does not do so, shall be covered by the Brokerage House involved, and then by the Clearing Agent.

Each CLC Clearing Agent should appoint a commercial bank to handle financial settlement, which is run on the basis of balances, meaning that once all the purchases, sales, operations on term markets etc. have been processed, there is a single debit or credit allocated at the end of each day to the Clearing Agent. This is transferred to the account of the Agent at the bank appointed thereby. Entries are made by the CLC through a CETIP terminal that handles these financial movements with banks in the System.

In the derivative markets there are no late delivery rules. The CLC becomes a counterparty to each and every contract, when it assumes the role of the buyer to all sellers and the seller to all buyers. The entire settlement process is due and completed by T+3.

The clearing agents of CBLC are responsible for settling trades on behalf of their customers. Settlement consists in delivering the shares from buyer to seller through the custody system operated by CBLC, via book entries. Such automated transfer of securities are made on line in real time fashion, meaning that the buyer is able to see the securities posted to its account immediately after transfer occurs.

Once delivery has occurred, CBLC will issue a statement to the clearing agents indicating the amounts due to each trade that must be paid for. This statement shows the net settlement amount to be tendered by the clearing agents on T+3. All payment activities between the clearing agents and CBLC are made trough an automated system operated by CETIP (please refer to question number 2 of section I of this questionnaire) named SFB – Inter-exchange Financial System.

In Brazil, same day value payments are only available to commercial banks with special reserve account with the Central Bank. In this sense, the payments made through SFB are not for same day value, meaning that those payments must obey a two days settlement cycle at CETIP. Because of this cycle, payments become final only on T+5 of the original trade settled through CBLC.

The members of the CBLC do not have any credit facilities provided by the clearing house in order to meet their financial obligations. All payments must be made in cash, where no credit device is allowed for members to meet settlement obligations.

In order to ensure that securities are delivered when funds are actually available to the selling party, CBLC has created a device in its settlement system, which prevents buyers from moving the securities purchased before payment becomes final. In this sense, shares delivered by the sellers on T+2 will remain blocked by the CBLC at the buyer’s custody account until T+5 – which corresponds to the settlement day funds are cleared in the CETIP system. Please notice that all securities transfers are made directly to the custody accounts of the final beneficiary owner allocated to these trades.

Please find herein a description of the settlement cycle for trades cleared on CBLC.

Every trade is automatically registered at the BOVESPA and reported to CBLC clearing system. Comparison and matching of trades are automatically done by the electronic recording system itself.

After the registration, the brokers can start the allocation of trades amongst beneficial owners. This allocation process is compulsory and is done through electronic links with CBLC Services Network.

T+0 is the last day for allocating trades among beneficial owners for the options and forward markets. This is also the last day for collateralizing positions in the options and forward markets in other eligible assets different from cash.

T+1 is the last day for allocating trades amongst beneficial owners for the cash market.

T+1 is the last day for providing cash collateral for the options and forward markets. Margin requirements are obtained through CM-TIMS on a daily basis and are marked-to-market.

T+2 is the last day for the delivery of securities. On T+2 at night, CBLC Custody Service debits the shares from the seller’s account and credits them to the buyer’s account. It is important to notice that, in spite of the securities being transferred to the buyer’s account, they will remain blocked until payment becomes final.

Clearing agents are required to send payment instructions to CBLC as of T+3. The clearing agent can verify, in the morning of T+3, that the securities purchased, on behalf of its client, are duly deposited. The clearing agent of the buying counterparty will not pay for the shares if the selling broker has not properly deposited them in the designated account.

CBLC provides the clearing agents with a complete report of the transactions whose settlement is under their responsibility, specifying the financial balance that the clearing agent is due to receive or to pay on that day. The financial settlement with CBLC is done through net balances.

Should the clearing agent representing the selling broker not deliver the securities on T+2, on T+3, it will be penalized with a debit of 30% of the gross value traded. This debit corresponds to the financial collateral of its defaulting position and it will only be returned by CBLC on the first business day after the transaction has been regularized, without remuneration for the period it was retained.

By T+4, almost the totality of the transactions executed on T+0 has been settled. Should the securities have not been delivered on T+2, T+4 is the last day for the clearing agents of the selling counterparty to make delivery. Otherwise, a buy-in process will be initiated on T+5. All expenses resulting from the buy-in will be debited to the account of the clearing agent responsible for the defaulting counterparty.

On T+5 CBLC will release the securities that were bought on T+0, which had financial settlement confirmed by T+4 at night.

Securities remain blocked on the buyer’s account until this date due to the fact that the confirmation of funds being cleared is only available on T+4. The clearing procedure adopted by CETIP, banks and the Brazilian Central Bank are the following:

• On T+3, the clearing agents confirm through the CETIP terminals the debits/credits corresponding to the balances statements issued by CBLC;
• On T+3 after 6:00 p.m., the clearing banks post debits and credits at the clearing agents’ cash accounts;
• On T+4 by 2:00 p.m., the banks where the agents have their cash accounts confirm the entries to CETIP, assuming responsibility for the settlement. If an agent’s account has insufficient funds, the bank will reverse the transaction, canceling the entry through SISBACEN – the system used by the Brazilian Central Bank;
• Only in the morning of T+5 CBLC will have access to such information, and therefore shares that have been blocked will be available for further deliveries.

The buy-in order is issued on T+5, in case of trades for which delivery has not occurred up to T+4. The execution period for the buy-in is extended up to T+7. If during this period the defaulting broker decides to settle the pending transaction, a request to the buying broker to cancel the buy-in order must be immediately issued. CBLC must be informed of this cancellation.

The buying broker who has executed the buy-in order on T+5 must report the new trade details to CBLC on T+6 informing the brokerage in-voice.

The financial coverage of 30% will then be restored to the clearing agent responsible for the defaulting broker on T+8.

T+7 is the last day for the buying broker to execute the buy-in order issued on T+5. In case buy-in cannot be executed, the trade will automatically be reversed on T+9.

If the buying broker has duly executed buy-in on T+6, on T+7 such operation must be confirmed to CBLC.

The buying broker must confirm the execution of the buy-in order until T+8 as at 1:00 p.m.. Should the order have not been accomplished and/or confirmed by then, the original trade will be unwound.

On T+9, if the buy-in order has not been reported to CBLC until T+8, the original trade will be subject to unwinding procedures. CBLC will calculate the amounts to be unwound, and will issue a debit to the defaulting selling broker’s clearing agent. This value will then be credited in favor of the buying broker’s agent. Such amounts include:

• Any positive difference between the price negotiated on T+0 and the price of the security in the session immediately before T+9, i.e. T+8. Should the price of the security be lower than its original value, CBLC will refer to the price of T+7, and so on. Should the prices of the security between T+8 and T+1 be all lower than originally negotiated, then the latter price should be considered; and

• Any commissions due during the outstanding period.

The amount of the financial coverage will be returned to the agent responsible for the defaulting selling broker on T+10.

With regard to the four models of DVP stated in this questionnaire, the settlement method used by the CBLC and CLC falls under Model II. In this sense, deliveries are settled on a trade-by-trade basis in a closed system during the settlement cycle but funds are paid on a net basis at the end of the cycle. Buyers may not remove the securities from the system until payment is made.

Securities are delivered by the sellers on T+2 on a gross basis, whereas payment occurs on T+3 on a net basis (for details, please refer to the previous question). As mentioned before there is a rolling settlement cycle in course. Each clearing agent receives a financial statement on a daily basis in hard copy or electronic format, containing the net values that must be cleared through CBLC – regardless of the number of counterparties involved.

Although DVP is not simultaneous, as the securities are blocked until the payment, the safety of the system is the same as a simultaneous DVP.

According to the 1997 statistics, 2.87% of the trades cleared through the CBLC failed to settle within the designated settlement time period. This percentage represents the trades for which delivery has not been carried out on the designated date, which is T+2.

Please note that currently CBLC is the clearing house exclusively for equities traded on the BOVESPA. In this sense, corporate debt and other types of securities different than equities are not subject to the statistics provided above.

The settlement structure of CBLC provides that all trades cleared through it are going to be settled. Please refer to question 2.d of this section, where all the mechanisms for guaranteeing proper settlement are described.

Stock lending is permitted (please refer to question 6 of section II). Lending of stock is a service provided by the clearing corporations; this is not a mandatory procedure nor it is enforced by the clearing systems to ensure settlement. It is a participants´ decision whether they will borrow stock to cover short selling.

CBLC and CLC are the counterparty of all stock lending contracts. Consequently, they manage all the collateral required from securities borrowers and assure securities owners that their shares will be returned pursuant to the contractual terms and conditions. CBLC and CLC are also responsible for the consolidation of positions. All depository service users can act as lenders.

Participants need to register each stock lending transaction either in CLC or CLBC systems; which act as intermediary and guarantor of all stock lending transactions. In order to guarantee performance of the borrower, the clearing corporations require pledging of collateral ; the amount of collateral varies according to the stock out on loan. The clearing corporations considers liquidity and volatility of the stock in order to establish the percentage margin. The collateral is managed under the same arrangements applying to collateral pledged to cover positions in futures and options markets.

From the borrower’s viewpoint, a typical stock lending transaction proceeds according to a process divided into the following basic steps:

Step 1 - Request for Loan: Through an intermediary (brokerage house, dealer or market maker) accredited by the CLC, the borrower registers an application for a loan under the Stock lending Service, available through the CLC Custody System, handled through the Rio de Janeiro Stock Exchange terminals network. The borrower must specify the type and quantity of stock to be taken out on loan and the date required (when the securities will actually be loaned), as well as the return date.

Step 2 - Confirmation of Loan: The CLC will immediately process the application and proceed with the loan, providing that suitable stock is available. However, the transaction is subject to confirmation until the actual date the loan is granted, after effective deposit of the collateral by the borrower and certification that this complies with the risk limits imposed by the CLC.

Step 3 - Deposit of Collateral: Prior to the date set for granting the loan, the borrower should deposit the guarantees accepted as collateral in the amount required by the CLC. The following guarantees will be accepted: letters of credit, government bills and bonds, bank deposit certificates, stocks, gold and cash, following the rules used for these assets to ensure margin coverage on other derivatives markets where settlement is handled by the CLC.

The amount of collateral required is basically the sum of the market value of the stock loaned, plus a margin that varies in accordance with the volatility and liquidity of the security. The loan positions of both lenders and borrowers form part of the CLC RADAR- Real Analysis of Derivatives Aggregate Risk system.

Step 4 - Delivery of Stocks: Stocks will be transferred to the custody account /sub-account of the borrower during processing on the date the loan is granted. For instance, a borrower making a cash sale and counting on borrowed stock to complete settlement, should specify the date of the loan as being the second business day after the sell transaction (T+2), in order to finalize physical settlement the same day.

Step 5 - Return of Stocks: The return of the stock on loan is returned is processed on the date specified by the borrower, through transfer from the custody account / sub-account thereof to that of the borrower. If the borrower makes a cash purchase in order to cover the return of the stock, the reversion date of the loan should be the second business day (T+2) after the buy transaction.

Stock loans may be taken out with three possible maturity dates: fixed return date; for a period of one day automatically renewable; or for a fixed period with return date option.

The fixed return date loan offers the advantage of guaranteeing temporary ownership of the paper by the borrower until the date desired, but has the disadvantage of necessarily tying the borrower to a pre-set date. If the borrower uses the paper for an uncovered sale, for instance, and then completes the buy-back prior to the date set for the return of the loan, the cost of the loan for additional days will nevertheless have to be borne.

Loans for a period of one day automatically renewable offer greater flexibility, although the borrower runs the risk of being unable to obtain automatic renewal due to a lack of securities.

Finally, loans for a fixed period with return date option resolve this problem, as they ensure temporary ownership of the security until the desired date, while also guaranteeing the option of return prior to the end of the period, paying fees proportional to the actual loan period. However, the fees for this type of stock lending are higher.

Step 6 - Return of Collateral: The guarantees deposited by the borrower will be returned thereto within the following periods:

Step 7 - Payment of Fees: Rental fees for stock loans shall fall due for payment by the borrower on the day after the return date. These rates shall be proportional to the duration of the loan and shall be set at an annual percentage calculated on business days.

Step 1: Registration of Stocks Available for Loan: Any custody services user may register stocks available for loan with the Stock Lending Service, specifying the shares, the respective quantities available and the maximum acceptable loan period. Stocks registered as available for loan by all CLC custody service users will constitute the pool of shares available to potential borrowers.

Step 2: Position of Stocks Out on Loan: Lenders receive position reports on stocks out on loan, listing the names, quantities and return dates of the stocks.

Step 3: Receipt of Fees: The rental fees for stock out on loan will be paid to the lender on the day after the return date. These rates shall be proportional to the duration of the loan, set at an annual percentage calculated on business days.

The uncovered sale is the simplest transaction that a trader can carry out when feeling the market becoming bearish. With this strategy, the trader believes that the share price will fall, and thus borrows the stock for sale on the cash market, hoping to buy it back later at a lower price.

In operational terms, when making the cash sale the trader receives funds that can be deposited with the CLC as collateral, plus an additional amount to cover the margin.

Stock loans make a whole series of arbitrage operations feasible, through the purchase of specific stocks and uncovered sale of others. For instance, preferred stock prices may be arbitraged against common stock prices, or the prices of stock in one sector may be arbitraged against those in another sector, or secondary shares may be arbitraged against blue-chip stocks.

The CBLC has procedures and plans in place for assuring (a) the safeguard of securities; (b) the integrity of automated processing systems and (c) the recovery from loss or destruction of securities, funds or data under a variety of contingencies that may arise. Please find herein a brief description of those processes.

Shares held in book entry form at the depository are controlled by a technical department through automated systems. In order to access customers’ holdings, officers are given special passwords for this purpose. There are two kinds of passwords used according to the level of service performed by each officer of the Custody Service.

A privileged officer is responsible for managing his subordinates’ access to the pool of services available in the system. In this sense, a non-privileged officer is given authorization to perform only some special tasks, determined by a privileged officer. In addition to that, such authorization restricts the officer to the use of some specific computer terminals only.

CBLC Custody Service has a back-up system, which may be used in the event of flaws in its original system or any other contingency situations. Every thirty minutes, the depository’s Systems Department prepares back-up files of all data on processed throughout the day. Two identical versions containing information on all movements in each custody account (at the level of the beneficial owner) are recorded on tape. Custodial positions are filed in three segments: CBLC’s mainframe computer, and two back up files stored off-site.

The depository also undergoes three audit stages:

The depository’s internal audit is carried out by BOVESPA’s Audit Consulting Department. The latter adopts a series of procedures for verifying and cross checking information. In this sense, the custody service is continuously audited. Some of these procedures are:

• Analysis of transfers generated from purchases or sales: the purpose of this procedure is to verify the legitimacy of the transfers of securities between custody accounts of customers resulting from trades.
• Analysis of transfers that are not connected to trading activities: the purpose of this procedure is to verify whether such transfers were authorized by the customer.
• Audit of posting of cash dividends, stock dividends and rights issues: the purpose of this auditing is to verify the compliance with procedures and the actions taken with regard to such corporate actions, and also whether subscription rights are being properly posted to Customers’ accounts.
• Cross checking of mailing addresses in the Second Tier Customer’s Reference Files against information related to First Tier Customers. Should there be a situation where the address given for an Second Tier Customer is the same as a Direct Customer, then the Audit Consulting Department requires the latter to indicate another mailing address, so that the Second Tier Customer can receive custody related information directly from BOVESPA.
• Cross checking of shareholders balances in custody accounts with records kept by the issuing company.

This analysis is carried out by an independent international auditing firm and is based on the comparison of records against the figures given by customers in response to a questionnaire that is periodically sent to them for this purpose. Such questionnaires indicate the balances of shares recorded by CBLC Custody Service at the level of each beneficial owner, which is confirmed by the customer’s reply. Such procedure allows both customer and CBLC Custody Service to match shareholding records, thereby ensuring adequate controls.

The independent audit firm is also responsible for comparing the balances in each customer’s accounts with records maintained by listed companies. Finally, the audit firm verifies whether the duties of custody officers are in compliance with the operational procedures set forth by regulations and control systems.

CVM Rule 89/88 states that companies which provide services related to registrar of companies, custodians, and stock certificate issuers must be accredited by the CVM. Such services may be performed by financial institutions and stock exchanges that have proper technical and operational financial conditions.

The authorization request shall be granted under the presentation of the following documents and information to the CVM:

1. general description of the system to be adopted by the companies that provide services, observing legal provisions, as well as rules and securities market practices;
2. organization chart of the department responsible for the services to be provided;
3. copy of the minutes of the management board or the directors meeting that appointed the responsible director;
4. list of companies of which the financial institution holds shares, including controlled or linked companies;
5. statement containing information of the implementation of a specific personnel training program;
6. copy of the services contract;
7. description of the internal auditing process;
8. contract with the company responsible for the external auditing services and a statement that the auditing company is independent; and
9. independent auditor report on information accuracy that will be generated, the quality and safety of the system.

In addition, the authorized institution shall present annually to the CVM a report on the quality and safety of the system, as well as on the accuracy of the information generated. This information must be issued by an independent auditor accredited with the CVM, that has sufficient technical specialization.

Regarding clearing and settlement, there is no specific CVM rule, self-regulatory rules being accepted.

For instance, the CBLC was designed to accept a wide variety of institutions acting as clearing agents. These participants are basically the financial institutions qualified to take on clearing responsibilities. In order to perform such activities, the participants must meet certain requirements determined by the by-laws of the CBLC:

• To become a shareholder of the corporation;
• To give proof of technical and professional capacity to act as clearing agent;
• To provide guarantees set out by the Board of Directors;
• To obtain approval from the Board of Directors.

The minimum financial standard imposed to participants of the CBLC corresponds to the number of shares required to become a member of the corporation. Currently, this value corresponds to approximately US$ 3 million.

The settlement flowchart of the CLC operates as follows:

In order to become a Clearing Agent — open to all financial Institutions — they must submit an application for admission to the CLC Executive Board and join the Clearing Agent Fund, depositing a guarantee in the amount established thereby.

The Settlement Guarantee Fund a joint-responsibility fund involving all Clearing Agents consisting of the sum of the assets deposited by Clearing Agents on joining the Organization.

The CLC assigns operational limits to the Clearing Members, according to financial capacity criteria. These operational limits are monitored on an on-line real time basis as the trading session progresses.

Intra-day monitoring is applicable and as registration of trades reaches 80% of a broker´s limit, the CLC notifies the director of the institution. A broker may have its registration of trades blocked should their activity be driven beyond operational limits assigned without the corresponding notification to the CLC that additional collateral is being pledged.

Clearing Members that are members of the Rio Stock Exchange have their operational limits established according to the following equation:

LOF = final operational limit

LOB = working capital of the institution

VTP = exchange seat value

GAT = total collateral deposited

LOA = additional operational limit corresponding to increases backed by other

clearing member

LOC = reduction of limit corresponding to guarantee granted to other brokerage firm

Clearing Members which are not members of the Rio Stock Exchange have their limits calculated basically according to equation below:

In order to update their operational limits, Clearing Members submit their balance sheets to the CLC on a monthly basis, on the same standards as required by the Brazilian Central Bank.

Clearing Members’ daily turn-over is accessed on a net basis during the trading session. The volumes traded are compared to the assigned limits for each broker, according to the following equation:

TRMU = accumulated ( f x ( C - V ) )

TRMU = total risk measure unit

f = risk correction factor of the asset

C = total purchasing

V = total selling

The CLC accesses the net financial settlement of each clearing member ( total purchasing - total selling ) for a three day period - which corresponds to the trading sessions under settlement on any day . Additionally, a risk correction factor is applied .

A Simple Clearing Agent may clear and settle only its own operations and those of its clients, while a Full Clearing Agent may, in addition to handling its own operations, settle the operations of other brokerage houses and their respective clients, which are linked thereto by a direct contract between the parties, with a copy placed on file with the CLC. Under any circumstances, brokerage houses may engage in trading only against guarantees deposited in advance.

Clearing Agents are held jointly responsible. This means that if a Clearing Agent enters into breach of contract, the guarantees deposited by this agent are executed first. Should they prove insufficient to cover the breach of contract, all the other Clearing Agents are called upon to divide up the losses among themselves, on an equal basis, which is why their guarantees must already have been placed on deposit. In order for Brokerage House to operate, it must be accredited to the CLC through a Clearing Agent by means of an agreement indicating the respective Clearing Agent. Credit Risk is assigned to the Clearing Agent, which is directly responsible for proper settlement of operations handled through the CLC.

The CBLC, CLC, and BM&F sets operational limits to its clearing agents according to their settlement capabilities. Such limits are determined based on the member’s net worth and net working capital, and may also be enhanced intraday by placement of additional collateral.

Yes. The by-laws of the CBLC determine that its members must give proof of technical and professional capacity to act as clearing agent.

All members of the clearing house must develop qualified infra-structure in order to be able to provide their customers with the best level of service. Please notice that the CBLC provides all necessary technical support to its clearing agents, enabling them to perform clearing and custody activities on a high standard fashion.

CETIP participants are required to maintain proper electronic equipment, but they may register operations on CETIP’s terminals.

Yes, the CBLC and the BOVESPA are well prepared to handle substantial increases in the trading volume. The daily average number of trades registered in 1997 was 12,822, whereas the systems used by CBLC and BOVESPA are able to process up to 100,000 trades per day. Also in this sense, system enhancements are planned in order to realistically accommodate such capacity requirements.

CETIP computers operate with 70% of their capacity. Communication links with service providers always have back-up links and the central processing unit operates on dual configuration.

Yes, the CBLC has back up procedures regarding any sort of computer failures or localized conditions.

As long as the depository is concerned, CBLC Custody Service has a back-up system, which may be used in the event of flaws in its original system or any other contingency situations. The depository’s systems department prepares back-up files of all data on a daily basis. Two identical versions containing information on all movements in each custody account (at the level of the beneficial owner) are recorded on tape. Custodial positions are filed in three segments: BOVESPA’s mainframe computer, and two back up files stored off-site.

As a back up for all the other systems and computers, CBLC has an arrangement in place with the Commodities and Futures Exchange – BM&F which allows CBLC to use BM&F’s equipment whenever deemed necessary. This procedure also comprehends a communication link between both institutions.

Furthermore, there is a third site permanently connected with CBLC, which may be used for data processing and telecommunications. All databases of the critical systems have back up copies kept offsite in the same terms as described for the depository service. CBLC also has electric power generators, which can be used, in case of panic stations.

Securities held within CBLC Custody Service have been numbered by BOVESPA according to ISO standards. BOVESPA is the numbering agency responsible for the allocation of ISIN codes to all securities tradable on the Brazilian market, both equities and fixed income. Please note, however, that real-time trading is diffused through a specific (shorter) code. CLC has its own numbering system, which is identical to the one utilized by the BVRJ. CETIP does not use ISIN codes.

In order to prevent the problems that may arise from the millennium bug, the CBLC and the BOVESPA have jointly prepared a document with the objective of guiding clearing agents and brokerage houses about the work that must me accomplished for that purpose.

Both CBLC and BOVESPA have been eager to provide proper orientation to their members for issues related to the Year 2000 problem. In this sense, the systems that are used by these institutions in liaison with CBLC and BOVESPA’s systems (core business) are already compliant with the Year 2000 bug. In November 1998, tests have been conducted with some selected members in order to assess systems’ compliance and eventual adjustments that may be deemed necessary. A complete test involving the entire community will be conducted in the first quarter of 1999.

Furthermore, please be advised that CBLC and BOVESPA have contingency plans in place for the Year 2000 problem.

CETIP system were adjusted on October 30, 1998.

The Rio de Janeiro Stock Exchange is coordinating the work on the year 2000 issue for itself, the Câmara de Liquidação e Custódia - CLC, and the Electronic Quotation System (SOMA).

The Rio de Janeiro Stock Exchange has issued a warning on the year 2000 problem to all its members (brokers) on November 24, 1996. This warning proposed a policy according to which all market participants disclose the procedures being adopted to avoid the problem.

In addition, they have finished the identification of all systems, programs, and files, regardless of their language, which can have any impact on the year 2000 bug. On an environment of 73 systems and sub-systems, 4,740 programs were identified, of which 3,829 would be somehow affected with the problem. BVRJ has already idealized the appropriated corrective actions.

To each system/sub-system converted, individual tests are executed. This process began on December, 1997, and is expected to be concluded on December, 1998. Systems related to derivatives have already been converted, i.e., they are already capable of operating with dates after January 1st, 2000.

The BVRJ is planning a large simulation test, involving market participants, which will simulate a trading day after year 2000.

Considering the recent implementation of BM&F’s Systems Department, its software and hardware are already prepared to the year 2000 problem. The BM&F has also required their software and hardware suppliers to present a report on whether they would have problems with the year 2000 bug, and most of them already informed that changes will not be necessary.

The BM&F will test the modification of the calendar soon; therefore, all problems, if existent, will thus be identified and repaired during 1998.