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CSD Trends - Links, Integration, Collaboration

CSD Trends - Links, Integration, Collaboration. Prepared by: Jorge Jaramillo Operations Vice-president BVC – Deceval. Challenges we face……. John. Six main global trends impacting Exchanges and CSDs. 7_89 11_89 12_89 13_89 38_89 39_89. Service & client orientation. Regulation changes.

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CSD Trends - Links, Integration, Collaboration

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  1. CSD Trends - Links, Integration, Collaboration Prepared by: Jorge Jaramillo Operations Vice-president BVC – Deceval

  2. Challenges we face……..

  3. John Six main global trends impacting Exchanges and CSDs 7_89 11_89 12_89 13_89 38_89 39_89 Service & client orientation Regulation changes • Recent years impacted by new regulations • Creating new opportunities (e.g., centralization of OTC registration and migration to CCP) • Restricted cross border trading and clearing, while required more transparency in risk control and reporting • Increasingly more service and client oriented to stay relevant • Increase in competition from traditional and non-traditional competitors • Sophistication and globalization of capital markets demanding better services • Keep both regulators and clients engaged • Broadening of scope and international expansion as important sources of revenue growth for exchanges • Non-trading revenues more relevant • Strong M&A activity • Partnerships to increase liquidity and experience sharing Centralized clearing Broadening business model • Cleared volumes are consolidating into large global CCPs • Risk concentrated in a few clearing players • Margin netting, collateral efficiencies are key and driving consolidation Lack of issuers and other sources of financing • Companies find easier funding in private equity funds, venture capitalists and banks • Market financing comes as an option for companies later in the game, reducing the number of issues coming to the market IT & Tech innovations • Distributed Ledgers have the potential to re-shape the business, and it is accelerating at a fast pace • Increasingly difficult togenerate competitive advantage via in-house development

  4. Challenges our Business Must Respond to….. Competitiveness Market Access Participation Liquidity How to improve it ? Industry pressures Efficiency -Cost - Risks New Instrumentos ETF, FIBRAS, REITS, Others Regulatory Pressures CSDR IOSCO FSB International Eligibility «Continue to be Relevant Global Links Interoperability Innovation Digital Transformation Fintech APIs DLT Blockchain Growth / Returns/ Industry cost Risk managementMarket Safety

  5. 24_84 Thomas Challenge : Free float and turnover ratio in our markets Turnover velocity (2017) Latam Emerging Developed Free float (2017) *Av. free float of sample = 0.45 GDP per capita (USD Thousands, 2016) Note: GDP per capita in U.S. Dollars to 2016; Average free float and average turnover velocity do not include United States (*) Nasdaq was used as a proxy for United states turnover velocity Source: The World Bank, WFE Annual Statistic guide 2017, free float: Bloomberg

  6. We need to solve a problem …… Market liquidity Growth of our markets turnover velocity (ratio) average 2011-2016 Market Cap aS % of GDP, 2016 No. Of listed companies, 2016 Source: World Bank, World Federation of Exchanges, BVC, BVC Consultant

  7. overall_0_131720166563262193 columns_1_131720166563262193 Besides regulation and cyclical downturns, market decline is driven by changing client demands and technology Client Demands Supply (technology) Transparency Data & Analytics Efficiency Disruption Automation & Processing Modular Platforms Solutions & Pricing Access Connectivity Triggers and Speed bumps Regulation Cyclicality Source: BVC consultant

  8. 46_88 47_84 48_84 49_84 Corporate customers are demanding more transparent, faster, and integrated solutions #3: Rapid Digitalization of Value Chain Clients demand… Access and ease-of-use Transactional efficiency Digitization of processes Integrated solutions Faster, efficient execution of transactions across multiple stakeholders Digitization,to decrease manual process and paperwork; increase analytics Integrated solutions,that cater to many parts of the client’s value chain with flexibility Accessto rich information from multiple sources available 24/7 1 2 4 3 Specialist who addresses all the needs of client in that industry while offering flexibility to tailor Multi-bank portals that aggregate information from across multiple providers Payment platforms enabling near real-time execution, keeping costs low Paperless systems that are linked across multiple stakeholders of the value chain

  9. Technology developments will transform financial market infrastructures in the future 22_85 24_85 25_85 Key drivers trends Demand for more advanced and flexible solutions to differentiate • Distributed Ledgers will re-shape the Exchange business, likely at an accelerated pace… • … In addition, there is an increasing need for participants to differentiate to win • Broadridge has just released a Blockchain bilateral repo this week and are interested in coming to Latam markets 1 • Increased focus on innovative products such as FinTech, especially to diversify sources of income • FinTech market has been growing exploding over the last years • New models such as crowdfunding are disrupting the way that companies raise money • Blockchain technologies and cryptocurrencies are changing the way people think about markets Increased focus on diversifying into non-core products 2 • Resource & investment requirements with in-house IT becoming increasingly prohibitive • Shift in thinking: proprietary platforms no longer considered key differentiator to the business • Higher than market growth in 3rd party IT spend – will impact all market participants • Demand for faster spread of technology & time-to-market with cheaper R&D investment Shifting away from in-house development in favor of 3rd party solutions 3

  10. Distributed ledger is expected to have an impact throughout the securities ecosystem 8_85 10_84 38_84 42_84 29_84 Central Banking Investment Management Capital Markets Clearing/ other securities services Clearing/ Securities services Core benefits are for sell-side and buy-side players Core disruption is in post trade & services Collateral Treasury & Liquidity Source : BVC Consultant

  11. Custodians and clearing houses face digital disruption as a result of Blockchain adoption 5_89 18_89 52_84 29_84 Custodians Clearing houses • Distributed asset ledgers will remove the value-add of core custodial duties • Risk of disintermediation as other players expand along value chain into other offerings • Unbundling of custody fees possible as demand for safekeeping/maintenance decline • Competition from pure tech players could result in downward revenue pressure • Role may shift to ensuring automated securities servicing actions are done properly • Immediate settlement would reduce the role of clearing houses • Long term, distributed-ledger technology may develop sophisticated capabilities required for netting/novation and nullify CH’s advantage • Continued mid-term need for trusted firm to handle novation to achieve netting and reduce counterparty risk maintains CH’s value-add • Role may evolve to that of additional oversight of the Blockchain-driven system Potential Impact of Blockchain Source: BVC Consultant Risk Opportunity

  12. CSDs and Exchanges will have new opportunities in downstream services, threatening incumbent providers 19_89 20_89 39_84 Potential Impact of Blockchain Risk Opportunity CSDs Exchanges • Investors may trade more equities peer-to-peer outside the public markets through DL platforms that circumvent the exchanges • Opportunity to grow data and analytic services through value-add services like algorithms for HFs, data sets for quant funds, data inputs for HFT, etc. • Seek additional revenue opportunities by moving upstream (custody) and downstream (registry services) • Expand investment offerings beyond equities as broader asset classes are digitized • The ledger for fully digitized assets does not require a post-trade book entry system • Open access to ledgers by regulators and other stakeholders will increase competition for the provision of these services • Possible role expansion through the digitization of other asset classes for buy-side players • CSDs may also assume operational governance, providing oversight as the ledger protocols evolve • Additional value may come from developing platform functionality Source: BVC Consultant

  13. Use cases of Innovative Technologies in the post-trade space - European Central Bank Governance of DLT Solutions - Similar to that of an FMI: Access requirements, risk management, investor protection, processing rules, data management, responsibilities, applicable law etc. Initiatives for Identification of Shareholders and transparency of their positions - Bilateral Synchronic Book - Investor Data Directory – IDD Shareholder Rights Directive - SRD2 European Union Innovation and Developments - Fintech - DLT European Post Trade Forum - EPTF Capital Market Union - CMU Initiativesforelectronicvoting Encourage shareholder participation in the assemblies -Shareholders - Tokens - Votes Initiatives for the transmission of information of corporate events DLT - Smart Contracts - «Golden Copy» - »trusted copy» of Corporate Event Information Fintech Developments Harmonization and standardization of practices Creation of a Digital Identity Unit - Certificates of Residence Process automation Code of Conduct for the handling of Tax Withholdings - Cross Border «Refunds - Relief at source» Require Regulation Source : ECB January 2019

  14. Investor Rights Directive : SRD II «Disclose Third party related transactions « «Disclose relevant transactions « Rights of the Investors Source: Investor Rights Directive

  15. T2S LOGROS Target 2 Securities – European Central Bank One year of full operation Single pool of collateral for banks and intermediaries for their European business Optimization of liquidity management through the introduction of a central liquidity manager Self collateralization mechanism to reduce the need to pre-funding cash accounts 22 CSDs, 20 Markets and two currencies on the platform (EURO - DANISH CROWN) Harmonization of settlement Harmonization of post-trade practices mitigating cross-border settlement risks Settlement Efficiency- 97.70% DVP - 69% of the total volume 500 thousand to 625 thousand daily transactions Single point of entry to the European Market and improvement of market access to international investors DVP Resources between 554.2 Million Euros and 698.5 Billion Euros Settlement efficiency: 97.54% Source: European Central Bank Report: T2S Special Series: One year of full operation

  16. Major Initiatives in the Americas Region… ORIENTED TO THE CLIENT AND TO THE SERVICE DYNAMIC CHANGES IN REGULATION AND MARKET REQUIREMENTS CONSOLIDATION OF VERTICAL INTEGRATIONS ACSDA Members MainTrends NEW DEMANDS FOR REGIONAL INTEGRATION REGIONAL IPOs IMPROVEMENT OF LIQUIDITY NEW BUSINESS DEVELOPMENT DIVERSIFICATION REQUIREMENT FOR THE ADOPTION OF STANDARDS AND COMPLIANCE – CONTINUE BEING ELIGIBLE TRANSFORMATIONS AND IMPORTANT TECHNOLOGICAL PROJECTS NTEROPERATING GLOBALLY INTERNATIONAL SERVICES

  17. 51_84 26_84 127_84 19_84 7_85 overall_0_131773865731016105 columns_1_131773865731016105 Evaluation of the Colombian Capital Market in relation to International Standards Principal FINDINGs SUMMARY TABLE • Risk Management – Control • CCP risk waterfall : CRCC aligned with IOSCO standards on security rings (collateral, warranty funds,, own capital) • Participant Segmentacion : Potential to segment participants according to services they use (e.g., Negotiating members, Clearing and settlement, information, issuers) • Cybersecurity: Collective effort of the entire ecosystem for the prevention and mitigation of cyber attacks. New SFC requirements in line with international standards • KYC Requirements: Appropriate level of control with international standards. Duplication of controls between entities and requirements not adapted to new technologies (e.g., eKYC) • Continuidad de negocio: Fortalecimiento de los procesos de crisis y continuidad del negocio a raíz de la integración en línea con estándares internacionales • Market Structure • Central counterparty systems (CCP): Clearing and Settlement by CCP partially implemented. Security rings aligned with international standards. • Central securities depository: Inefficient and expensive bilateral clearing and settlement system. To consider hybrid omnibus system with final beneficiary registration in depository • Regulatory framework: The regulatory framework is adequate for the control of financial markets and in line with international standards • International Custody: No gap has been identified against international principles on international custody • Interoperability • Communication standards: Pre-trade and adequate trade communication standards (FIX). Need to standardize messaging in post-trade (ISO 20022) • Unequivocal identification codes: Key ISO identification codes partially implemented (implemented: ISIN, CFI and MIC, pending: FISN and LEI). • International eligibility: The product team takes into consideration international best practices for potential harmonization with local practices • Liquidity and Products • - Securities Lending for Equity : Multiple barriers hinder the liquidity of equity securities loans (TTVs) • - Market makers: Partial adoption of market makers (esp. In equities and derivatives), given the incentives (regulation, low liquidity, more attractive OTC) • - Cross-collateral optimization: CRCC cross-collaterals between products with the same underlying and correlated underlying assets, not between markets. Non-existent mechanism in bvc 1 A Risk Management and Control 1 2 Market Structure B C D E 2 A B C D 3 A B Interoperability C 3 4 Liquidy and Products 4 A B C 4 = In line with international standards and / or global examples = In line with international standards and / or global examples with opportunity for improvement 2 = Partial compliance with the best international / standard examples 1 = Not in line with the best international / standard examples Source: BVC consultant

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