Derivatives in Brazil

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Derivatives in Brazil
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Derivatives in Brazil
History OTC Exchange Traded Risk Control
Capital Allocation Legal Issues Trends
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History of Derivatives
Significant growth since early 90s, although
observed reduction after Asian Crisis
Evolution intimately related to Domestic
economic scene New products in international
markets Globalization process
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History of Derivatives
1979 São Paulo Stock Exchange (BOVESPA)
launched options on stocks
1986 Mercantile and Futures Exchange (BMF) was
founded and launched BOVESPA Index Future
Contract Custody and Financial Settlement of
Securities (CETIP) was founded
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History of Derivatives
1991 BMF merged with São Paulo Commodities
Exchange and changed its name to Commodities and
Futures Exchange
1992 / 93 National Monetary Council (CMN)
allowed Brazilian Companies to trade derivatives
overseas 1992 Interest Rates 1993 Foreign
Currencies and Commodities
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History of Derivatives
1994 Regulation authorizing local OTC
Derivatives interest rates, foreign currencies,
gold and price indices
Obligation to register OTC Derivatives in systems
authorized by regulators (SPRCETIP and BMF)
CMNs regulations1 on Capital Requirement to
cover credit risk
1in accordance with the guidelines of the Basel
Committee on Banking Supervision (BCBS/BIS)
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Derivatives in Brazil
History OTC Exchange Traded Risk Control
Capital Allocation Legal Issues Trends
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Products
Swaps Plain vanilla Index1 (Fixed) x Index2
(Floating) NDF Option features Swaption
MaxIndex1Index2 Synthetic option
Options
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What is available at BOVESPA?
Call and Put options
Forward and future with stocks
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What is available at BMF?
Exchange traded
OTC (registration)
Largest trading center in Latin America 6th
largest Futures Exchange in the World
Source Futures Industry Magazine
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What is available at BMF?
Exchange traded
Dollar futures and options
One day Interbank Rate futures and options
IBOVESPA futures and options
Gold options
Bradies futures
Commodity Futures Coffee, sugar, soy bean, live
cattle, alcohol
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What is available at BMF?
OTC
Swaps Plain Vanilla
Flexible options Dollar IBOVESPA
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What is available at CETIP?
Swaps
Plain Vanilla
Option features Swaption Max USDSpread100DI
Asian Swap Synthetic Option Others
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Interbank and Exchange Rate
Source Bacen
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Interest Rate Derivatives
SourceBMF and Cetip
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Currency (USD) Derivatives
SourceBMF and Cetip
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Other Derivatives1
1Commodities, Domestic Indices, Other Currencies,
Ibovespa
SourceBMF and Cetip
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Derivatives - Mar/20011
1 Open Positions at BMF and CETIP
SourceBMF and Cetip
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Derivatives in Brazil
History OTC Exchange Traded Risk Control
Capital Allocation Legal Issues Trends
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Risk Control Development
Credit Risk
Year
Resolution 2.099 Capital Allocation for
Assets 1.994 Resolution 2.139 Capital
Allocation for Swaps Potential Credit Risk 1.994
Resolution 2.390 Credit Risk Central 1.997
Resolution 2.682 Provisions based on Client
Rating 1.999
Market Risk
Year
Resolution 2.606 Capital Allocation for Foreign
Currency Exposure 1.999 Resolution 2.692
Capital Allocation for Interest Rate Risk 2.000
Operational Risk
Year
Resolution 2.554 Practical procedures to reduce
Operational Risks 1.998
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Risk Control
Current situation in major Brazilian banks
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Regulatory Capital Allocation
Credit Risk 11 Risk Adjusted Assets 20 Swaps
Potential Risk
Market Risk Foreign Currency Risk Market Risk
(VaR x factor from 1 to 3)
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Systemic Risk
New Brazilian Payment System
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Derivatives in Brazil
History OTC Exchange Traded Risk Control
Capital Allocation Legal Issues Trends
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Legal Issues
Bankruptcy Law
Uncertainties as to the efficacy of early
termination clauses upon an insolvency
event Trustees ability to cherry pick
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Legal Issues
Netting x Bankruptcy Law
Civil Code addresses netting
New Brazilian Payment System Settlement using
net positions
Regulators already discussing netting in the
derivative market
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Derivatives in Brazil
History OTC Exchange Traded Risk Control
Capital Allocation Legal Issues Trends
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Trends in Brazil
More interaction between Regulators and Market
Participants
Clearings and Multilateral Netting
Improved Internal Control Systems
Credit Derivatives
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Derivatives Trend
More sophisticated products Exotic Derivatives
Need for MODELS PROFESSIONALS
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Derivatives in Brazil