Derivatives in Brazil

May/01 Derivatives in Brazil  History  OTC & Exchange Traded  Risk Control & Capital Allocation  Legal Issues  Trends

May/01 Derivatives in Brazil History of Derivatives  Significant growth since early 90´s, although observed reduction after Asian Crisis  Evolution intimately related to : 3Domestic economic scene 3New products in international markets 3Globalization process

 1986 : 3Mercantile and Futures Exchange (BM&F) was founded and launched BOVESPA Index Future Contract 3Custody and Financial Settlement of Securities (CETIP) was founded May/01 Derivatives in Brazil History of Derivatives  1979 : 3São Paulo Stock Exchange (BOVESPA) launched options on stocks

 1991 : 3BM&F merged with São Paulo Commodities Exchange and changed its name to Commodities and Futures Exchange  1992 / 93 : 3National Monetary Council (CMN) allowed Brazilian Companies to trade derivatives overseas H 1992 : Interest Rates H 1993 : Foreign Currencies and Commodities May/01 Derivatives in Brazil History of Derivatives

 1994: 3Regulation authorizing local OTC Derivatives Hinterest rates, foreign currencies, gold and price indices 3Obligation to register OTC Derivatives in systems authorized by regulators (SPR CETIP and BM&F) May/01 Derivatives in Brazil History of Derivatives 3CMN´s regulations 1 on Capital Requirement to cover credit risk 1 in accordance with the guidelines of the Basel Committee on Banking Supervision (BCBS/BIS)

May/01 Derivatives in Brazil  History  OTC & Exchange Traded  Risk Control & Capital Allocation  Legal Issues  Trends

 Swaps: 3Plain vanilla H Index 1 (Fixed) x Index 2 (Floating) H NDF 3Option features H Swaption H Max{Index 1 ;Index 2 } H Synthetic option May/01 Derivatives in Brazil Products  Options

 Call and Put options May/01 Derivatives in Brazil What is available at BOVESPA?  Forward and future with stocks

 Exchange traded May/01 Derivatives in Brazil What is available at BM&F?  OTC (registration) Largest trading center in Latin America 6 th largest Futures Exchange in the World Source: Futures Industry Magazine

 Exchange traded May/01 Derivatives in Brazil What is available at BM&F? 3Dollar: futures and options 3One day Interbank Rate: futures and options 3Bradies: futures 3IBOVESPA: futures and options 3Gold: options 3Commodity Futures HCoffee, sugar, soy bean, live cattle, alcohol

 OTC May/01 Derivatives in Brazil What is available at BM&F? 3Swaps H Plain Vanilla 3Flexible options H Dollar H IBOVESPA

 Swaps May/01 Derivatives in Brazil What is available at CETIP? 3Plain Vanilla 3Option features H Swaption H Max { USD+Spread ; 100%DI } H Asian Swap H Synthetic Option H Others

May/01 Derivatives in Brazil Interbank and Exchange Rate Source: Bacen

May/01 Derivatives in Brazil Interest Rate Derivatives Source:BM&F and Cetip

May/01 Derivatives in Brazil Currency (USD) Derivatives Source:BM&F and Cetip

May/01 Derivatives in Brazil Other Derivatives 1 Source:BM&F and Cetip 1 Commodities, Domestic Indices, Other Currencies, Ibovespa

May/01 Derivatives in Brazil Derivatives - Mar/ Source:BM&F and Cetip 1 Open Positions at BM&F and CETIP

May/01 Derivatives in Brazil  History  OTC & Exchange Traded  Risk Control & Capital Allocation  Legal Issues  Trends

May/01 Derivatives in Brazil Risk Control Development Credit Risk H Resolution H Resolution 2.099: Capital Allocation for Assets1.994 H Resolution H Resolution 2.139: Capital Allocation for Swaps´ Potential Credit Risk1.994 H Resolution H Resolution 2.390: Credit Risk Central1.997 H Resolution H Resolution 2.682: Provisions based on Client Rating1.999 Market Risk H Resolution H Resolution 2.606: Capital Allocation for Foreign Currency Exposure1.999  Resolution  Resolution 2.692: Capital Allocation for Interest Rate Risk Operational Risk H Resolution H Resolution 2.554: Practical procedures to reduce Operational Risks1.998 Year

May/01 Derivatives in Brazil Risk Control Current situation in major Brazilian banks Implementation Completed CapitalAllocationRiskValuation Risk Database Database MarketRisk Risk Modeling Modeling CreditRisk OperationalRisk

May/01 Derivatives in Brazil Regulatory Capital Allocation  Credit Risk 311% Risk Adjusted Assets 320% Swaps´ Potential Risk  Market Risk 3Foreign Currency Risk 3Market Risk (VaR x factor from 1 to 3 )

May/01 Derivatives in Brazil Systemic Risk  New Brazilian Payment System RTGS COMPE Clearings (DNS) Financial Institutions Central Bank SELIC CENTRAL BM&F CBLC CIP (payments) Checks Government Bonds

May/01 Derivatives in Brazil  History  OTC & Exchange Traded  Risk Control & Capital Allocation  Legal Issues  Trends

May/01 Derivatives in Brazil Legal Issues  Bankruptcy Law 3Uncertainties as to the efficacy of early termination clauses upon an insolvency event 3Trustee´s ability to “cherry pick”

May/01 Derivatives in Brazil Legal Issues  Netting x Bankruptcy Law 3New Brazilian Payment System H Settlement using net positions 3Regulators already discussing netting in the derivative market 3Civil Code addresses netting

May/01 Derivatives in Brazil  History  OTC & Exchange Traded  Risk Control & Capital Allocation  Legal Issues  Trends

May/01 Derivatives in Brazil Trends in Brazil  More interaction between Regulators and Market Participants  Clearings and Multilateral Netting  Improved Internal Control Systems  Credit Derivatives

May/01 Derivatives in Brazil Derivatives Trend  More sophisticated products : H Exotic Derivatives  Need for : H MODELS H PROFESSIONALS

Derivatives in Brazil