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DerivativDerivatives in es in BrazilBrazil
May
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Der
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in B
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Derivatives in Brazil
History
OTC & Exchange Traded
Risk Control & Capital Allocation
Legal Issues
Trends
May
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Der
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in B
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History of Derivatives
Significant growth since early 90´s, although observed reduction after Asian Crisis
Evolution intimately related to:
Domestic economic scene
New products in international markets
Globalization process
1986:
Mercantile and Futures Exchange (BM&F) was founded and launched BOVESPA Index Future Contract
Custody and Financial Settlement of Securities (CETIP) was founded
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History of Derivatives
1979:
São Paulo Stock Exchange (BOVESPA) launched options on stocks
1991:
BM&F 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 BM&F)
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History of Derivatives
CMN´s 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
Swaps:
Plain vanilla
Index1 (Fixed) x Index2 (Floating)
NDF
Option features
Swaption
Max{Index1;Index2}
Synthetic option
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Products
Options
Call and Put options
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What is available at BOVESPA?
Forward and future with stocks
Exchange traded
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What is available at BM&F?
OTC (registration)
Largest trading center in Latin America
6th largest Futures Exchange in the World
Source: Futures Industry Magazine
Exchange traded
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What is available at BM&F?
Dollar: futures and options
One day Interbank Rate: futures and options
Bradies: futures
IBOVESPA: futures and options
Gold: options
Commodity Futures
Coffee, sugar, soy bean, live cattle, alcohol
OTC
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What is available at BM&F?
Swaps
Plain Vanilla
Flexible options
Dollar
IBOVESPA
Swaps
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What is available at CETIP?
Plain Vanilla
Option features
Swaption
Max {USD+Spread;100%DI}
Asian Swap
Synthetic Option
Others
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Interbank and Exchange Rate
Source: Bacen
10
20
30
40
50
60
70
80
90
D 95 D 96 D 97 D 98 D 99 D 00 D 01 D
0,75
0,95
1,15
1,35
1,55
1,75
1,95
2,15
Short term Interbank rate % p.y
Exchange rate R$/US$
Mexican Crisis Asian Crisis
Russian Crisis
Brazilian Crisis
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Interest Rate Derivatives
Source:BM&F and Cetip
-
50
100
150
200
250
300
Dec/97 Dec/98 Dec/99 Dec/00 Mar/01
US
D -
Bill
ion
OTC BM&F
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Currency (USD) Derivatives
Source:BM&F and Cetip
-
50
100
150
200
250
Dec/97 Dec/98 Dec/99 Dec/00 Mar/01
US
D -
Bill
ion
OTC BM&F
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Other Derivatives1
Source:BM&F and Cetip
1Commodities, Domestic Indices, Other Currencies, Ibovespa
-
5
10
15
20
25
Dec/97 Dec/98 Dec/99 Dec/00 Mar/01
US
D -
Bill
ion
OTC BM&F
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Derivatives - Mar/20011
Source:BM&F and Cetip
1 Open Positions at BM&F and CETIP
BM&F 14%
BM&F21%
OTC33%
OTC7%
OTC25%
BM&F0%
Interest Rate54%
Other7%
Currency (USD)39%
USD 300 Billion
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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 RiskCredit Risk
Resolution 2.099Resolution 2.099: Capital Allocation for Assets 1.994
Resolution 2.139Resolution 2.139: Capital Allocation for Swaps´ Potential Credit Risk 1.994
Resolution 2.390Resolution 2.390: Credit Risk Central 1.997
Resolution 2.682Resolution 2.682: Provisions based on Client Rating 1.999
Market RiskMarket Risk
Resolution 2.606Resolution 2.606: Capital Allocation for Foreign Currency Exposure 1.999
Resolution 2.692Resolution 2.692: Capital Allocation for Interest Rate Risk 2.000
Operational RiskOperational Risk
Resolution 2.554Resolution 2.554: Practical procedures to reduce Operational Risks 1.998
YearYear
YearYear
YearYear
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Risk Control
Current situation in major Brazilian banks
Implementation
Completed
Capital Capital AllocationAllocation
RiskRiskValuationValuation
RiskRisk DatabaseDatabase
Market Market RiskRisk
RiskRisk ModelingModeling
CreditCreditRiskRisk
Operational Operational RiskRisk
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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
RTGSCOMPE
Clearings (DNS)
Financial Institutions
Central Bank
SELIC
CENTRAL
BM&F
CBLC
CIP (payments)
Checks
Government Bonds
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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
Trustee´s ability to “cherry pick”
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Legal Issues
Netting x Bankruptcy Law
New Brazilian Payment System
Settlement using net positions
Regulators already discussing netting in the derivative market
Civil Code addresses netting
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Der
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Derivatives in Brazil
History
OTC & Exchange Traded
Risk Control & Capital Allocation
Legal Issues
Trends
May
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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
Derivatives in Derivatives in BrazilBrazil
