Augusto CarvalhoFinance Lecturer

FAAP Economics Department

FINANCIAL REGULATION AFTER THE CRISIS:

EVOLUTION OR REVOLUTION?

AGENDA

2008 Crisis

Regulation in Brazil

Pioneer Initiatives: CED

Brazilian Resistance to Crisis

Regulation in US & Europe

When, Where, How...

2008 CRISIS

WHEN...

INTEREST ON WORD „CRISIS‟ OVER TIME ON GOOGLE

0

20

40

60

80

100

120

WHERE...

Source: google trends @ http://www.google.com/trends/explore#q=crisis&cmpt=q

2008 Crisis happened not due to :

• “Weapons of mass destruction“

• Stocks or Derivatives Exchanges

• Bad credit loans per se...

HOW...

2008 Crisis happened due to...

OTC market which, by its own

nature, lacks regulation.

HOW...

“Such contracts are traded outside of the organized financial

exchanges in an opaque, decentralized environment of phones, fax

and quotations screens. As such, the two counterparties to a

patricular transaction may customiza virtually any of the terms of

that transaction.”

Culp (2000, p. 263 e ss.)

OTC

OTC PRE AND POST CRISIS

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Am

ou

nts

ou

tsta

nd

ing

B

illio

ns

Foreign exchange contracts Interest rate contractsEquity-linked contracts Commodity contractsCredit default swaps Source:BIS

EXCHANGE TRADING PRE AND POST CRISIS

8.869.97

11.87

15.53

17.68 17.74

22.3

2004 2005 2006 2007 2008 2009 2010

Options and Futures In Billion of Contracts Traded

Source: Futures Industry

Characteristics

REGULATION IN BRAZIL

REGULATION IN BRAZIL

0

50

100

150

200

250

300

350

Brazil France Hong Kong

USA China Chile Japan Singapure Korea Great Britain

India

Source: Atratividade do Brasil como polo internacional de investimentos e negócios, avaliable at : http://www.brainbrasil.org.br

Normatives/Month

REGULATION IN BRAZIL

Source: BM&FBOVESPA presentation, available at : http://ri.bmfbovespa.com.br//

Normatives/Month

REGULATION IN BRAZILTRANSPARENCY AND GOOD PRACTICES

• > 15y Regulatory Authorities require that derivatives transaction, either

Exchange or OTC, to be registered in one of authorized repository system.

• > 3y Central Bank requires that foreign derivatives transactions performed by

residents to be registered in one of authorized repository system.

• Mutual Funds are required to market-to-market their portfolios on a daily

basis.

• High Regulatory Capital Ratio.

REGULATION IN BRAZILTRANSPARENCY AND GOOD PRACTICES

• Mutual Funds are required to market-

to-market their portfolios on a daily

basis.

• High Regulatory Capital Ratio.

REGULATION IN BRAZILHIGH REGULATORY CAPITAL RATIO

17.115.7

0

2

4

6

8

10

12

14

16

18

20

Source: Brazil Central Bank

REGULATION IN BRAZILACTIVE CCP AND REPOSITORIES

• BM&FBOVESPA

Optional Derivatives Clearing

• CETIP

Biggest OTC Repository

• BM&FBOVESPA

Foreign Exchange Clearing

Equity Clearing

Derivatives Clearing

Fixed Income Clearing

Trading System / Clearing OTC / Repositories

REGULATION IN BRAZILTHE EXCHANGE MODEL

Source: BM&FBOVESPA, avalilable at: http://ri.bmfbovespa.com.br/site/portal_investidores/en/home/home.aspx

REGULATION IN BRAZILTHE EXCHANGE MODEL

Source: BM&FBOVESPA, avalilable at: http://ri.bmfbovespa.com.br/site/portal_investidores/en/home/home.aspx

Regulation prohibits internalization of orders, dark pools, stocks trading in both exchange and

OTC simultaneously.

Settlement and clearing of stocks trading must be done through a CCP.

Settlement and clearing at the beneficial owner level.

Under the regulation in place, potential competitors would be obliged to provide the same

integrated solution, with the same rules and transparency.

Other exchanges have been seeking integrated models (self clearing models).

Naked access is not allowed.

Naked short selling is not possible.

PIONEER INITIATIVES

CED

PIONEER INITIATIVES

CED

(Derivatives Exposures Central)

• Partnership between:

• BM&FBOVESPA

• CETIP

• Central Bank

• FEBRABAN (Brazilian Association of Banks)

PIONEER INITIATIVES

CED

(Derivatives Exposures Central)

• Serve as a prospect tool for the banks.

• Substitute the traditional credit

analysis.

• Audit.

• Serve as a parameter for assessing

the financial health of the company.

• Sell the information to third parties.

• Improve transparency with regards to

derivatives exposures in both exchange

and OTC.

• Allow the banks to identify the exposure

profile of its clients through risk factors

and terms.

• Support the regulatory framework with

regards to derivatives registering.

It Aims It does not Aim

PIONEER INITIATIVESCED

BM&FBOVESPA CETIP

CED

Not Only Due to Regulatory Framework

BRAZILIAN RESISTANCE TO CRISIS

NOT A HIGHLY LEVERAGED MARKET

40

42

44

46

48

50

52D

ez Jan

Fev

Mar

Abr

Mai

Jun

Jul

Ago Set

Out

Nov

Dez Jan

Fev

Mar

Abr

Mai

Jun

Jul*

Ago

*

Set

*

Credit / GDP

Source: Brazil Central Bank

NOT SUCH A RISK SEEKER(VERY LOW ACTUARIAL GOALS)

0

100

200

300

400

500

600

700

2002 2011

Bill

ion

BR

L

Pension Funds Portfolio

Equity

Fixed Income andOthers

Source: BM&FBOVESPA presentation, available at : http://ri.bmfbovespa.com.br/

69.90%

30.10%72.30%

27.70%

Population

Investing in

Equity

Market:

< 0.5%

NOT SUCH COMPLEXITY DRIVEN…

Source: CETIP

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

Mill

ion

s CDS Registering

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Am

ou

nts

ou

tsta

nd

ing

B

illio

n

…WHEN COMPARED WITH DEVELOPED MARKETS

Source: BIS

CDS Registering

(R)Evolution

REGULATION

US & EUROPE

WILL DODD-FRANK REEDUCATE THE MARKET ?

Source: http://dodd-frank.com/cftc-issues-first-determination-regarding-swaps-required-to-be-cleared/

AFTER 2008 CRISIS

BRAZILIAN REGULATION FRAMEWORK HAS

AN OPPORTUNITY TO BECOME A

BENCHMARK, AT LEAST, FOR OTC

DERIVATIVES.

Thank you very much.