Derivatives Markets in Brazil

Abstract

This paper provides an overview of the evolution, surveillance, regulation and recent developments of derivatives markets in Brazil, concentrating on the markets under the jurisdiction of the Securities Commission of Brazil (CVM - Comiss=E3o de Valores Mobili=E1rios). This means equity derivatives traded at organized exchanges. Derivatives markets in Brazil have developed following a policy of gradual expansion. Accordingly, new products have been phased in, in response to market demands, adjusted to the capabilities of the regulatory bodies. Forward contracts and options on stocks have been traded at Rio de Janeiro Stock Exchange and S=E3o Paulo Stock Exchange since the early 70's. The BM&F (Commodities and Futures Exchange) started its activities in 1986, and currently ranks third among the futures exchanges of the world, by number of contracts traded. Its US dollar futures and interest rate futures are among the ten most traded contracts at all futures exchanges. Futures contracts on the S=E3o Paulo Stock Exchange Index - Ibovespa - are the third most traded contracts at the BM&F. Since 1990, total turnover at the BM&F has grown at an average yearly rate of 150%. OTC derivatives are so far restricted to swaps, which started trading at the beginning of 1994, and non-standardized covered stock options (warrants), authorized in November 1994. The economic stabilization plan (the Real plan), introduced in July 1994, has given a strong boost to derivatives markets in Brazil. Regulation and enforcement are carried out either by the Central Bank or the Securities Commission (the CVM), according to the underlying assets. Stock and futures exchanges play an important role as self-regulatory organizations. International recommendations concerning daily mark-to-market, netting, exchange of information, financial institutions capital adequacy and responsibilities, and development of risk-management models have been adopted. Due to a highly favourable domestic environment, coupled with increasing integration into global markets, derivatives markets in Brazil are expected to keep up the high rates of growth observed so far. The importance of Brazilian financial markets has been strengthened by the recent launch of futures contracts on the real (the Brazilian currency) at the Chicago Mercantile exchange. IMPORTANT NOTICE An earlier version of this paper was presented at the Latin American Derivatives Conference, held in Washington DC in November 1995, sponsored by the Interamerican Development Bank - IDB and the International Swaps and Derivatives Association - ISDA. The paper was the basis of Mr. Rogerio Martins', CVM=B4s commissioner, speech at the conference. I would like to thank Mr. Martins for his contribution in organizing and writing the paper.