augusto carvalho british consulate panel - regulation in derivatives market in brazil
TRANSCRIPT
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Augusto CarvalhoFinance Lecturer
FAAP Economics Department
FINANCIAL REGULATION AFTER THE CRISIS:
EVOLUTION OR REVOLUTION?
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AGENDA
2008 Crisis
Regulation in Brazil
Pioneer Initiatives: CED
Brazilian Resistance to Crisis
Regulation in US & Europe
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When, Where, How...
2008 CRISIS
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WHEN...
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INTEREST ON WORD „CRISIS‟ OVER TIME ON GOOGLE
0
20
40
60
80
100
120
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WHERE...
Source: google trends @ http://www.google.com/trends/explore#q=crisis&cmpt=q
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2008 Crisis happened not due to :
• “Weapons of mass destruction“
• Stocks or Derivatives Exchanges
• Bad credit loans per se...
HOW...
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2008 Crisis happened due to...
OTC market which, by its own
nature, lacks regulation.
HOW...
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“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
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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
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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
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Characteristics
REGULATION IN BRAZIL
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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
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REGULATION IN BRAZIL
Source: BM&FBOVESPA presentation, available at : http://ri.bmfbovespa.com.br//
Normatives/Month
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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.
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REGULATION IN BRAZILTRANSPARENCY AND GOOD PRACTICES
• Mutual Funds are required to market-
to-market their portfolios on a daily
basis.
• High Regulatory Capital Ratio.
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REGULATION IN BRAZILHIGH REGULATORY CAPITAL RATIO
17.115.7
0
2
4
6
8
10
12
14
16
18
20
Source: Brazil Central Bank
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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
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REGULATION IN BRAZILTHE EXCHANGE MODEL
Source: BM&FBOVESPA, avalilable at: http://ri.bmfbovespa.com.br/site/portal_investidores/en/home/home.aspx
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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.
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PIONEER INITIATIVES
CED
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PIONEER INITIATIVES
CED
(Derivatives Exposures Central)
• Partnership between:
• BM&FBOVESPA
• CETIP
• Central Bank
• FEBRABAN (Brazilian Association of Banks)
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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
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PIONEER INITIATIVESCED
BM&FBOVESPA CETIP
CED
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Not Only Due to Regulatory Framework
BRAZILIAN RESISTANCE TO CRISIS
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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
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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%
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NOT SUCH COMPLEXITY DRIVEN…
Source: CETIP
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
Mill
ion
s CDS Registering
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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
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(R)Evolution
REGULATION
US & EUROPE
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WILL DODD-FRANK REEDUCATE THE MARKET ?
Source: http://dodd-frank.com/cftc-issues-first-determination-regarding-swaps-required-to-be-cleared/
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AFTER 2008 CRISIS
BRAZILIAN REGULATION FRAMEWORK HAS
AN OPPORTUNITY TO BECOME A
BENCHMARK, AT LEAST, FOR OTC
DERIVATIVES.
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Thank you very much.