Brazil: Derivatives Market

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Brazilian Derivatives Market


Brazil boasts a vast network of financial intermediaries authorized to operate in the derivatives market. Besides the intermediaries linked to the capital market, which has been mentioned above, there are those linked to the exchanges dealing in futures and to banking and non-banking financial institutions, all actively participating in the derivatives market. In addition, Swap operations are carried out by financial institutions in general. On the over-the-counter market, operations are mainly registered in the CETIP. However, the majority of Brazilian financial institutions have the potential to participate in the derivatives markets.

Exchange and over-the-counter markets

The two principal exchanges for Brazilian futures - the Commodities and Futures Exchange (the BM&F) and the Brazilian Futures Exchange (the BBF) maintain systems to scrutinize the market, clearing operations, settling and guarantees which resemble those of the Stock Exchanges.

The transactions involving over-the-counter derivatives predominantly take place through the CETIP, which concludes the process of financial liquidation within one working day. The system also updates and provides daily information throughout the market on the prices of various financial assets and charges levied for the trades registered there. Monitoring operations are also carried out on transactions with a view to identifying and, if necessary, impeding those which deviate substantially from applicable market standards.

Derivatives related to Shares and Indices

Share derivatives, which have been the object of transactions since the beginning of the 1970s, began to be regulated on Brazilian stock exchanges as of 1979. In 1982 was seen the advent of negotiations for options on the BVRJ and, a year later, term and futures operations were being regulated. The futures contract in the Bovespa Index began to attract negotiations in 1989 and is presently one of the most active on the Brazilian market. In addition futures contracts of individual share value and portfolio indices as well as options on futures for share indices are negotiated on the BBF.

Derivatives Compared to Other Assets

Although they are of more recent origin, the markets for interest and exchange rate derivatives represent the bulk of derivative transactions carried out in the country. The success of such contracts has put Brazil among the leading derivatives market in the world. The combination of a solid institutional base able to guarantee reliability for the fulfilment of contracts and, in the recent past, a highly volatile economic environment, especially regarding interest and exchange rates, made such contracts especially attractive to the investing public.

Derivatives connected with commodities are not relevant in terms of volumes negotiated, especially taking into account the share of the agribusiness sector in the total Brazilian GDP (around 40%). This is explained by the model for agricultural policy adopted by the Brazilian Government, in which it acts as the principal financing agent, keeper of regulating stocks and guarantor of minimum prices for the purchase and sale of crops. The predominance of the government in agricultural activities plays a decisive role in reducing, and sometimes even eliminating, the risks inherent in farming and inhibits the emergence of derivative products.