Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Cogito Ergo Sum who wrote (77983)	8/19/2011 10:48:59 AM
From: elmatador	1 Recommendation Respond to of 217615

Brazil a possible model for derivatives reform By Tony Freeman August 19, 2011 11:33 am European policymakers are committed to mandatory clearing of the derivatives markets in order to reduce systemic risk in the financial systems, which will move a vast majority of over-the-counter (OTC) derivatives on to exchanges. It is not known exactly how much of the European OTC market will become part of the exchange-traded derivatives market, although Gertrude Tumpel-Gugerall, a member of the executive board at the European Central Bank, recently cited rough estimates that 80-90 per cent of OTC volumes could be centrally cleared. As authorities and market participants gear themselves for this profound shift, they may care to look at the template provided from Brazil. Brazil learnt lessons from other emerging markets and consciously designed trading and post-trade infrastructure suitable for a market heavily orientated towards natural resources and, crucially, dominated by derivatives trading. The government realised many years ago that robust infrastructure helps provide the certainty that foreign investors crave – and lays the foundations for the creation of a regional financial centre. Unlike the US or Europe, or indeed the rest of the world, Brazil’s domestic derivatives market is dominated by products cleared via a central counterparty. There is much to be lauded about the country’s derivatives framework. It has already moved 80 per cent of its derivatives on to exchange, with BM&FBovespa – the country’s only securities, commodities and futures exchange – taking on counterparty risk. All details of trades are stored in its central securities repository. In Brazil all domestic OTC trades, which account for 20 per cent of the overall derivatives market, are required to be reported to one of two data repositories. Some OTC contracts are cleared and reported on BM&F, but the majority are registered with CETIP, one of Latin America’s largest custody and settlement houses. This information is then monitored by CETIP throughout the day for the build-up of systemic risk. Brazil’s sophisticated middle and back office processes, which include a settlement cycle of T+0 – meaning the trade is settled on the same day it is initiated – have resulted in a derivatives market with high levels of transparency, regulatory access to information and supervision. Moreover, the level of regulatory oversight has not adversely affected the performance of the market; BM&FBovespa became the world’s sixth-largest derivatives exchange by contract volume in 2010 and the number of futures and options traded on the exchange increased by 54.5 per cent from the previous year, to over 1.42bn contracts, according to the Futures Industry Association’s survey of the world’s leading derivatives exchanges published in March 2011. As the rules for a global derivatives framework are laid down, this begs the question; are there lessons to be learnt from Brazil? The market is not perfect. There are crippling tax laws, restrictions on fund participation in the cash market and – while the supply of and demand for more exotic products grow – there are still gaps in the product range. That said, the capital markets industry in Brazil is still relatively young. This is certain to bring challenges but it also means that market participants can benefit from a clean slate and, if Brazil has the foresight, it could take up the mantle of being the standard for global derivatives reforms. Europe’s derivatives legacy is more complex. It is in the process of being untangled and understood, before it can be rebuilt. In this rebuilding process we must be mindful of regulatory arbitrage, global harmonisation and investor confidence. The goal of policymakers is to create a framework that makes the market sufficiently transparent and allows supervisors and overseers to effectively monitor the build-up of systemic risk. So far, Brazil has operated, by and large, as an efficient system whereby regulators have complete oversight of all activities within the derivatives markets. In terms of transparency and systemic risk management, Brazil is topping the league table. Tony Freeman is executive director of industry relations at Omgeo, a post-trade services group jointly owned by Thomson Reuters and the Depository Trust and Clearing Corporation ft.com