Author Name: Edemir Pinto, CEO, BM&FBOVESPA
1. Could you give us an overview of your exchange?
BM&FBOVESPA, with its vertically integrated model, is a complete exchange in terms of products and infrastructure, as a result of a merger on May 2008 between BOVESPA (the São Paulo Stock Exchange, founded in 1890) and BM&F (the Commodity & Futures Exchange, founded in 1986). It offers a diversified array of products and services ranging from trading in equities and derivatives to all stages of post-trade activities including clearing, settlement and depositary services, always at the beneficial owner level.
In terms of market and product development, the company has played an important role over the past ten years in leading significant changes in the Brazilian capital markets. For example, we have launched two important premium listing segments, Novo Mercado and Bovespa Mais. The companies listed in these segments are committed to high standards of corporate governance.
Historically speaking, BM&FBOVESPA also has a long track record of fostering sustainability on the part of listed companies and all other stakeholders, as well as being a signatory to several major organizations that promote local and global sustainability. BM&FBOVESPA was the world's first exchange to sign up to the United Nations Global Compact, for example. This was on April 8, 2004. The UNGC, in partnership with social actors, promotes a globally recognized framework for best practice in private-sector environmental, social and governance policies, contributing to the construction of a more sustainable and inclusive world economy.
It is also part of our DNA as a company to promote financial education and diffuse a culture of planning, saving and personal finance, so as to increase the participation of individual investors in the capital markets, and especially the stock exchange. We have an Educational Institute that offers a vast portfolio of programs open to the general public, including short, medium and long modules or courses.
2. How active are foreign investors on your exchange?
How accessible is your market? In recent years BM&FBOVESPA has intensely promoted the Brazilian capital markets on a global scale via its offices in London, New York and Shanghai. Foreign investors currently account for more than 50% of average daily trading volume in the equity market and more than 30% in derivatives.
The legal framework governing foreign investors in the Brazilian capital markets has been in force since 2000 and is based on resolutions referring to portfolio investment in equities and financial derivatives, as well as trading in commodity derivatives. In this context, international investors who wish to buy Brazilian securities directly in Brazil enjoy the advantage of exemption from all capital gains taxes relating to investment in equities or derivatives.
Protection and transparency are constant concerns, not only for the government and the institutions responsible for regulating and overseeing the markets, but also for private institutions.
An example of this is the fact that Brazilian regulation requires final beneficial owners to be identified for all transactions, collateral, and margin allocations. In addition, every trade executed in Brazil must be intermediated by an authorized financial institution. Order internalization is not allowed. There are no alternative and listing venues, such as dark pools, and no preferences in the order book for the markets operated by BM&FBOVESPA.
It is also important to stress that all listed and over-the-counter derivatives must be registered with the exchange or with a central registration system authorized by the Central Bank. For this reason, every single transaction handled by BM&FBOVESPA is registered and most are guaranteed by its clearinghouse, which acts as central counterparty.
3. What projects and products are you working on at the moment?
We are scheduled to deliver important projects in 2014. They will be fundamental to the development of our markets. This is a year of major transformation in our exchange. A year in which the company is updating itself for the next 15 years from the standpoint of its technology infrastructure and risk management systems.
The main project, which we will deliver in mid-year, is migration of all post-trade processes in derivatives to the exchange's new integrated clearinghouse. This completes the first stage of our Post-Trade Integration Project (IPN). We are unifying BM&FBOVESPA's entire post-trade structure. This year we go live with our new integrated risk management system known as CORE (CloseOut Risk Evaluation), which is unique worldwide. CORE manages the risk associated with all positions held by portfolio, considering both the exchange market and the OTC market. As a result we will significantly reduce margin calls without affecting the security and credibility of our risk management processes. When the project is complete, the four clearinghouses we have today will have been integrated into a single new clearinghouse.
The IPN project is part of our strategic investment plan, which amounts to some R$1.5 billion (US$ 680.4 million) and also includes PUMA Trading System, a new unified multi-asset trading platform that is already up and running. PUMA Trading System was developed in partnership with CME Group. The other key components of the plan are the CORE risk system and our new data center, as well as iBalcão.
iBalcão is BM&FBOVESPA's new platform for registration of OTC products. It came on stream in March. It consists of flexible modules and enables participants to track the complete life cycle of derivatives, fixed-income securities and other funding instruments used by financial institutions.
We are also developing an important project to facilitate access to the exchange by small and medium enterprises. In this case we are awaiting a response from the government to the question of exemption from capital gains tax for investors in SMEs. The Brazilian capital market is already one of the most active in the world: between 2002 and 2013, our listed companies raised more than R$390 billion. We are working to ensure that funding mechanisms are not restricted to major transactions. Our goal is to enable SMEs to raise capital via the new access market just as large caps already do on BM&FBOVESPA.
4. What challenges do you face now and for the future?
Reduction in regulatory risk; enhancement of processes and procedures for foreign investors; creation of a large access market for small and medium enterprises (SMEs); internationalization of BM&FBOVESPA through partnerships for dual listing and order routing; redesigning access to the exchange to allow brokers more flexibility in their business models, by creating the categories of Full Trading Participant and Trading Participant.
I also believe the market faces a major challenge to continue growing and attracting more and more investors and issuers with each passing year. Our projects and long-term actions are geared to this objective. And this is important for the economy and for society as a whole, as it enables more companies to build capital strength and thereby promote economic growth.
5. How would you assess your position as an exchange at a time of growing globalization?
BM&FBOVESPA plays a fundamental role on the global scene because it is Latin America's leading exchange and one of the largest in the world by market value. Our vertically integrated structure and the excellence of our trading and post-trading systems, associated with the growth potential of our markets and a highly effective regulatory environment, make us a dynamic, cutting-edge institution in a globalized world, with an extremely secure, modern and interesting business environment for investors everywhere.
The partnership with CME in 2008 generated international visibility for BM&FBOVESPA, and since then we have intensified development of our international activities, with a range of products such as order routing via Globex, cross-listing of contracts and our new trading platform, PUMA Trading System, which as mentioned earlier was developed jointly with CME Group.
As a member of WFE, BM&FBOVESPA maintains close relations with the world's leading exchanges and follows international recommendations such as those of IOSCO and other multilateral organizations.
In Latin America we have a strategic alliance with the Santiago Stock Exchange in Chile to develop the derivatives market in that country. We also participate actively in the Ibero-American Federation of Exchanges (FIAB), contributing to integration of the region's capital markets.
In terms of regulation, it is important to mention the fact that in Brazil the exchange-listed derivatives market is far bigger than the OTC derivatives market. Indeed, the exchange market accounts for about 90% of total volume in derivatives. Even before the global crisis of 2008, registration of all OTC transactions with a central repository was mandatory in Brazil. This makes our market much more secure. With this in mind we are seeing opportunities arise as regulation becomes tougher globally, in terms of capital requirements and incentives for migration from bilateral OTC markets to markets with a central counterparty (CCP).
In sum, our new single clearinghouse will offer customers the opportunity to integrate their positions across the entire range of products operated by the exchange, as well as the benefits of a much more efficient risk calculation system, which will potentially reduce capital requirements.