Brazils Derivatives Markets: Hedging, Central Bank Intervention and Regulation

Randall Dodd Stephany Griffith-Jones Research Sponsored by ECLAC/CEPAL Funding from the Ford Foundation1 December 19, 2007

We would like to thank first Ricardo Ffrench-Davis and Jose Luis Machinea of ECLAC for their support and very valuable comments, Leonardo Burlamaqui for his support, the Ford Foundation for essential funding, and Carlos Mussi, Renato Baumann and Cecilia Sodre for an excellent effort in arranging extensive interviews, a seminar at the Central Bank of Brazil and providing feedback on our work in Brazil. We are especially grateful to the derivatives market participants, regulators and academics who generously contributed their time for our many interviews (they are listed in Appendix 4). As usual, the responsibility for any mistakes is our own.

Table of Contents
PART I
1. 2. 3. 4. Introduction: Overview of Brazils Markets: exemplary developments Importance and Size of Derivatives Markets Derivatives Instruments Market Structure 1. Exchanges 2. Over-the-Counter a) Derivatives Dealers b) Brokers in Derivatives Markets c) Customers or End-Users in Derivatives Markets Key Features and Special Innovations in Brazils derivatives markets Overview of Regulatory Framework

5. 6.

PART II
7. Derivatives in an open, developing economy 1. Brazils history of high inflation, high interest rates and high fx volatility 2. Derivatives as a means of hedging 3. Derivatives as a focal point for exchange rate collapse 8. Central Bank Intervention in Derivatives Markets 9. Regulatory Proposals to Improve Derivatives Markets a) Registration and Reporting Requirements b) Capital and Collateral Requirements c) Orderly Market Rules 10. Concluding Remarks