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International Conference Call BM&FBovespa nd 2 Quarter 2013 Earnings Results August 9th, 2013 Operator: Good morning, ladies

and gentlemen, and welcome to the audio conference call about the earnings results of BM&FBOVESPA for the second quarter of 2013. Thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by zero (*0). As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Eduardo Refinetti Guardia, Chief Product and IR Officer of BM&FBOVESPA. Mr. Eduardo Refinetti Guardia: Thank you. Hello everybody, welcome to BVMF 2Q earnings call. I have with me today Cicero, Luis Furtado, Claudio and our new CFO Daniel Sonder. In our last conference call I said that Daniel had been elected by our Board of Director and that he would need some time before starting to work with us. So he has joined the company in July we are very happy to have him on board and with us in this conference call. I will start this call today with some highlights about the quarter then I will hand over to Claudio to walk through the numbers in more details. Before you open up the call for your questions, I would also like to comment on CVMs initiative to promote a public hearing to discuss the possible impacts of market fragmentation in cash equities segment. So now moving to the presentation we can see on page 3 the main highlights for the quarter. We are very pleased with the results. Net revenue hit new records increasing 10.8 year over year driven by all-time high volumes for the equities and derivatives segments. Adjusted expenses are in line with the budget range for the year, which we still hold and therefore top line growth and cost control generated strong operating income increasing 12.8% year over year. We all know the scenario for the rest of the year should be more challenging, especially when compared with the excellent performance of the first half of the year. I would like to use this ordinary 2Q result to emphasize one important aspect that we have always been telling you about, which is the outstanding operational
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leverage potential this company has and I think it was clearly demonstrated in the 2Q results. I also would like to emphasize that several products have maintained their fastgrowing trend and I am particularly referring to securities lending increasing 53.4 percent year-over-year, tesouro direto that rose 10.4% compared to 2Q12, real estate funds ADTV had an excellent performance increasing to R$41 million in the 2Q13 from 8.8 million in the 2Q12, agribusiness credit bill AUM has reached 52.3 billion in June and if we consider these four products together we are talking about a revenue of R$75 million and the first half of the year equivalent to approximately 6% of our total revenue. The important message here is that the revenue of this group of products is growing almost 40% year over year. Adjusted expenses are strictly under control and adjusted net income totaled 469.6 million; up 11% compared to 2Q12. Finally, in line with what we have been doing related to a dividend payment, yesterday our Board approved a payout equivalent to 80% of the gap net income equivalent to R$0.14 per share or R$280.7 million. The payment will be done on September 30. Now I would like to hand over to Claudio. Mr. Claudio Jacob: Thank you Eduardo. Hello everybody. Please, let's go to page 4. There we will start to see some details about our operating performance in the Bovespa segment that probably everybody is following here once we report every month and actually sometimes every week some numbers, but here I want just to highlight some points that is the strong performance of the Bovespa was mainly supported by foreign investors and HFTs that is majority are foreign investors and the domestic institutional investors that drove the turnover to the level of the 80s in the second quarter. Another highlight is the growth of almost 20% in the options market when we compare with 1Q13. Here we also see a slight reduction in average margin when we compare second quarter 12 with 13. That is pretty much impacted by a change that we announced in the fee structure in March and implemented in April so in the 2Q we see the full impact. Moving to page 5, we have the BMF segment performance that's our derivatives and futures markets and here we also had a strong volume performance that is, again, by interest rate contracts. We also had a slight decrease in the RPC actually when we compare with 1Q13 versus the 2Q13. This decline from 1.21 to 1.15 is pretty much related to a mix effect of the interest rate contracts once in the second quarter (as we can see here the chart below) the
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participation of the shorter term contracts increased from something like 16 to 30% and that's pretty much related to the volatility of the period. Folding the page to 6, here we have the revenues breakdown as we always tried to focus and two main messages are important to highlight. The first one is: the participation of the cash trading revenues in the total after the change in the fee structure we announced as we mentioned the period of this announcement, this participation would be around 6%, so we are confirming this quarter this number. The other message is that the revenues of the company are pretty much driven by the derivatives activity. Once part of this derivatives activity is connected in the Bovespa segment it gives us a sense that the main market is the equity market, actually you have another angle to see that these derivatives are driven the major part of the revenues reaching around 44% in the quarter. Going to page 7, we see the expenses side and, as expected and guided, we are keeping on track in our budget announcement, just to remind it is 560 to 580 million adjusted expenses. When we compare 2Q versus 2Q13 we see this 4.1% growth that is pretty much related with the personnel line. As we can see in the chart at the right, this 7.3 million increase is backed by two effects; the first one is the union bargain that happens every third quarter, actually every August and we have some costs that were previously capitalized and once we finish some projects now they are being expensed. Going to next page, page 8, as we always show here the financial position we can see what we see as available cash, actually the cash that the company manages, reaching almost R$2 billion. These 2 billion is lower than 2.34 that we saw last quarter, in the end of the last quarter and the explanation is a payment of dividend that we have that amounted to almost R$400 million, actually R$388 million that is related to the 2012 dividends and the buyback program that we did in the second quarter that amounted to R$260 million. And I think here this is the main message of this page, so the company run 1% of stock buyback in the second quarter and also more than 3 million (3.3 million) stocks in July. That's within the new buyback program that we approved in the end of June with our Board. Capex, as previously announced, we have the budget is between 250 to 290 million and in the first half we performed 120 million, so we have the remaining of the year to perform the rest of the Capex. Going to page 9, we see a summary of the income statements. Here the main message is the operational leverage that Eduardo mentioned in the beginning. So our operating income growing almost 13% and the other message is the adjusted
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net income growing 11% that is lower than the net income or the gap net income that is growing 17%. This difference is pretty much explained by the equity income of investees that is actually the results that we print in our income statements from our participation of CME. So now going to page 10, here what is important to show in more detail a group of products that are having an accelerated growth in the last few years and products that have been promoted and actually we are seeing these materializing. So we have here ETF's, real estate investment funds, securities lending, treasure direct (tesouro direto), marketmaker for options and agribusiness credit bills that combined are growing in the last four years around 48% in their participation in the total revenues more than doubled. And now I will return the word to Eduardo. Mr. Guardia: Thank you Claudio. If we move to page 11 we give you an update on our main investment projects. Here the message is that Puma is performing very well since its implementation for cash equity in April this year Furtado is here and he can give you an update during the Q&A if you want. Concerning the clearing house integration the tests for derivatives have already started and, as I said, we have Cicero here who would be glad to give you more details on that. We did the first delivery of our new OTC derivatives platform that is open to the registration of NDFs, so that's another important step during this second quarter. We have also implemented the first of changes in the fee structure for cash equity, that Claudio has already mentioned and it is important to emphasize the successful launching of the small and midsize companies program that we announced with government entities; with CVM, BNDES, which is a program to attract small and midsize companies to the exchange. We do not expect any material impact in the short run, but we do believe that this is a very important initiative for the medium and long-term perspective. Last, concerning the data center, the building is finished and now we are working on the power system, cooling, and all the necessary infrastructure to operate the data center. We expect to initiate migration all the first quarter of next year, of 2014. If we move to page 12 we highlighted our priorities, which is to promote revenue growth with the diversification and, as we mentioned before, we believe we are beginning to see the results of all of our initiatives. We also have a strong commitment to achieving operating and technological excellence that's why we are investing U$600 million in four years. Our commitment to focus on the customer,
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deepen the relationship with all type of clients and launching the products that the market is really demanding and, finally, our strong commitment to shareholder return, which is our focus on cost control and to keep a high payout dividends ratio combined with the share buyback program. Before I open up the call for your questions I would like to (as I said in the beginning) to make some comments on the public hearing that CVM has announced. I don't know if all of you are aware that CVM has launched a public hearing to discuss regulatory alternatives for identification, mitigation, management of risks related to fragmentation of liquidity and market data generation as well as a forceful change in self regulatory structure. My message here is that we welcome this initiative. We believe it's very important. We are talking about issues that are very important and that have to be considered to have a comprehensive cost-benefit analysis of the market fragmentation. We are always favor of competition, but we have to keep in mind the costs and benefits of this fragmentation in the cash equity market and we believe that the issues that CVM is requesting the market to discuss as the alternatives for implementing best execution, alternatives for providing a consolidated tape and also alternatives to organize the self regulatory role (that today is performed by BSM) are crucial issues to discuss, cause some benefits of fragmentation so we welcome the initiative. We think the approach is the correct one and the deadline for delivering the comments will be next Monday and today our CEO (Edemir) will deliver our comments to CVM, so we really believe we will have the opportunity to have a very technical and comprehensive discussion on all of these issues that's why we, again, welcome a lot CVM's initiatives. So these were our initial comments. Now I would like to open up the call for your questions. Thank you very much. Question & Answer Session Operator: Excuse me, ladies and gentlemen, we will now begin the Question and Answer session. If you have a question, please press the star (*) key, followed by the one (1) key on your touch-tone phone now. If at any time you would like to remove yourself from the questioning queue, press star 2. Our first question comes from Mr. Ken Worthington, from JP Morgan.
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Mr. Ken Worthington: Hi, good morning. Maybe first there's been some headlines that have come out this morning that indicated I think it was Edemir mentioned that Bovespa would open up its clearing house to a new exchange by the end of 2014. I guess firstly, you know, is the media kind of characterizing that correctly? And if so I've got some questions around that. Mr. Guardia: Well Ken thats correct. What Edemir said is that once we finish the clearing house integration, which is scheduled to be completed by the end of 2014, we will be able to open up the clearing house and to have discussions with other alternative trading platforms that would like to use for clearing house. So what Edemir said (and Cicero can give you more color on that) is that the new clearing house will be able to provide services to third parties. Of course, this will require and this will need a very important discussion related to risks controls, commercial aspects. So what we're saying is that once we finish the clearing house integration the new clearing house will be able, yes, to provide services to third parties. Mr. Worthington: Okay. Cicero did you have any comments? Mr. Cicero Vieira: I think what Eduardo points was precise, was correct. So, as you know, we are planning to rollout the derivatives CCP in the beginning of next year and then to rollout cash equity and cash equity derivatives by the end of 2014. Of course, this is subject to approval by the Central Bank and also CVM that's an extremely important component of this process because they are going to certify all the system, the are going to certify disaster recovery plans, the are giving to certify continuity plans and also to certify the new risk management methodology. So everything that we say in terms of schedule is contingent on this Central Bank and CVM certification process, but as Eduardo has stated, if everything goes according to this plan by the end of 2014 beginning of 2015 we will be able to provide CCP services for another exchange and at this point the main concern will be with the new exchange or any capacitor complying with CVM rules and also all the questions regarding pretrade risk management and also the protection of the market integrity, which is something that we also have to look at. Mr. Worthington: This seems to be opening the door to a potential risk that is you allowing new competitor to come in that they can siphon off volume where, you know, you're making real money on clearing is supposed to trading, but it opens the door to a stronger trading competitor, which could impact eventually clearing because you're seeing other exchanges go to kind of self clearing model over time. It would seem to maybe put some of these other revenue streams at risk; securities lending, custody, data, you know. How are you thinking about those other topics as
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you think about opening up the clearing house in equities and does the same thing apply to futures? Mr. Guardia: Ken, let me start with equities. This is Eduardo speaking. First, as Claudio emphasized, when you look to the cash equities revenue it's 6% of our top line, so that's an important issue, so the impact on our business related to opening up the clearing house is very small and eventually we may even see an increase in volumes. I don't know if this is going to happen or not, but the impact of opening up the clearing house is a small. So you're talking about another exchange coming to Brazil and setting up a new clearing house. It is possible today. Its independent of our decision to open up or not the clearing house. And then you are right, if we are talking about competition with another fully integrated exchange, then the impact on our business would be much higher, but then you have to look to everything we are doing. So that's why we are investing the amount of money, we are investing that's why we are integrating the four clearing house to become more competitive. That's something that is important to the market and for ourselves, for our company. So my answer to you is; we believe BM&FBovespa (considering everything we are doing) we will be highly competitive when you think about a fully integrated exchange. So we respect everyone that may want to come to Brazil. We believe we are providing good services, we are improving the quality of our clearing house, we are setting up the new risk model that will give a lot of capital efficiency to client and that's what we can do. If we will have competition with a fully integrated exchange in the future we don't know, but we are preparing ourselves for any type of possible competition now or in the future. So that's what we have to do. I don't think about opening up the clearing house two years from now will change the outcome. And by the way, when you think about competition with a fully integrated exchange I think it's important to look to the market size, to scale issues and to see if it's reasonable to expect that a new exchange will get the return on the investment necessary to setup a new clearing house. We are doing our part. So that's what we can tell you. Cicero, I don't know if you want to add anything on that. Mr. Worthington: Okay, thank you very much. Operator: Excuse me, our next question comes from Ms. Carolima Yashimoto, with Goldman Sachs.
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Ms. Carolima Yashimoto: Hi, good morning. Congratulations for the strong results. My first question is a follow-up on the public hearing that will take place next Monday. I was wondering if you could please explore a bit more on the possible outcomes that could impact you directly or any measures that can be harder than expected like on the clearing business, pricing or any other. And then, my second question is on the Puma. You had very high actually record volumes in the quarter so I was wondering to which extend if the puma trading system also supported that considering its best performance and lower latency. Thank you. Mr. Guardia: Okay, I'll start than my colleagues can add new information. First, the public hearing we are not discussing clearing in the public hearing, so that's very important. What CVM is doing is to have this public hearing to discuss, as I said, the risks and costs related to fragmentation of liquidity and the market data. So the concern CVM has is; if we have a fragmented market for cash equities there are costs, there are risks, there are important issues related to best execution, consolidated tape and self-regulation that have to be addressed and I think we are not prepared today to deal with these issues because this will be (if it happens) a new reality in Brazil and this has to be discussed. So the point is; the discussion has nothing to do with clearing house. It has to do with the best execution, consolidated tape and self-regulation. Moving to your second question, we had a very strong second quarter for cash equity and derivatives, Puma performance is quite good (Luis will talk a little bit about it), but I don't think it would be right to explain the all-time record in volumes, in cash equities, which was R$8.3 billion in the second quarter to the Puma. Puma was important, but I think that's not the explanation for such high volumes in the second quarter. Luis, please. Mr. Luis Furtado: As Eduardo mentioned, the matching engine is not a booster of volumes, but definitely when we fully migrate to Puma we move some bottlenecks that we used to have in our infrastructure. So the good side of it is that we were able to handle those volumes without a slack; it works as planned, with very low latency, we have peaks in terms of the number of messages per minute and per second that were double the peaks we had with our previous platform. We have migrated fully to Puma by the beginning of April, so we almost had a full quarter with Puma above equities and derivatives, so we can say that the migration and the project itself was a complete success.
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Mr. Guardia: Carolina, I think that the right way to put this is that Puma gives us the ability to do more business when the market wants. So that's I think is the message. Mr. Vieira: Just to add: We've been displaying the performance of HFTs and the equity segments and it is related to a higher capacity, better condition in etc., just to let you know that in July HFT reached around 13% of participation in Bovespa segments that is around 20 to 30% growth related to the participation that we've been seeing previously. Ms. Yoshimoto: Okay, thank you. That's clear. Thank you very much. Mr. Guardia: Welcome. Operator: Excuse me, our next question comes from Mr. Alexandre Spada, from Ita BBA. Mr. Alexandre Spada: Hi gentlemen, good morning and congratulations on the results. My question is about another public hearing from CVM that's number six of 2013 and that public hearing relates to the central depository of securities. Do you see that as an opportunity or threat for Bovespa? And then I'll come up with a follow up question. Thank you. Mr. Vieira: No, we do not see this as a threat. I think, we think that this brings more clarity to the roles played by CSD's, trade repositories, custodian agents and issuers, so we see this as a very positive move from CVM. Mr. Spada: Okay, thank you. My understanding from reading that document is that Bovespa would be obligated to open its central repository to an eventual competitor at what could be considered fair prices. Does that understanding make sense? Mr. Vieira: This is something that we are reviewing with the CVM to see if this is the right interpretation. We do not have the final word on that. Mr. Spada: Okay, that's very clear. A final question. If that's approved, do you expect any material changes in your cost or Capex guidance or that's immaterial? Mr. Guardia: No, it's immaterial. Mr. Spada: Okay, thank you very much. Operator: Excuse me, our next question comes from Mr. Bernardo Mariano, with ER Desk.
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Mr. Bernardo Mariano: Good morning and congratulations on the quarter. A couple of questions. Have you done any estimates on how much capital you expect to free based on cross margining on the BM&F segment and on the Bovespa segment? Second, I'd like to have how what percentage of the capacity in messaging you are using on Puma based on the peaks you are having and if you can also provide information about throughput latency on Puma? Those are my first questions. Mr. Vieira: So, regarding the release of capital I will give you some very simple and concrete examples. Of course, if you have an investor, which is long only in a futures position or any type of derivative with short only, so there is no reduction to be expected because it is the new risk methodology, it's not about a change in the risk of version in the degree of risk of version or risk parameters of the CCP, but it is about how we offset risks coming from different instruments with similar or correlated risk factors. So that's one extreme example. The other extreme example is if you have, for instance, investors long, let's say, just as an example, interest rate futures, short interest rate options or long interest rate options, short interest rate swaps or long in collateral, people that have deposited collateral, which is exposed to risk factor and you have an offsetting position in a derivative contract where you can have a risk offset between the derivatives and the collateral attached to the deposition. So in such situations I have other situations, I may have long short positions, and securities lending versus collateral deposited as stock. In such situations depending on the risk factor, the capital efficiency can go up to 50%. So we have some examples where we reduce the total amount of collateral in 50%. The overall estimate, I mean, if we take a picture of all positions that we have right now and we round the new risk management methodology it is something that we are not announcing to the market yet because we are in a process of fine-tuning several parameters and this is something to be announced in the future. Mr. Mariano: Usually, when you have cross margining estimated that 50% of capital requirements is compared to the market that has no cross margining at all up to 50% of the capital can be free. Do you expect that to be the number? Mr. Vieira: No, what I'm saying is that it ranges from zero, it depends on the type of position that the investor has in our CCP and it will range from 0 to 50% depending on the composition of the portfolio. Mr. Mariano: No, I'm not talking about particular trade, I'm talking in general, total capital requirement today by the exchange to the users.
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Mr. Vieira: Oh, ok. So it will be, again, it will be an average across all the investors, so we will be of course less than 50 and of course more than zero. Mr. Mariano: Thank you for the answer. Mr. Guardia: Okay, let's go to next question Bernardo. Mr. Furtado: On the latency of Puma and the capacity of Puma, the latency and the total RTT is a little bit above the one millisecond, but that includes also our pretrade risk 2, which is the line that we made mandatory for BMA session depending on the type of usage. If you look at the matching engine itself it stays consistently under 400 s with very low variation around this average. In terms of capacity, the beautiful thing about Puma is that it scales horizontally in similar ways commodity hardware so we are running Puma, for instance, for equities with 6 engines. CME uses 18 engines so we can keep scaling that horizontally as the business grows. As already mentioned, we had peaks of 400,000 messages without any deviation on this latency I mentioned. So we have installed capacity to handle the current volumes with a lot of comfort and we can scale horizontally very fast as needed. Mr. Mariano: What is your throughput today? Mr. Furtado: It's 400,000 messages per minute. That was the highest peak we had, but we can go beyond that, definitely. Mr. Mariano: Per second? Can you convert it in seconds? Mr. Furtado: We got up to Mr. Mariano: Oh, per minute, okay. Mr. Furtado: That's the actual data. We had a peak of 30,000 per second also with any deviation. Mr. Mariano: Okay, thank you. Mr. Guardia: Thank you Bernardo. Operator: Excuse me, our next question comes from Mr. Akhil Bhatia, with Rosenblatt Securities.

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Mr. Akhil Bhatia: Hi, good morning. Can you clarify the HFT penetration? I think in the reported said 10.7% in the quarter and I think I heard you say 13%. Mr. Guardia: Sure. The 10% is for the quarter, the 13% is for July. Mr. Bhatia: Okay and do you think that's a sustainable level? Because the last two quarters have been around 10.7, 10.6%. How do we think about that going forward? Mr. Guardia: I can give you month by month then we have an idea of the trend. So April was 9.5 and then we jumped to 11.4 in May and then we went to 11.5 in June and July we ended with 13.5, ok? Mr. Bhatia: Perfect. Thank you. And then on the expense guidance are you still using the range of 560 to 580 so that implies a little bit of an increase in the second half? Can you explain where the costs will be increasing? Mr. Guardia: So, first, we are keeping the guidance and if you look to the numbers of 2012, 2011, 2010, you will see that we always have a concentration of expenses in the third and fourth quarter of the year concerning payroll, personnel expenses (we have an increase in the salaries after August so this is only reflected in the last five months of the year), so this is one explanation. We have some expenses that traditionally have a concentration in the last two quarters; expenses with law firms (this year we will have a concentration in the last two quarters), IT (we postpone some expenses for the third and fourth quarter related to some projects, contracts that we are negotiating), so there is not one only single explanation for that, so that's pretty much in line with what we observed in the last two or three years. But the important message is; we are keeping the guidance. Mr. Bhatia: Got it. Thank you. Operator: Excuse me, our next question comes from Mr. Francisco Kops, with Safra Bank. Mr. Francisco Kops: Hello everyone. Congrats for the results and welcome to Daniel (I think it's his first conference call). I think most of the questions were already answered, but I would like to ask the i-balo, which is the OTC new registration platform, that's already the project that you guys developed with Calypso? Is that right?

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Mr. Guardia: Yes it is. So we already launched the platform for NDF and we are now discussing the next projects. So that was an important step to have this ibalo up and running for in NDFs. And it is true, that's Calypso's. Mr. Kops: Okay, and that's all about Calypso, I mean, or are you guys have next steps with them? I mean, that's the whole project or, I mean, that's the first phase were second? Mr. Guardia: That's the first stage. We don't have yet the swaps, so it's just the first stage. Mr. Furtado: And the reason we are using this i-balo brand is because it's not going to be only about derivatives, which Calypso addresses, I mean, there will be other projects so we want to put this all under the umbrella of the brand i-balco. Mr. Kops: Okay, thank you guys. Just another quick question. This quarter I think you guys had a competitor that made an official request for CVM. You guys have any conversation with them, like official one and somehow their decision to file with the CVM interfering your decision to open your clearing house in 2014? Mr. Guardia: Francisco, first of course we don't have the access to the processes at CVM, so we don't know what is the request, but we did have discussions with them a few months ago, I think it was four months ago, something like that and they asked us authorization to use, to access the clearing house and what we said to them was exactly what we have said to direct edge in the past; that we will only be able to provide post-trading services to competitors once we finish the clearing house integration. So there is no news here. That's what we told them and that's what we are going to tell anyone who asks us to use the clearing house and this is, of course, we have an agreement with the regulators, the regulators are comfortable with our decision because they understand the importance of the clearing house integration process and that doesn't make sense to stop this important project to connect another exchange to our clearing house that will be replaced for a new one. So there is no news here. Mr. Kops: That's clear. Thanks Eduardo. Operator: Excuse me our next question comes from Ms. Denise Godoi, with Bloomberg.

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Ms. Denise Godoi: Hi. You said that you are planning or studying changes to the IBovespa. I went to know how concerned you are about the volatility of the X Companies, like OGX and MMX and if this change has anything to do with this volatility coming from these specific companies. Mr. Guardia: Denise, I don't like to make comments on specific companies. I don't think it's appropriate for us to make this type of comments. And concerning the Ibovespa this is a very important discussion for the exchange and for the market. This is an index that hasn't been around for 45 years already, we have the benefit of having suggestions coming from a working group, we still continue having discussions with important market participants and the only thing I will talk about Ibovespa is that when and if we make any change in the index, if we make any change in the index, we will announce the changes in advance so there will be no surprises and we will respect the contracts that we have and, therefore, the methodology of IBovespa. Ms. Godoi: Fine, thanks. Mr. Guardia: You're welcome. Operator: Excuse me, this concludes today's question-and-answer session. I would like to invite Mr. Eduardo Refinetti Guardia to proceed with his closing statements. Please, sir you can go ahead. Mr. Guardia: I just want to thank you once again for joining us today in this call. Any other doubt, please, do not hesitate to contact anyone of us. Thank you very much. Operator: That does conclude the BM&FBovespa audio conference for today. Thank you very much for your participation. Have a good day and thank you for using Chorus Call.

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