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BM&F: Attractive Business Environment for International Capital Flows

Discover the allure of Brazilian Mercantile & Futures Exchange (BM&F) with improved fundamentals attracting global investments and safeguarding economy against external risks. Learn about the exchange's performance and diverse trading offerings.

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BM&F: Attractive Business Environment for International Capital Flows

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  1. 32nd Annual International Futures Industry Conference Info Exchange The Brazilian Mercantile & Futures Exchange - BM&F Boca Raton – March 14th 2007

  2. Brazilian Business Environment is Attractive to International Capital Flows • Improved Macroeconomic Fundamentals

  3. Enhanced Performance of Brazilian Economy Reflects Upon the Decrease of Sovereign Risk EMBI BR - Spread Over US Treasury 900 800 700 600 500 400 300 200 100 Feb-04 Jul-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Source: JP Morgan Securities WC, Emerging Markets Research and Bloomberg

  4. Building Up International Reserves Protects the Brazilian Economy Against External Turbulences Brazilian Central Bank International Reserves 101.1 105 90 75 60 US$ Billions 45 30 15 0 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Source: Brazilian Central Bank

  5. Helping to Attract Non-Resident Investors Non-Residents Investors at BM&F 2,000 16% 1,500 12% 1,000 8% US$ Billion 500 4% 0 0% 00 01 02 03 04 05 06 Traded Contracts % of Total Contracts of BM&F

  6. Brazilian Business Environment is Attractive to International Capital Flows • Improved Macroeconomic Fundamentals • Strong Base to Build Derivatives Business

  7. BM&F Highlights • World class derivatives exchange and self–regulatory organization • Markets are supervised by the Brazilian Securities Commission (CVM) and Clearinghouses are regulated by the Brazilian Central Bank (BCB) • Provides hedge and asset allocation related to the main exposures of the Brazilian economy and exports commodities prices • The number of traded contracts grew 42.2% in 2006 to USD 283.6 million • The financial volume increased 38.9% in 2006 to USD 10.6 trillions • More than 90% of BM&F clients are qualified investors buyers

  8. 235,862,979 6th Bolsa de Mercadorias & Futuros (BM&F) One of the Top 10 Futures Exchanges in the World Traded Contracts Jan – Nov 2006 Rank Exchange Chicago Mercantile Exchange (CME) Eurex Deutchland (EUREX) Chicago Board of Trade (CBOT) Euronext Mercado Mexicano de Derivados (MexDer) 1st 2nd 3rd 4th 5th 1,010,066,878 890,077,317 630,869,854 397,660,221 265,881,288 New York Mercantile Exchange (Nymex) National Stock Exchange of India (NSE) Dalian Commodity Exchange (DCE) ICE Futures 199,900,022 155,511,862 104,586,832 84,707,576 7th 8th 9th 10th Source: FIA’s Monthly Volume Reports

  9. BM&F is an Institutional Investor Arena Breakdown by Financial Volume Financial Institutions 52.25% Others 1.72% Private Individuals Institutional Investor 6.66% 23.06% Foreign Investors 16.30%

  10. BM&F Trading and Registration Systems • GOVERNMENTBONDS • Electronic platform • SISBEX – trading • OTC registrationplatform FOREIGN EXCHANGE OTC registration platform Open outcry • DERIVATIVES • Open outcry • Electronic platform • GTS and WebTrading (E-mini) • OTC registration platform Derivatives Clearinghouse 1986 FX Clearinghouse 2002 Securities Clearinghouse 2004 BM&F Business Model Guarantees the Safety and Soundness of Brazilian Financial Markets Settlement Bank 2004

  11. CAGR = 28% Growth of Daily Traded Volume at BM&F 1,800 1,600 1,400 1,200 1,000 Thousand Contracts 800 600 400 200 0 00 01 02 03 04 05 06 Jan-Feb 07

  12. 00 01 02 03 04 05 06 Feb-07 Increasing and Steady Open Interest at BM&F 16,000 14,000 12,000 10,000 Thousand Contracts 8,000 6,000 4,000 2,000 0

  13. FINANCIALDERIVATIVES COMMODITYDERIVATIVES What Can You Trade at BM&F? OTCDERIVATIVES SWAPS - INTEREST RATE - EXCHANGE RATE - PRICE INDEX - STOCK INDEX - GOLD FLEXIBLE OPTIONS - STOCK INDEX - EXCHANGE RATE - INTEREST RATE FUTURES & OPTIONS - ARABICA COFFEE - CONILLON COFFEE - SUGAR - ETHANOL - COTTON - CORN - SOYBEAN - LIVE CATTLE - FEEDER CATTLE SPOT - GOLD - U.S. DOLLAR EXCHANGE RATE • FUTURES & OPTIONS - STOCK INDEX - INTEREST RATE - EXCHANGE RATE - DOLLAR DENOMINATED DOMESTIC YIELD CURVE • INTEREST RATE X PRICE INDEX (PPI/CPI) SPREAD • PRICE INDEX (PPI/CPI) - SOVEREIGN DEBT BOND - GLOBAL BOND • - A BOND • - US TREASURY • STRUCTURED PRODUCTS - SPREAD STRATEGIES - VOLATILITY TRADING - STOCK INDEX - INTEREST RATE - EXCHANGE RATE - FORWARD RATE AGREEMENTS

  14. BM&F - Full Fledged Exchange Offering Solutions to Non-Resident Investors BM&F Product Breakdown Interest Rates Exchange Rates 66.38% 25.61% Stock Indices 6.96% Agricultural Commodities OTC Market 0.42% 0.63% Feb’07

  15. A Sharp Increase of Non-Resident Participation at BM&F • 41 million traded contracts (D05 78.5%) • Average traded volume of 166 thousand contracts (D05 81.4%) • 14.7% of negotiated contracts (D05 25.5%) • USD 1.6 trillion in financial volume (D05 66.0%) • Average daily financial volume of USD 6.3 billion (D05 68.7%) • 14.8% of the total financial volume negotiated (D05 20.3%)

  16. Non-Resident Investors Are Trading More Contracts in the Most Liquid Markets Million Contracts 25.4 18.3% 17.7% 13.3% 10.6% 14.1 12.4 7.7% 7.4% 7.4 3.1 1.3 Interest Rates Exchange Rates Stock Indexes 2005 2006 Relative Participation 2005 Relative Participation 2006

  17. Non-Resident Investors Are Increasing Volumes in the Most Liquid Markets USD Billion 993.7 22.0% 21.3% 20.0% 17.3% 13.5% 530.5 482.2 9.5% 353.8 67.8 44.5 Interest Rates Exchange Rates Stock Indexes 2005 2006 Relative Participation 2005 Relative Participation 2006

  18. Non-Resident Investors Are Trading More Agricultural Commodities Markets Contracts Thousand Contracts 21.5% 135.5 105.7 10.1% 7.9% 4.0% 14.2 1.9% 1.7% 7.5 3.6 1.1 Agricultural Commodities Gold Sovereign Bonds 2005 2006 Relative Participation 2005 Relative Participation 2006

  19. Non-Resident Investors Participation is Increasing in the Agricultural Commodities Markets USD Million 1,447.7 1,196.0 11.9% 11.8% 840.5 5.6% 5.3% 1.7% 0.6% 75.0 16.9 6.5 Agricultural Commodities Gold Sovereign Bonds 2005 2006 Relative Participation 2005 Relative Participation 2006

  20. Pledged Collateral by Non-Resident Investors Will be Facilitated in New York 20% 15% 10% 5% 0% 01 02 03 04 05 06

  21. Derivatives Clearinghouse CCP to Every Contract Traded at BM&F • Clears, guarantees and settle every contract traded at BM&F • Average daily trading volume: 1.8 million contracts • Averagedaily notionalfinancial volume: USD 64 billion • Open interest: 13.71million contracts • Open interest notional financial value: USD 656 billion • Value deposited as collateral: USD 28.3 billion Feb’07

  22. Why it is Safe to Trade at BM&F? BM&F’s financial safeguard system is based on self contained layers of protection facilitated by a defaulter, survivor, and third party payment structure BM&F’s has expertise in dealing with unexpected volatility peaks and a capacity to handle a boost in the settlement volume BM&F utilizes state-of-the-art risk management procedures to mitigate market and counterparty risk

  23. BM&F Clearing Member Clearing Member Brokerage House Brokerage House Brokerage House Local Customer Customer Customer Derivatives Clearinghouse Participant Structure BM&F Participants Structure

  24. Customer collateral Derivatives Clearinghouse Sound Safeguards System USD 28.3 billion Feb’07

  25. Sturdy and Conservative Collateralization BM&F Derivatives Clearinghouse Collateral Composition Federal Government Bonds 87.13% Gold 0.05% Other Assets 0.87% Stocks Bank CDs 4.15% Letters of Credit 5.23% 2.56% Feb’07

  26. Guarantee Fund USD 80 million Clearing Fund USD 40 million Mutualized Funds Clearing Memberproprietary collateral Clearing Member Joint and severalequity liability Brokerage Houseproprietary collateral Brokerage House Customer Derivatives Clearinghouse Sound Safeguards System USD 45 million USD 469 million BM&F equity Customer collateral USD 28.3 billion Feb’07

  27. Why it is Safe to Trade at BM&F? BM&F’s financial safeguard system is based on self contained layers of protection facilitated by a defaulter, survivor, and third party payment structure BM&F’s has expertise in dealing with unexpected volatility peaks and a capacity to handle a boost in the settlement volume BM&F utilizes state-of-the-art risk management procedures to mitigate market and counterparty risk

  28. High Standards for Liquidity Risk Management Achievement of Lamfallusy Plus Criteria 900 Access to Central Bank Discount Window 800 700 600 500 USD Million 400 2002/2003 Event May 2006 Event 300 200 100 0 06/03 12/03 06/04 12/04 06/05 12/06 06/06 12/01 06/02 12/02 12/05 BM&F credit facilities Sum of the two largest clearing members' settlement debts

  29. Why it is Safe to Trade at BM&F? BM&F’s financial safeguard system is based on self contained layers of protection facilitated by a defaulter, survivor, and third party payment structure BM&F’s has expertise in dealing with unexpected volatility peaks and a capacity to handle a boost in the settlement volume BM&F utilizes state-of-the-art risk management procedures to mitigate market and counterparty risk

  30. Market Risk Credit Risk Liquidity Risk OperationalRisk Legal Risk Intraday riskcalculation Credit analysis Central Bankdiscount windowand 5 bankingrepo facilities Businessrecovery plan BrazilianPayment System Portfolio stresstesting Concentrationlimits Pricevariationlimits Contingencyhot site Law 10214 Economic outlookanalysis and Extreme Value Theory Models Additionalmargin calls Achievement ofLamfalussyPlus Criteria Independentinternal andexternal audits Finalityand netting Collateralmarket risk Collateralcredit risk Collateralliquidity risk ISO 9001compliance Insolvencyprotection Efficient and Modern Risk Management BM&F Derivatives Clearinghouse Risk Management

  31. Foreign Exchange Clearinghouse CCP for Interbank FX Transactions • The world’s first clearing and settlement system for interbank FX market • 95% market share on T+1 and T+2 BRL/USD FX Transactions • 72 participating banks • Average daily registered gross volume: USD 2.5 billion • Average daily net settled volume: USD 932 million • 81% of netting power • The Clearinghouse mitigates principal, volatility, and operational risks through DVP, pre-pledged collateral and deferred net settlement

  32. Central Bank CorrespondentBank abroad CorrespondentBank abroad CorrespondentBank abroad CorrespondentBank abroad Bank of America Citibank Wachovia Bank StandardChartered FX Clearinghouse Settlement Accounts Foreign currency settlement account BM&F FXClearinghouse Localcurrencysettlementaccount

  33. Securities Clearinghouse CCP and SSS for government Bonds • Renders registration, clearing and settlement services for federal government bonds cash transactions on the spot market • Provides services that contributes to higher liquidity and lower operational and credit risks • General and specific collateralized repos for the cash driven and securities driven repo markets • Settlement of primary government auctions • Securities lending facility • Average daily volume of USD 6.5 billion (Mar-06 to Feb-07) • Clearing 41% of the Brazilian repo market, i.e., the “on the run” National Treasury Bills trading (LTN)

  34. Sisbex Screen REAL-TIME QUOTES NEWS REFERENCE PRICES AUCTIONS

  35. Settlement Bank Enhances Competitiveness of Brokers and Clearing Members • The business model is based on three pillars • Risk management mitigation – Access to Brazilian Central Banking reserves accounts, efficiency of margin charge and allocation, and a full platform integrated to the BM&F clearing systems • Settlement facilities – Real time collateral management and liquidity assistance trough repo transactions and FX services for non-resident investors • Custody – Pre-matching and post trading reconciliation of securities positions under fiduciary ownership of the CSDs • A wholly-owned BM&F subsidiary, with capital of USD 11 million • STP structure not exposed to market and credit risks • Services 50% of BM&F’s members

  36. Brazilian Business Environment is Attractive to International Capital Flows • Improved Macroeconomic Fundamentals • Strong Base to Build Derivatives Business • Sound Regulatory Framework for Investments

  37. Resolution 2689 – An Efficient Legal Gateway for Non-Resident Investors to Access Brazilian Markets • Allows nonresidents investors to invest in the Brazilian capital and financial markets, including BM&F’s products • Focuses on foreign institutional investors, financial institutions, corporations, and individuals • Creates a Privileged Taxation Regime for Non-Resident Investors from Non-Tax Havens • Makes foreign investment more efficient • Eliminating investment restrictions • Simplifying procedures • Creating operational safety

  38. Resolution 2689 – A Step by Step Process for Non-Resident Investors Access to BM&F • Select a legal representative in Brazil • Receive a registration number from CVM • Select a local custodian • Select a BM&F Brokerage House member • Provide documents required • Select a Brazilian bank FX transactions • Starts to trade

  39. Brazilian Business Environment is Attractive to International Capital Flows • Improved Macroeconomic Fundamentals • Strong Base to Build Derivatives Business • Sound Regulatory Framework for Investments • Following Global Tendencies

  40. Volumes are Moving to Our Electronic Trading System 92.9 87.6 78.8 74.9 66.6 54.0 51.8 48.2 46.0 33.4 25.1 21.2 12.4 7.1 01 02 03 04 05 06 Jan-Feb 07 Open Outcry Electronic Trading

  41. WebTrading Facility

  42. The WebTrading Volume Reached 8.8 million Contracts Traded in 2006 4,000 10% 8% 3,000 6% 2,000 Thousand Contracts 4% 1,000 2% 0 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 Jan-Feb 07 Number of Traded Contracts (WebTrading) % of Contracts Traded Electronically (WebTrading + GTS)

  43. Carbon Trading System • Electronic Certified Emission Reduction Auctions • Web based trading system • To be scheduled on demand • Direct Access to Authorized Participants • BM&F Brokers • Carbon Funds • Carbon Brokers/Traders • Government Entities • Multilateral Organizations • First Stage • Spot market (already issued CERs) • Clearing: • Delivery Versus Payment • CER Physical Delivery: CDM Registry UN / EU ETS • Full integration with BM&F Carbon Facility

  44. BM&F Carbon Facility

  45. Demutualization: A Tendency Adopted by the Top Exchanges • Creates competitive advantages • Maximizes the value of members’ titles • Provides access to capital markets to boost investments on new projects • Creates opportunities to businesses combinations, joint ventures, and strategic alliances with other exchanges and markets participants

  46. Demutualization Agenda • Demutualization approved by General Meeting of Members in December 2006 • Appointment of Rothschild as advisor • Expected changes on Bylaws and corporate structures in July 2007 • Regulatory approvals • IPO expected to be conclude at the end of 2007

  47. BM&F New York Office BM&F Shanghai Office Phone (1-212) 750-4197 Phone (86-21) 5037-2886 BM&F Headquarters São Paulo Phone (55-11) 3119-2320 internacional@bmf.com.br

  48. 32nd Annual International Futures Industry Conference The Brazilian Mercantile & Futures Exchange – BM&F www.bmf.com.br Boca Raton – March 14th 2007

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