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• LacDebt Group: Visit Program, Brazilian
National Treasury
Murilo Robotton Filho
Chief Products Officer
October 2008
1
Roadmap to the New Exchange
3Q07 4Q07 1Q08 2Q08 3Q08
Demutualization Merger Merger Operational
IPO
Announcement Approval Integration
Shareholders Shareholders
50% 50%
2
The Combined Exchange at a Glance
3rd Largest Exchange in The
World and 2nd in the Americas
by Market Value
Leadership in Latin America
and Strongly Positioned in the
World
Efficient and Safe Trading and
Clearing Infra-Structure
Standard Setter of Corporate
Governance in Brazil
Worldwide connection
3
Combined Exchange
A Complete Chain of Products and Services
Operating a vertically integrated exchange,
offering multi-asset class markets and main business lines
Cash and Spot Markets Derivatives Markets
Equities Fixed Income Equities Fixed Income (Options & Futures)
- Stocks - Federal - Stock Options - Interest rate
- International Companies Government Bonds - Stock Index Futures, Options, and - Dollar denominated domestic yield
(BDR) - Debentures Options on Futures curve
- Closed-End Funds - Commercial Papers - Futures on Stocks - Interest rate x price index
- Exchange Traded Fund (ETF) - Mortgage-Backed - Forwards - (PPI/CPI) spread
- Real-Estate Investment Securities - Warrants - Price index (PPI/CPI)
Trust (REIT) - Asset Backed - POP (Protected and Participative - Sovereign debt bond (Global Bond,
Securities (FDIC) Investment) A Bond, US Treasury)
Corporate Governance Levels
- NEW: Corporate - CDS (SPOT Market)
- Novo Mercado Governance Bonds Structured Products
- Level 2 - Spread Strategies
Currencies
- Level 1 - Volatility Trading (Stock Index, Currencies
- US Dollar
- BOVESPA MAIS (SMEs) Interest Rate, Exchange Rate) - US Dollar
- Forward Rate Agreements
Indexes (Benchmarks) Commodities
OTC Commodities (Options & Futures)
- IBOVESPA, IBrX100, IBrX50, - Gold
IVBX-2 - SWAPs (Interest Rate, Exchange - Arabica Coffee - Conillon Coffee
- Sectorial: IEE (Energy), ITEL Rate, Price Index, Stock Index, Gold) - Sugar - Ethanol
(Telecom), INDX (Industrial) - Flexible Options (Stock Index, - Cotton - Corn
- Corporate Governance: IGX, ITAG Exchange Rate, Interest Rate) - Soybean - Live cattle
- Corporate Sustainability Index - Metals - Feeder cattle
Clearing, Depository and Settlement Bank
-Central Counterparty / Risk Management -Securities Lending Program – stocks and corporate bonds
-Final Beneficial Owner Market -Repo for Collaterals
4
Business Model
Complete Array of Services
Cash Market Trading - shares, bonds and FX
Derivatives Market Trading
single shares options and forward, interest rates, FX, Indexes, Commodities and OTC
Listing
Market Data
Indices Licensing
Software Licensing
Clearing and Settlement
Securities Lending
Depository
Custody
High Competitive Edge
5
Main Goals of the New Exchange
To become an integrated exchange, offering a full
range of services, one stop shop
To offer innovative and multi asset class products and
the state of the art in trading and clearing
To be a global player and the hub for Latin America
securities
6
Strategies and Opportunities
Direct Market Access for derivatives
CME Globex Agreement
IT opportunities: merging the trading systems and the
clearings
Collateralization in USA for financial derivatives
Innovation capacity
New products and services opportunities
7
CME Group Agreement Enhances Global
Presence of BM&F SA Products
Global distribution, 4 continents
Thousands of trading terminals
Mostly local distribution
66 brokerage firms
670 GTS terminals
8
Trading, Registration & Clearing Model
Derivatives Stocks and Government
FX Cash Market
Open outcry Corporate Bonds Bonds
Open outcry Electronic trading
Electronic trading Electronic Trading
OTC registration OTC registration
OTC registration OTC Registration
Derivatives Securities
FX Clearinghouse CBLC
Clearinghouse Clearinghouse
9
BOVESPA’s Markets:
Equity, Equity Derivatives
and Corporate Bonds
Markets
10
PRODUCTS AND SERVICES:
Equity Markets
Equity Corporate Depository
Cash
Listing Derivatives Bonds and
Trading
Trading Trading Clearing
Brazilian Stocks Stock Options Debentures Central
Companies Brazilian Counterparty
Index Options Commercial
International Depositary (IBovespa and Papers Securities
Companies Receipts IBrX) Settlement
Mortgage-
SMEs (BDRs) Forward Backed Services
Closed-End Real Estate Contracts securities Central
Funds Investment Warrants Asset-backed Securities
Funds (REITs) securities Depository
Equity POP -
Products (FIDC) Securities
Exchange Protected and
Lending
Corporate Traded Fund Participative Corporate Program
Fixed (ETF) Investment Governance
Final Beneficial
Income Bonds
Owner Market
Products
Corporate
Actions Services
11
11
PRODUCTS: BENCHMARKS
A Comprehensive List of Indices
OVERALL MARKET SECTOR BASED CORPORATE
INDICES INDICES GOVERNANCE
INDICES
IEE – ELECTRIC POWER INDEX
Most liquid companies of the electric
IBOVESPA - BOVESPA INDEX power sector
IGC – CORPORATE GOVERNANCE
Companies representing 80% of
INDEX
the total trading value
Companies traded in the Novo Mercado
ITEL – TELECOMMUNICATIONS
or Levels 1 and 2
INDEX
IBrX-50 – BRAZIL INDEX 50 All companies in the telecommunication
50 most liquid shares of the sector
ITAG – TAG ALONG COMPANIES’
cash market
INDEX
Companies that offer tag along rights
IBrX - BRAZIL INDEX INDX – INDUSTRIAL SECTOR
to all shares
100 most liquid shares of the INDEX
cash market Industry most representative stocks
ISE - CORPORATE SUSTAINABILITY
INDEX
IVBX – Valor BOVESPA INDEX
Companies committed to environmental,
50 second tier companies Real Estate Index
social and corporate governance issues
(to be launched soon)
12
100
200
300
400
500
600
0
dec/03
apr/04
aug/04
dec/04
apr/05
aug/05
dec/05
apr/06
IBOVESPA
aug/06
dec/06
apr/07
aug/07
dec/07
32%
apr/08
7M2007 – 7M2008
AMONG THE TOP PERFORMING MARKETS
13
Trading Value
Financial Trading with Stocks
2002 - 7M2008 CAGR
$ 3.7
billio n
81% of Latin America
Trading Value in Equities $ 198
millio n
2002 7M2008
14
CORPORATE GOVERNANCE STOCKS
The Brazilian Quality Seal for Companies
NOVO MERCADO
Created in 2000 as a special listing segment for companies which
voluntaily provide more rights for their shareholders
Only shares with full voting rightsSolamente acciones con derecho de voto
Higher Transparancy
Annual financial statements in IFRS or US GAAP
Improved Quarterly Reports (ITRs), including an English version, consolidated
financial statements and cash flow statements
Related party transactions
Trading and ownership of the company´s shares by the management and the
controlling shareholders
Better Practices of Corporate Governance
Delisting: tender offer at a price based, at least, on the economic value
Board of directors: a minimum of 5 members, maximum two years terms
25% minimum free-float and adoption of special procedures in public offerings
to enhance the dispersion of the company´s shares
Adhesion to an arbitration panel (dispute resolution)
Directed for New Companies
LEVEL 1 and LEVEL 2
Rules for companies gradually adhere to Novo Mercado
15
Special Listing Segments Evolution
37.2% of total listed companies
61.6% of total market capitalization
72.3% of total traded value
164
92 102
44
7 18 20 18
2 10 14
2 3 7
3 44 44
31 33 37 36
19 24
2001 2002 2003 2004 2005 2006 2007 August 2008
Level 1 Level 2 Novo Mercado
16
THE ROLE AS CAPITAL RAISING CENTER
FOR COMPANIES
Strong Participation of
International Investors in IPOs
ALMOST ALL COMPANIES HYPE 85%
JOINED NOVO MERCADO TEMP 84%
MPXE 71%
LISTING ONLY IN BRAZIL BMEF 77%
Strong participation BPNM 67%
of foreign investors in MILK 64%
offering purchase in
HBOR 56%
Brazil
AMIL 80%
BBRK 98%
BOVH 78%
Source: BM&FBOVESPA
17
AMONG THE TOP CAPITAL RAISING
CENTERS OF THE WORLD
5th Market in IPO Capital Raising Activity in 2007
Total Capital Raised by
Brazilian Companies:
In 2007: US$ 42.8 billion
In 2006: US$ 16.5 billion
In 2005: US$ 10.9 billion
In 2004: US$ 3.8 billion
Source: BOVESPA Source: WFE – World Federation of Exchanges
18
OPTIONS MARKET
Leadership on Equity Options
Options on Equities
June 2008
Notional – US$
# Exchange # of contracts
million
1 Eurex* 689 n.a.
2 CBOE 293 n.a.
3 Philadelphia 256 117
4 BOVESPA 153 545
5 AMEX 101 26
* Including International Securities Exchange
Source: BOVESPA and WFE – World Federation of Exchanges
19
AN ECONOMICALLY IMPORTANT MARKET
Listed Companies
Broad Range of Sectors
Market Cap In
USD billion Information
Oil, Gas
Technology
Bio
July/08 1365 Financial 0,3%
17,8%
23,2%
Basic
2007 1399 Materials
GDP ratio 23,2%
2007 97% Public
2006 723 Utilities
9,6%
2005 482 2006 65% Capital
Goods and
Telecommu Services
2005 52% nications Consumer 1,8%
2004 341 Consumer Constructio
6,7% Non
Cyclical n and
Cyclical
3,0% Transportat
2003 234
2004 45% 10,1%
ion
4,2%
2002
2003 38%
124
2002 30% Source: BM&F BOVESPA
World 11th Largest Stock Exchange in
terms of Market Capitalization of Listed
Companies
20
INVESTORS PRESENCE IN OUR MAKETS
Investors' Participation in August 2008
Enlargement of Investor’s Base Stock Market
Others
Financial Institutions 0,1%
9,8%
Companies
2,5% Retail Investors
24,3%
Foreign Investors
34,7% Mutual Funds
28,7%
21
TRADING INFRASTRUCTURE
State-of-the-art technology
•More than 1200 terminals connected to Megabolsa
•Our execution speed is in average fractions of a second
•The system is ready to process over 770,000 trades and 7 million orders
per day
214,2
Thousands of trades
153,0
87,4
62,2
53,8
39,5
22,4 26,8 28,2 Daily Average Number of
Trades Registred at
Megabolsa
2000 2001 2002 2003 2004 2005 2006 2007 Aug 2008
Source: BOVESPA
22
Hybrid Clearing Model: Collateralization
and Settlement Fund
Special Net Worth
CBLC Model
Settlement Fund
Collateralization
Participants Requirements
Hybrid model: Collateralization
and Settlement Fund
23
SECURITIES LENDING PROGRAM
Provides Automatic Securities Lending for Cash
Market
Allow the possibility of arbitrage transactions
between securities and markets
Registration of offers by Lenders and Borrowers
Offers registered through the intermediation of
Clearing Agents and Brokers
Closing of lending/borrowing offers
Anonymous order driven
BTC contracting types
borrower may delivery prior to the maturity
lender may call back prior to the maturity (borrower
has four days to deliver the securities)
pre-fixed term
24
Operational Indicators
Securities Lending and Investors Accounts
Securities Lending – Open Interest
(R$ billions)
25% 23.5 23.5 -40%
14,1
18.8
2Q07 2Q08 Aug 07 Aug 08
Number of Investor Accounts (thousands)
540.0 552.0
99% 83%
271.3 300.9
2Q07 2Q08 Aug 07 Aug 08
25
BM&F’ Markets:
Futures, Commodities, FX
and Government Bonds
Markets
26
BM&F Product Grid
FINANCIAL OTC COMMODITY
DERIVATIVES DERIVATIVES DERIVATIVES
FUTURES & OPTIONS SWAPS FUTURES & OPTIONS
STOCK INDEX INTEREST RATE ARABICA COFFEE
INTEREST RATE EXCHANGE RATE CONILLON COFFEE
EXCHANGE RATE PRICE INDEX SUGAR
DOLLAR DENOMINATED STOCK INDEX ETHANOL
DOMESTIC YIELD CURVE
GOLD COTTON
INTEREST RATE X PRICE INDEX
CORN
(PPI/CPI) SPREAD
SOYBEAN
PRICE INDEX (PPI/CPI)
FLEXIBLE OPTIONS LIVE CATTLE
SOVEREIGN DEBT BOND
FEEDER CATTLE
GLOBAL BOND / Fut. On CDS • STOCK INDEX
A BOND
• EXCHANGE RATE
US TREASURY
• INTEREST RATE
CREDIT DERIVATIVES SWAPS
SPOT
STRUCTURED PRODUCTS MARKET
SPREAD STRATEGIES
VOLATILITY TRADING
METALS
GOLD
STOCK INDEX
U.S. DOLLAR EXCHANGE RATE
INTEREST RATE
FEDERAL GOVERNMENT BONDS
EXCHANGE RATE
FORWARD RATE AGREEMENTS
27
BM&F at Glance
Key Highlights Consistent Trading Volume Growth (ADTV)*
1,800 1,740 1,697
1,600
4th largest futures exchange in the world(1) 1,400
Million contracts
1,200 1,153
1,000
801
737
Largest derivatives exchange in Latin 800
America and only futures exchange in Brazil 600
425 483
400 334 398
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
More than US$1.2 trillion in open interest(2) *On April 17, 2006, the size of the contracts based Jan-Aug
on the Ibovespa stock index was divided by 3.
Consistent Open Interest Growth
High growth trajectory
22,500
20,285 20,688 19,217
18,750
Vertically integrated business model 14,268
Million contracts
15,000
11,250 10,924
9,069
7,500
Multi-asset class exchange
3,750
0
2004 2005 2006 2007 1Q08 Aug-08
28
ADTV of Major Contracts
Interest Rates in BRL FX Rates 564
1,400 600 571
1,192 527
1,200 480 498
1,030 500
938 954
1,000 931 387
400
780
800
300
Thousands of Contracts
600
200
400
200 100
0 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Interest Rates in USD 140 Indices
120
120
103 120 114 110
100 90 93 91 104
100 92 88
78 80
80
80
60
60
40 40
20 20
0 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
ADTV – Avg. Daily Traded Volume 29
Breakdown of Market Participants
Private Individuals
7.1% Others
Foreign Investor 3.0%
18.6%
Financial Institutions
50.2%
Institutional Investor
21.2%
Jun. 08
Traded Contracts
30
Derivatives Product Breakdown
Commodities
Web Trading 0.8%
2.3%
OTC
Interest Rate USD
0.8%
5.3%
Stock Index
5.3%
Interest rate BRL
53.0%
FX Rate
32.5%
Jun. 08
Traded Contracts
31
Breakdown of Traded Contracts by
Trading Venue
94.3
81.6
75.9
70.9
62.5 75.0 76.5
53.4
46.6
%
23.5
37.5 25.0
29.1
24.1
18.4
5.7
01 02 03 04 05 06 07 Jan-Jun
08
Open Outcry Electronic Trading
32
Non-Residents Investors at BM&F
3,000 18%
16%
2,500
14%
2,000 12%
US$ Billion
10%
1,500
8%
1,000 6%
4%
500
2%
0 0%
2000 2001 2002 2003 2004 2005 2006 2007
Financial Volume % of Total Financial Volume of BM&F
33
Derivatives Clearinghouse Sound
Safeguards System
BM&F Equity USD 924 million
Clearing Fund USD 88 million
Special Clearing
USD 21 million
Member Fund
Agricultural Market
USD 26 million
Trading Fund (FOMA)
Clearing Member Clearing Member
Proprietary Collateral
USD 47 million Guarantee Fund
Brokerage House Brokerage House
Proprietary Collateral
Customer Collateral USD 45 billion Customer
34
Efficient and Modern Risk Management
Derivatives Clearinghouse Risk Management
Operational
Market Risk Credit Risk Liquidity Risk Legal Risk
Risk
Central Bank
Intraday risk Credit analysis discount window Business Brazilian
calculation and 5 banking recovery plan Payment System
repo facilities
Concentration Price
Portfolio stress Contingency
limits variation Law 10214
testing hot site
limits
Economic outlook
Additional Achievement of Independent
analysis and Finality
margin calls Lamfalussy internal and
Extreme Value and netting
Plus Criteria external audits
Theory Models
Collateral Collateral Collateral ISO 9001 Insolvency
market risk credit risk liquidity risk compliance protection
35
Broad and facilitated access to markets
Electronification
Connectivity
Direct Market Access
Association with international ISVs and DMA providers
Agreement with a Global Player
36
BM&FBOVESPA CME order routing
agreement
US BRAZIL
Buy order for an ID
futures contracts
CME GROUP BM&FBOVESPA
GLOBEX GTS
GLOBEX GTS
communication communication
network network
High speed and
high capacity
international link
MATCHING
Sell order for an ID
futures contract
SETTLEMENT IN BRL THROUGH
BM&FBOVESPA DERIVATIVES
CLEARING, WHICH MAY BE
FACILITATED BY BM&FBOVESPA
BANK
37
Algorithmic trading
Although high frequency traders represent a large share of trading
volume in exchanges such as CME, ICE and LIFFE, currently they do
not trade at BM&F derivatives market (no DMA).
Big profit opportunities for algo-traders:
BM&F derivatives are liquid and volatile. However, there are no
algo-traders scanning the order books of the electronic trading
system.
Deterministic and statistical arbitrage opportunities must be
bigger than in more mature markets.
Profit opportunity hidden from human eyes
Impact on trading volume expected to be huge.
38
Derivatives x Gov. Securities
Participant´s Needs
Foreign Investor Invest in long-term
fixed-rate derivatives
Foreign Funds
Intermediates Flow/BM&F
(Resolution 2689)
Invest in long term
Real Money Funds
government securities
Issue long-term
National Treasury
fixed-rate securities
39
Derivatives x Gov. Securities
Benefits resulting from the rise in trading volume
Enhanced Liquidity
Improved price formation
Extension of derivatives
maturities
(interest rates)
Extension of federal
domestic debt maturities
40
Foreign investors are important “risk takers”
Diversified investment portfolio
(global operations)
Greater “appetite for risk”
Better conditions for
hedging and for domestic credit
41
Derivatives x Gov. Securities
Enhanced liquidity and improved price formation
Fixing the same maturity dates for both the federal government bonds and the
futures contracts has not only enhanced the liquidity of government bonds and
derivatives, but also facilitated the execution of hedge transactions.
Public Debt x DI
700
600
Stock, in BRL/billion
500
400
300
200
100
-
Jun/07
Dec/02
Dec/03
Dec/04
Dec/05
Dec/06
Dec/99
Dec/00
dec/01
Fixed-rate Public Debt ID
42
Extension of maturities for the derivatives transactions
In 2003, the National Treasury determined that all LTNs must be issued with the
same maturity dates as those for the DI futures contracts (1st business day of
each quarter).
Extension of Public Debt Maturities
18
16
14
Treasury altered
the maturity dates
Average maturity, in months
12 for LTNs
10
8
6
4
2
-
Jun/07
Dec/06
Dec/99
Dec/00
Dec/01
Dec/02
Dec/03
Dec/04
Dec/05
Fixed-rate Public Debt ID
43
The market share and stock of foreign investors in fixed
rate bonds is growing
Market share of Foreign Investors in the Public Debt
40 3,0%
35
2,5%
Market share in the stock (%)
30
Volume (BRL billion)
2,0%
25
20 1,5%
15
1,0%
10
0,5%
5
- 0,0%
Abr/07
Jan/07
Abr/04
Abr/05
Abr/06
Out/04
Out/05
Out/06
Jul/04
Jul/05
Jul/06
Jan/04
Jan/05
Jan/06
Foreign Investor Participation (BRL) Foreign Investor market share in the stock of public debt (%) 44
International Investors Flow - Derivatives
Pay Fixed Rated Receive Fixed rate
SWAP PRE X DI SWAP PRE X DI
Foreign Hedge Fund
Bank Proprietary Trading
OUTSIDE
BRAZIL
INSIDE
BRAZIL
2689 - Foreign
Bank
Recieve Fixed Rate
Pay Fixed
DI FUTURES
Rate
LOCAL BANK National Treasury
Buy Fixed
Bond ISSUE Fixed Bond
45
International Investors Flow - Derivatives
Pay Fixed Rated Receive Fixed rate
SWAP PRE X DI SWAP PRE X DI
Foreign Hedge Fund
Bank Proprietary Trading
OUTSIDE
BRAZIL
INSIDE
BRAZIL
2689 - Foreign
Bank
Recieve Fixed Rate
Pay Fixed
DI FUTURES Rate
LOCAL MUTUAL LOCAL BANK National Treasury
FUND
Buy Fixed
Buy Float
Bond ISSUE Fixed Bond
Bond
46
INTEREST RATE FUTURES MARKET
POSITION AS OF OCTOBER 1, 2008
Buy Sell
Contracts % Contracts %
Financial companies 1,799,671 34.52 3,256,196 62.46
Institutional investors 1,659,836 31.84 1,516,024 29.08
Non resident Investors 1,713,587 32.87 411,704 7.90
Nonfinancial companies 35,254 0.68 28,865 0.55
Individuals 4,516 0.09 75 0.00
Total 5,212,864 100.00 5,212,864 100.00
47
Interest Rate Future Contract
Non Resident Investors
2,500 2,500
2,000 2,000
1,500 1,500
Thousands of Contracts
1,000 1,000
500 500
- -
(500) (500)
(1,000) (1,000)
(1,500) (1,500)
jan-06 mar-06 mai-06 jul-06 set-06 nov-06 jan-07 mar-07 mai-07 jul-07 set-07 nov-07 jan-08 mar-08 mai-08 jul-08 set-08
BOUGHT SOLD NET
48
Investment Funds Industry
Composition of Net Worth (Set/08 BRL1,190.17)
Real Estate
0.02%
FIDC Other Short term
4% 3.85% 3.42%
Pension ID referenced
8.62% 15.40%
Stocks
13.27%
Fixed income
Multi-markets 30.01%
21.79%
External
Debt
0.04%
Foreign Exchange
0.05%
Source: Andib
49
Sisbex – Electronic Trading System
The Sisbex electronic system is a set of applications that permit
the trading and registration of transactions with federal
government bonds.
These bonds may be traded in accordance with the following
transaction types:
Buy/Sell Cash Transactions;
Buy/Sell Forward Transactions;
Repos.
The Sisbex has special tools for managing and controlling the
risk of the participant institutions’ trading desks, as well as for
providing support to trade settlement procedures.
50
END OF PRESENTATION
51
