Docstoc

OTC Fixed Income Market in Brazil Andima

Document Sample
OTC Fixed Income Market in Brazil Andima Powered By Docstoc
					   E c o n o m i c R E p o Rt




OTC fixed income
 market in Brazil




            Rio de Janeiro



         ANDIMA
            National Association of
         Financial Market Institutions
                   Brazil


                   2007
Published in 2007
Total or partial reproduction of this book without quoting the source is prohibited.

PRODUCTION CREDITS
Technical Supervision - Valéria Arêas Coelho
Technical Management - Sandro Baroni Selaimen
Economic and Tax Studies - Mary Carmen Mendez
Editor - Patrícia Fesch Menandro
Economists - Ana Lúcia Andrade dos Santos, Antônio Luís Filgueira, Berenice Ribeiro
Fontes, Dalton Boechat, Demetrius Durante, Eduardo Norman Otero, Enilce Leite Melo,
Glória Maria Medeiros Baptista, Marcelo Cidade, Marcelo Kucuruza Mehl, Nuno Miguel
Conde, Patrícia Herculano and Vinícius Gomes Araújo.
Trainee - Márcio Portugal Meliga
Communication Advisor - Cláudio Accioli
Cover, Publishing and Chart Production - Marcelo Paiva and Carlos Alberto V. Junior
Proofreading - Renato Mourão
Cataloguing and Bibliographic Reference - Cláudia Kropf


ANDIMA
Rio dE JanEiRo: Av. República do Chile, 230/13º andar - CEP20031-170 - Phone: (55 21) 3814-3800
Superintendência Técnica: Phone: (55 21) 3814-3803
Commercial Management: Phone: (55 21) 3814-3889
São paulo: Rua Líbero Badaró, 377/4º andar - CEP 01009-906 - Phone: (55 11) 3115-1313
intERnEt: www.andima.com.br / E-mail: comerc@andima.com.br



                   O87
                            OTC fixed income market in Brazil/National Association of
                            Financial Market Institutions - Rio de Janeiro: ANDIMA, 2007.
                            78 p.; 25 cm. - (Economic report)

                                ISBN 85-86500-41-1

                                 1. Financial Market - Brazil. 2. Over-the-counter market.
                            3. Fixed Income. 4. Debt securities. I. National Association of
                            Financial Market Institutions (Brazil).
                                                                          CDD-332.1140981
                                                                                                                                          




                                                    SummaRy

LIST OF CHARTS & TABLES .............................................................................................. 5

LIST OF ABBREVIATIONS .................................................................................................. 7

PRESENTATION..................................................................................................................... 9

1 - INTRODUCTION ............................................................................................................ 10

2 - RECENT CONCEPTS AND CHARACTERISTICS ...................................................... 12
    Fixed income assets .......................................................................................................... 12
    Trading characteristics ...................................................................................................... 13
    Over-the-counter market ...................................................................................................13
    Why the discussion about transparency? .......................................................................... 14
    Electronic systems ............................................................................................................ 15
    Why is liquidity important? .............................................................................................. 17

3 - INTERNATIONAL MARKET – FIGURES AND DISCUSSIONS ............................... 20
    General Overview ............................................................................................................ 20
    Transparency in liquid fixed-income markets .................................................................. 21
The American experience .................................................................................................         22
    The debate in Europe ........................................................................................................ 26
    The discussion in emerging economies ............................................................................ 27
    The recent situation in Latin America .............................................................................. 29

4 - DOMESTIC MARKET: HISTORY, CONFIGURATION AND FIGURES;
    REGULATION AND SELF-REGULATION .................................................................. 32
    Main characteristics ....................,,.................................................................................... 32
    Brief history ..................................................................................................................... 35
    The first measures designed to promote liquidity ............................................................ 38
    Recent initiatives and advances ........................................................................................ 41
    The market’s current configuration .................................................................................. 43
    Trading in the secondary market ...................................................................................... 46
    Electronic systems ........................................................................................................... 51
    Transparency .................................................................................................................... 52
    Liquidity ........................................................................................................................... 54
                                                                                                 OTC fixed income market in Brazil



5 - PROJECTS: A PROPOSED AGENDA FOR THE BRAZILIAN FIXED-INCOME
    MARKET ......................................................................................................................... 55
    Macroeconomic issues ..................................................................................................... 55
    Institutional and Microstructure Issues ............................................................................ 59
       - Primary market and the actions of the authorities .................................................... 59
       - Regulation of the secondary market of custody, depositary and settlement
         services ...................................................................................................................... 61
       - Securities lending and short operations .................................................................... 65
       - Taxation of fixed-income instruments ...................................................................... 66
       - Investor base ............................................................................................................. 68
    Conclusions on the agenda ............................................................................................... 69

6 - APPENDIXES ................................................................................................................. 71
    Fixed-Income Market: Trading and Payment System ...................................................... 72
    Fixed-Income Over-the-Counter Market – “Knowing the ropes” .................................... 73

7 – BIBLIOGRAPHY ............................................................................................................ 74
                                                                                                                              




                    liSt             of        chaRtS & tablES

Table 1 - Electronic Trading Systems in Europe/USA - December 2005 ...................................... 16

Table 2 – Stock of Bond Debt in Selected Countries ............................................................ 21

Chart 1 - U.S. Treasury Bonds ............................................................................................... 22

Chart 2 - U.S. Treasury Bond Holders ................................................................................... 23

Box 1 - The Trace Experience - Trade Reporting and Compliance Engine .......................... 25

Table 3 - Distribution of Corporate Bond Trading in the European Market ......................... 26

Chart 3 - Market Weights for the Pan-Asian Securities Fund ............................................... 29

Box 2 - Main Recent Features of Latin-American Bond Markets ........................................ 30

Chart 4 - Composition of the Brazilian Financial Market ..................................................... 32

Table 4 - Fixed-Income Market ............................................................................................. 33

Table 5 - Characteristics of the Main Fixed-Income Bonds and Securities .......................... 34

Chart 5 – Main Holders of Federal Government Bond Debt ................................................ 35

Chart 6 - Average Daily Volume x Stock of Federal Public Debt ......................................... 36

Chart 7 - Composition of the Federal Public Bond Debt by Type of Profitability ................ 37

Chart 8 - Maturity Structure of Outstanding Government Bonds ......................................... 37

Box 3 - Follow-up of the 21 Measures Proposed by the National Treasury/Brazilian
        Central Bank in 1999 in order to Expand Primary and Secondary Public
        Debt Markets Liquidity ............................................................................................ 38

Box 4 - Recent Measures Oriented Toward Liquidity and Transparency ............................. 42

Chart 9 - Stock and Traded Volume/Stock by Type of Bond ................................................. 44
                                                                                              OTC fixed income market in Brazil



Table 6 - Distribution of Trading in Federal Public Bond Debt - July/2006 ......................... 44

Chart 10 - Terms of Fixed Rate Government Bond Debt ...................................................... 45

Chart 11 - Forward Interest Rate Structure ............................................................................ 46

Box 5 - Main Features of Sisbex ........................................................................................... 48

Table 7 - Outstanding Stock, Traded Volume and Distribution of Trading in the
          Debentures Market ................................................................................................. 49

Box 6 - Main Features of CetipNet ....................................................................................... 50

Table 8 - Distribution of Trading in Government Bonds by Type of Operation and by
          Environment/Trading System ................................................................................. 51

Box 7 - Transparency in the Brazilian Fixed-Income Market - Information Availability
        in the Over-the-Counter Market ............................................................................... 53

Chart 12 - IMA versus Selic Rate versus DI Rate – Cumulative YTD Percentage
            Variation in 2006 ................................................................................................. 57

Box 8 - Over-the-Counter Fixed-Income Market Agenda – Outlook, Suggestions
    and Projects ................................................................................................................... 58

Table 9 - Number of Public Bond Maturities in the Market .................................................. 60
                                                                                                                                     




                           liSt              of        abbREviationS

Anbid .......................................................................................... Investment Bank Association
ANDIMA ............................................. National Association of Financial Market Institutions
BC ........................................................................................................ Brazilian Central Bank
BMA ..................................................................................... BM&F Securities Clearinghouse
BM&F ............................................................................. Futures and Commodities Exchange
BNDES ....................................................................................... Brazilian Development Bank
Bovespa .......................................................................................... São Paulo Stock Exchange
BovespaFix .................................. Electronic Trading Platform for Fixed Income Instruments
CBLC ............................................................. Brazilian Clearing and Depository Corporation
CDB ................................................................................................... Bank Deposit Certificate
CETIP .................................................................................. Custody and Settlement Clearing
CETIPNet .................................... Electronic Trading Platform for Fixed Income Instruments
CPF ............................................................................. Brazilian Individual Taxpayer Registry
CPMF ......................................................... Provisional Contribution on Financial Movement
CVM ..................................................................................... Brazilian Securities Commission
Demab ....................................................................... Central Bank Open Market Department
DI ................................................................................................................. Interbank Deposit
DPMF .............................................................................................. Federal Public Bond Debt
DVP .................................................................................................. Delivery versus Payment
FDIC ................................................................. Asset-Backed Receivables Investment Funds
FGV ............................................................................................... Getúlio Vargas Foundation
IBGE ............................................................... Brazilian Institute of Geography and Statistics
Ibovespa ............................................................................... São Paulo Stock Exchange Index
IRF-M ........................................... Fixed Income Market Index (LTN and NTN-F portfolios)
IGP-M ............................................................. General Price Index for the Financial Markets
IMA .................................................................................................... ANDIMA Market Index
IMA-B ................................................................. ANDIMA Market Index (NTN-B portfolio)
                                                                                                 OTC fixed income market in Brazil



IMA-C ................................................................. ANDIMA Market Index (NTN-C portfolio)
IMA-S ...................................................................... ANDIMA Market Index (LFT portfolio)
INSS .................................................................................... National Social Security Institute
IOF .............................................................................................. Tax on Financial Operations
IPCA ..................................................................................... Expanded Consumer Price Index
IR ........................................................................................................................... Income Tax
LBTR ............................................................................. Real Time Gross Settlement (RTGS)
LDL ....................................................................................... Deferred Net Settlement (DNS)
LFT ..................................................................................................... Treasury Financial Bills
LTN ...................................................................................................... National Treasury Bills
NTN ................................................................................................... National Treasury Notes
NTN-B ...................................................... National Treasury Notes – Series B (IPCA linked)
NTN-C ................................................... National Treasury Notes – Series C (IGP-M linked)
NTN-D ...................................... National Treasury Notes – Series D (Exchange Rate linked)
NTN-F ......................................................... National Treasury Notes – Series F (Fixed Rate)
PIB ......................................................................................... Gross Domestic Product (GDP)
PU ............................................................................................................................. Unit Price
SELIC ................................................................. Special System for Settlement and Custody
SISBEX ............................................................................................ BM&F Trading Platform
SFN ............................................................................................... Brazilian Financial System
SNA .......................................................................................... CETIP National Asset System
SND .............................................................................................. National Debenture System
SPB ................................................................................................ Brazilian Payment System
SPR ...................................................................................... Financial Risk Protection System
SRF .................................................................................................. Internal Revenue Service
STN ............................................................................................ National Treasury Secretariat
STP ................................................................................................... Straight Through Process
TJLP ................................................................................................... Long Term Interest Rate
                                                                                                 




                                pRESEntation

    The Economic Report – the OTC Fixed Income Market in Brazil sums up two of the

guidelines that we proposed to follow when we took over the Presidency of ANDIMA in

March 2005: the improvement of the secondary fixed income securities market, particularly in

relation to over-the-counter trades, and the production of technical studies showing the impact

on the financial sector. An analysis of the international literature in relation to transparency

and liquidity in this segment demonstrates that the trends and proposals which are being de-

bated in the domestic market are in line with the main discussions and initiatives observed in

consolidated bond markets as well as in those that are expanding. Therefore, what is the main

challenge facing the segment? In our view, one factor shows itself to be absolutely essential:

increasing the number of participants capable of operating in a competitive way. Nowadays,

trading in the fixed income secondary market is characterized by the prevalence of inter-fi-

nancial operations of high unit value, by assets with complex pricing and by specialized par-

ticipants, such as financial institutions and institutional investors, conditions that restrict the

presence of other potential interested parties eventual participants. There is a need to improve

the trading instruments that are available, amplify the disclosure and the discussion of the

operations carried out, by creating parameters and indicators of intent to trade, and reduce

transaction costs. We expect that this report, in which these and other issues are analyzed in-

depth in light of international experience, to be a catalyzing agent of transformations that will

benefit not just the market, but also the country as a whole.

                                                                Alfredo Neves Penteado Moraes
                                        1
10                                                                   OTC fixed income market in Brazil




                               intRoduction



     The macroeconomic stability that has been achieved in Brazil over the last few years, sup-
ported by a fiscal discipline process, a system of targets for interest rates and inflation and a
management of both foreign and domestic debt that is in line with what is deemed to be correct
in international circles, produced positive effects in relation to the bond market and risk assess-
ment of this indebtedness. The marked growth in the stock of bonds and the recent improve-
ment in the profile of the debt have been occurring in a particularly favorable external context.
     At the same time, and also in tandem with international trends, there was a restructuring
in Brazil of the domestic payment system and an adaptation to fit in with the so-called Basel
Rules, as well as recommendations for segregating the asset management area and mark to
market of own portfolios. The activities and controls related to the management and settle-
ment of assets were modernized. These changes, coupled with the marked strengthening of
the investment fund industry, the consolidation of pension funds and insurance companies as
institutional investors and the resurgence of the credit market, have helped to encourage par-
ticipation by new customers together with product creation in the fixed income segment.
     However, notwithstanding these advances, the existence of a consolidated derivatives
market and a sophisticated recording and settlement structure, it can be observed that both the
volume of trading in the secondary domestic debt market as well as the investor base are still
restricted. Recently the debate on how to overcome these determining factors has found an
excellent parallel in the discussions and initiatives observed in other countries that are directed
towards increasing liquidity and transparency in the bond markets.
                                                                                               11



     The purpose of this study is to present the main characteristics and trends of the over-the-
counter fixed income market in Brazil, using international experience as a backdrop. To this
end, chapter II deals with the concepts and indicators used in worldwide literature and that is
regarding as being important for the mapping of this experience, which is covered by chapter
III. Meanwhile, chapter IV analyzes issues that are significant to the debate on transparency
and liquidity in the domestic over-the-counter fixed income market. Last but not least, in the
final chapter, initiatives and measures of a macroeconomic, institutional and microstructure
nature are discussed, assembled in a proposed agenda, with a view to increasing the liquidity
and transparency of the secondary market for Brazilian bond debt.
                                                 2
12                                                                                  OTC fixed income market in Brazil




                           REcEnt concEptS
                          and c haRactERiSticS



    Fixed Income assets
    In the financial market, fixed income assets are bonds or securities1 which foresee the cor-
rection of their face value by a defined profitability or a previously established remuneration
parameter. In the first case we have the fixed rate securities, and in the second, the floating-rate
assets, which are adjusted by the variation in the prices indices or in the FX rate, or pegged to
floating interest rates, obtained from the average rate of operations carried out in the financial
market (SELIC Rate).
    The differences between assets traded on the fixed income markets and shares begin with
the price-setting process. The price of a share is the result of an agreement between centralized
offers and bids in physical or electronic trading environments, which is redefined in a differ-
entiated manner at any moment on account of the various events which affect these environ-
ments and the respective issuers. The price of a fixed income security meanwhile depends on
the implied profitability foreseen for the bond – and a rough idea of the bond’s present value
can be obtained by discounting this remuneration from the payments. Factors such as market
conditions and issuer risk may influence pricing, but the security’s main movements will be
pegged to basic price references of the economy – which affect the present value of its remu-
neration -, as well as its liquidity at any given moment.

1 According to the legislation, this definition may be more or less comprehensive. In Brazil, for taxation purposes, the
Federal Revenue Service considers as fixed income any structure operations that ensure obtaining predetermined revenues,
such as box operations.
Recent concepts and characteristics                                                                                                1



     Trading characteristics
     Also as far as trading is concerned, fixed income securities exhibit specific2 conditions,
which can be summarized as follows: due to their own characteristics, purchases and sales
of bonds are not distributed proportionately over their useful life. Unlike the stock market,
fixed income securities show periods when there is a higher level of trading – issue, payment
of events, changes in the foreseen profitability of contracts or reference assets of equal term.
Excluding these periods, - and except for changes related to the assessment of the issuer or the
sector, in the case of corporate securities - , assets of this type exhibit a lower number of trades,
and a relatively lower liquidity: discontinued trades over time, no trades at all for long periods
or trading concentrated in the hands of just a few specialized participants3.
     Furthermore, in contrast to the stock market, where a issuer usually accounts for a single
share issue or a few, in the fixed income segment the same issuer may carry out various several
issues, in accordance with funding conditions or requirements. Companies and governments,
for example, issue securities with different terms, conditions and maturities, generating high
issuing amounts and figures, but in a scenario of concentrated liquidity – in general, only a
very low percentage of the total number of issues exhibit at least one trade a day, and this in-
cludes markets (those of the USA and Europe)4, which are deemed to be more liquid.

    Over-the-counter market
    Another characteristic that is common to this market refers to the trading environment.
According to international literature, over the counter trades are those that do not involve
a stock exchange (centralized free trading environment) – with the participants trading di-
rectly with each other, either by telephone or electronic systems. Due to the factors that were
mentioned previously, this is the predominant trading format in the fixed income segment, in
other words, that which involves government debt or corporate private debt securities, such
as debentures, or bank funding instruments, such as certificates of deposit. This trait is also
noted in American and European markets, just to mention better known examples, as well
as in the Brazilian one.


2 FSA report – Financial Services Authority (United Kingdom) Discussion Paper No. 5/05 – Trading Transparency in the UK.
Secondary Bond Market – December 2005 presents a detailed review of these specific characteristics, applied to the European
and, especially, the United Kingdom market.
3 Further according to the FSA, government bonds present high liquidity periods related to their utilization as monetary policy
instruments. Anyway, though with distinct frequency, they keep a liquidity concentration characteristics at localized times of
their life cycle.
4 Differences could also be verified in the degree of tradability according to the type of profitability of these assets, which is not
found in the stock market.
1                                                                                 OTC fixed income market in Brazil



    Because of the way it has been set up, the over-the-counter market is traditionally operated
by specialists – financial institutions and institutional investors – and shows little dispersion.
Due to the profile of its participants and to the afore-mentioned concentration of liquidity,
there are long periods when there is little trading, but when trades take place they show a high
unit value. Therefore, the pricing of the assets becomes more specific, with very little presence
of commoditized trades outside the so-called turnover markets, and this explains why the seg-
ment is still not really understood by retail investors.

     Why the discussion about transparency?
     It was this recent increase in the participation of these investors that led the financial mar-
kets supervisory bodies to be concerned in connection with the presence of scattered agents
in a segment with such peculiar characteristics. The expansion of managed portfolios, in the
form of investment funds and pension funds, has also helped boost interest from individual
investors in the segment, which is more representative in some countries than others, and that
expanded following the stock exchange crises that were seen in the last decade.
     The transparency of a market is related to the larger or smaller quantity of information
available regarding the proposals made and the trades carried out – particularly regarding
prices – and the access conditions and dissemination of this information. Specifically with
regard to prices “transparency refers to the ability of participants in the market to get access
to information about transactions carried out (post-trade transparency), price quotes (pre-trade
transparency) and to price indications that help in the process of price-making”5. Taking into
account the carrying out of operations in real time, and on an international scale, and the con-
nection between the different markets, the recent emphasis by international entities on trans-
parency also extends to the timeliness and consolidation of information.
     In the stock markets, the disclosure of proposals and the obtaining of the actual prices are
the counterpart of trades themselves. The results are continuous and made available in a timely
fashion, reflecting multiple operations with standardized characteristics, and the clients, di-
versified, including among others individuals, funds, companies and institutions, with access,
therefore, to the figures. For its part, the consolidation of information is also made easier by the
recent unification of the organizations and by the centralization of trading. As a result of this,
the trends and initiatives capable of ensuring greater transparency for the different markets
have been analyzed by the international entities and regulatory bodies with a special focus on
the over-the-counter market.

5 TBMA – The Bond Market Association eCommerce in the Fixed-Income Market, December 2005, pg. 2. Indicative prices are
price estimates for trading a certain bond, but not firm prices, quoted or executed.
Recent concepts and characteristics                                                                                                1



     In this segment, in addition to the expansion of the investor base to include retail investors6, the
assets have become more complex and both investment decisions and market prices are increasing-
ly influenced by an ever greater number of factors (in addition to interest rates and the benchmark
represented by government bond prices). In segments where there is online availability of price
information, but the trade is carried out either by telephone or voice systems, timeliness becomes
an essential factor, because the published figures may not reflect market prices at a given time.
Fragmentation is also a distinctive quality of the information in these markets, with trades not nor-
mally being centralized in physical or electronic environments, and there is a great diversity in the
systems used for supporting or carrying out trades (voice, screens or even platforms). Furthermore,
depending upon the distribution of market members and the concentration of liquidity, the existing
information may not be sufficient or accessible or constitute a suitable parameter for other trades.

    Electronic systems
    Among the processes that have helped increase the level of transparency in this segment
are the electronic recordings or trading systems, which are able to consolidate and promptly
disclose the characteristics of potential or actual trades. In more liquid and homogenous mar-
kets, the introduction of electronic platforms (trading systems) was a natural result of the
growing utilization of trading support systems – online quotation screens, information agen-
cies and voice systems. Starting with the market globalization process, measures directed to-
ward adopting STP – Straight Through Processing7, have gained strength, due to the reduction
of costs and operating risks. The possibility of extending these measures to the trading stage
resulted in a successful migration to electronic platforms, in these cases.
    The predominance or high utilization of electronic trading systems in some segments has
an effect on transparency, to the extent that it facilitates the creation and disclosure of informa-
tion. A yearly survey regarding these systems in Europe and the USA that was carried out by
the Bond Market Association states that, in 2005, 27 out of the 54 platforms surveyed allowed
their users at least to check the most recent effective price of a given asset or operation; 20 of
the platforms surveyed disclosed data regarding transactions that had taken place to non-us-
ers; 26 made data available through vendors; 40 published quoted prices for the assets; and 23
allowed their users to access price indications.

6 In general, the greater number of retail participants are confirmed by statistics on the number of operations. When considering
traded volume, this participation is quite reduced, although differentiated among markets. See, about it, note in Box 1 on Trace.
7 According to definitions used by BIS – Bank for International Settlement, STP – Straight Through Processing consist of “cap-
turing trade details directly from front-end trading systems and complete automated processing of confirmations and settlement
instructions without the need for rekeying or reformatting data”. In the case of systems involving asset settlement, it also refers to
“fully performing pre-settlement and settlement processes from data on entered trades, manually, only once in a system”.
1                                                                                     OTC fixed income market in Brazil


 TABLE 1

                Electronic Trading Systems in Europe/USA – December/2005
                   Types of Platform by Trade, Participants and Services
 Types                                                                                              No. of Systems
     Surveyed universe                                                                                        
     By type of participant/platform:
     Financial institutions and brokers only (inter-dealer or B2B)                                            2
     Financial Institution/broker and custumer (dealer to custumer or B2C):
     Single-dealer to customer                                                                                22
     Multiple-dealer to customer                                                                              1
     Allow access to retail investors                                                                         12
     New issue                                                                                                12
     By trading method:
     Order driven (participants send proposals, which are centralized and may be seen or
                                                                                                              
     executed by all others)
     Market-making/Cross-matching (participants send buy and sell quotes throughout the
     day; trades are executed when quotes and quantity coincide or when the participant                       2
     accepts a quoted price)
     Request for quote (usually B2C: investors request quotes from institutions)                              2
     Auction (usually used for new issues, allows participants to bid simultaneously for a
                                                                                                              11
     securities offering)
     Other characteristics:
     Visibility to users of, at least, latest traded price                                                    2
     Direct access to clearing and settlement systems                                                         2
     Risk monitoring or management                                                                            1
Extracted from “European Bond Pricing Sources and Services: Implications for Price Transparency in the European Bond Market”,
April 2005 and “eCommerce in the Fixed-Income Markets – The 2005 Review of Electronic Transactions Systems”, December 2005,
available at www.bondmarkets.com.



    The increased presence of these agents in the European and, particularly the American
market, has improved the situation in terms of operating costs and risks -related conditions, as
well as the access of clients, both institutional ones as well as others, to the fixed-income seg-
ment. It should be noted that, by providing greater transparency, the introduction of these sys-
tems affected the configuration of these segments in relation to access and costs are concerned,
but did not imply, either previously or subsequently, alterations to the original characteristics
of the fixed-income market in which they operate. The trading systems implemented are de-
signed to be flexible so they can incorporate different ways of trading, providing mechanisms
that make it possible to choose counterparts, fractioned trades or firm offer conditions, more
typical of an over-the-counter market, but also with risk controls or auction devices.
    Indeed, in the survey that was previously mentioned four general pricing criteria in these en-
vironments were mapped – auction, quotation, matched bid offers and matched firm orders (see
Recent concepts and characteristics                                                                                               1



table on the previous page). Their distribution among the platforms that were surveyed demon-
strates that a number of them offer more than one alternative. The systems may also be restricted
to financial institutions or promote contact between a single institution and clients or various
institutions and clients. Furthermore, out of 54 platforms that were surveyed, 29 offer links to
clearing and settlement systems, and 14, to risk monitoring or risk management services.
     Therefore, an important observation regarding the automation of processes and the ad-
vance of electronic markets relates to the adjustments in the procedures seen in the Stock Ex-
change and over-the-counter markets. The introduction of voice or trading systems8 multiplies
the number of parties to a trade by comparison with the two-sided contracting by telephone,
and trading screens or platforms increase client participation in trades and allow trading by
best price criteria. At the same time, the utilization of these alternatives has been compatible
with the existence of trading rounds, of firm orders or the use of fractioned trades In the over-
the-counter market, these alternatives allow a better adaptation of the trading methods to the
diversity of assets and operations that can be seen in the fixed-income segment9, which has
also been observed in the case of derivatives.

    Why is liquidity important?
    In segments with more heterogeneous assets and operations and where liquidity presents
the afore-mentioned unusual characteristics, electronic systems, even when present, are not
generally the predominant means of trading, nor do they exhibit great degree of diversity
or high level of specialization. In these cases, the introduction of electronic methods for the
transmission of prices or the execution of trades has taken place in such a way as to enable the
online disclosure of information or the register of bids to market participants, with dealers and
specialists continuing to play a major role in the carrying out of operations.
    Therefore, the typical fixed-income segment characteristics, such as the irregular distribu-
tion of liquidity, the predominance of institutions and institutional clients and the existence

8 Voice systems allow a party to make or receive proposals from more than one counterpart through oral communication among
several participants. Trades may be executed in this manner, as happens in the case of telephone, but, in order to be effectively
executed, they require entering the operation in a trade system and/or record, Whereas in the electronic trading system, the
command to execute an operation may result in, simultaneously, recording it and procedure for respective settlement; in Brazil,
so-called “voice boxes” are used for calls made by brokers operating in the public security market.
9 As described in Chapter III, the presence of electronic trading systems in the American Treasuries market illustrates this
observation; while in the on-the-run segment, with a high degree of non-differentiation, electronic platforms already account
for practically the totality of trade, in off-the-run and primary segments, whose operations are heterogeneous, less frequent and
require greater specification, trading by means of voice systems and using dealers prevail. As to the latter, the most active in this
segment also control electronic platforms used in the other, which is to say, they alternate provided service to trading completion
according to the characteristics of each segment. In the European market, according to ICMA – International Capital Market
Association, it is also possible to use (or not) a central counterpart, on the same Euro MTS platform, and the parties may opt for
anonymity or bilateral settlement.
1                                                                                  OTC fixed income market in Brazil



of complex trading assets, may lead to situations in which the expansion of transparency is
related to the consolidation and timeliness of information, without necessarily requiring any
changes to the segment’s modus operandi. In such situations, the initiatives observed in terms
of the international experience were along the lines of adopting– and this included making it
compulsory to do so – of the recording of operations in centralized systems, with real time
information reporting capability to a wide group of (potential) participants.
     However, if we look at the bond markets in emerging economies countries, which are not
yet consolidated, the discussion regarding liquidity takes on a distinct perspective to that ob-
served in the case of American and European experiences. In these latter economies, the spe-
cific characteristics of the fixed-income segment remain valid, but market liquidity as whole
is relatively high, as is the number and absolute volume of transactions, the number of partici-
pants and the depth of the secondary securities market.
     Based on the international concept, the liquidity of a given market is related to its ability to
execute transactions cheaply and quickly, without affecting prices. Liquid markets are impor-
tant because they allow their participants to adjust their portfolios at the lowest possible costs.
If this is not viable, the trend is for investors to charge a premium to compensate them for the
lack of liquidity, which results in constant increases in the funding costs of the segment’s issu-
ers10. The liquidity measures used to assess the secondary markets of these economies may be
grouped into four most frequently used concepts:
     • Market depth: usually related to the volume transacted and its impact on the prices prac-
ticed in a segment, it is assessed in a simplified way, using the ratio between the volume traded
and the outstanding debt stock.
     • Size of the spreads: the difference between purchase prices and selling prices, which tend
to present an inverse relation to the volume traded or the depth
     • Concentration of the investor base: in this case, it is assumed that the greater the concen-
tration of the entire debt in the hands of just a few holders, the lower liquidity will, and this is
particularly so, if buy and hold type strategies are present.
     • Market size: what is taken into account here, apart from the stocks involved, is the value
of the individual issues in the primary market.
     Moreover, according to the international literature, in unconsolidated shallow debt mar-
kets, a series of macroeconomic, institutional and microstructure aspects may compete to re-
strict liquidity in the segment. The macroeconomic determining factors refer to historical or
market structure related reasons that help to explain the profile of indebtedness or its vulner-

10 Promoting Liquidity in Domestic Bond Market, speech given by BIS general manager, Mr. Malcolm Knight, in Saint Peter-
sburg, in May 2006.
Recent concepts and characteristics                                                            1



ability to external and internal factors. While the factors of an institutional and microstructure
nature are related to market characteristics that might help (increase) liquidity, such as taxa-
tion, controls on foreign capital, hedge market size, clearing and settlement structure, segment
regulation and yield curve shape.
    It is worth noting that, in markets which are considered to have restricted liquidity, infor-
mation on actual trades, may be scarce and concentrated over time. It is possible that assets
with a relevant participation in the market’s stock of debt stock will not be traded for a number
of periods, and that trades, when executed, depending on the batch and conditions, will not
provide representative prices for new future trades. So-called pre-trade information may also
correspond to indicative spreads rather than firm trading intentions, bearing in mind the lack of
market players who are capable of acting as market makers – in other words, willing to quote
firm market prices at any given moment. Therefore, in these cases, the debate about transpar-
ency is very closely linked to improving liquidity conditions. And, though essential to the effi-
cient functioning of the markets, increasing transparency, in the situation under consideration,
includes not only adopting initiatives or incorporating trends related to making information
available, in a consolidated and timely fashion, but also the overcoming of factors which, by
limiting liquidity, prevent the proper incorporation of these changes
                                       3
20                                                                 OTC fixed income market in Brazil




                 intERnational maRkEt
                figuRES and diScuSSionS


    General overview
    For the purpose of analysis, international academic articles on the subject of liquidity and
transparency in the fixed-income markets may be grouped into two main blocks. The first re-
lates to the discussion about transparency in those countries that exhibit liquid fixed-income
segments, with a great variety of private debt securities and active secondary markets. In these
cases, the main issues revolve around increasing the amount and the timeliness of the informa-
tion available, which may take place through changes in the nature of trading – for example,
the expansion of electronic platforms or the participation of retail investors – or adoption of
objective measures aimed toward this purpose.
    The second block looks at the debate in relation to the context of the emerging coun-
tries, of Asia and Latin America, along with those in the process of joining the European
Union or getting closer. In these cases, the expansion in the debt markets has not been
accompanied by a comparable growth in the level of liquidity. Due to the fact that we are
dealing here with illiquid markets, the international prescription is to analyze the macro-
economic, structural and microstructure factors that explain this context, but basically the
discussion is focused on the initiatives that are capable of changing the scenario. In these
economies, therefore, the debate on transparency, though important, is linked to improv-
ing the liquidity conditions – and taking into account the above-mentioned factors, we can
observe significant differences between among the various countries that are considered to
make up this block.
International market - data and characteristics                                                           21



    Transparency in liquid fixed-income markets
    The fixed income markets present significant figures on the European continent and in the
USA, with over-the-counter trading being the predominant form. They exhibit ample liquidity
and have registered increasing transaction volumes over the last few years. In the USA, there
is a significant stock of corporate bonds, and the other segments of municipal bonds have a
high weight. In Europe, government bonds and those issued by financial institutions are pre-
dominant, but there are distinctions. In Italy, government debt exceeds the sum of the remain-
ing segments. The investor base and the distribution of private issuers show a high degree of
diversification. In the American market, there is growing participation by retail customers,
while on the European continent there are differences (it is higher in Germany and Italy and
very low indeed in the United Kingdom).

 TABLE 2

         Stock of Bond Debt in Selected Countries - In US$ billion/March 2006
                                                                                          International
                                         Domestic Debt Bonds Stock                         Debt Bonds
                                                                                              Stock
                                                             Financial
                             Total        Government                       Corporations       Total
     Countries                                              Institutions
 Germany                  1,998.1           1,091.2            774.6          132.3           2,302.6
 France                   2,008.5           1,127.5            641.8          239.3           1,039.8
 Italy                    2,283.6           1,398.6            634.6          250.4             759.4
 United Kingdom           1,069.5             715.7            331.4           22.3           1,649.9
 Netherlands                696.5             265.5            373.9           57.0             780.5
 United States           21,168.0           6,101.2         12,335.5        2,731.3           3,695.7
 All Countries           46,510.7         22,781.8          18,475.6        5,253.3          15,495.6
  Source: BIS Quartely Review, September 2006. Preparation: ANDIMA.




    High liquidity, however, does not prevent one from observing aspects that are typical of
fixed income securities, which explains the growing emphasis on transparency in recent ac-
tions and recommendations. It is interesting to note that, contrary to what was expected at the
start, the main initiatives aimed at increasing transparency – such as the introduction of record-
ing and/or trading systems and the spread and consolidation of the disclosure of quoted prices
and actual trading prices– have not had a negative impact on liquidity, and there has even been
an inflow of new investors to the segment. However, up to the present moment, there have not
been any changes to differentiated pricing structures and performance by specialized entities,
which show to be more suitable to the fixed-income segment.
22                                                                                    OTC fixed income market in Brazil



    The American experience
    In the USA, federal debt bonds (treasuries) are offered at regular primary auctions and
traded in the secondary market by financial institutions and institutional investors through
inter dealer brokers – specialized brokers which have been presenting a marked process of
concentration. A recent report released by the Fed11 estimates that virtually the entire segment
is controlled by four major brokers, with just two of them – ICAP and Cantor Fitzgerald –ac-
counting for an 88% share of the market. The report also confirms the growth of the electronic
systems in this trading and recognizes the clear advantages of the process. Over the last few
years, practically all trading in so-called on-the-run securities, which have more liquid and
homogenous maturities and which account for 70% of the volume of treasuries trading, has
migrated to electronic platforms, with a significant reduction in transaction costs (90% in the
decade) and spreads (over 75% in the last five years) and an increase in the market depth.

 CHART 1

                   U.S. Treasury Bonds - Daily Volume x Outstanding Stock*
        Stock                                                                                          Volume
      (US$ trillion)                                                                                 (US$ billion)
        5,0                                                                                                  600

        4,0                                                                                                  500

                                                                                                             400
        3,0
                                                                                                             300
        2,0
                                                                                                             200
        1,0                                                                                                  100

        0,0                                                                                                  0
                  2000         2001          2002          2003          2004         2005        2006*


                                               Stock                Volume

     * Up to June. Source: TBMA - The Bond Market Association. Preparation: ANDIMA.




    Trades that require specification of amounts or terms of settlement still benefit from
the presence of the traditional dealer, backed up by voice systems that increase telephone
trading, but out-perform platforms when it is a question of dealing with complex informa-
tion, illiquid assets and non-standard instruments. In the off-the-run segment, as well as in

11 Fed Working Paper 2006-012B, Research Division – Bruce Mizrach and Christopher Neely “The Transition to Electronic
Communications Network in the Secondary Treasury Market” – revised April 2006.
International market - data and characteristics                                                                               2


 CHART 2

                                           U.S. Treasury Bond Holders
       51,0%




                       17,3%



                                    7,1%
                                                5,9%           5,9%          5,2%
                                                                                          4,0%
                                                                                                                    2,5%
                                                                                                       1,1%

    Non-residents      Monetary    Pensions   Investment     Individuals    State and    Insurance    Financials    Others
   and international   Authority    funds     funds/trusts                  municipal    companies   institutions
      organisms                                                            governments

  Source: TBMA - The Bond Market Association. Preparation: ANDIMA.



primary market trading (including prior to auctions12), although operations exhibit lower
volumes, they are predominantly carried out by means of voice systems made available
by brokers.
     One of the report’s conclusions is that the introduction of electronic systems has fa-
cilitated portfolio management and information consolidation in the more liquid on-the-run
segment, attracting new investors, including of retail investors. On the other hand, the report
confirms the high concentration of specialized institutions operating in this market. The
major electronic trading platforms (or ECN – Electronic Communications Networks), Bro-
kerTec and eSpeed, which account for 61% and 39%, respectively, of the on-the-run market
are controlled by the same dealers that have the largest share of the off-the-run segment
(ICAP and Cantor). These brokers also trade other fixed income market-related instruments,
by means of voice or electronic systems.
     The gradual, but intensive move, towards electronic trading in the most liquid treasur-
ies segments had already been preceded by the recording and consolidation of informa-
tion regarding the market prices of American government bonds, which was initiated by
GovPX13.

12 Operations known as when-if-issued, in Brazil, they are equivalent to forward operation using a bond offer in auction.
13 GovPx was the first consolidated system for reporting debt bond prices in the USA. Result of demands by the SEC – Secu-
rities and Exchange Commission and treasuries market dealers for greater transparency, the system was created in 1991 by an
Inter dealer brokers group to provide real time information on prices and traded volumes of these securities. Information is made
available over the internet and distributed by vendors. In January 2005, ICAP Plc acquired GovPX Inc., but the system keeps
operating as a separate company.
2                                                                                   OTC fixed income market in Brazil



    Expanding this experience, the SEC – Securities and Exchange Commission – and Nasd -
National Association of Securities Dealers designed Trace – Trade Reporting and Compli-
ance Engine, making it compulsory to record in this system each and every trade made on
the over-the-counter market with corporate securities in the USA. The implementation of
the system followed a cautious strategy to measure the impact of information availability
on illiquid segments. Initially, only investment grade securities and trades over and above
a certain given value had their prices and amounts reported in a timely fashion (in real
time, in relation to executed trades). Other segments were organized in order of their re-
spective liquidity, with increasing lags in relation to the availability of information. This
process was begun in 2002 with the last group of securities shifting to real-time reporting14
in 2005.
    Among the impacts of the implementation of Trace, we can mention the reduction in
transaction costs – with no significant effects on liquidity -, resulting from the reporting
in a consolidated environment, of executed prices, on a trade by trade basis, most of them
in real time. According to initial estimates, in addition to benefiting both large and small
investors, the transparency achieved provided the segment’s regulators with new tools. Not-
withstanding this, the specific characteristics related to liquidity distribution in the segment
were maintained, with only 5% out of the 29 thousand (corporate) security issues that are
subject to recording in Trace being traded five times or more a day. Out of this total, 4,700
(or 16.2%) exhibit at least one trade a day, with less than half (46%) being traded at least
once a month.
    Two observations are further drawn from the first official system assessments. The first
one concerns growing transparency ensured by information, without necessarily having
changes to segment structure – forcing it, for example, to resemble the stock market. Ac-
cording to the SEC, “transparency changes the market structure because it results in subse-
quent market initiatives”. As far as investor education is concerned, the finding is that by
adopting auxiliary electronic tools to traditional supervising can improve regulation, but it
should not replace prudential regulation, such as protection from bankruptcy and reporting
of information on issuers15.




14 For a more detailed description of the Trace experience, see Edwards, Amy extracted from BIS Paper No. 26/2005 – US SEC
Corporate bond market microstructure and transparency – the US experience and the following Box.
15 See reference in the preceding note.
International market - data and characteristics                                                                                         2


 BOX 1

            The Trace Experience – Trade Reporting and Compliance Engine
 • Compulsory recording and reporting system of prices used in trades executed in the over-the-
 counter market, involving US corporate securities, taking into account the exceptions.
 • Information is reported in real time to Nasd affiliated institutions and information providers and with a
 lag time of at least four hours to the general public. Retail investors have access to information on retail
 operations and with investment grade bonds, as well as to selected databases and other information with
 a lag time of at least 1/2 hour, on the Nasd website (www.nasd.com) or www.investinginbonds.com.
 • Introduced in July 2002 by Nasd – National Association of Securities Dealers, at the request of the
 SEC - Securities Exchange Commission, it was implemented in phases:
 - Regarding to register within the system: it was originally 75 minutes, dropping to 45 minutes, then
 to 30, and is now at 15;
 - With regards securities subject to enforcement and the reporting deadline: the sample of securities
 whose operations must be informed was gradually being extended, starting with investment grade
 securities with issues exceeding US$ 1 billion (50% of total) and selected high yield securities and
 going on to encompass securities with different ratings, issue size and trading frequency;
 - Due to liquidity concerns, up to Feb. 2005, infrequently traded high value operations with low rating
 securities and reduced liquidity (trades over US$ 1 million with BB securities (or less) and BBB securi-
 ties (or less) in the period immediately after their issuance) were not informed, which went on to be
 reported with a decreasing time lag.
 • Securities universe:
 - In the first year of their implementation (2002), prices for 500 securities were reported. In April 2003,
 this figure increased to 4,600 and then to 17,000 in October 2004;
 - In 2005 this total was to reach 29,000, corresponding to 99% of the universe of corporate securities
 traded in the USA.
 • About current exceptions:
 - Operations with asset backed securities and commercial papers are not reported; trades backed by Rule
 144-A (private placements for qualified investors – QIB Qualified Institutional Buyers) must be reported,
 but not disclosed;
 - After market trades with BBB rating (or less) securities and of a high value with less active high yield
 securities are reported with up to a ten day lag time. The traded amount is “truncated” at US$ 1 million (or
 more) for high yield securities and at US$ 5 million (or more) for investment grade securities.
 • Main effects of the introduction of Trace based on studies (2003 through 2005):
 - Transaction cost reduction, both for institutional and retail investors, and in spreads;
 - High participation of retail investors in the number of performed operations in the segment*;
 - Greater information available to relevant Authorities of the segment;
 - Conclusions on impacts in liquidity provision of institutions operating in the segment are not defini-
 tive;
 - Gradual implementation:
 - There was no negative effect of transparency on executed trades, neither was there a negative ef-
 fect in segments with a low number of transactions; traded volume did not increase either;
 - a drop in spreads was also seen, to a lesser degree, relative to those securities of the segment not
 reported to Trace.
* 2003/2004 Trace data show that while the average operation size is 788 securities, the median is 32, in other words, most trades involve
small batches [commoditized trade size]; reported inter dealer trades were less than one half of the records. In a study by the Bond Market
Association for 2005 surveying the electronic trading system it was found that transactions of amounts below US$ 100 million accounted
for 65% of performed total, though they corresponded to just 1.8 % of their value. Source: European Pricing Sources and Services –
TBMA, April 2005, NASD; Edwards, Amy – SEC, 2006; CEPR (ICMA & Others) European Corporate Bond Markets – May 2006.
2                                                                                      OTC fixed income market in Brazil



    The debate in Europe
    In Europe, taking into account the differences between the various countries, Eurobonds, -
for regulatory and fiscal reasons, are listed on the Stock Exchange, but most operations
are carried out by financial institutions (dealers) who trade directly with clients using elec-
tronic platforms. Governments bonds also exhibit the same characteristics, with a high par-
ticipation of electronic over-the-counter trading systems (70%) and of institutional clients
(60%). With regard to the distribution trades, a survey conducted on a random day showed
that, out of 40 thousand fixed-income securities which are registered with TRAX16, 85%
were not traded and, out of 15% that registered trades, less than one half showed more than
two trades17.
    In this case, the focus on transparency has been strengthened with the debated on im-
plementation, in the European Union,
of a new guidance for the financial             TABLE 3

market: MiFiD18, predicted to become                    Distribution of Corporate Bond
                                                       Trading in the European Market*
mandatory in April 2007. The measure
                                                  No. of Trades on a            No. of Traded Maturities
sets a series of requirements oriented                Random Day                  in Frequency Interval
toward reporting prices on stock mar-                      00+                                1
kets, such as disclosing prior and ac-                  300-399                                2
tual information on trades as timely as                 200-299                                
possible in relation to their proposition               100-199                                
or execution, ensuring broad access                       50-99                               2
conditions and data availability. In the                  10-49                              
guiding text, the European Commis-                          4-9                             1.197
sion predicts that: at the discretion of                    2-3                             1.713

the UE member State, such measures                           1                              1.891

may be extended to fixed income mar-                 Total maturities                       5.273
                                                 * TRAX database data, excluding domestic governmental securi-
ket, which is already being studied in           ties and related repo operations, and taking as basis a typical
                                                 June 2005 day. Extracted from FSA – “Trading Transparency in
Italy and Germany, possibly for already          the UK Secondary bond Markets”.

anticipated reasons. Such possibility,           - Discussion Paper No. 05/5, page 16, September 2005.



16 TRAX – Trade Matching and Reporting System. Initiative of ICMA – International Capital Markets Association, self-regula-
tory European market entity, is a quote and operation recording system, used by several institutions in the United Kingdom and
the European Union.
17 Extracted from FSA Discussion Paper No. 5/05 – Financial Services Authority: Trading Transparency in the UK Secondary
Bond Markets, November 2005.
18 The EU Directive on Markets in Financial Instruments (NiFID) was published on April 20, 2004 by the European Com-
mission.
International market - data and characteristics                                                                              2



however, has brought about detailed assessments on transparency conditions and liquidity
in this market19.

    The discussion in emerging economies
    Concurrently with the literature on transparency, and largely due to the examination of the
points in common in relation to the consolidated corporate securities market given in the report
by IOSCO (International Organization of Securities Commissions), the debate spread beyond
the European and US borders, reaching the emerging economies, whose liquidity conditions
are, in general terms very different. The main points at issue are the considerable growth ob-
served in the bond markets of these economies since 1990s and the fact that this expansion has
not been accompanied by a comparable increase in liquidity.
    Recent data published by the BIS20 (Bank for International Settlements) shows that do-
mestic debt in the Asian economies has raised from 20% of GDP in 1997 to 40% in 2005. In
Latin America, there was a marked trend towards replacing external debt by domestic debt
denominated in local currency: in the continent’s seven largest economies, issues of non-fi-
nancial public and corporate bonds in local currency, increased by 337% between the end of
1995 and 2005, rising to a total sum of US$ 899 billion, which is equal to 40% of the combined
GDP of these countries. According to Knight (2006), bond issues of foreign debt by these same
borrowers rose by a mere 65% during the same period, registering a figure of US$ 264 billion,
which meant that funding in domestic currency became the predominant format in both the
public as well as and private sector.
     This change is due, among other factors, to the strong demand by global investors for debt
issued by the emerging economies – which is not restricted to dollar denominated debt – and to
the efforts made by the local authorities themselves to encourage this trend. Taking advantage
of improvements in the macroeconomic fundamentals, a number of countries have begun to
enjoy the benefits resulting from a consolidation of their domestic bond market. In the Asian
case, this fact made it possible for governments to raise funds for the purpose of financing their
deficits, and restructuring their financial systems, following the crisis that occurred in the late
1990s. In Latin America, this was helped by the decentralization of banking activity risks and


19 More recent studies can be found in the BMA Europe websites; FSA (original and recent versions), in the United Kingdom,
and ICMA. See complete references in the Bibliography. Studies attest to the existence of high pre-trade transparency in the Eu-
ropean market and the growing presence of electronic platforms (with emphasis on Euro NTS, in the government segment) and
information disclosure systems, which, though decentralized, have been expanded.
20 References on Asian economies were extracted from Knight (2006), Promoting Liquidity in Domestic Bond Markets, and
regarding the Latin American economies from Tovar and Jeaunneau (2006) Domestic Bond Markets in Latin America: achieve-
ments and challenges. The analysis also used quotations that were common to both texts.
2                                                                   OTC fixed income market in Brazil



the formation of a cost of money curve for the various maturities. In both cases, this led to an
increase in the number of instruments available for the carrying out of monetary policy and
helped bring about a decrease in the level of FX exposure.
     From the figures collected by the BIS, it is also possible to confirm that there has been a
decrease in the correlation between the profitability levels of the bonds issued by these coun-
tries, and between these and those of the developed countries’, showing that internal factors
have been assuming a more important role in the formation of the interest rates practiced in
these economies. Nevertheless, low liquidity in these markets represents an obstacle to the as-
similation of the positive consequences resulting from this process. As has already been noted,
since in illiquid markets one cannot ensure that the reorganization of the portfolios occurs at
the lowest possible costs, investors tend to charge a premium for this gap, which increases the
cost of funding for local governments and private agents.
     Based on the characteristics which are utilized to assess liquidity – the depth, base and
profile of investors, the spreads practiced and the size of the market -, virtually all indicators
reflect the relative lack of liquidity in these countries. According to the BIS, while the annual
turnover/stock ratio in the USA is close to 22, in Korea it is 15, in Indonesia 0.5, in Mexico 5,
in Venezuela 0,4, and in Brazil about 2. The spreads between the purchase and selling prices
vary from 3 to 5 basis points in Mexico and Colombia, 7 in Indonesia, and from 10 to 20 in
Peru, while on average in the USA and Germany they stand at around 1.
     In terms of common factors, it is also worth mentioning a narrow investor base and the
prevalence of buy and hold type strategies among the most active agents – in Asia, for ex-
ample, 50% of the debt is held by banks exhibiting this profile. On the supply side, the issue
amounts and average trade values are also lower.
     There are other factors that influence this scenario, and which in emerging countries
may take on a greater importance than usual, generally related to market micro structure
and to macroeconomic and institutional factors. With regard to these last items, Knight
lists for the case of the Asian markets, the main conditions for a favorable handling of
economic policy – including control of government spending, of the fiscal result and the
tax system – as well as the monetary policy objectives, with a focus on factors such as the
full convertibility of the local currency. Among the suggestions that could be adopted in
order to achieve an expansion of liquidity in these markets, the following items are con-
sidered; the consolidation of various types of government debts into a single debtor; the
concentration of bond maturities, the encouraging of short selling operations– assuming
short positions in the spot market; and using securities with high values as guarantees in
loan operations, including repo operations.
International market - data and characteristics                                                                                    2


                                                                                  Considering market profitability only
    Still based on the Asian experience, Knight exemplifies the weight of these factors in fund
allocation in these economies: in a pan-Asian fund21, the distribution of the portfolio by assets,
                                                                                  China
which, purely based on profitability, would consist for the most part of securities from the Ko-
                                                      Korea

rean and Chinese markets, allocates relevant fractions to securities from the Hong Kong and
Singapore markets, due to the better conditions in terms of liquidity, market opening, taxation
and hedge, as well as the clearing and settlement structure (see graph).       Hong Kong
 CHART                                                                                                Singapore
                                                                                      Others**
                         Market Weights for the Pan-Asian Securities Fund
               Considering market profitability only                             Considering market-related factors*

                                                                                                        China
                                                                                  Korea

       Korea                                  China
                                                                                                                   Hong Kong




                                          Hong Kong
                                                                              Others**                          Singapore
                   Others**         Singapore


  * They refer to four factors making up the “market opening” concept: capital controls, taxing at the source, hedge instruments
  and clearingConsidering market-related factors*
                and settlement structure. ** Consisting of Indonesia, Malaysia, the Philippines and Thailand.
  Extracted from: Knight, Malcolm “Promoting Liquidity in Domestic Bond Markets – BIS, May 2006.
                                    China
               Korea
    The recent situation in Latin America
    Specifically with regard to Latin America, it should be noted that, though they exhibit very
                                     Hong Kong

distinct conditions, the local markets exhibit similarities, such as a history of macroeconomic
instability, institutional or regulatory controls that are inadequate for the regular development
of bond markets and the absence of any solid, diversified investor base. As described in Jean-
         Others**                 Singapore
neau and Tovar (2006), these factors led to debt structures that were concentrated in the short
terms and/or dollar-pegged that went hand in hand with the subsequent financial crises that
occurred in the 90s and at the start of the following decade.
    The significant growth of the local currency bond markets in the last few years – which
was also made possible by the stability of macroeconomic policy and the favorable foreign
context -, was in addition to movements such as the strengthening of institutional investors,
the reduction of foreign capital controls and the efforts made by the authorities to reduce the
FX exposure of the debt – and, as a balancing item, an increase in the degree of predictability

21 Information extracted from the report of The Asian Bond Fund 2 initiative, a regional fund set up by 11 Monetary Authorities of
the EMEAP – Executive Meeting of the East Asia and Pacific group 1 initiative, oriented toward investing in eight exclusive regio-
nal markets and a diversified Pan-Asian portfolio, also consisting of local currency securities of eight countries, in conjunction.
0                                                                                            OTC fixed income market in Brazil



and transparency associated with its management. However, the profiles of the debt and low
liquidity of their secondary markets still represents an obstacle to the consolidation of this seg-
ment on the continent. Among the most significant characteristics in relation to the bloc’s bond
markets that were pointed out (see box), are the differences between the countries: Brazil is
an exception in terms of the size of its market and in relation to its derivatives market, where
it exhibits differences to the other countries, followed by Mexico, but it shows much lower
liquidity indices in its secondary market, with the result that its turnover/stock ratio, is lower
than that registered by economies whose market debt is smaller, in absolute terms.
    Also in relation to the recent processes in Latin America, factors were identified that tend
to contribute to a continuation of the advances observed so far, such as the growing integration

 BOX 2

                      Main Recent Features of Latin American Bond Markets
     1     Domestic debt markets vary widely in size
           - Brazil has the largest stock in absolute terms and in GDP percentage.
           - Mexico holds second place in absolute values, but Argentina, Chile and Colombia have better
           positions in GDP %.
     2     Public sector issuers dominate domestic securities markets
           - Corporate markets are less developed (they reach 40-50% of the government securities
           market in Chile and Peru)
           - An expansion of securitization in the region is being experienced.
          Short-term, floating rate and inflation-indexed securities continue to account for the
           largest share of the stock of domestic government securities
           - A change in the profile of the government is apparent, with a drop in the share of securities
           indexed to foreign exchange, with the exception of Argentina and Venezuela.
           - Fixed rate securities have increased in several countries.
          Gradual increase in the maturity of government debt in local currency
           - The lengthening of the terms of fixed rate security issuances, also relying on local currency
           issuing overseas.
            - Securities with longer-term have been contributing to a better use of the forward interest rate
           structure.
          Secondary market trading in domestic bonds has expanded in recent years, but it re-
           mains low relative to more mature markets
           - Indicators vary among countries: annual volume is five times the stock in Mexico, and re-
           mains below the unit in other cases, on average it is equivalent to 1.6*.
           - Low liquidity affects market efficiency: spreads are higher comparatively to USA, Europe and
           Asia markets.
          No actively traded derivative contracts on government bond benchmarks
           - Operations with short-term interest rate agreements and swaps are have been rapidly devel-
           oping in some countries.
           - They have contributed to the increase in the volume of trading on the stock exchange.
     * In Brazil, considering only extra-group operations with government bonds (and excluding repo operations) the traded volume/
     turnover ratio in 2005 was 2.024 (Source: ANDIMA). Source: Jeanneau, Serge & Tovar, Camilo E. – Domestic Bond Markets in
     Latin America: achievements and challenges, NIS Quarterly Review, June 2006. Prepared by: ANDIMA.
International market - data and characteristics                                                   1



of markets, the introduction of electronic trading processes and the lower correlation of the
return on investments vis-à-vis the more developed economies, in addition to a healthy port-
folio diversification process. However, analysis carried out by BIS, notes that notwithstanding
despite these advances and the undeniable reduction in foreign vulnerability that has recently
been achieved, there are still limitations to be overcome. The most significant ones are the
high refinancing risk, which is still associated by domestic investors with securities that do not
fit into a short-term public floating rate profile, making it harder to consolidate private debt
markets, together with the previously mentioned restricted liquidity conditions and expansion
of the investor base.
     Therefore regarding the inclusion of the Brazilian fixed-income market into the recent
debate over the change in the debt markets, it is not enough to simply look for factors that help
increase its transparency, particularly in relation to the possibilities for transformation that
arise in relation to trades carried out in the over the counter market. It is also necessary to iden-
tify determining factors and actions that alter their liquidity conditions. In addition to making
it harder to increase transparency, for macroeconomic and institutional reasons, restricted li-
quidity in emerging markets requires the authorities and market players to take action so that
it does not become a restricting factor on the expansion cycles of these markets.
                                           4
2                                                                        OTC fixed income market in Brazil




       domEStic maRkEt: hiStoRy,
       configuRation and figuRES;
     REgulation and SElf-REgulation
     Main characteristics
     Domestic federal public debt bonds are the predominant asset in the Brazilian fixed-income
market. Totaling R$ 1 trillion (which is equal to US$ 545 billion), the country’s stock of public
debt is three times greater than the total amount in Mexico and more than four times the size of
the combined debts of Argentina, Chile and Colombia. For purposes of comparison in the do-
mestic market, the main non-bank private debt security stock – debentures – currently stands
at a figure of R$ 95 billion, or
                                      CHART 
one tenth of public debt, while
                                        Composition of the Brazilian Financial Market
the main instruments issued                                 R$ billion - June/2006
by the banks, such as CDBs                                            Corporate
                                                                      Securities       Financial
and DIs show figures of R$             Derivatives                     R$ 111        Instruments
                                                                                        R$ 532
                                         R$ 1.413                         3%
330 billion and R$ 189 bil-                33%
                                                                                         12%

lion, respectively.                                                                               Federal
                                                                                                   Public
     As is the case in other                                                                       Bonds
                                                                                                  R$ 1.016
emerging economies, the                                                                             23%

level of liquidity in the Bra-
zilian secondary fixed-income
                                                            Equities
market is sharply reduced.                                  R$ 1.284
                                                               29%
The volume of trading in the
                                        Sources: Brazilian Central Bank, BM&F, Bovespa and CETIP.
public debt segment came to             Preparation: ANDIMA.
Domestic market: history, conformation and data; regulation and self-regulation                                             



a total of R$ 40 trillion in 2005, with repo operations accounting for 91% of this amount. In
yearly terms, the turnover in extra-group delivery operations is equal to twice the outstanding
stock –, and therefore lower than the, figures observed in developed economies and a number
of emerging countries. Nevertheless, in relative terms, government debt is the most liquid seg-
ment, while debentures exhibit a volume of trading corresponding to 0.23 of the market total.
     Despite the significant recent advances made, macroeconomic history is the most impor-
tant factor in the formation of the highly concentrated, short-term profile of the debt market. A
significant portion of the outstanding public debt is still composed of very short-term SELIC
Rate-pegged securities (LFT) and is obtained based on the average rates of one-day repo oper-
ations carried out executed between financial institutions. The high profitability and extremely
low risk of these bonds reduces the attractiveness of fixed rate or inflation linked bonds and
encourages hedging strategies aimed at reproducing these conditions in future settlement mar-
kets. The significant share of total public debt that LFTs (Treasury Financial Bills) account for,
as well as the high percentage (over 80%) of DI Rate-adjusted debentures are the other side of
the high demand for investments in so-called DI funds, at the expense of options that combine
a higher profitability with a certain degree of risk. Other institutional factors – mainly taxa-
tion-related ones– help produce a reduced mobility between investment options, strengthening
investor performance by means of buy and hold type strategies.
     Regarding the microstructure factors that affect the liquidity and transparency of the sec-
ondary fixed-income market, the particularly favorable conditions provided by the existing
settlement and custody structure, together with the sophistication of the derivatives market,
will be explained in detail further ahead.
 TABLE 4

                                      Fixed-Income Market - R$ million
                   Corporate Securities                  IF Securities/Financ. Inst.                DPMF                In GDP
   Year                                                                                                       Total
              Debentures Others         Total       CDB          DI         Others    Total         Bonds                 %**

   2000          26,333      6,492      32,825      44,797      47,399 14,212        106,408        510,698   649,931     59.0
   2001          37,892      3,405      41,297      62,945      43,950 11,878        118,773        624,084   784,154     65.4
   2002          46,149      6,752      52,901      83,858      55,821 10,709        150,388        623,190   826,479     61.4
   200          42,744      4,173      46,917 154,865          74,065 12,162        241,092        731,426 1,019,435     65.5
   200          44,109      7,040      51,149 129,256        108,232 12,558         250,046        810,264 1,111,460     62.9
   200          85,007     14,966      99,973 286,529        177,002        9,735   473,265        979,662 1,552,901     80.1
   200*         95,277     15,485     110,762 334,530        189,533        7,985   532.048 1,016,100 1,658,910          82.6
 In GDP %             4.7       0.8         5.5       16.7            9.4      0.4      26.5           50.6      82.6
% Particip.           5,7       0,9         6,7       20,2         11,4        0,5      32,1           61,3     100,0
  * Position in June 2006. ** GDP of last 12 months (Sources: Note to Fiscal Political Press/BC).
  Sources: Central Bank and CETIP. Preparation: ANDIMA.
                                                                                           OTC fixed income market in Brazil


 TABLE 5

                Characteristics of Main Fixed-Income Bonds and Securities
                                                                                                      Average            Stock
        Assets                Remuneration                        Characteristics                      Term             in % of
                                                                                                     (months)            GDP*
     Federal Public                                              Compounded rates                     29.22**            50.6**
        Bonds                                                       for 252 b.d.
          LTN                    Fixed Rate                             No strip                        9.37              15.1
        NTN-F                    Fixed Rate                     With half-yearly strip                 36.94              0.8
          LFT             SELIC Rate (floating)                         No strip                       19.60              21.4
        NTN-B                IPCA Price Index                   With half-yearly strip                 57.47              7.1
        NTN-C               IGP-M Price Index                   With half-yearly strip                 78.51              3.2
        NTN-D                 Exchange Rate                  Linear rates for 360 w.d.                  9.24              0.2
                                                               with half-yearly strip


         CDB                  DI Rate (90%)                    May foresee advance                       NA               16.7
                            Fixed Rate (6%),                 redemption; repurchase;
                           TJLP, TR and IGP-M                 different remuneration
                                                                 according to term
      Debentures           DI Rate (88%), Price           May foresee periodic interest             9.75 years            4.7
                          Index (9%), Exchange             payments, amortizations,
                           Rate (2%) and TJLP                      repricing
 * Position in June 2006. ** GDP of last 12 months (Sources: Note to Fiscal Press/BC). ** Refer to total federal public bonds and
 not only to bonds listed in the table. Sources: Central Bank, CETIP and SND. Preparation: ANDIMA.




    On the other hand, markets such as the securities lending one and spot market strategies
such as short operations are still very much at the early stages in the fixed-income segment,
though they exhibit a significant growth in stocks. With regard to the investor base, the main
holders of public debt and debentures are the investment funds and the banks’ own portfolios
(see graph on the next page).
    In the case of investment funds, which carry roughly 50% of the stock, the substantial
demand for DI-referenced portfolios favors the acquisition of securities that exhibit this
profile – LFT (on a greater scale) or debentures, -, or even the search for hedge, in very
liquid future settlement markets, in order to match fixed rate asset profitability to this spe-
cific rate. It should be observed that the prevailing management strategy in these funds’
portfolios is fully compatible with the acquisition of securities held to maturity, which
offer little risk, and, therefore, hardly make any contribution whatsoever to the liquidity
of the secondary market.
Domestic market: history, conformation and data; regulation and self-regulation                                              


 CHART 

                     Main Holders of Federal Government Bond Debt* **
           49,7%




                                   31,7%




                                                            11,1%
                                                                                      6,4%
                                                                                                               1,1%

    Investment Funds           Banks Portfolio          Bonds and           Individual + Non-financial        Others
                                                     Mandatory Deposits            Legal Entity

  * Position in August 2006. ** Interest in Closed Private Pension Entities: 15.32%, being 11.46% through investment funds and
  3.86% in Non-Financial Legal Entity according to Pension Funds Secretariat estimate. Source: Brazilian Central Bank. Prepara-
  tion: ANDIMA.



     Brief history
     As observed, the secondary fixed-income market in Brazil shows a low trading volume,
including as far as public bonds are concerned, which are generally characterized by a sub-
stantial degree of liquidity and function as benchmarks for private sector operations. Nor do
these bonds represent a significant portion of the fixed-income debt universe, which is directly
reflected in the liquidity of the secondary market. Inflationary memory and the history of fis-
cal policy leniency are partly responsible for this configuration. LFTs, with a reduced level
of market risk, were created in a context where indexed currency protected a number of the
market players who had access to the financial markets.
     The prolonged co-existence with high levels of inflation also gave rise to specific charac-
teristics in this segment: the registration and settlement systems were structured in such a way
as to promote short settlement cycles (d0 or d+1) and enable the recording of the strategies
that had already been adopted in the market, such as repurchase and resale, forward and inter-
mediation operations. The registration of operations executed in the over the counter market
by institutions’ own portfolios and by institutional investors has been mandatory for more than
a decade, along with the individualization of these agents’ custody accounts in depositories.
Also for reasons related to the indexation structure, the futures markets became sophisticated,
and a diversified composition of hedge contracts for use with debt bonds, although with a sig-
nificant wide advantage for floating rate ones.
     After more than ten years of price stabilization, it would be logical to assume that in-
vestors would feel more attracted to securities, whose market risk could guarantee a better
                                                                                           OTC fixed income market in Brazil



perception of the risk/return ratio. However, the recent monetary stabilization has not been
accompanied by a marked reduction in the volatility of the economy’s basic prices – interest
rates and FX rates -, which operated alternatively, at different times, as the anchors of the
process, which led to shocks in these two variables during the period. This characteristic
kept investors risk-averse, preventing the allocation of funds in longer term securities. On
top of this there is the fact that Brazil’s yield curve has exhibited a continuous downward
slope for prolonged periods.
     Apart from the problems in relation to the handling of monetary policy, which resulted
in the overexposure of issuers to market risk, it is also worth highlighting the narrow investor
base as a factor restricting the volume of trading on the secondary market. The fiscal discour-
agement of timely changes strategies in positions drove away a significant percentage of the
potential creditors who, for individual motivations and expertise, might distribute the percep-
tion of risk and reduce the asymmetry of information in price-setting. Examples of this were
the obstacles to the entry of foreign investors in the fixed-income segment and the excessive
taxation on financial transactions, in addition to other significant institutional factors.
 CHART 

                       Average Daily Volume* x Stock of Federal Public Debt
      Stock                                                                    Volume
     (R$ trillion)                                                            (R$ billion)

      1,00                                                                          9,00
      0,90                                                                          8,00
      0,80                                                                          7,00
      0,70
                                                                                    6,00               Stock
      0,60
                                                                                    5,00
      0,50                                                                                             Average Daily
                                                                                    4,00               Traded Volume
      0,40
                                                                                    3,00
      0,30
      0,20                                                                          2,00

      0,10                                                                          1,00
       -                                                                            -
                     2003           2004             2005            2006*

     * Considering only extra-group for delivery operations. Source: Demab/BC. Preparation: ANDIMA.



    Over the course of the last few years, the administrations of public debt and monetary
policy have been converging upon international standards. The reduction of the public sector
deficit, the concentration of maturity, with the decrease in the number of issues that compete
with one another, the drastic drop in the level of dollar-denominated debt, and construction
of a fixed rate interest curve indexed to the IPCA – Extended Consumer Price Index have
Domestic market: history, conformation and data; regulation and self-regulation                                           



leveraged secondary operations in public bonds, widening the degree of market information
regarding inflationary lack of control risks and interest rate flow path. This initial movement is
already being felt in trading records and in the stock composition.


 CHART 

          Composition of the Federal Public Bond Debt by Type of Profitability
         R$ trillion
    1,20


    1,00


    0,80


    0,60


    0,40


    0,20


     -
                 Dez    Jun   Dez   Jun    Dez       Jun        Dez   Jun     Dez       Jun       Dez   Jun   Dez   Jun
                  99     00    00    01     01        02         02    03      03        04        04    05    05    06

                                     SELIC Rate            Foreign Exchange           All Other
                                     (floating)

  Source: Brazilian Central Bank. Preparation: ANDIMA.



 CHART 

                        Maturity Structure of Outstanding Government Bonds
          R$ trillion
    1,20


    1,00


    0,80


    0,60


    0,40


    0,20


     -
                Dec     Jun   Dec   Jun   Dec       Jun      Dec      Jun     Dec       Jun   Dec       Jun   Dec   Jun
                 99      00    00    01    01        02       02       03      03        04    04        05    05    06

                                                 Up to 1 year         All Other Maturities


  Source: Brazilian Central Bank. Preparation: ANDIMA.
                                                                                    OTC fixed income market in Brazil



     The first measures designed to promote liquidity
     As has been stated in the international literature, the consolidation of local currency bond
markets is not an overnight process, especially in emerging countries, where cultural issues
and periods of turbulence generate backward steps and uncertainties about its materialization.
In Brazil, the adoption of the inflation target system and complying with fiscal surplus targets
have certainly increased the perception among market players of stability and transparency in
relation to the use of monetary policy instruments.
     The adoption of measures specifically directed towards the expansion of liquidity in the
bond market is, therefore, relatively recent and, as mentioned, has been marked by periods
of advances and retreats, in accordance with the volatility of the domestic economy and the
reaction of the local market to foreign crises. The first measures formally announced by the
National Treasury in connection with this topic date back to late 1999. They were assembled
in a package of 21 measures, products and projects which ranged all the way from basic points
covered treated in the international prescription – such as the concentration of bond maturi-
ties and the increase in the amount of information made available by market entities and the
issuer – up to specific determining factors related to the imperfections that were present at that
time in the Brazilian experience, such as the absence of forward operation registration and the
reduced leverage limit of institutions.
 BOX 3

                    Follow-up of the 21 Measures Proposed by the
              National Treasury/Brazilian Central Bank in 1999 in order to
              Expand Primary and Secondary Public Dept Market Liquidity
 Measures/Products/Projects                               Remarks
     Implemented
 1. A reduction in the number of outstanding public       The number of maturities was reduced from 260 in late 1999
 bond maturities, greater concentration of matu-          to 99 in August 2006. LTNs present maturities concentrated
 rity of securities with fixed rate profitability and a   in the beginning of each quarter (Jan, Apr. Jul, Oct), semes-
 reduction in public bid frequency.                       ter or year. Regular security auctions were organized weekly
                                                          by type of auction and offered security, but formal offers still
                                                          exist in high numbers and several modalities.
 2. Prior disclosure, by the NT, of security issuing      Monthly, the National Treasury reports the month’s security
 schedules to be placed by public auctions.               issuing schedule through a Treasury Communication.
 3. The National Treasury holds regular, predefined       These have been held with relative regularity since Nov/99
 public bond purchasing auctions.                         (with exception of the period of Mar/01 to Sep/03). The
                                                          Treasury holds LTN purchasing auctions periodically, in gen-
                                                          eral aimed at decentralizing maturation in order to reduce
                                                          financing risks, through public offers. NTN-F (public offers)
                                                          and NTN-B (dealers only) purchasing auctions are also held
                                                          in order to increase the liquidity of these bonds.
                                                                                                          To be continued
Domestic market: history, conformation and data; regulation and self-regulation                                             


Continued
                      Follow-up of 21 Measures Proposed by the
              National Treasury/Brazilian Central Bank in 1999 in order to
              Expand Primary and Secondary Public Dept Market Liquidity
 4. Daily report by ANDIMA of outstanding fixed rate        ANDIMA started reporting indicative prices for these securi-
 and exchange rate bonds.                                   ties and LFT in 2000, subsequently expanding the sample to
                                                            inflation pegged bonds, hedged LTN and NTN-F.
 5. Development of a system to register at SELIC            This was implemented in the SELIC system in Feb/2000
 forward operations with government bonds.                  (Comm. No. 7282). Current Regulation is given by Circular
                                                            Letter No. 3159/05.
 6. The leveraging limit on operations with govern-         This was implemented with two significant reformulations
 ment bonds made flexible.                                  in repo operation’s legislation, occurred in 2002 (Res. No.
                                                            2950) and 2006 (Res. No. 3339).
 7. Alteration in the selection process of the Central      Several alterations were made to this regulation in order
 Bank dealers in order to boost their capability of         to strengthen: rights and obligations of these agents in the
 being market makers.                                       open market; diffusion provided by their performance and
                                                            their participation in primary and for delivery operations. The
                                                            function of specialist dealer and the possibility of non-bank-
                                                            ing institutions participating in the group were also created
                                                            (See Regulatory Act-Set No. 7 and 8/06).
 8. Periodic Central Bank and National Treasury             The Authorities have been promoting regular meetings with
 meetings with dealers, rating agencies, end custo-         several representative groups of the segments of the finan-
 mers and class associations.                               cial market, including videoconferencing.
 9. Periodic release of a Note to the Press, contain-       The Open Market Report was created in November 1999
 ing information and comments about the govern-             and has been published on a monthly basis since then.
 ment bond market and liquidity conditions.
 In implementation/partial implementation
 10. Allowing separate trading of the principal and         This was regulated and made operable within the system,
 of the strips of exchange securities with term under       even for other securities not pegged to foreign exchange.
 5 years.                                                   The functionality, however, has not been used by the market.
 11. The launch of securities at SELIC, with D+1            This never got implemented, mainly due to the restructuring
 settlement.                                                of the SPB (Brazilian Payment System), which changed the
                                                            concept of the SELIC system to RTGS, but a when-if-issued
                                                            settlement modality was created in this System.
 12. Stimulation to increase transparency in trading        Two electronic platforms were structured that allow for the
 government bonds on the secondary market, by,              quoting and trading of securities registered in the SELIC
 for example, using electronic systems.                     system (Sisbex and CetipNet) and several measures were
                                                            adopted in order to increase the reporting of information on
                                                            these trades (see text referring to the recent period).
 13. Facilities for financial institutions to short posi-   The possibility of assuming short positions is provided for in
 tions.                                                     current legislation of repo operations (Res. No. 3339, article
                                                            4), since 2005, Operations, however, are seldom performed.
 14.Fixed rate bond go-arounds with reverse repo            The Central Bank has been performing go-arounds of fixed
 for dealer institutions to cover short positions.          rate securities with 3 to 5 month terms, in the form of sale
                                                            and repurchase with free movement. It has also regulated
                                                            combined operations performed on a daily basis in order to
                                                            ensure liquidity in securities to institutions in short positions
                                                            (see Appendix II for legal basis), but they are not demanded
                                                            given the reduced number of short operations. The modality
                                                            was recently extended to NTN-B.

                                                                                                             To be continued
0                                                                                       OTC fixed income market in Brazil


Continued
                        Follow-up of 21 Measures Proposed by the
                National Treasury/Brazilian Central Bank in 1999 in order to
                Expand Primary and Secondary Public Dept Market Liquidity
 15. Purchase and final sale of short securities in         The Central Bank seldom uses for delivery operations to level
 supplementation to Banking Reserve go-arounds              off liquidity, but began performing long repo operations (from
 performed by the Central Bank.                             3 to 5 months) with fixed rate and free movement securities,
                                                            with this objective. Since the instrument (repo) is different,
                                                            objectives to reduce cash cost predictability and increase
                                                            liquidity and secondary market depth are not being fully met.
 16. Periodically holding of public bond purchase           The Treasury hold security purchase and sale auctions for
 and sale go-arounds.                                       the decentralization of maturities and the increase in bond
                                                            liquidity (see item 4). The holding of these events by the
                                                            Central Bank, through for delivery operations in order to
                                                            regularize prices or to alter the composition of outstanding
                                                            securities, is, however, very rare (see item 16).
     Implemented, but not continued
 17. Public long-term bond auctions, with fixed             The firm bid auctions were held during the period from Janu-
 rates of profitability, after receiving a request from     ary 2000 to December 2003.
 financial institutions containing a firm buy proposal.
     Not implemented
 18. Issuance of long securities with pre-fixed profit-     There has been a lot of discussion about the advantages
 ability and simultaneous competitive put option.           and risks involved in using securities with a put clause by
                                                            the Treasury. With the advances in improving the debt pro-
                                                            file, exchange auctions and swap operations, the Treasury
                                                            has enhanced the available instruments and this alternative
                                                            was never implemented.
 19. Incentive for the stock exchanges to create a          It lost its purpose as from the lack of put issuances.
 derivative market for put options issued by Central
 Bank.
 20. Creation of zero coupon bond.                          Possibilities for defining the value of coupons upon issuance
                                                            (Res. No. 2673/99 and Dec. No. 3540/00) and of exchange
                                                            security strips (Comm. No. 7744/00) have been regulated
                                                            but never used, since the Authority opted for holding inten-
                                                            sive swaps and, subsequently, with the significant reduction
                                                            in the amount of exchange securities on the market.
 21. Overnight rate oscillation around the target for       In practice, oscillations are limited and the need for the
 SELIC Rate.                                                Central Bank to be active in levelling liquidity practically
                                                            eliminates significant variations to the SELIC Rate.
     Sources: National Treasury and Brazilian Central Bank. Prepared by: ANDIMA.


    The adoption of measures has moved forwards, with improvements in the availability of
benchmarks and in the information utilized in the secondary market. In 2000, the Central Bank
standardized expression of the interest rate, in an attempt to unify criteria for securities refer-
enced in local currency, differentiating them from those adopted for securities indexed by the
FX variation, which began to utilize linear rates calculated for 360 calendar days, in line with
Domestic market: history, conformation and data; regulation and self-regulation                  1



the international standard. In the case of securities denominated in domestic currency (Real),
compounded interest rates and the 252-business day period have been maintained, but the
values switched to being expressed in percentages per year (instead of monthly or even daily
rates). Additionally, the calculation criteria for updating the face values of securities has been
consolidated into a single methodology.
     The discontinuation of the strategy for managing the public debt imposed by shocks in the
economy became obvious in 2002. The adoption of international mark-to-market accounting
criteria and the restructuring of the Brazilian Payments System restructuring – projects that were
relevant to the bond market – were implemented in a context of high volatility in terms of eco-
nomic variables, as a result of the closeness to the election period and the resulting increase in
the level of Brazil’s country-risk. The marking to market of securities belonging to institutional
investors’ portfolios reflected the pronounced oscillations in prices that occurred during the pe-
riod, which came on top of an already perceptible rejection of bonds maturing after the election.
This process generated sharp drops in the asset values of these portfolios, resulting, for the first
time, in accounting losses in the segment’s main investment modality: fixed-income funds.
     The so-called “LFT crisis” is a good example in that it relates to the relative weight of the
economic variables and the risk-aversion in the country: between April and December 2002,
fixed rate securities’ percentage share of the debt dropped from 9.8% to 2.2%. The Treasury once
again began to offer LFTs, acted in various ways in the sense of offering shorter term securities in
exchange for long-term ones and began to offer the market hedge by means of security placement
operations matched to FX swaps. The expansion of liquidity that characterized the implementa-
tion period of new settlement systems, with real time operation, increased the undersold position
resulting from redemptions and the shortening of bond lengths, necessitating the development of
new forms of operation by the Monetary Authority in order to balance the System’s liquidity.
     The process became smoother at the year end, and the implementation of the new pay-
ments system proved to be less traumatic to liquidity and highly advantageous for the SFN’s
(Brazilian Financial System) clearing and settlement structure. Initiatives in the mark-to-mar-
ket process – including those contained in the Treasury’s proposal, which included ANDIMA’s
pricing project –made a significant impact on the segment’s transparency, with the consolida-
tion and disclosure of reference prices which were previously separately limited to each insti-
tution or to the average prices generated by registration systems operating in the segment.

   Recent initiatives and advances
   The recent period was marked by the coming to maturity of the first measures directed
towards expanding liquidity in the securities market and of a series of new initiatives ad-
2                                                                            OTC fixed income market in Brazil



opted in an environment of stability in terms of the monetary and fiscal policies, of inflation’s
convergence upon the respective targets and of particularly favorable results in terms of the
foreign accounts. In this context, in addition to the serious study of deepening microstructure
measures, targets related to improving the profile of the public debt and reducing FX exposure
were adopted, and these have proven to be particularly successful. On top of these steps of
an institutional nature – mainly in the tax field – there were also others aimed at lengthening
investment terms and expanding the segment’s investor base.
 BOX 4

     Recent Measures Oriented Toward Liquidity and Transparency - By Nature
 Nature                    Measure-Event                                  Purpose
 Macroeconomic:
 Domestic debt manage-     The treasury stopped placing exchange          Profile improvement and reduction of
 ment                      securities (2002); intensified LTN and NTN-    exchange exposure
                           B placement and reduced LFTs, which had
                           not occurred between the months of Febru-
                           ary to June 2006
                           LFT offers were reduced in volume and assi-    Profile improvement and liquidity
                           duity. The 2006 PAF (Financing Annual Plan)    increase
                           has contemplated a drop in its share of over
                           10 percentage points over the debt total
 Foreign debt management   Swap, buyback operations and Brady             Sovereign risk improvement and
                           Bonds cancellation and security issuing        reduction of exchange exposure
                           (even in reais) overseas.
 Monetary Policy           Interest rate reduction                        Profile improvement and term
                                                                          stretching
 Monetary policy           Credit market recovery with private security   Issuer and investor base diversifica-
                           market strengthening and structuring of        tion, liquidity increase
                           securitization operations.
 Institutional:
 Taxation
                           Creation of the Investment Account, with       Term lengthening
                           CPMF (Provisional Contribution on Finan-
                           cial Movement) being levied only on invest-
                           ment applications or redemptions (2004)
                           Income Tax Rates on fixed income start to      Term lengthening
                           be decreasing according to the investment
                           term of each product of the segment
                           Income Tax exemption for foreign investors     Investor base increase and term
                           buying federal public bonds                    lengthening
 Other
                           Simplification of available investment mo-     Investor base increase and term
                           dalities for non-residents (Res. No. 2689)     lengthening
                           Term reduction for CPF (Brazilian Individu-    Investor base increase and term
                           al Taxpayer Registry) issuing for foreigners   lengthening
                                                                                                 To be continued
Domestic market: history, conformation and data; regulation and self-regulation                                       


Continued
   Recent Measures Oriented Toward Liquidity and Transparency - By Nature
 Microstructure:
 Security loan                 The Central Bank included NTN-B among             Liquidity increase
                               those securities that may be traded in com-
                               bined operations and the CMN (National
                               Monetary Council) authorized the perform-
                               ance of loan operations and fixed-income
                               security swaps.
 Creation of referential       ANDIMA started reporting the family of IMA        Term stretching
 alternatives                  indices, referential alternatives to DI (Inter-
                               banking Deposit) oriented toward portfolios
                               consisting of government securities.
 Pricing                       ANDIMA started pricing a representative           An increase in transparency
                               debenture sample on a daily basis
 Electronic systems            Start of operation of CetipNet (April/2002)       An increase in liquidity and transpar-
                               and Sisbex (May/2004)                             ency
 Direct Treasury               Program for the access of individuals to          An increase in investor base and
                               government debt bond buy and buyback              transparency
                               over the Internet
 1999 measures deepening       New upgrades in rules in force for repo,          An increase in liquidity and transpar-
 (see previous box)            short operations, dealing rules, performing       ency
                               in the primary market and forward opera-
                               tions by Central Bank and the increase
                               of information on operations and events
                               under the responsibility of the Treasury.
 Prepared by: ANDIMA.


    The culmination of these measures was the PAF – Annual Financing Plan for 2006, which
was disclosed by the National Treasury. This plan’s targets contain indicative intervals regard-
ing the percentage shares in the debt of the various types of securities, in addition to average
terms and composition of the debt stock for the period. As in previous years, the Treasury is
working with the objective of achieving a reduction of the percentage of debt represented by
LFTs – Treasury Financial Bills pegged to the SELIC Rate (to a figure of below 50% of the
debt) –. Inflation linked and fixed rate bonds take on a greater importance, with it being fore-
seen that there will be a lengthening in the average term of their maturities in all cases. As for
FX indexed debt, with the decrease in the percentage of the total stock of debt represented by
these securities to a figure of between 3% and 4%, and taking into consideration swap posi-
tions, the Central Bank and the Treasury, in conjunction, began to exhibit an active position
in foreign exchange, thus reducing Brazil’s exposure to external shocks and improving the
indebtedness profile even in situations of a deterioration in the international scenario.

    The market’s current configuration
    The stability achieved on the macroeconomic front and the advances made in relation to the
debt profile have given rise to a scenario that is particularly favorable for the adoption of practices
                                                                                          OTC fixed income market in Brazil



and tools that are typical in the case of a market where both liquidity and transparency show a po-
tential for expansion. Two basic trends seem to have assumed a greater importance in this process
up to the present moment: the growth in the relative share of fixed rate and inflation linked securi-
ties in the make-up of the government’s bond debt and the growth in the stock of private securities,
including expanding segments such as those of credit securities and receivables.
     In the first case, the LTNs (National Treasury Bills) and NTN-Bs (National Treasury Notes -
Series B), in addition to helping increase the debt’s duration22, by comparison with the LFTs,
are much more liquid assets. Recent figures showing the distribution of trades by assets show
that these securities (LTN and NTN-B) add a greater volume to the secondary bond market,
in relative terms – in other words, ignoring the fact that the number of maturities of LFTs is
still much greater than those exhibited by the former categories. Also, as far as spreads are
 CHART 

                           Stock and Traded Volume/Stock by Type of Bond
                  Stock by Security (in R$ billion)                             Traded Volume*/Stock Ratio
  600                                                           6,00
  500                                       2005                                                             2005
                                                                5,00
                                            1st semester 2006                                                1st semester 2006
  400                                                           4,00
  300                                                           3,00
  200                                                           2,00
  100                                                           1,00
       0                                                         -
                 LFT              LTN              NTN-B                     LFT                LTN                 NTN-B

     * Only for delivery extra-group operations considered. Source: Demab/BC. Preparation: ANDIMA.

     TABLE 6

                Distribution of Trading in Federal Public Bond Debt - July/2006
                                                                    No. of Traded
           No. of Trades         No. of Traded Maturities            Maturities
           in One Month          in a Frequency Interval
                                                                LFT     LTN     NTN-B                  %             Accum. %
           00+                                                 1       2        1                                     
         200-299                                                2       1        1                                    1
         100-199                                                       2        1                    1               
          50-99                               11                        2        1                    22               
          30-49                                                 -       1        2                                    2
          10-29                                                        -        2                    1               
            4-9                                                        -        1                    10               
            1-3                                                 2       -        -                    12              100
 Total traded maturities
                                              0                 2                    
      in the month
     Fonte: Brazilian Central Bank. Preparation: ANDIMA.


22 By considering LFT duration as close to zero, according to the Fiscal Policy Note, taking into account their high elasticity to
short-term interest rate change.
Domestic market: history, conformation and data; regulation and self-regulation                                             



concerned, recent surveys of indicative bid/ask spreads have been showing a narrowing in the
average value, as trades involving more liquid securities grow.
    At a slower pace than that of the change in composition, this process has also been favoring
the lengthening of terms, a fact which, coupled with the better macroeconomic conditions and
the advances made on the pricing front, has allowed optimization of the slope enhancing inclina-
tion and an increase in the number of the vortices of the economy’s yield curves vertexes. As a
result of this there has been an increase in, the quantity and the quality of information obtained
from the forward structure of nominal interest rates. The construction of a longer fixed rate yield
curve has fueled the debate regarding the extraction of the implied inflation imbedded in the for-
ward interest rate structure of inflation linked securities with payment of intermediate interest23.

 CHART 10

                           Terms of Fixed Rate Government Bond Debt
          Years
        20
                                     Issuance term in Reais overseas (Global Bonds)
                                     Maximum issuance term in Reais in Brazil
                                     Minimum Issuance term in Reais in Brazil
        15



        10



         5



         0
         2001                 2002                 2003                 2004                2005                 2006
  Up to September 2006. Source: Brazilian Central Bank and National Treasury. Preparation: ANDIMA.


    With regard to the private securities market, the diversity of assets and issuers, as well
as the increase in the number of issues (the stock, in the case of debentures, has increased by
151.5% since 2005), may become a key factor to the expansion of liquidity in the segment. In
relation to the representative assets of receivables securitization operations, for example, the
possibility of structuring portfolios with higher profitability and discriminated risks has led to
a rapid growth in FIDCs – Credit Rights Investment Funds, with the value of quota offers ris-
ing to R$ 15.3 billion over the past two years24.

23 The offset calculation for inflation imbedded in fixed rate interest rates is procedure performed in several countries where
the government bond market records high liquidity and the yield curve is sufficiently long to extract important information on
monetary policy conduction.
24 For a detailed description about the FIDC – Credit Rights Investment Funds, see the special study FIDC Funding Products,
published in 2006 by ANDIMA, in partnership with CETIP.
                                                                                            OTC fixed income market in Brazil


                                          GRáFICO 11
    This expansion, which                                      Forward Interest Rate Structure*
has been important for the                    Rate                                   On 2/1/2001
                                           (% p.a.)/252
consolidation of the bond
                                              17,5
market as a whole as well
                                               17
as to the creation of dif-
                                              16,5
ferentiated risk structures,
has gone hand in hand                          16


with the increased demand                     15,5

for diversification in the                     15
                                                     1         21   40   66    85 110 130 151 196 239 263 384
portfolios of institutional
investors, who have al-                       Rate
                                           (% p.a.)/252
                                                                                    On 15/9/2006

ready caught a glimpse of                    14,25

the opportunity in a lower                      14
interest rate scenario to
                                             13,75
increase the percentage
                                              13,5
of private risk (and profit-                              10        71        133    195    260    321    383     445     575

ability) in the composition                 * By considering LTN maturities on respective dates.
                                            Source and preparation: ANDIMA.
of their portfolios25.

    Trading in the secondary market
    With regard to the configuration, the over-the-counter market is the prevalent format for
trades executed in the fixed-income segment, with a number of specific characteristics. Trans-
actions involving government bonds and debentures, are for the most part executed by tele-
phone and recorded in the segment’s registration and settlement systems26.
    In the case of government bonds, trades are executed by financial institutions and insti-
tutional investors, predominantly investment and pension funds, either using brokers or not.
The level of broker activity in the segment remains significant, though the brokers and dealers
who perform this function have been going through a noticeable concentration process over
the last few years. Operations may be carried out over the telephone or by voice systems – the
so-called daily calls, which were recently launched in the segment by more active brokers.



25 This process may suffer a significant revision, if the new investment fund regulation proposal is approved, which foresees res-
triction to private securities in typically retail fund portfolio composition. See, about it, CVM Public Hearing Notice No. 3/06.
26 A detailed scheme of depositors and trading, clearing and settlement systems, by asset and trading environment can be found
in Appendix I.
Domestic market: history, conformation and data; regulation and self-regulation                                        



     Trading via electronic platforms, although still at a low level, is more significant on Sis-
bex, an environment where a collateral deposit is required and where the direct participants are
banks and brokers. A second alternative, CetipNet, which is also available for private securi-
ties, allows the utilization of the trading module used for government bonds, access by funds
and other institutional investors and the choice of counterparts, with CetipNet not acting as the
central counterpart for settlement purposes.
     The SELIC (Special System for Settlement and Custody), in addition to performing the
role of central depository for government bonds, acts as a financial registration and settlement
system, operating in the RTGS27 modality, for operations executed over either the telephone
or by voice system, or using the CetipNet trading module. The commands related to the reg-
istration of operations are entered either by the participants themselves or by settlement banks
or managers, in the case of institutional investors with individualized accounts. Trades made
through Sisbex are settled at the BM&F’s Clearing Chamber, in net deferred settlement modal-
ity. Funds and other institutions may take part in trades indirectly, by means of orders placed
by participating institutions. Generally, operations are registered for settlement the following
day, both in the SELIC system as well as in the Clearing Chamber, in the form of one-day for-
ward repurchase and resale agreements, regulated for the fixed-income market.
     Individual investors have also gained access to the government bond market through Di-
rect Treasury. Made available over the internet, this system permits the simplified acquisition
of securities, as long as a financial institution is appointed to be responsible for carrying out
operations and bearing brokerage and custody costs which is the responsibility of the CBLC,
the depository of the respective accounts. The participants have access to the weekly buyback
operations of securities carried out by the Treasury, which are aimed at ensuring liquidity in
this environment. Though it represents a reduced percentage of the total debt outstanding in
the market, the stock of bonds in the hands of 65 thousand investors registered with Direct
Treasury already stands at close to R$ 1 billion28.
     As for the debentures market, the same rules apply to operations executed in the over-
the-counter market, registered in CETIP, depository of over-the-counter private securities and
derivatives and the registration and settlement system authorized by the Central Bank and the
CVM (Brazilian Securities Commission). Debentures may also be traded in modalities made
available by the Bovespa – using BovespaFix’s electronic platform or via SomaFix – and, in
this case, the CBLC acts as a depository.

27 Gross Settlement on Real Time.
28 R$ 989 million, in 9/1/06 position. Further information on the Direct Treasury Program may be found at the address www.
stn.fazenda.gov.br.
                                                                                   OTC fixed income market in Brazil


 BOX 5

                                             Main Sisbex Features
 • Electronic trading and registration system of operations with governments bonds and private fixed-income secu-
 rities issued by financial institutions.
 • For the purposes of federal public bond operations, it consists of two modules:
 - trading module: for securities trading, through bids, with subsequent registration of the operation;
 - registration module: for registering operations executed in trading environments external to Sisbex Trading.
 • Dealer to Dealer System or B2B.
 • Participants:
 - Traders: banks, brokerage houses and distributors;
 - Any other market member: may only forward orders through a trader.
 • Institutional clients (investment funds and pension funds) may:
 - Have access to the terminal;
 - Send an electronic order through a participant (this order may not be modified);
 - Consult on the terminal his operations, market operations and the entire list of available bids;
 - Use the registration module;
 - Send an order by telephone to previously qualified trader as his representative.
 • Other clients: have no access to the terminal.
 • Approximately: 63 trading representatives and 12 already operational institutional clients, in addition to 41 institu-
 tional clients in the process of being qualified (September/2006).
 • Standardization: organized in trading rounds:
 - by operation modality (for delivery, forward for delivery, when if issued, specific repo, generic repo and order
 driven repo);
 - by securities indexer type (Selic, fixed rate, price index, foreign exchange)
 - Standard commoditized trade size: for delivery (10,000 units), repo (R$ 100 million + R$ 1 million supplementary
 trades).
 - Small trades round (all operations/securities; smaller trades than standard commoditized trade size).
 • Trading features:
 - Bids are organized by considering the best market price and chronological precedence, ensuring the best per-
 formance;
 - It is possible to enter buy bids, sell bids or spreads (the combination of a bid of each nature);
 - BM&F acts as a central counterpart: trades are closed with any counterparts, conditioned only to checking the
 operating limit generated by BM&F according to the prior provision of individual guarantees;
 - Anonymity: hybrid system, in which 8 participants (with the largest volume of operations for the quarter) may
 operate with anonymity. Others are identified on the screen.
 - Criticism mechanism: BM&F sets reference prices for all securities that are accepted for trading at least twice a
 day. Additionally, trading acceptance intervals are established:
 - Operating tunnel: an interval that stipulates bid acceptance limits. Any bids outside this interval will be rejected
 by the system;
 - Auction tunnel: a price interval that sets minimum and maximum prices for closing trades. Trades at prices
 outside this interval and that do not extrapolate the operating tunnel are immediately submitted, in auction, to the
 market referendum, and any participant may intervene in the trade and set a better price. If there is no interfer-
 ence, the original trade is accepted and a new reference price may be adopted by Clearing.
 - Operations run in the registration module are submitted to auction tunnel verification and are rejected if they
 exceed this interval;
 - It contributes to the timely registration of the operations and of the quality of the data generated by the System;
 - Loan program: loan and swap modality (which are not operational) driven repo (recently implemented).
 • Settlement:by means of BM&F Asset Clearing, which acts as a central counterpart, in the LDL modality, with
 settlement between 1:30 p.m. and 3:30 p.m.
 • Information:
 - Users with terminals have access to any and all prices, information on businesses and better bids;
 - Vendors: they receive, at a cost, information on best bids.
     Sources: Sisbex and BM&F regulations. Prepared by: ANDIMA.
Domestic market: history, conformation and data; regulation and self-regulation                                            



TABLE 7

            Outstanding Stock, Traded Volume and Distribution of Trading
                             in the Debentures Market
           Debenture         Total Traded          Traded                        Trading Distribution (%)
  Year       Stock             Volume**            Volume/
           (R$ billion)       (R$ billion)          Stock            SND        CetipNet       BovespaFix          SomaFix

  2002         46,1               21,5               0,46           98,27          0,15            1,58              -
  200         42,7               23,8               0,56           98,28          0,02            1,66             0,04
  200         44,1               14,1               0,32           89,87          0,10           10,02              -
  200         85,0               19,2               0,23           98,26          0,04            1,69              -
 200*         103,8               7,6               0,07           98,86          0,12            1,02              -
  * Up to July/2006. ** Considers for delivery operations only. Sources: Bovespa and CETIP. Preparation: ANDIMA.


    It is worth noting that volume traded in this segment in the period was equal to 7%
of the stock at the end of the first half of 2006. Since the secondary market is still very
limited and the bond indentures may contain various complex conditions, the majority
of operations require the participation of specialized institutions, banks or brokers. The
presence of retail investors is practically nonexistent, and the utilization of electronic
trading platforms is still in the initial stages (1% of total), but is becoming increasingly
common.
    Initiatives in the sense of stimulating the secondary market of these assets, mainly
by expanding the investor base and simplifying features, have been observed recently.
Among these highlight should go to the self regulation initiatives, as well as to actions
announced by the BNDES. In the first case, although the legislation proposed by the CVM
for the issue of standardized debentures has not produced the expected results, the objec-
tives that justified this measure have ended up guiding initiatives for the formalization
of calculation criteria and the clauses that are common to the respective bond indentures
in the operating codes of entities acting within the sector (ANDIMA and Anbid), which
currently provide guidance for the issue and trading of debentures which are deemed
to be simplified. In the case of the BNDES, in 2006 this entity announced a Debenture
Investment Program that included channeling resources for purchasing and participating
in primary placements, in addition to supporting the adoption of distribution and trading
practices that favor the dispersion of bonds in the market, liquidity and the standardization
of clauses.
0                                                                             OTC fixed income market in Brazil


 BOX 6

                                        Main CetipNet Features
     • CETIP electronic trading platform
     • Module structure: auction, quotation, trading and bookbuilding (for debentures only)
     • Multi-dealer to customer or B2C system
     • Participants: approximately, 154 institutions and 600 funds
     • Auction module features
     - secondary placement of fixed-income public or private bonds and securities, in CETIP custody or
     not);
     - operations have an appointed time, batch (participant defines whether he accepts a partial standard
     trade size or only full) and minimum price (PU or rate);
     - assessment: Dutch-type auction (payment by PU or cutoff rate) or competitive (payment according
     to contemplated bid)
     • Quotation module features
     - Request for quote type: the customer or institution creates a group to receive quotes (fund borrower
     or donor);
     - primary or secondary markets (SELIC repo and, starting in August 2006, other operations);
     - receives proposals from all counterparts; one bidder does not see the other’s proposal;
     - it is not automatic closing;
     - institutional client may participate directly (no broker);
     - the outcome is released to all bidders.
     • Trading module features
     - bid input (buy or sell): batch and PU;
     - blind screen (bidder is not identified) all participants see the proposal, but bidder may restrict
     counterparts (in other words, he may restrict whoever attacks the proposal);
     - cross matching system (it abides by the best price criteria); participant may define whether he wants
     to close total or partial amount: the bid choice will observe this option;
     - in homologation: if proposed price is off market (according to oscillation tunnels), the asset goes to
     auction – in this case, restrictions to counterparts are not valid, a minimum standard trade size for
     interfering is not stipulated;
     - the customer makes his bid through a financial broker, but the proposal terms are his own.
     • Other remarks – participant has the possibility to create:
     - special screen (single dealer to customer) with his proposals.
     • Settlement
     - operations with assets deposited with CETIP: through CETIP, in LBTR or LDL modality (primary
     quotation module market: issuer risk – with settlement between 11:25 a.m. and 12:45 p.m.); STP
     - Straight Through Process (trading module) or requiring registration (quotation/auction module);
     - when dealing with government bonds, in the SELIC system: it is not STP (SELIC registration must
     be made by participant, who may use information generated by CetipNet).
     • Information
     - website (www.cetip.com.br): post-trades; minimum, maximum, medium and last trade; total
     amounts (trading); amounts for bids made (quotation).
     - participant has access to all information on his own operations.
 Sources: Operating Manual and CETIP. Prepared by: ANDIMA.
Domestic market: history, conformation and data; regulation and self-regulation                                                 1



     Electronic systems
     Electronic systems are still not used very much in the fixed-income market, and there are
doubts as to about the scale and the changes that their adoption may lead to within the sector.
It can be observed that the use of such systems has been gaining force in the fixed-income seg-
ments where the concentration of information and of buying and selling agents increases leads
to a direct increase in liquidity and transparency: this is the case, for example, with the quota-
tions of CDBs by institutions, to customers providing funds, via CetipNET’s Request for Quote
type module. It is also possible that the concentration and specialization of market makers in
certain more liquid LTN maturities, together with the possibility of operating anonymously and
the substantial access to hedge markets for their protection has contributed to the utilization of
the Sisbex system by the predominant banks in this public bond market segment.
     With both platforms, there is the possibility for trading by commoditized trade size or frac-
tions thereof, and these trades will be concluded at the best possible price – with the exception
being that, under the CetipNet system, the choice of counterparts may imply that this rule is
not complied with. Sisbex counts on bid acceptance and rejection intervals, with adjustment
throughout the course of the day, in order to prevent off-market trades or operating failures
(two intervals). The projects that are on the agenda for these systems mirror the comments
made at the start of this report, regarding the approach similarity to typical stock exchange or
over-the-counter market procedures. While CetipNet is testing the implementation of float-
ing intervals capable of detecting off-market bidding practices and determine the immediate
auction of the asset, Sisbex, in addition to a highlighted registration module of the trade, is
analyzing the incorporation of institutional investors, by means of electronic orders, and the
conditions that are required in order to adjust the guarantee system to this integration.
TABLE 8

          Distribution of Trading in Government Bonds by Type of Operation
                  and by Environment/Trading System - in R$ million
                                   Traded Volume                                              By Trading System
                       For Delivery                                                                                     Off
                                                      Repo                       Sisbex       Sisbex
            Extra-                                                  TOTAL                                CetipNet    Electronic
                         Others         Total         Total                     Register      Trade
            group                                                                                                     Systems
 200      1.037.322     1.233.056    2.270.378    31.334.858      33.605.235           0              0         0    33.605.235
 200      2.039.972     1.105.317    3.145.289    35.648.287      38.793.576      25.214    1.308.837         1    37.262.262
 200      1.920.347     1.559.331    3.479.657    36.545.140      40.024.797      38.540    1.143.096          10    38.833.289
 200*       970.998       887.355    1.858.353    26.018.656      27.877.010       9.342    1.547.346           0    26.320.322
                                In Relation to Stock**                                               Share %
 200         1,4          1,7           3,1         42,8            45,9         0,0%          0,0         0,0         100,0
 200         2,5          1,4           3,9         44,0            47,9         0,1%          3,4         0,0          96,5
 200         2,0          1,6           3,6         37,3            40,9         0,1%          2,9         0,0          97,0
 200*        1,0          0,9           1,8         25,7            27,5         0,0%          5,6***      0,0          94,4
* Up to June. ** Ration between total traded volume in the period and government bond stock at period end. *** Only considering for
delivery extra-group operations, this ratio goes up to 23% in 2006. Sources: Central Bank, BM&F and CETIP. Preparation: ANDIMA.
2                                                                                       OTC fixed income market in Brazil



    Transparency
    Electronic systems produce timely information regarding operations quoted and signed
in their environments, but only partially disclose this information to the public. In the case
of Sisbex, computer monitor owners may check details of bids in terms of operations and
prices including reference prices for “tunnels” –without identifying the counterparts. General
information regarding about deals and best bids is disclosed to the public and disseminated by
vendors. Meanwhile in the case of CetipNet, the trading module’s bids are disclosed, includ-
ing over the internet, but details of operations signed are restricted to users. With regard to
post-trade information, the main statistics are produced by the depositary systems on the day
following that of the trade, and these include average, minimum and maximum prices and total
amount traded, per asset29 – but do not yet meet timeliness criteria. The information generated
by financial systems and institutions can also be found on the pages of communication sys-
tems, such as those of the Reuters and Bloomberg agencies.
    Recent projects involving SELIC, CETIP, BM&F and ANDIMA are aimed at expanding
the range of this information, either in the sense of timeliness, such as the disclosure of actual
prices in real time by SELIC, or by amplifying the collection universe over the course of the
day, by including ANDIMA’s indicative prices, and the results of calls, etc. The consolidation
of sources of information on the various segments is being looked at both by ANDIMA as well
as by market members themselves.
    It should be noted that, in the case of operations executed in non-electronic environ-
ments, an additional effort should be made in relation to the timeliness of information:
registration in the depositary systems will have to be made shortly after the trade is com-
pleted, which is not currently the case with most entries made in gross settlement systems.
For cultural, operating and scale reasons, the greater part of institutions’ entries, both their
own as well as those of third parties, are concentrated in the day’s final period. Therefore,
even if the information were to be disclosed in real time, it may not reflect the prices and
amounts being negotiated at any given minute, and could even lead to produce inaccurate
averages or benchmarks30.




29 In Table 7, available information about prior and subsequent prices and main indicators used in the Brazilian fixed-income
market and projects aimed at expanding available data, are summarized.
30 In electronic trading environments, this problem tends to be avoided by the existence of tunnels: such as referential prices
may change over the day, a participant who delays recording his operation may have his entry rejected, which stimulates prompt
registration of transactions.
Domestic market: history, conformation and data; regulation and self-regulation                                                  


 BOX 7

                          Transparency in the Brazilian Fixed-Income Market
                        Information Availability in the Over-the-Counter Market
                             Pre-Trade                            Post-Trade                            Benchmarks/
                            Information                           Information                          Other Indicators
                 - Quotes made available on            - Mandatory registration of all        - SELIC Rate (average rate prac-
                 trading platforms (CetipNet,          operations with securities at          ticed in overnight repo opera-
                 BovespaFix and Sisbex); BM&F          SELIC (government bonds) and           tions, with securities with SELIC
                 trade screens; information report     CETIP (private) systems: Infor-        or BMA used as guarantee).
                 screens (Bloomberg, Reuters)          mation released on the following
                 – due to the absence of market        business day, without identifying      www.bcb.gov.br ð Economia e
                 makers it is generally a question     the parties, containing minimum,       Finanças ð SELIC – Mercado
 TODAY




                 of indicative quotes and not firm     average and maximum prices on          de Títulos Públicos.
                 proposals.                            each maturity, separated in total      - DI Rate (average interbank
                                                       and extra-group (SELIC) and            financing rate of one-business
                 Bloomberg Terminal ð MRKT             total amounts by maturity.
                 <go> ð n°19 Títulos Públicos ð                                               day term executed on CETIP).
                 n° 8 Brasil.                          www.cetip.com.br ð Informativo         www.cetip.com.br.
                                                       Diário.                                - Interest rate forward structure,
                 Reuters Terminal ð BR/DEBT
                 ð várias opções                       www.selichml.rtm ð Consultas.          based on synthetic prices (ANDI-
                                                                                              MA) and on DI swap curve rate x
                 - Quotes provided by institutions     - Trade results reported on online     fixed rate (BM&F).
                 to their customers (exclusively)      electronic platforms – still cor-
                 – in liquid markets and upon          respond to a very little significant   www.andima.com.br ð Informa-
                 request only;                         portion of the market.                 ções Técnicas ð Títulos Públi-
                                                                                              cos ð Mercado Secundário ð
                 - Synthetic prices prepared and       www.bmf.com.br ð Boletim ð             Estrutura a Termo.
                 reported by ANDIMA at the end         Cotações e Volumes ð Sisbex.
                 of the day, referring to the secon-                                          www.bmf.com.br ð boletim ð
                 dary government bond market                                                  indicadores ðtaxas referenciais
                 (96 maturities) and debentures                                               - IMA rate family – released by
                 (48 maturities).                                                             ANDIMA: index representative
                 www.andima.com.br ð Technical                                                of government bonds technical
                 Information.                                                                 portfolio weighted by market
                                                                                              amounts of each class of title
                                                                                              (except exchange) and sub-
                                                                                              indexes referring to each class
                                                                                              separately – IRFM (fixed rate);
                                                                                              IMA-B (IPCA); IMA-C (IGP-M)
                                                                                              and IMA-S (SELIC Rate).
                                                                                              www.andima.com.br ð Infor-
                                                                                              mações Técnicas ð Títulos
                                                                                              Públicos ð IMA.
                 - Gathering and reporting of buy      - The creation of a capture and        -- Assembly of an “environment”
                 and sell quotes, more than once       report system of trades recorded       that allows the consolidated re-
                 a day, obtained from specialist       at SELIC (government bonds),           port of pre and post-trade prices,
 NEW PROPOSALS




                 dealers (for a set of selected        without identifying the parties, by    accompanied by other statistics
                 securities by the Treasuries) and     trading and timely, organization       and information to assist the
                 financial brokers.                    by type of commoditized trade          user in interpreting the available
                                                       size, maturity, indexer, etc.          information.
                                                       www.selichml.rtm ð Consultas.          - The construction of a moni-
                                                                                              toring tool of executable price
                                                       www.bcb.gov.br ð Economia e            behavior throughout the day.
                                                       Finanças ð SELIC – Mercado
                                                       de Títulos Públicos.                   - Follow-up/analysis of registe-
                                                                                              red prices at SELIC and CETIP
                                                       - Extension of partnership to CE-      by ANDIMA’s Operational and
                                                       TIP system (private securities)        Ethics Committee.
                                                       and to Sisbex (BM&F).
   Prepared by: ANDIMA
                                                                   OTC fixed income market in Brazil



     Liquidity
     The projects related to expanding the range of information available on the bond market
should result in major advances in terms of the segment’s transparency in Brazil. Such initia-
tives tend to imply changes in the market’s characteristics, but, as is shown by the international
literature on this subject, liquidity conditions may have a significant impact on the extent of
these changes. The comparison between synthetic rates and trade intentions (buy and sell bids)
in the debenture market, for example, seems to indicate, in a number of periods, that the former
provide a more consistent reference for agents to assess prices. Likewise, by observing the
comparison between synthetic rates and trades executed, it can be concluded that they exhibit
a closer correlation with each other, despite the existence of divergences– justifiable by the
size of commoditized trades conjectural demand and supply behaviors or by deals that are part
of a structured operation in distinct markets. Therefore, in these cases, information obtained
prior to trades may not reflect fair prices for assets, and that produced by transaction records
usually requires suitable statistical treatment.

    It can be observed that, in the Brazilian experience, the trends have been diversified and,
suitably, targeted toward an expansion of both transparency and liquidity. In this context, the
expansion and consolidation of price information, including timely information, goes hand-
in-hand with the eventual introduction of new registration rules or electronic systems capable
of adding benefits to certain specific segments within this market. In other cases, it is possible
to note that the efficiency of the secondary bonds market is more linked to structural precon-
ditions related to the macroeconomic environment, to the concentration of operations in the
near-term, to the low volatility of the financial assets and to the narrow investor base than it is
to the existence of pre-registration or on screen trading.

    Therefore, there are difficulties related to expanding the liquidity of the fixed-income mar-
ket in Brazil, which it is vital to overcome in order to meet transparency requirements, do not
require changes (in principle) to trading environments, as they involve questions of a mac-
roeconomic, institutional and microstructure nature. Some themes related to these issues are
analyzed in the next chapter, which also presents a proposed agenda designed to stimulate the
growth of the domestic bond market.
                                               5
Projects: an agenda proposal for the brazilian fixed income market                                




                             pRopoSEd
                        pRoJEctS:                       a
                agEnda foR thE bRazilian
                  fixEd-incomE maRkEt
     The utilization of the international discussions as a backdrop for considering the liquidity
and transparency in the Brazilian fixed-income market seems highly appropriate to outline the
main characteristics, relative advantages and limitations of the segment. More than this, in
light of recent experience and based on the international prescription, allows us to identify a
proposed agenda that, though far from altering the determining macroeconomic factors, lists
institutional actions and those directed at the segment’s microstructure, which are capable of
contributing to the growth of the domestic securities market.
     Apart from counting on an amplification of the advances obtained in the macroeconomic
field – and therefore assuming continued positive scenarios for the monetary, fiscal and external
areas – this agenda sought to bring together gather proposals and projects under discussion by
ANDIMA’S Committees and workgroups or, separately, at the level of institutions, fund man-
agers and regulators. It is not intended to cover all the alternatives for the expansion of transpar-
ency and liquidity, or for the consolidation of the domestic bond market, but rather to encourage
discussion of themes and obtain a consensus in relation to initiatives designed to overcome
barriers, by clarifying doubts and improving rules capable of contributing to this process.

    Macroeconomic issues
    The recent trends, in the financial market sphere, indicated by the current debt manage-
ment strategy and by the stability in the handling of monetary and fiscal policy may mean
that three movements which are relevant to the domestic bond segment become increasingly
                                                                     OTC fixed income market in Brazil



evident: the change in the profile of the federal debt, the reduction in interest rates and the
strengthening of the credit market.
    The first of these resulted from a deliberate strategy on the part of the National Treasury,
which was contained in the Annual Financing Plans of the last few years and, which became
more evident, from 2004 onwards, in the sense of favoring the placement of fixed-rate and
inflation-linked securities at the expense of those pegged to foreign currency and short-term
interest rates. The decision is regarded as a deliberate strategy due to the fact that it implied
higher costs in terms of financial charges for the Treasury and, during certain periods, back-
ward steps in relation to the process of lengthening the average term of the debt.
    For example, the decrease in the portion of the debt pegged to foreign currency to the cur-
rent level of between 3% and 4% of the total stock of debt, has caused criticisms due to the
fact that it has been implemented in a context of ample liquidity in the FX segment and of an
appreciation in the Real. It is possible that indebtedness in FX-pegged securities would have
implied relatively lower costs, by comparison with the rates being paid on other floating rate
securities and, particularly, fixed rate bonds.
    The same reasoning applies to the recent emphasis on offering LTNs and NTN-Bs, the
primary placement of which was significantly affected by the volatility that was registered
between May and June of 2006, a period in which LFTs would possibly have enjoyed a wide
level of acceptance, leading to lower rollover costs. Though the Treasury still has some room
– according to its schedule for the year – to place LFTs, it is perceived that this instrument
has been used sparingly, with auctions of fixed rate and inflation linked assets having been re-
sumed as soon as the context permitted it. For these reasons, it can be observed that this option
gives priority to reducing the country’s exposure reduction to foreign shocks, whether direct
ones – due to the repercussion regarding the FX rate – or indirect ones.
    With respect to the reduction of the absolute interest rate levels, its effects are related to the
current relevance of the portion of financial savings that are remunerated by the SELIC Rate or,
equally, by the DI Rate. Since a large part of the public debt, of outstanding private securities,
from the fund industry and other products offered by the banking network is remunerated by
floating rates, the reduction in the level of interest rates should increasingly enable a comparison
of the relative performance of these assets with those of fixed rate or mixed portfolios. This pro-
cess is already visible, although only to a limited degree, from the structuring of multi-market
funds, which has recently shown considerable growth, and from the increase in variable income
investments. Added to the expansion in credit, the growth in the stock of funds and credit rights
certificates also confirms the search for new sources of revenues that are not exclusively pegged
to operations based on bonds remunerated by either the DI or the SELIC Rate.
Projects: an agenda proposal for the brazilian fixed income market                                                           



    The effects of these movements are obvious, but nevertheless important to the alteration of
the current profile of the Brazilian debt market profile: in addition to contributing to asset di-
versification in the segment, it should lead to an expansion in benchmark alternatives, includ-
ing for the fund industry, which is compatible with the new conditions in terms of composition
and demand. On the other hand, strengthening the portion of debt in securities with fixed rate
profitability or which are pegged to other parameters tends to contributing to the formation of
a yield curve that is capable of better reflecting the economy’s risk/return ratio.
      By way of illustra-
                               CHART 12
tion, the comparison be-
tween the IMA and the                      IMA versus SELIC Rate versus DI Rate
                                     Cumulative YTD Percentage Variation in 2006*
SELIC and DI Rates
                                                                                            12,48
during the recent period                                        11,05
                                                                              11,9

                                    10,38          10,41                                                  10,57
shows that, in 2006, the
performance of the first
of these has outstripped
those of the referential
rates (see chart).
    The third trend reg-
istered in the macro-
                                      DI          SELIC       IMA Geral     IRF - M        IMA - B       IMA - S
economic plan – that of
                                 * Up to August/2006. Sources: ANDIMA, Brazilian Central Bank and CETIP.
strengthening the credit         Prepared by: ANDIMA.
market – has effects in
common with the interest rate drop. Among these, there is the diversification of the assets of-
fered in the market and of the investment fund industry – which in the latter case, is dependent
upon the (re)discussion of the CVM’s proposals in the sense of restricting the presence of
privately-issued securities in retail funds31. In addition to a series of other extremely relevant
changes to the composition of assets and risks in the financial market, the development of
structured operations and the resulting diversification in terms of issuers and investors– with-
out mentioning the impact on the real economy – could also help aspects related to the per-
formance of the rating agencies in Brazil, contributing to a necessary improvement in the
evaluation processes of both issuers’ and issues, which still exhibit limited sophistication and
use in the domestic market.


31 In Addition to CVM Public Hearing Notice No. 3, on the site of this Authority, see, in this respect, suggestions forwarded by
ANDIMA (Letter Suger/Sutec No. 265/06), on the website www.andima.com.br.
                                                                                    OTC fixed income market in Brazil


 BOX 8

                        Over-the-Counter Fixed-Income Market Agenda
                              Outlook, Suggestions and Projects
      Macroeconomic Issues
 1    Continuity of the debt market profile change strategy
      - Increase in liquidity associated with the LTN and NTN-B market
      - Average term lengthening.
 2    Interest Rate Reduction
      - Increase in fixed-income asset demand/diversification
      - Investment fund industry diversification
      - Benchmark diversification.
      - Interest curve consolidation.
     Credit market strengthening
      - Increase in fixed-income asset demand/diversification
      - Investment fund industry diversification
      - Rating agent upgrading
      Institutional Issues
      Tax-related
     - Extend non-resident income tax (IR) exemption to private securities
     - Correction of distortions broughton by periodic revenue IR taxation.
     - Extinction of the short-term IOF (Tax on Financial Operations)
     - Investment term, for IR tax rate purposes, measured by investment account,
     - CPMF (Provisional Contribution on Financial Movement) extinction
      Regulatory
     - Over-the-Counter: harmonize concepts applicable to the segment, clarifying the effects of this regulation on
      operating questions and tax-related issues related to settlement, registration and electronic trading systems.
 10   - Custodians and depositaries: clarify and consolidate the concept, rights and duties related to the rende-
      ring of custody services and to the relationship of these agents with depositary systems in the fixed-income
      market.
 11   - Loans: publish supplementary standards for securities loan and swap (Res. No. 3197/04), even with regard
      to program structuring by systems or custodians, to accounting and to taxation.
 12   - Settlement delay: redefine differences between forward market and deferred settlement and developments
      on registration and accounting systems.
 1   - Guarantees: definition of the legal role of guarantees in repo operations settled with or without central
      counterpart and escrow accounts in depositary systems.
      Microstructure Issues
 1   Primary Market: Strengthening of the performance of the Central Bank by means of bond go-arounds
      (informal auctions) with for delivery operations. It helps the leveling of liquidity (supplementing the role of
      compulsories) and the correction of momentary pricing problems or maturity concentrations.
      Transparency
 1   - Information: Timely dissemination and consolidation of executed prices (SELIC, CETIP, BM&F and ANDIMA
      projects) and of platforms, even for non-users; proximity between the trading occurrence and the effective
      recording in the systems; greater availability of pre-trade information (quotation modules, proposal screens).
 1   - Electronic systems: expand the utilization of quotation or trade systems, coordinated by specialized bro-
      kers or in segments whose utilization results in liquidity and counterpart concentration, especially institu-
      tional investors.
      Investors Base
 1   - Pension Funds: increase participation in the secondary market, including, as the case may be, through
      supporting electronic systems and the professionalization of managers.
 1   - Investor Education: expansion of technical information and programs aimed at clarifying fixed-income
      investment features and respective assets.
 1   Lengthening the term of Central Bank associated operations
 20   Adaptation of institutional investor’s internal systems oriented toward short and loan operations.
 Prepared by: ANDIMA.
Projects: an agenda proposal for the brazilian fixed income market                                                            



                                Institutional and Microstructure Issues

     Primary market and the actions of the authorities
     In Brazil, public debt bonds are issued by the National Treasury and placed in formal
public offer auctions held by the Central Bank, acting as an agent of the Treasury. The CB is
responsible for the management of the monetary policy, including by means of informal auc-
tions (go-around), selling or buying securities in a definitive manner, or via the carrying out of
performing repo operations, in conjunction with institutions accredited as open market dealers.
These same institutions have exclusive access to the so-called special Treasury operations:
selling auctions established in public offering and purchase auctions at competitive prices.
     Based on specific regulation, the accreditation process of the 22 open market dealers in-
volves one-semester evaluation and validity periods. Since the adoption in 1999 of the first
measures aimed at increasing the liquidity of the secondary market, and following debates
with representative entities such as ANDIMA, the selection of these institutions has undergone
various changes. The purpose was to attribute a greater value to liquidity operations and those
institutions that exhibit a significant performance in the segment, contributing to the turnover
and capillarity of the system. Currently, there are two groups of dealers: 12 primary dealers
and ten specialists. Only four institutions, at most, are allowed to be present in both groups.
Out of the specialist dealers, at least two must be brokers or dealers that do not belong to fi-
nancial conglomerates. The selection criteria include the volume of operations in the primary
and secondary markets and, more recently, a greater weight has been attached to delivery and
auction operations, involving fixed rate and inflation linked securities (NTN-Bs).
      Another measure adopted and originally foreseen in the 1999 proposals was the concen-
tration of security maturities, which that year, registered a figure of 260 and which currently
stands at around 9932. LTN maturities and regular securities auctions were also organized, with
the latter occurring on a weekly frequency and being preceded by a monthly placement sched-
ule. The Treasury also continues to hold purchase auctions, by means of public offerings, in
the case of LTNs and NTN-Fs, and restricted auctions, in the case of NTN-Bs. The majority
of LTN purchase operations are aimed at avoiding the concentration of maturities, while in the
remaining cases they are focused on ensuring asset liquidity.
     The Central Bank regularly acts by means of go-around, which are basically aimed at
leveling the market’s liquidity. In the last few years, these operations involving buyback (or

32 In fact, the number of total public debt bond maturities is quite higher, if a security whose placement has not been made by
public bidding is included, as is the case of LFT-A and B. By including these and other securities, which do not present frequent
trading, total maturity number reaches 635.
0                                                                                   OTC fixed income market in Brazil


                                             TABLE 9
sellback) agreements be-                Number of Public Bond Maturities in the Market*
gan to adopt distinct guar-             Bond            June/00 June/02 June/04 June/05 June/06
antees and longer terms –            LTN                    11                                                   
currently, the ones with the         LFT                  1          10            100                        
largest volume fluctuate be-         NTN-B                    -           1                                      1

tween three and five months          NTN-C                   2                                    10              
                                     NTN-D                  2           2             1                         2
and are carried out using
                                     NTN-F                    -            -             1                         
either LTNs or NTN-Bs.
                                     NBC-E                             2                                       2
The agreements involve the           TOTAL                211          12            1          11             
so-called free movement              * Position on the last business day of the period. Note: Universe of priced bonds by
                                     ANDIMA. Source and preparation: ANDIMA.
clause33, in other words,
they allow the buyer to sell
the bond that will be the object of resale, so as to stimulate the taking of short positions. It
should be noted that it is rare for the CB to carry out delivery operations, which could help to
bring about a more permanent leveling of liquidity (which currently requires a strong reserve
requirement structure) or the correction of temporary pricing problems in the secondary secu-
rities market. Therefore, if on one hand the operations carried out by the Treasury have been
varied, but remain frequent34, the same thing cannot be said on the Monetary Authority front
in relation to delivery operations.
     As for the private securities market, primary issues, which may be registered in the depositary
systems of either the Stock Exchange (CBLC) or the over-the-counter market (CETIP), already
have rate building alternatives via electronic book-building. In spite of this option, which may re-
sult in increased pricing transparency, the majority of primary debenture placements continue to
be preceded by non-electronic book-building processes carried out by coordinating institutions.
Although these processes are similar to closed auctions, taking place in isolated environments,
with proposals received by fax in even conditions, in practice they permit greater selectivity than
that offered by electronic systems. At CETIP, settlement occurs by means of transfer of the secu-
rities from the SDT – Security Distribution System - to the investors’ custody account in the SND
– National Debenture System, the depository of debentures in that Clearing House.
      Other distribution processes in the fixed-income market, such as those of closed fund quo-
tas and institutions’ financial instruments, rely on specific modules in the electronic systems
or on simple recording in the case of over-the-counter and stock exchange systems. As men-

33 See related aspects to security loan and short market.
34 According to ANDIMA’s survey, between 2000 and 2006, the National Treasury held 1,099 auctions, being 380 LTN and
351 LFT.
Projects: an agenda proposal for the brazilian fixed income market                                                            1



tioned, the raising or provision of funds via CDBs and DIs has been carried out by CetipNet’s
quotation module, which does not imply simultaneous recording of the operation, and the uti-
lization of which was due to the initiative of large institutional customers who were interested
in expanding centralization and transparency. Fund quotas such as FIDC should be distributed
with later recording in the CBLC or CETIP35, but may take utilize electronic options in related
systems, including SomaFix. Since the primary placement process for private sector fixed-
income securities does not offer any centralized environments and exhibits a high degree of
specialization due to the diversity of the assets and the characteristics of the issues, incentives
to the utilization of electronic quotation systems, book-building or auctions may in this case be
important to organize segments, gather information and concentrate liquidity, providing more
suitable conditions for issuers and investors.

     Regulation of the secondary market, of custody, depositary and settlement services
     As demonstrated in the previous chapter, the clearing and settlement structure and the
depositary systems operating in the country date back to the creation of the secondary market
itself, having been reformulated in 2002 in order to bring them into line with the recommenda-
tions contained in the international prescription aimed at reducing credit, liquidity and operat-
ing risks. As for custody risk and the disclosure of public information, the depositary systems
adopted measures, which have been updated on a constant basis, that increase the transparency
and regulatory capacity of the relevant authorities.

    Specifically with regard to the fixed-income over-the-counter market, this background en-
sured the recording of the universe of operations carried out in this environment and of assets
that make up the portfolios of institutions and institutional investors, in a centralized way with
SELIC or CETIP, making it possible for operations to have regulations in common and rules
for the participation of financial institutions and brokers. The use of legal agreements, which
are common in some countries for standardizing over the counter trades, has been restricted
in the case of the domestic market to the relationship between institutions and clients whose
positions have not been covered by individualization and, the same applies to retail products
and complex operations. The rules that regulate the functioning of operations and assets in the
Brazilian over-the-counter market are listed in the regulations issued by the CB and the CVM,
or in the regulations of the registration and settlement systems, which are also approved by
these authorities, in their respective areas of activity.

35 A detailed scheme of depositaries and trading, clearing and settlement systems, by asset and trading environment, can be found
in Appendix 1.
2                                                                                         OTC fixed income market in Brazil



     The recent advances made in the regulation of the financial system in order to keep up with the
changes that have occurred in the segment are remarkable, including in terms of compliance with
issues discussed at the international level: public hearing processes have multiplied, both within
the sphere of the CB as well as within that of the CVM; there has been an ample reformulation of
investment fund legislation, by the CVM, and more recently new guidelines have been discussed;
repo operations have undergone a similar process, within the sphere of the CB; and the basic rules
for bank funding and securitization instruments are being debated at the present time. Thus, al-
though the sophistication of products that are available within the sphere of the financial market,
the changes in the distribution of tasks between the authorities and, in particular, the appearance of
new modalities of services and activities by agents require constant improvements in regulations,
this seems to be an auspicious moment for the consolidation of more conceptual rules.
     This is the case, for example, with the treatment given to the over-the-counter market by
the local regulations36: the CVM has established conditions for systems regarded as belong-
ing to the” organized over-the-counter market”; the legislation on over the counter derivatives
has only been partially defined up to now in the CB’s regulations, but the CVM has already
been given this assignment legally; and although the Internal Revenue Service, differentiates
taxation solely by criteria related to the definition of fixed and variable income, it maintains a
number of rules in force that allow differentiated treatments according to whether the opera-
tions are carried out on the Stock Exchange or at “similar” entities, as occurs, for example, in
the case of foreign investors37. Given the growing sophistication of securitization operations
and of the receivables segment, there is a need for the harmonization of the concepts that are
applicable to the over-the-counter market and the electronic systems among other reasons in
order to avoid legal risks that reduce the segment’s attractiveness.
     Parallel to the act of defining the concept of the markets and to the conditions that these
definitions imply for the agents acting in the trading and settlement stages, we need to stress
other examples of concepts that deserve to be updated in the regulations that are currently in
force. One of these is the differentiation between the functions of depositary and custodian,
the definition of which is confused in the laws regulating the securities market and that, in the
case of custodians, lays out rules just for the securities segment. The rights and duties of these
agents and the conditions that are common to their supervision are not consolidated and, when
they exist, they are differentiated according to the asset.
     The relationship between the custodians – usually institutions which provide services to

36 A script with basic legal references in force for several assets, operations, systems and for the fixed-income over-the-counter
market participants can be found in Appendix II.
37 See tax issue detailing in the Fixed-income market Taxation item, further ahead.
Projects: an agenda proposal for the brazilian fixed income market                               



end investors and whose roles may or not include the tasks of portfolio management or admin-
istration – and the depositaries – which are virtually nearly always systems or institutions that
render services to issuers – is also covered by systems and asset indenture regulations, without
any prior harmonization of concepts and establishment of mutual obligations. In addition to
the difficulties pointed out, this situation complicates the simple compliance with other market
rules, such as those regarding the identification of agents’ positions and the withholding of
taxes, leading to doubts and uncertainties for the participants.
     Difficulties are also created by a few specific points related to the definition of concepts,
in the financial market sphere, of existing legal figures in other Law areas. An example of
this situation is the functioning of escrow accounts in depositary systems, with the rules for
these that are found in the regulations containing opening, closing and command forecasts,
but whose actual functioning is based on private agreements governed by other legal codes.
As other options of legal forms related to the exercise of guarantees are still being used in
financial market agreements, and bearing in mind the growth in the product and receivables
certificates’ market, these accounts could incorporate new functions or services – pursuant to
the respective regulations, and in accordance with the specific legislation applicable – which
would strengthen their role with depositors and depositaries.
     A similar situation applies to the repo operations market with fixed-income securities. In
the case of Brazil, these operations – purchases and sales tied to repurchase and resale agree-
ments and forward purchase and sale operations - have not been regulated as loans. In other
words, securities are actually sold or purchased and the “return” operation is entered into the
books separately from the “outgoing” operation. On the other hand, the agreements are estab-
lished by the entering of specific codes, in the sphere of the registration systems, and backed
up by their own regulations as well as those of the system. Since the asset settlement systems
work in the DVP modality – Delivery Upon Payment, there is no risk to the principal involved
in these operations, but the securities utilized may not be considered as a guarantee – in other
words, there is no way to ensure standardized behavior, in the event of an operation by an in-
stitution that is under intervention in which the return agreement has not yet been entered.
     The importance of repo operations to the secondary market becomes even clearer if these
are compared to delivery operations (buy and sell trades): in the case of public debt, repo op-
erations are almost 14 times larger than the second modality, while in the debenture segment
they six times larger. It is observed that these operations, in Brazil, are essentially borrowers or
providers of funds (cash-oriented)38: they represent the main way for the Central Bank to level


38 See next note.
                                                                       OTC fixed income market in Brazil



liquidity and the overnight market for the swapping of funds between among the institutions
of the financial system (with a guarantee in government bonds and a one-day term). These lat-
ter ones, after statistical treatment, are used as a source for the calculation of the SELIC Rate,
which is the main rate within the segment and the benchmark of the monetary policy.
     It should be noted that, since the proposals made in 1999, the repo operation market has
been deserving attention by the regulators. Among the measures adopted: highlight goes to the
increase in the leverage limits, the regulation of recording of forward operations, the inclusion
of private securities, from debentures to export notes, among the securities that can be used in
repo operations; and the regulation of free movement operations (and the possibility of taking
out short positions) in the segment – providing evidence of the willingness of the authorities
to improve the applicable legislation. Furthermore, by means of back-to-back reverse repo and
simultaneous operations between the same counterparts, the CB makes daily securities offer-
ings from its portfolio in exchange for others offered as guarantees – the loan of CB securities.
It may be that the purpose is to stimulate the carrying out of repo operations directed towards
strategies involving securities that can be used in such operations and, thereby, short selling
operations, which are virtually nonexistent in the domestic fixed-income segment.
     Last but not least, a final aspect related to the systems and clearing houses that make up
the payments system refers to the settlement delay offered to users in the securities market.
Most of the operations executed in the segment are settled on the day after the operation is
registered in the systems, coinciding, therefore, with the D+1 standard that is observed in other
economies. To this end, operations are entered in the system as one day forward operations,
reconciling the commands made at SELIC with the Asset Clearing House and, also with sales
of - securities associated with auction purchases made on the same day – at auctions where
settlement is carried out on the following day.
     It so happens that cash operations settled on D+1 are traded at D+0 reference rates or prices,
while the one day term would correspond to a future settlement operation, forming rates or prices
that are related to the respective settlement date. In fact, although entered as forward operations,
these operations are regarded as entailing lagged settlement, and are computed accordingly for pur-
poses of the calculation of average rates or spot market prices. Although it does not seem to lead to
any relevant operating differences, this distinction is reflected in the accounting of both institutions
as well as investors, generating a concentration in the processing of operations at SELIC, from 9.30
a.m. onwards, when the forward operation settlement mechanism is initiated. The existence of a fixed
timetable, in this situation, affects the conclusion of part of these operations, hinders the transfer of
funds by foreign investors and, in some cases, requires the re-registration of the operation made the
preceding day, and thus may help contribute to distort the average prices calculated on the day.
Projects: an agenda proposal for the brazilian fixed income market                                                               



     Securities lending and short operations
     In chapter III, a number of initiatives were listed that may help promote liquidity in second-
ary markets, and among them was the stimulation of lending and short selling operations, taking
into account their positive effects on the volume of transactions and on asset pricing. The opera-
tions may be complementary to each other, to the extent that, in order to revert a short position,
agents choose between buying or borrowing the asset that is covered by the operation. In Brazil,
short selling operations in the fixed-income market are practically nonexistent, though they are
provided for in the regulations for repo operations – based on free movement operations – and
may be carried out within the sphere of the clearing house that acts as a central counterpart or in
the SELIC system, with this only being possible if it entails government bonds.
      Several reasons help explain this situation. One of them is related to the regulation them-
selves of the operations that may be carried out in order to borrow or lend securities, providing
reversal conditions to eventual short selling39 strategies. As was previously noted, in Brazil
repo operations have not been regulated in the form of loans. Even if in conceptual terms they
represent an option for the segment, bearing in mind the very structure of the CB’s securities
lending under this format, there are operating limits on its utilization. The structuring of a
lending program in which a custodian seeks to bring together a pool of lenders and borrowers
would run up against restrictions due to the fact that the agreements are made between pairs
of counterparts, one on one.
     The rule that entitles financial institutions to borrow securities, as well as to swap and lend
securities that belong to their respective portfolios, including with individuals and non-financial
corporations, as long as they are within the sphere of authorized systems or clearing houses,
should overcome this difficulty. However, it still requires supplementary regulation, particularly
in relation to the conditions for authorized agents to structure the aforementioned programs and
in relation to the accounting and taxation of the operations. Other one-off measures could help
the process, such as the carrying out of back-to-back operations by the CB with a term of more
than one day and the adaptation of the internal systems of institutional investors who have not
yet incorporated into their structures the possibility of acting as lenders.
     At any rate, it is likely that the main justification for the fact that this segment’s short selling
and lending market is still in its initial stages is the lack of demand for the aforementioned opera-


39 Taking as a basis the international market, securities loans may be structured based on several operations, the best-known ones
being repurchase agreements and securities lending properly said. In several economies, the repo market is, usually cash oriented,
where the security works as a collateral or operation guarantee. Whereas lending operations are used for supplementing the search
for a certain asset covered by the loan – in other words, securities oriented. There are also mentions of sell back or sell buy back
type transactions, whose contractual formality and terms would be distinct from the repo market, resembling even further to cash
oriented operations and, therefore, to the Brazilian case.
                                                                                         OTC fixed income market in Brazil



tions. In fact, the main end-buyers of securities – fixed-income investment funds – do not exhibit
any interest in this modality nor have they adopted strategies of this type, since their portfolios
are concentrated in DI and LFT funds, and an eventual search for strategies that guarantee other
assets floating rate profitability is easily remedied in very liquid futures market segments. In the
case of Brazil, the sophistication and liquidity exhibited in certain agreements that are available
in the future market “compete” with the development of typical cash market strategies.

    In this sense, the diversification of options provided by the investment fund industry could
also create different conditions for this segment. Stock lending, which has been regulated in
Brazil for the last ten years, has posted excellent development in the recent period, to a great
extent due to the expansion in terms of access to strategies and the diffusion of investment in
these assets, including with regard to the proliferation of long-short funds. In the case of the
fixed-income market, the diversification of benchmarks and of reference rates for institutional
investors’ portfolios may reveal itself to be a development alternative for this market40.

     Taxation of fixed-income instruments
     The taxation of financial operations in Brazil has been the theme of a great many discus-
sions, mainly due to the accumulation of rules and recurring changes that have taken place in
the last few years. Recently, a number of measures were taken in order to accompany the ef-
fort towards the consolidation of the local bond market, with highlight going to the following
items: the creation of the Investment Account41, which has eliminated CPMF being charged on
the migration of funds between financial investments; the use of decreasing rates of income tax
on bond revenues earned in the fixed-income market, including investment funds, according
to the term of the investment42; and exemption from Income Tax in the case of revenues gener-
ated by securities issued by the National Treasury, purchased by non-resident investors.
     A series of suggestions, which were made before and after the changes, remain on the dis-
cussion agenda with the Federal Revenue Service. Among the most valid proposals, it is worth
mentioning the extinction of the tax levied on fixed-income investments and funds when re-


40 In the case, for example, of IPCA remunerated Treasury bonds (NTN-B), for which sufficiently liquid future markets have not
yet been built, growing demand for products linked to this inflation index could serve as the first step toward structuring short
operations. The CB has recently included these securities among those offered at associated operations that it daily holds and has
raised the weight in dealer evaluation for for delivery and auction operations having these securities as a basis.
41 The proposal for creating Investment Accounts was prepared by ANDIMA and is consolidated in a text contained in the Eco-
nomic Report “Public Debt: proposals for expanding liquidity”, published by the Association in 2003.
42 This taxation modality by income tax – decreasing tax rates according to the investment terms – has also been extended to
supplementary social security participants, as established by Law.
Projects: an agenda proposal for the brazilian fixed income market                                                    



demption occurs less than 30 days after the initial investment (short-term IOF - Tax on Finan-
cial Operations). Established in the initial stages of the effort aimed at lengthening terms, the
effectiveness of the tax is currently heavily affected by the change in the profile of investments
available, including by the better liquidity premium and the new way of assessing Income Tax,
which also differentiates on the basis of investment term, but takes into account much longer
periods (from up to six months to over two years)43. With regard to CPMF, it is known that
even with the operation of Investment Accounts, this tax fuels the high cost of bank interme-
diation in Brazil and should be reviewed, particularly in the context of growing participation
by retail investors, especially non-resident ones.
    With regard to the new rules that are in force for income tax, a number of points have been
the subject of debate in the financial market sphere, with a view to improving them. As for the
levying of decreasing rates of tax, since the measure was aimed at stimulating the lengthening
the profile of investments, doubts have arisen in relation to the inclusion of the term of opera-
tions (for delivery and repo operations) of the portfolios of funds among the variables taken
into consideration when calculating their respective average term – bearing in mind that the
purpose was to stimulate the purchase of long-term securities by these investors, instead of
discouraging them from operating in the secondary market, and in relation to the extension of
the general rule to include the payment of periodic revenues by fixed-income bonds and se-
curities, which has led to distortions in their taxation, discouraging their purchase and trading,
particularly when held by retail investors44.
    Some market segments have also observed remarked that the decrease of tax rates after a
period of remaining in certain investments may reduce competition between products, to the
extent that it discourages migration to a new modality (which initially has a higher income tax
rate). One possible solution would be to consider the movements on the Investment Account,
for the purpose of determining the Income Tax calculation basis. Another alternative would
be to measure the terms, for the purpose of determining the tax rate applicable, according to
entry in the Investment Account and withdrawal from this account and transfer to the check-
ing account, rewarding long-term investments, but making products indifferent with regard to
Income Tax taxation.
     As for the recent exemption granted to non-residents in the case of the purchase of gov-
ernment debt bonds, in keeping with the objective of strengthening the domestic bond market,


43 The subject was covered by ANDIMA’s request to the Ministry of Finance, by Correspondence Suger/Sutec No. 514/04 dated
11/3/04.
44 The matter was covered by ANDIMA’s request forwarded to the Federal Revenue Service, by means of Correspondence
Suger/Sutec No. 319~05, dated 7/20/05.
                                                                                    OTC fixed income market in Brazil



its extension to private fixed-income securities could also be looked into. If this measure were
adopted it would ensure equal treatment for all local currency denominated securities and
would encourage the expansion of both the investor base as well as the secondary market in
this segment.
     Lastly, and specifically in relation to the over-the-counter market and electronic systems,
the lack of any harmonization in terms of concepts between regulators, as already mentioned,
and of any consolidation of the more specific rules published over the last few years has led to
gaps and doubts with regard to the treatment to be given to new assets and operations or those
that are being developed in this segment, as is the case with FIDCs - Credit Rights Invest-
ment Funds, agribusiness assets and derivatives agreements. Furthermore, the rules observing
distinct criteria, such as those applicable to non–residents and to the “gain” earned on trading
certain assets “off the Stock Exchange”, have been associated with the general rule that has
always differentiated tax treatment by markets (fixed income, variable income or specific as-
sets), regardless of the environment in which they are traded, generating uncertainties regard-
ing the procedure to be adopted in each case.

     Investor Base
     With regard to the expansion of the investor base, it can be noted that efforts aimed at
stimulating the presence of non-resident investors and retail investors in the local market are
both recent, and in the latter case the effort has been a very modest one. In relation to non-resi-
dents, in addition to the exemption from Income Tax on government bond revenues, a number
of measures have been adopted with the aim of simplifying the procedures for investment in
the country, such as reformulation and consolidation of the applicable rules and the reduction
in the amount of time required to obtain the necessary documentation enabling such invest-
ments to be made45.
     As far as resident investors are concerned, the portfolios managed by closed pension funds
were worth of R$ 297 billion in December 2005, and though it is not possible to calculate
their share of the total public debt – because a significant percentage of their investments are
carried out by means of exclusive funds -, it is estimated that fixed-income securities account
for 50.6% of these portfolios, or R$ 150 billion. However, from the point of view of their
contribution to the liquidity of the local markets, the funds managed by these entities still
represent a potential market that has hardly been explored at all. Recently, their participation
in the secondary market, which was still in the initial stages, was aggravated by the segment’s


45 With regard to this, see ANDIMA’S Technical Report “Public Debt – Foreign Investor Participation”, 2005.
Projects: an agenda proposal for the brazilian fixed income market                             



reaction to charges relating to the use of ‘off-market’ prices in trades executed in the fixed in-
come market, which ended up limiting purchases of purchase by these agents at the respective
primary auctions.
    Undoubtedly, measures designed to encourage participation on the part of pension funds
in the secondary market involve the training of managers, which has already been occurring,
but might get a boost from initiatives such as the adoption of continuous education programs,
which have been successfully adopted in other financial market sectors. On another front, re-
lated to their activity per se in the secondary market, these funds should have access to online
information – in existing information, voice or quotation systems -, as well as using electronic
quotation or trading systems. In this way, price execution would be ensured at market con-
sidered intervals and, therefore, an efficient allocation of the savings deposited with these
agents.
    In addition to measures aimed at specific investors, initiatives related to investor education
take on an increased importance. The expansion of technical information and programs de-
signed to clarify the characteristics of fixed-income investments and respective assets not only
attract new investors to the segment, but also contribute to more proactive behavior on the part
of these participants. The diffusion of fixed- -income investments in Brazil would certainly
yield advances in terms of the consolidation of the bond market, the management of public
debt and the funding conditions of companies and other private sector entities.

     Conclusions on the Agenda
     As previously stressed, the suggestions presented in this study do not intend to cover all
the measures directed towards toward expanding liquidity and transparency in the fixed-in-
come over-the-counter market in Brazil. Their purpose is to get financial institutions, issuers,
fund managers, regulators and depositary system managers involved in the debate regarding
the implementation conditions and, when it is the case, the adoption of regulation or self-regu-
lation measures aimed at the segment. In particular institutional issues directed toward market
regulation, have been the subject of analysis by ANDIMA’s Monetary Policy Committee, for
the forwarding of proposals, formal or informal, to the authorities, as well as matters related
to taxation, discussed within the sphere of the Taxation and Standards Committee,. In addi-
tion to the utilization of regular forums, such as committees and commissions, the Association
resorts to the creation of workgroups for monitoring specific topics. A recent example was the
creation of a Study Group, which brought together ANDIMA, Abrapp and other authorities
to debate issues related to increasing the participation of institutional investors in the second-
ary fixed-income market. With regard to transparency, ANDIMA is especially involved in the
0                                                                 OTC fixed income market in Brazil



project for the consolidation, disclosure and monitoring of prices in the secondary securities
market, and continues to be active in relation to the question of investor education initiatives
by means of the carrying out of workshops, studies, courses and material made available on its
website (www.andima.com.br) and on the SND’s website (www.debentures.com.br).
 6
             1




appEndixES
2                                                                                       OTC fixed income market in Brazil



APPENDIX I

                                 Fixed-Income Market: Trading and Payment System

                                          GB;CB;FI               GB                 GB;CB;FI                 CB




                                           CetipNet                                Bilateral or         BovespaFix
                                                               Sisbex
     Trading




                                          (Quotation;                            Multilateral (by        (Trading)
                                                              (Trading
                                           Auction;                              phone or voice          SomaFix
                                                             or Record)
                                           Trading)                                 system)              (Record)
     Clearing




                                                               BM&F*
                                               C              Assets
                                                              Clearing                                            C
                                               E                                                                  B
                                               T
     Settlement




                                                                                                                  L
                                               I                                         S                        C*
                                               P**                                       E
                                                                                         L
                                                                                         I
                                                                                         C
                                              CB
                  Depositaries




                                                                                                              CB
                                              FI                                        GB




                                                             Brazilian Central
                                                                                                Settlement
                                    Banking Reserve             Bank STR
                                                                                                 Accounts
                                  Accounts of Financial
                                                                                               of Chambers
                                      Institutions        Reserve Transfer System
                                                                                               and Systems
                                                                   (STR)




     GB - Government Bond                            Record                  DNS             RTGS
     FI - Financial Instruments
     TDC - Corporate Debt Security

 * Central Counterpart. ** DNS for issuer’s risk operations only. Source and preparation: ANDIMA.
                                                                                                                             



APPENDIX II

                              Fixed-Income Over-the-Counter Market
                                       “Knowing the ropes”
                 Subject                                                       Legal Basis
Government Bonds                                Law No. 10.179/01 (amended by Provisional Measure No.
                                                2.181);
                                                Decree No. 3.859/01 (Securities Feature);
                                                Adm. Rule STN 410/03 (Public Offering);
                                                Adm. Rule STN No. 554/01 and No. 44/02 (Direct Treasury);
                                                Communication No. 7.818/00 from CB (Rate calculation);
Debentures                                      Law No. 6.404, art. 52;
                                                CVM Instructions No. 400 and 404;
                                                Joint Decision BC/CVM No. 13;
CDB – Bank Deposit Certificate                  CMN Resolutions No. 105 and 367;
                                                BC Circular No. 127;
DI – Interbank Deposit                          CMN Resolution No. 3.399/06;
Investment Funds                                CVM Instruction No. 409/04;
Repo Operations                                 CMN Resolution No. 3.339/06;
SELIC System                                    BC Circular No. 3.316/06;
Payment System                                  Law No. 10.214; CMN Resolution No. 2.882;
                                                BC Circular No. 3.057;
Short Operations                                CMN Resolution No. 3.339, art. 4; BC Circular No. 3.252;
Organized Over-the-Counter Market               CVM Instructions No. 243, 289 and 343;
Open Market Dealers Selection                   Joint BC/STN Regulatory Acts No. 9 and 10;
Central Bank Loans                              BC Circular No. 3.316, RA section 7, items 26 & 26;
(Back-to-Back operations)                       BC Circular No. 3.107;
                                                BC Circular-Letter, No. 3.239 (BC website);
Bond Lending                                    CMN Resolution No. 3.197 and BC Circular-Letter No. 3.225;
Securities Lending                              CMN Resolution No. 3.278/05
 Prepared by: ANDIMA.

 Addresses for searching mentioned standards:
 Resolution; Circular; Circular-Letter; Communication – BC website (www.bcb.gov.br, option: Legislation and Standards; CMN
 and BC standards; :Search for Standards).
 Law; Decree – Planalto website - (www.planalto.gov.br , option: Legislation).
 Instruction; Joint Decision – CVM website (www.cvm.gov.br ; option: Legislation; CVM acts).
 STN Administrative Rule; Joint Regulatory Act – Treasury website - (www.tesouro.fazenda.gov.br / legislação/dívida).
                                        7
                                                                   OTC fixed income market in Brazil




                               bibliogRaphy


ASSOCIAÇÃO NACIONAL DAS INSTITUIÇÕES DO MERCADO FINANCEIRO. Dívida
pública: participação do investidor estrangeiro. Rio de Janeiro, 2005. 53 p. (Relatório econômico).
Available at: <http://www.andima.com.br/publicacoes/arqs/divida-publica_2005.pdf>.
Last access in: Sept. 2006.

ASSOCIAÇÃO NACIONAL DAS INSTITUIÇÕES DO MERCADO FINANCEIRO. Dívida
pública: propostas para ampliar a liquidez. Rio de Janeiro, 2003. 98 p. (Relatório econômico).
Available at: <http://www.andima.com.br/publicacoes/arqs/divida-publica.pdf>. Last access
in: Sept. 2006.

ASSOCIAÇÃO NACIONAL DAS INSTITUIÇÕES DO MERCADO FINANCEIRO. Produ-
tos de captação: FIDC: Fundo de Investimento em Direitos Creditórios. Rio de Janeiro, 2006.
74 p. (Estudos especiais). Also available in electronic media for RTM – Market Telecommu-
nications Network – for subscribers only.
Available at: <http://www.andima.rtm/site-andima/publicacoes/arqs/fidc.pdf>. Last access in:
Sept. 2006.

THE BOND MARKET ASSOCIATION. E-commerce in the fixed income markets: the
2005 review of electronic transaction systems. Washington, 2005. 94 p.
Available at: <http://www.bondmarkets.com/assets/files/e-commerce_survey_final_120505.pdf>
Last access in: Sept. 2006.
                                                                                            



THE BOND MARKET ASSOCIATION; EUROPEAN PRIMARY DEALERS ASSOCIATION.
European bond pricing sources and services: implications for price transparency in the
european bond market. [Washington], 2005. 44 p.
Available at: <http://www.bondmarkets.com/assets/files/pricetransparencystudy_april05.pdf>.
Last access in: Sept. 2006.

THE BOND MARKET ASSOCIATION et al. Response to FSA discussion paper 05/05 on
trading transparency in the UK secondary bond market. New York, 2005. 35 p. Also au-
thors are: The European High-Yield Association, the Association for the Emerging Markets,
the European Primary Dealers Association and the European Securitisation Forum.
Available at: <http://www.bondmarkets.com/assets/files/FSAResponse_Dec05.pdf>. Last ac-
cess in: Sept. 2006.

CENTRE FOR ECONOMIC POLICY RESEARCH et al. European Corporate Bond Mar-
kets: transparency, liquidity, efficiency. London: City of London, 2006. 81 p. This report also
produced by the following institutions: ABI - the Association of British Insurers, the European
High Yield Association, ICMA - the International Capital Market Association, IMA – the
Investment Management Association e LIBA - the London Investment Banking Association.
Writers of this report: Bruno Bias, Fany Declerck, James Dow, Richard Portes e Ernst-Ludwig
von Thadden.
Available at: <http://www.icma-group.org/content/Advocacy/bond_market_transparency.
Par.0002.ParDownLoadFile.tmp/TT%20CorporateFULL.pdf>. Last access in: Sept. 2006.

CENTRE FOR ECONOMIC POLICY RESEARCH et al. European Government Bond
Markets: transparency, liquidity, efficiency. London: City of London, 2006. 88 p. This
report has also been produced by the following institutions: ABI - the Association of British
Insurers, the European High Yield Association, ICMA - the International Capital Market
Association, IMA – the Investment Management Association e LIBA - the London Investment
Banking Association. Writers of this report are: Peter Dunne, Michael Moore e Richard Portes.
Available at: <http://www.icma-group.org/content/Advocacy/bond_market_transparency.
Par.0003.ParDownLoadFile.tmp/TT%20GovernmentFULL.pdf>. Last access in: Sept. 2006.

EDWARDS, Amy K. Corporate bond market microstructure and transparency: the US experi-
ence. BIS Papers, n. 26, p. 31-38, 2006.
Available at: <http://www.bis.org/publ/bppdf/bispap26g.pdf>. Last access in: Sept. 2006.
                                                            OTC fixed income market in Brazil



FINANCIAL SERVICES AUTHORITY. Trading transparency in the UK secondary bond
markets: feedback on DP05/5. London, 2006. 60 p. (Feedback statement, 06/4).
Available at: <http://www.fsa.gov.uk/pubs/discussion/fs06_04.pdf>. Last access in: Sept.
2006.

INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS. Transparency
of corporate bond markets. Madrid, 2004. 39 p. IOSCO Technical Committee Report, pro-
duced in May 2004.
Available at: <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD168.pdf>. Last access in:
Sept. 2006.

KNIGHT, Malcolm. Promoting liquidity in domestic bond markets. [s.l.]: BIS, 2006. 11 p.
Bank of International Settlements Director-General speech on Government Borrowers Forum,
held on May 25, 2006, St. Petersburg. (BIS management speeches)
Available at: <http://www.bis.org/speeches/sp060525.pdf>. Last access in: Sept. 2006.

MIZRACH, Bruce; NEELY, Christopher J. The transition to electronic communications
networks in the secondary treasury market. St. Louis: Federal Reserve Bank. Research
Division, 2006. (Working Paper 2006-012B).

SERGE, Jeanneau; TOVAR, Camilo E. Domestic bond markets in Latin America: achievements
and challenges. BIS Quarterly Review, p. 51-64, June 2006.
Available at: <http://www.bis.org/publ/qtrpdf/r_qt0606e.pdf>. Last access in: Sept. 2006.



Consulted Websites:

Banco Central do Brasil
http://www.bcb.gov.br

BM&F – Bolsa de Mercadorias & Futuros
http://www.bmf.com.br

The Bond Market Association
http://www.bondmarkets.com
                                                                       



Bovespa – Bolsa de Valores de São Paulo
http://www.bovespa.com.br

CETIP – Câmara de Custódia e Liquidação
http://www.cetip.com.br

Comissão de Valores Mobiliários (Brasil)
http://www.cvm.gov.br

CBLC – Companhia Brasileira de Liquidação e Custódia
http://www.cblc.com.br

European Central Bank
http://www.ecb.int/home/html/index.en.html

Financial Services Authority
http://www.fsa.gov.uk

International Organization of Securities Commissions
http://www.iosco.org/about/

NASD - National Association of Securities Dealers
http://www.nasd.org

SELIC – Sistema Especial de Liquidação e de Custódia
https://www.selic.rtm/extranet/
Restricted Access to RTM – Market Telecommunications Network – users

SND – Sistema Nacional de Debêntures
http://www.debentures.com.br/

Tesouro Nacional (Brasil)
http://www.stn.fazenda.gov.br

U.S. Securities and Exchange Commission
http://www.sec.gov
   ANDIMA
      National Association of
   Financial Market Institutions
             Brazil



           Presidente
Alfredo Neves PeNteAdo MorAes


        Vice -Presidentes
       Aldo luiz MeNdes.
     edgAr dA silvA r AMos


            diretores
       dANiel luiz gleizer
  José roberto MAchAdo filho
    MArco ANtoNio sudANo
   MArcos AlbiNo frANcisco
  regis leMos de Abreu filho
       reiNAldo le grAzie
      robert JohN vAN diJk
          sAšA MArkus
   sergio cutolo dos sANtos


     suPerintendente geral
PAulo eduArdo de souzA sAMPAio

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:83
posted:10/13/2011
language:English
pages:79