Brazilian SEC, Capital and Derivatives Markets

The distribution and intermediation system of the Brazilian capital market is made up of 566 institutions, of which 227 are brokerage firms dealing in securities, 316 are distributors, 17 are categorized as investment banks and six can be described as development banks. Another three companies are responsible for custody and registration of operations. Bearer shares are not authorized in Brazil and almost all other transactions are registered, a method which demands a high level of operational sophistication from the companies looking after their custody.

All trades on the stock exchanges are made through brokers; that is, even financial institutions must use brokerage services. The commissions levied in Brazil are fixed at competitive rates and all negotiations are performed in the name of the end client.

Of these nine exchanges, BOVESPA is responsible for the greatest part (85%) of the trades made in the country. The remaining eight exchanges are integrated within the SENN - Electronic System for National Negotiation - and account for around 15% of the total volume.

By December, 1995, there was a total of 874 public corporations registered with the Securities Commission, of which 578 with shares quoted on the stock exchanges, representing a total market valuation of US$ 147.6 billion.

The average volume of shares negotiated on a daily basis in Brazil was, in December of 1995, US$ 234.2 million on the sight market and US$ 47.6 million on the futures and options markets. The level of concentration in the Brazilian shares market is high. Also in December, 1995, the 10 most actively traded shares on the BOVESPA were responsible for 83.1% of the total volume negotiated, while at Rio de Janeiro the 10 most active after shares represented 79.8% of the total.

The São Paulo Stock Exchange, founded in 1895, is totally automated today. Its liquidation and custody systems are fully integrated and make use of real time systems to register transactions and transmit information. Transactions can be carried out viva voice on the floor of the exchange or, since 1990, through CATS (Computer Assisted Trading System). Brokers located in other parts of the country can use CATS to participate in the market at greatly reduced costs. Transactions on the exchange floor and via CATS take place between 10am and 4pm and embrace the cash, futures and options markets.

BOVESPA currently has 86 member-brokers, with another 47 brokers located outside of São Paulo who are authorized to operate on the exchange. This latter type of broker is called a permissionário or permitted member. By the end of 1995, 543 companies were listed on the BOVESPA.

Founded 50 years earlier than its counterpart in São Paulo (in 1845), the exchange at Rio de Janeiro today has 65 member-brokers and two permitted members, along with 570 listed companies. Its technological level is comparable to standards found anywhere in the world.

Transactions take place between 10am and 4pm through the SENN, Electronic System for National Negotiation - and viva voce on the exchange floor. The SENN is an electronic negotiation system which links together eight Brazilian exchanges -- BOVESPA is not a SENN member. Operations on the cash market and for derivatives are carried out simultaneously via voce on the exchange floor and through the SENN.

At the end of 1995, BVRJ began a pioneering effort by permitting specialists to operate trades on the exchange floor.

BVRJ and BOVESPA have signed several agreements leading to the interchange of information and cooperation with overseas exchanges. Both are active members of FIABV, the Iberian-American Federation of Stock Exchanges.

As far as dealings in shares are concerned, the Brazilian over-the-counter market has little economic significance. The exchange markets account for almost all share transactions in the country. The success of electronic negotiation systems like CATS and SENN confer considerable advantages to the formal market. In recent times the CVM has taken over the regulation of the organized over-the-counter market for shares and the market maker in order to make the capital market more accessible to smaller companies and break up the concentration of the main market in which the exchanges deal.

The over-the-counter market for debt certificates and derivatives contracts is already highly significant. CETIP - the Central Office for the Custody and Liquidation of Private Bonds - is a company which operates a securities trading system throughout the country and recourse is made to it by financial institutions for the custody, negotiation and financial liquidation of certificates of deposit, interfinancial deposits, commercial paper, bills of exchange, gold, debentures, privatization certificates, future contracts, swaps, etc. Considered extremely reliable and secure, CETIP is the preferred system for participants in the Brazilian financial system.

The average daily volume of securities negotiated in this market in 1995 was US$29.0 billion, of which 95% corresponded to bank and inter-bank deposit certificates and other types of private securities, while 5% was accounted for by Swaps and other derivatives.

It is a legal requirement that the clearing and custody of securities on the Brazilian capital markets must be conducted by companies set up exclusively for this purpose. The custody of securities negotiated on the São Paulo stock exchange is the responsibility of the exchange itself and the financial settling of the operations falls to CALISPA - Liquidation Cashiers for São Paulo S.A., while at the stock exchange at Rio de Janeiro and in the SENN the custody of bonds and settling of operations is entrusted to CLC S.A. - the Liquidation and Custody Chamber S.A. Both offer a system for custody which is fully automated and allows securities to be delivered within three working days. Services such as appropriation of benefits, on-line queries and the issue of summaries of securities trading are also commonly performed by these two companies. Furthermore, both maintain an interface between their custody systems to facilitate the arbitrage between transactions at BVRJ / SENN and BOVESPA.

The system for clearing and settlement at BOVESPA is operated by CALISPA S.A., while BVRJ / SENN is operated by CLC S.A. The clearing of the cash market transactions takes place on the first working day after performance. Financial clearing takes place on the third working day.

Negotiations on the Brazilian exchanges come under constant scrutiny by the respective departments responsible for monitoring the market. Furthermore, the Securities Commission (CVM) carries out the supervision of trading on the exchanges and the over-the-counter market. Through these means it is possible to identify not only the intermediary but also the principal in any given operation.

Market oversight is carried out both on- and off-line. On-line scrutiny occurs during trading sessions when previously defined price and quantity parameters are checked. Off-line observation occurs each night after the close of business.

The adherence to other rules and regulations applicable to the exchange floor and electronic trading, imposed by the exchangesí own regulations, is verified by inspectors present on the trading floors and in special rooms set aside for electronic monitoring. At any given moment brokers or distributors may be summoned to identify the principals in operations. The disclosure of relevant information which could have a bearing on prices also is followed. Possible instances of privileged use of such information are analyzed in the light of price variations and the strategies adopted by investors. Moreover, both the exchanges and the CVM make periodical audits of brokers.

The guarantee mechanisms are created by the clearinghouses and take the following form:

The clearinghouses impose operational restrictions on the clearing agents working in their field. Clearing and Settlement are regarded as complementary activities to market observation and monitoring of transactions is a feature common to all these activities.

At the close of 1995, there were 874 public companies in Brazil, of which 570 whose shares were listed on the stock exchanges. Below is a chart showing changes in the number of companies listed on the exchanges since 1973:

The total market value of Brazilian public corporations at the close of 1995 was some US$147.6 billion. Below is a chart illustrating developments in total capitalization as a percentage of the GDP:

As explained above, BOVESPA and SENN account for all trading on the Brazilian market. The table below gives statistics for the Brazilian exchanges:

The performance of the Brazilian stock market is illustrated by the indices for the two major stock exchanges, Ibovespa and IBV, and, furthermore, by the index maintained by the Electronic System for National Negotiation or I-SENN.

The principal Brazilian indices were created with the objective of recording the performance of their respective markets. They are developed to consider the relative contribution of each asset in the total financial volume of transactions. As the market tends to concentrate on relatively few shares, the indices naturally reflect this trend. For this reason, the indices for the Brazilian exchanges cannot always be regarded as an accurate reflection of the country's economic situation. As the market is currently excessively concentrated, they above all reflect the variations in prices of a limited number of shares.

Below are percentage variations per month of the principal indices during the period 1992 to 1995:

The investment funds industry in Brazil is regulated by Law N^o. 4728/65, which establishes the essential structure of requirements for listing, reimbursement of investors, tariffs and administrational practices. The responsibility for the supervision and discipline of all the funds originally fell to Brazilian Central Bank. But once the CVM was created the latter took over the duties of regulating the funds containing assets yielding variable returns, while the bank retained responsibility for the funds yielding fixed returns. The various categories of investment funds are currently regulated through the Resolutions of the National Monetary Council and disciplined through Circulars issued by the Central Bank and Directives from the CVM.

There are currently 37 different types of mechanisms for collective investment, with 30 of these being directed towards resident investors and seven towards foreign investors. The CVM supervises a total of 20 different funds and the Central Bank is responsible for the control of the 17 others. Of these, 15 present significant volumes of capitalization, 12 being

destined for domestic investors and three towards overseas investors. The main types of funds for residents are: Investment Funds in Shares, Investment Funds - Free Portfolio, Financial Investment Funds - 60 days; Financial Investment Funds - 30 days, and Short-Term Investment Funds. Those for foreign investors are: Fixed Income Funds, Privatization Funds, Conversion Funds and the mechanism contained in Supplement IV.

The investment funds industry in Brazil is responsible for assets of some US$85.1 billion, representing 13.5% of the GDP. The following table represents the evolution of assets within the system since 1991:

Brazil boasts a vast network of financial intermediaries authorized to operate in the derivatives market. Besides the intermediaries linked to the capital market, which has been mentioned above, there are those linked to the exchanges dealing in futures and to banking and non-banking financial institutions, all actively participating in the derivatives market. In addition, Swap operations are carried out by financial institutions in general. On the over-the-counter market, operations are mainly registered in the CETIP. However, the majority of Brazilian financial institutions have the potential to participate in the derivatives markets.

The two principal exchanges for Brazilian futures - the Commodities and Futures Exchange (the BM&F) and the Brazilian Futures Exchange (the BBF) maintain systems to scrutinize the market, clearing operations, settling and guarantees which resemble those of the Stock Exchanges.

The transactions involving over-the-counter derivatives predominantly take place through the CETIP, which concludes the process of financial liquidation within one working day. The system also updates and provides daily information throughout the market on the prices of various financial assets and charges levied for the trades registered there. Monitoring operations are also carried out on transactions with a view to identifying and, if necessary, impeding those which deviate substantially from applicable market standards.

Share derivatives, which have been the object of transactions since the beginning of the 1970s, began to be regulated on Brazilian stock exchanges as of 1979. In 1982 was seen the advent of negotiations for options on the BVRJ and, a year later, term and futures operations were being regulated. The futures contract in the Bovespa Index began to attract negotiations in 1989 and is presently one of the most active on the Brazilian market. In addition futures contracts of individual share value and portfolio indices as well as options on futures for share indices are negotiated on the BBF.

Although they are of more recent origin, the markets for interest and exchange rate derivatives represent the bulk of derivative transactions carried out in the country. The success of such contracts has put Brazil among the leading derivatives market in the world. The combination of a solid institutional base able to guarantee reliability for the fulfilment of contracts and, in the recent past, a highly volatile economic environment, especially regarding interest and exchange rates, made such contracts especially attractive to the investing public.

Derivatives connected with commodities are not relevant in terms of volumes negotiated, especially taking into account the share of the agribusiness sector in the total Brazilian GDP (around 40%). This is explained by the model for agricultural policy adopted by the Brazilian Government, in which it acts as the principal financing agent, keeper of regulating stocks and guarantor of minimum prices for the purchase and sale of crops. The predominance of the government in agricultural activities plays a decisive role in reducing, and sometimes even eliminating, the risks inherent in farming and inhibits the emergence of derivative products.

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By end of	Quantity
1973	690
1982	607
1990	616
1992	591
1993	577
1994	569
1995	570

Year	Capitalization	% of GDP
1983	15,102	6.0
1985	42,768	14.0
1987	16,900	4.7
1989	44,368	11.1
1991	42,759	7.7
1992	45,261	8.2
1993	96,698	16.8
1994	185,352	30.0
1995	147,560	23.4

	BOVESPA	SENN	Total
Av. monthly vol. on cash mkt.	4,780.5	878.6	5,659.1
Av. daily vol. on cash mkt.	234.15	45.26	279.41
Av. daily vol. futures/options	47.63	9.99	57.62
Av. monthly no. bonds negotiated	547,795.770	242,841.315	790,637.085

Company	Share %
Telebrás PN	53.94
Petrobrás PN	6.02
Eletrobrás ON	4.54
Vale do Rio Doce PN	4.34
Eletrobrás PNB	4.24

		Ibovespa				I-SENN
Period	1992	1993	1994	1995	1992	1993	1994	1995
January	84.4	36.9	97.2	-10.8	269.6	33.1	101.2	-7.7
February	29.4	51.3	42.3	-15.8	26.9	46.6	42.1	-18.4
March	21.1	36.5	43.8	-8.9	16.6	35.0	49.6	-6.6
April	28.6	25.6	8.9	28.0	28.7	-88.1	8.9	28.5
May	14.8	47.0	44.4	-2.4	17.5	49.3	46.2	-3.1
June	-22.6	51.8	46.9	-3.2	-18.5	54.2	47.4	-1.6
July	33.5	22.0	16.0	7.6	30.6	19.8	-88.4	5.5
August	21.9	47.0	26.9	11.2	14.0	51.5	27.5	5.2
September	36.2	52.0	2.9	8.3	26.1	60.4	11.2	8.7
October	3.8	25.8	-12.5	-11.6	7.5	26.5	-5.2	-8.5
November	-0.9	48.7	-3.0	6.1	6.3	50.3	-6.6	0.8
December	48.2	37.0	-6.5	-1.8	37.2	-85.8	-3.5	0.4
Accum. in yr.	1,015.8	5,437.0	1,021.0	-1,3	1,881.0	-43.0	41.0	-3.8

Year	Total assets	% of GDP
1991	10,227.6	1.8
1992	21,208.2	3.9
1993	37,225.3	6.5
1994	83,456.4	13.7
1995	85,147.5	13.5