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Brazil: Cleared for take off

Published in Automated Trader Magazine Issue 35 Winter 2015

The heart of Latin America skipped a beat this year as Brazil, the world's seventh-largest economy, fell into recession. But the financial system that underpins the beleaguered economy is undergoing changes which could help bolster growth. Sophie Lewisohn reports.

Nils-Robert Persson, Chairman, Cinnober

Unlike its northern neighbour the US, which boasts more than a dozen stock exchanges, Brazil has only one: BM&F Bovespa. It launched a new clearing house in August, bringing improved speed and safety to investors. Meanwhile, competitor exchanges in Brazil are inching towards launching bourses of their own, which would inject some much-needed competition into the market. Funds which have cautiously awaited election results see Brazil becoming increasingly attractive for investment.


When the futures exchange BM&F merged with the
stock exchange Bovespa in 2008, they ran four separate clearing houses: one each for derivatives, equities, bonds and foreign exchange.

The tumult of 2008 spurred on plans to integrate the clearing houses, with reduced risk at the forefront of developers' minds.

"After the crisis, there was recognition around the world that more effective regulation and better clearing systems were needed," says Nils-Robert Persson, chairman of Cinnober, which provides the technology for Brazil's new clearing house. "Here in Europe, we've talked about it for five years. In Brazil, they've taken action."

In Brazil, every single market participant now has its own account with the clearing house rather than passing their trades through a few big banks. While clearing houses in western Europe and the US handle a few hundred accounts, Brazil's handles several million separate clients, with the capacity to serve 12 million simultaneously.

Importantly, the risk represented by each market participant is now assessed by the clearing house, rather than by the banks. The immediate effect is that collateral is calculated in an entirely new way: on an individual client basis, and across all different asset classes at once.

The way it used to work was that a bank might receive instructions from one client to buy a hundred stocks of a company, and instructions from another to sell a hundred of the same. The orders would cancel each other out, and so the bank would not be asked to post any collateral by the clearing house.

If one of those parties defaulted, the bank took the hit. "This set-up might allow crises to occur," says Persson. "We've seen crises before arising when no one knew what was going on behind the front presented by the bank."

Not content with traditional methods of calculating collateral, BM&FBovespa created a new model with the assistance of internationally recognised quants and risk experts. After four years in development, the result is an integrated risk calculation system called Closeout Risk Evaluation, or CORE.

When the new clearing house went live on a Monday morning in late August, BM&FBOVESPA was asking its traders for $8.8bn less collateral than the week before...

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