Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENTTO CASH MARKETS 385Until the devaluation of the real in 1999, Brazil accounted for more than 40percent of Latin America's gross domestic product (GDP).The country has approximately180 million people, or one-third of the population of Latin America. Brazil hasa long history, throughout the 1970s and 1980s, of double-digit or more inflation, atrend that was sharply reversed with the implementation of the Real Plan in 1994.Several factors have contributed to the country's success over the years:• The preexistence of a sophisticated financial system with many banks andbroker-dealers• Cultural optimism and an appetite for risk taking• Rapid development in the 1970s, when the savings rate grew to more than20 percent of GDP• Derivatives contracts that were designed around mature underlying markets• The need for inflation/volatility hedging• Lack of transaction taxes and other favorable fiscal policies• Limitation of Brazilians to local markets• Limitation on dollar-denominated debt• A fiscal responsibility law that is difficult to repeal.There have been failures as well in Brazil, such as the speculative bubble in futureson individual stocks that killed that market. In 1989, there was a manipulation ofthe Rio stock market by traders acting in concert using futures, options and washtrading, unauthorized trading, and accounts, orchestrated by a trader who previouslyhad been sanctioned for participating in the manipulation of the U.S. silver market.This resulted in multiple broker failures, suspension of trading in futures contracts, andcivil and criminal penalties for multiple parties. Significant changes were made tostrengthen the system as a result of this experience, including identification of endusers, reduction of the settlement period in the cash market, prohibition of cash advances,and linking surveillance between futures, options, and cash markets in securities.Todate, efforts to revive a market in single stock futures have been unsuccessful,but this may change if planned securities futures products prove successful in theUnited States.Prior to 2002, the central bank supervised only certain contracts on the futuresmarkets, and the Commissao de Valores Mobiliarios (CVM) supervised contractson equities. Jurisdiction by law for most of the financial market, including futures,has now been granted to the securities regulator although some money market instrumentsand foreign exchange remain subject to the central bank's oversight.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub