The Brazilian Mercantile and Futures Exchange (BM&F) announced on December 15, 2006 that it would study the possibility of opening its capital and alter its status as a non-profit organization owned by its members. This move reflects changes on other important exchanges such as the New York Mercantile Exchange (NYMEX) and the merger of the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME). The BM&F has become one of the world’s largest exchanges for commodities and financial futures trading over the last 20 years with daily transactions in derivatives averaging one million contracts. In this interview, the BM&F chairman, Manoel Felix Cintra Neto, talks about the exchange´s decision to consider opening its capital, how the BM&F compares with other leading exchanges and the challenges Brazil faces to achieve greater economic growth.

Manoel Felix Cintra Neto: This operation was a great success, as has been the case with all futures markets which have opened their capital. For example, the NYMEX IPO raised US$ 10 billion and the merger of the CBOT and the CME raised the market capitalization to US$25 billion. We contracted Rothschild as an adviser to carry out a study and present the pros and cons of opening our capital and the brokers and dealers who form our membership approved the recommendations. A decision on how much of the capital would be made available to the public will be put to the next general meeting of shareholders.  Right now, the Board of Governors is studying the subject.

Cintra: The BM&F was only created in 1985 yet it quickly became the biggest commodities exchange in Latin America and one of the largest in the world. The world rankings for the first half of 2006 put the BM&F in sixth place in terms of futures trading and eighth in terms of commodities. We did not have as much volume as the biggest exchanges like the Chicago Mercantile Exchange and Board of Trade or the Eurex but we did more business than other major players listed in the Futures Industry Trading (FIA) ranking. We were behind the Mexican Derivatives Market (MexDer) but it only trades financial futures and has no commodities trading. This shows we are still a main player on the world stage. One of the reasons for our success has been the transparent way in which we work. We would not have reached our present position had we not had high levels of transparency, compliance and self-regulation.

Cintra: The total volume traded by September 2006 amounted to 246 million contracts amounting to US$ 7.726 trillion. This compares with 199 million contracts amounting to US$ 7.638 trillion for the whole of 2005. The BM&F has been increasing volume rapidly in line with the world trend in derivatives. We have reached a daily volume of one million contracts which was almost double the original estimate for 2006.  As Brazil is a main producer of commodities, we are very strong in that area. For example, in 2005 commodities trading in coffee alone came to 2.5 times the size of the national harvest. A breakdown shows that our trading in financial operations and in commodities follows the same patterns of other leading exchange.

Cintra: This is a trend among the more liquid exchanges which are trying to concentrate business and become stronger. I have nothing against these mergers but we are not considering anything like this. In any case, this trend has already happened here. For example, in 1991 the BM&F signed an operating agreement with the São Paulo Commodities Exchange (BMSP). In 1997, another agreement was signed with the Brazilian Futures Exchange of Rio de Janeiro. In 2002, the BM&F acquired all the equity of the Rio de Janeiro stock exchange and the SISBEX electronic system. During that year we also assumed the main clearing operations for government bonds and other securities from the Clearing and Depositary Corporation (CBLC). Two years later, in 2004, the BM&F´s own Securities Clearing House was set up.  We now have three clearing houses – for foreign exchange, derivatives and securities. In 2002, we launched the Brazilian Commodities Exchange which merged a number of exchanges in agriculturally important states like Goais, Matto Grosso, Parana and Minas Gerais.

Outside Brazil, we have a strong association with the Rosario commodities exchange in Santa Fe province in Argentina. We do good volume and are working on a joint soybean operation for the Asian market which has become a big buyer of Brazilian and Argentinean soybeans in recent years. This was a first step. We are considering extending soybean operations to the Middle East and starting a similar operation for wheat.

Brazil is home to the Amazon region. Is the BM&F involved in trading of carbon credits?
Cintra: The BM&F launched a Carbon Facility in September 2005 as part of a joint initiative with the ministry for development, industry and foreign trade aimed at developing a Brazilian carbon market to provide incentives to reduce greenhouse gas emissions. This facility is a state-of-the-art electronic system designed for the on-line registration of projects with the potential to generate carbon credits in accordance with the principles established by the Kyoto Protocol.

Could we see the BM&F following the BOVESPA and scrapping floor trading?
Cintra: At the moment we have three systems of trading – open outcry on the floor of the exchange, electronic and web trading. We have no plans to change this and the market itself will decide how we continue. I think electronic trading will increase its share but I also foresee the open outcry system remaining with us for a long time.

What is your relationship with the Bovespa?
Cintra: We have always had a close relationship since the BM&F was actually founded by Bovespa members. This gave the new exchange great credibility and, in the early years, one third of the members of the board of directors were appointed from the Bovespa. As the new exchange developed it began to stand on its own feet and showed it could look after itself. The Bovespa still has the right to appoint three members to the board but it is not involved in the management. It is an Honorary Member. The Bovespa chairman, Raymundo Magliano, has declared that Bovespa would give up its “Golden Share” as part of any move to open our capital.

Finally, Brazil´s GDP growth rate has been somewhat disappointing in recent years and President Luiz Inacio Lula da Silva has been talking of achieving growth of 5% in his second term. Is this feasible?
Cintra: It would be great challenge to achieve the rates of growth of 7% or 8% we really need to reduce inequality, create jobs and increase income. I am optimistic that we will surpass the mediocre growth rates of 2% and 3% of recent years. This can be done by making reforms, such as tackling the fiscal adjustment and reducing the levels of taxation. President Lula knows this and has said he will listen to the opposition. I believe the opposition is mature and, if the government´s policies are in the national interest, it will support them. Lula is in a strong position as he tries to create the political base for his second mandate. Let´s see if he uses his power well.
© John Fitzpatrick 2007