Brasil Bolsa Balcão S.A (B3) is a stock exchange located in Brazil. Back in the year 2011, B3 achieved R$ 2.3 Trillion of market capitalization which made it as the 13th largest stock exchange across the globe. Unfortunately, the market capitalization shrank by the end of 2015 due to the
Question A
BM&F Bovespa Index Performance in 2014
In the year 2014, the trading volumes increased in the second half of the year due to contested presidential race until the voting day. However, even though there was in increase there, the trading activity was not efficient to recover the small volume of the first part of the year for the low volume of trading. It can be concluded that the overall volume traded of the year 2014 fell short from the previous year. This consists of both the stock exchange’s BM&F segment and the markets that is comprising with the Bovespa segment (equities and equity derivatives).
BM&F Segment
It fell 9.3% in 2014 compared to the prior year (2013) of the average volume traded in financial and commodity derivatives market where it hits 2.6 million contracts where it was slightly equalized by a 5.3% year-on-year increase in average rate per contract (RPC).
Comparing data with the year 2013, the year 2014’s performance can be explained by a 23.7% year-on-year reduction in volume traded in Brazilian-interest rate contract. This usually is the top traded contracts in this segment. Within 2014, there was 54.9% of the overall volume for short maturity contracts where it was higher. This may cause due to the decrease volatility and less unreliability of the direction of the Central Bank’s decisions during the first half of the year 2014 just before the presidential race period took place.
There was a 40.9% year-on year surge in the volume of trading using the U.S dollar for the denominated interest rate contract. This has made the highlight of the year itself.
The increase of 5.3% year-on-year in average RPC for commodity and financial derivatives contracts is commonly affected due to the factors listed below:
• Due to the greater concentration of trading in the longer maturity contract, the average RPC for Brazilian interest rate contract risen by 7.1% where B3 charged higher fee compared to the prior year.
• Secondly it is mainly due to an increase of fee for trades in forex contracts where there was a 5.3% year-on-year. In addition, there was also an increase in fee rates of 5.1% for the trades in the U.S dollar-denominated interest rate contracts. Overall, in both cases it can be explained by the 8.6% year-over-year average depreciation of the Brazilian currency with the U.S dollar as the currency used in for the contracts are in denominated in U.S dollars.
There was an increase from 15.9% to account for 34.5% of the overall volume yearly within the B&F segment volume distribution by investor category by the investor category shown by foreign investors. Moreover, it can be concluded that both financial institution and local institutional investors depreciated the volume of trading by 22.6% and 32.1%, to account for 29.6% and 28.6% of the overall yearly volume, respectively.
Bovespa Segment
For this segment, the average daily value in the equity derivatives markets and the stock market hit 7.29billion of Brazilian real where this indicated a 1.7% drop from the previous year (2013). It can be seen from the figure below where it is an analysis of a five year of average daily trading value risen to a 3.0% compound annual growth rate (CAGR).
The performance of the cash equity showed a drop in average trading value at 1.7% where it had accounted for 95.7% of the overall average substantially determined the segment performance. This result occurred due to an addition of a small decline in the average equity market capitalization.
BM&F Bovespa Index Performance in 2015
For the year 2015 on the other hand, there was a positive impact on revenues from the BM7F segment due to the increased volatility within the market and an increase devaluation of the Brazilian currency (Real) against the U.S Dollar. However for the Bovespa segment, there were huge fall within the market value of listed companies and in volumes traded. In both case, these can be affected by the deterioration in the Brazilian economy and also changes in the world or global situation.
BM&F Segment
In the year 2015, there was an increase of 10% where the average volume on this segment went up to R$2.9 million contracts. This is commonly due to the interest rate that is in the U.S. Dollar contracts and mini contracts which increased by 31.7% and 67.5%.
The results of the USD interest rate contracts shows that there was higher level of volatility. The increased are not just due to the increase of volatility but also the activities of the new clients where for the mini contracts which consists of stock indices contacts of total 7.01% and FX rates contracts of total 29.9%.
From the figure above, it can be seen that the interest rate in BRL contracts grew by 2.9% compares to the previous year (2014). This was the most traded contracts in this segment.
Some of the reasons of the increase are as per below:
• Increase in the RPC for contracts that are in the U.S. Dollar due to the depreciation of 28.9% of the Brazil Real affected the RPC of the Forex contracts which increases 37.6% and plus 42.2% of interest rate in the USD contracts.
• Commercial policy for investors using Direct Market Access (DMA) was amended which was affected in January 2015.
Bovespa Segment
There was a slight decrease of 6.9% below the year 2014 which was because of the lower cash volumes which lead to the result of 96.5% of the total traded in the Bovespa Segment. The average daily trading value in cash equities and equities derivatives in this segment was R$6.8 million in the year 2015. This can be referred to the figure below:
Furthermore, the fall of 6.1% in the average daily trading value of the cash market was mainly due to the reduction of 7.5% in average market capitalization. The figure below shows that there was a decrease from R$2.39 trillion in the year of 2014 to R$2.21 trillion within the year of 2015.
BM&F Bovespa Index Performance in 2016
In the year 2016, there are a lot of economic and political changes occur that affect the stock exchange both in Brazil and other countries performance over the year. The events such as the vote on favor of the United Kingdom’s exit from the European Union, the prices for some countries improves or recovered and not to forget the election of the president of the United States of America where it affects great volatility and increase in the unreliably in the global market.
BM&F Segment
Question B
CORPORATE GOVERNANCE AND RISK MANAGEMENT
The main aim of this stock huge stock exchange sector is to maintain its’ excellence of the corporate governance practices, to make sure the balance of interests between the this huge company with the shareholders, stakeholders, management and market participants.
Internal Audit
The aim for the Internal Audit of BM&FBOVESPA is to give all parties involve which consist of the Board of Directors, the Audit Committee and also the Executive Board the risk management and the governance process with an independent and unbiased effectiveness of the risk management and also the governance process. Also to have excellency of the internal controls and compliance following the rules and regulation that are related to all parties that is connected with the company and industry.
Internal Controls, Compliance and Corporate Risk
To manage its risks and controls, the stock exchange company implemented the four lines of defense model which consist of; the first line where it is primarily important for the risk of diminish and internal controls procedures where these all are related with the business area itself. Secondly, it is the second line of defense which includes risk management, internal controls and compliance functions and is operated by the department of Internal Controls, Compliance and Corporate Risk, which provide support for business units and assist Management’s decision making. The next line which is the third line is the internal audit, and acts independently of the internal controls environment. Finally, the fourth line of defense comprises revision of the financial statements by an independent external audit and the regulatory oversight of the Central Bank of Brazil (BACEN) and
The mission of BM&FBOVESPA’s Internal Audit is to give the Board of Directors, the Audit Committee and the Executive Board an independent, impartial and timely assessments of the efficacy of risk management and governance processes, as well as of the adequacy of internal controls and compliance with rules and regulations relating to the operations of the Company and its subsidiaries.
Central Counterparty Risk – Risk Management
Collateral for transactions in markets managed by BM&FBOVESPA consists of margin deposits in cash, government bonds, corporate debt securities, bank letters of guarantee, and stocks. As of December 31, 2016, the volume of collateral deposited by participants totaled R$266.6 billion and was 12.7% lower than the total deposited at the end of 2015.
The volume of collateral deposited increased in the equities and corporate debt securities clearinghouses as a result of greater average market capitalization in the Bovespa segment. However, there was a reduction in the amount of collateral deposited in the derivatives clearinghouse, reflecting lower volumes of outstanding contracts for Interest rates in USD, FX rates and Stock indices.