International Conference

1
Financial Innovation Emerging Markets
International Conference Developments and Trends
in National Bond Markets
July 2008
2
Macroeconomic Overview

• Fiscal Commitment
• Reduction in the External Vulnerability
• Inflation under control and economic stability

Demab
2
3
Macroeconomic Overview
4
Macroeconomic Overview
5
Macroeconomic Overview
6
Macroeconomic Overview International Reserves
7
Macroeconomic Overview Nominal Rates
Nominal interest rates ()
Daily data, interest rates in per cent against
years of 252 working days, calculated as a
cubic-spline interpolation of the interest rates
observed for DI futures contracts.
Sources BCB, The Brazilian Mercantile Futures
Exchange (BMF)
8
Macroeconomic Overview GDP growth
Daily data, interest rates in per cent against
years of 252 working days, calculated as a
cubic-spline interpolation of the interest rates
observed for DI futures contracts.
Sources BCB, The Brazilian Mercantile Futures
Exchange (BMF)
9
Objectives
Fedral Public Debt Management

• Minimize long-term financing costs, while
  ensuring the maintenance of prudent risk levels
  and contributing to the smooth operation of the
  public bonds market.

10
Guidelines
Fedral Public Debt Management

• Subject to market conditions, the guidelines for
  the DPF management are to
• Lengthening of average DPF maturities and
  reducing the percentage of DPF maturing in 12
  months
• Gradual substitution of floating-rate bonds for
  fixed-rate or inflation-linked bonds
• Improvement of the external liability profile
  through issuance of benchmark bonds, early
  redemption program and structured operations
• Incentives to the development of the interest
  rate term structures for federal public bonds on
  domestic and external markets and
• Expansion of the investors base.

11
Indicators
Fedral Public Debt Management

• Lengthening the average maturity
• Reducing the percentage due in 12 months
• Consolidating the share of fixed rate bonds plus
  inflation linked bonds above 60.

12
Debt Composition
Fedral Public Debt Management
13
Maturitydebt maturing in the following 12 months
Fedral Public Debt Management
14
Fedral Public Debt Management
Domestic federal debt maturity structure in R
billion
End of the month data. Source Banco Central do
Brasil, Press Releases - Open Market
(www.bcb.gov.br)
15
Fedral Public Debt Management Strategy

• Fixed Rate
• Focusing on increasing the average issuance term
  of these bonds
• Issuance of shorter term LTN, with benchmarks of
  6,12 and 24 months, while maintaining 3,5 and 10
  year NTN-F.

16
Fedral Public Debt Management Strategy

• Inflation Linked Bonds
• Issuance of 3,5, 10,20 , 30 and 40-year terms.
• No issuance of NTN-C( linked to the Wholesale
  Price Index- IGP-M).

17
Fedral Public Debt Management Strategy

• Floating Rate Bonds
• Net redemptions of floating-rate bonds-LFT, with
  new bonds issued maturing in the third month of
  each quarter
• Lenghtening of the average issuance term of these
  bonds.

18
Initiatives

• New Dealers System
• New Payment System
• Securities Lending Program
• New electronic platforms
• Investor base enlargement
• Mark-to-market rules

19
Stimulating Primary and Secondary Markets

• Primary Dealers
• Strategy
• Improvement of the current system aiming at
  increasing both the liquidity of the government
  securities secondary market and the efficiency
  of the open market operations accomplished by the
  Central Bank of Brazil.

20
Stimulating Primary and Secondary Markets

• Previous Primary Dealers System
• Only one group of primary dealers with 22
  institutions
• Semiannual replacement of two institutions
  according to performance evaluation
• Capital requirement of, at least, 100 of the
  minimum value fixed for commercial banks
• Privilege access to the open market operations
  accomplished by the Central Bank of Brazil
• Obligation provide the monetary authority with
  market information and analysis.

21
Dealers

• Diagnosis
• Low liquidity in the securities secondary market
• Lack of institutions playing the role of market
  makers
• Large institutions, with great participation in
  public offers and repo operations, benefited too
  much from the performance evaluation system
• Institutions ranked below the 12th position used
  to contribute only marginally to the primary
  market (less than 3 of participation per
  institution)
• The Brazilian system, regarding dealers
  privileges and obligations, was too timid when
  compared with the international experience
• Liquidity in the secondary market can be
  increased if representative maturities are chosen
  for each security
• The primary dealers current structure of
  privileges and obligations should be changed in
  order to spur intermediation and increase the
  number of participants in the federal securities
  market.

22
New Dealers System

• Creation of two groups of dealers
• Group of Primary Dealers, aimed at primary offers
  and money market operations, with up to 12
  institutions
• Group of Specialist Dealers, aimed at outright
  operations in the secondary market, with up to 10
  institutions.

23
New Dealers System

• New Dealers System privileges
• Participation in second round auctions
• Counterpart in Central Banks open market
  operations
• Access to Central Banks securities lending
  program.

24
Stimulating Primary and Secondary Markets

• Primary Dealers -
• Additional performance targets for specialist
  dealers.
• Specialist dealers will have to post daily, twice
  a day, bid and ask proposals for each one of the
  negotiated bonds
• Participants will have greater knowledge of
  prices and offered bonds, providing more
  transparency and improving the pricing of the
  bonds in the primary and secondary markets.

25
Challenges

• Low daily turnaround on secondary markets
• Private credit growing at a higher pace
• Absence of long term funding
• Preference for short-term operations (overnight
  operations)

26
Challenges
Total credit operations in the financial system
as a of GDP

27
Challenges
Daily Turnover

28
Foreign Investors