Brazil working to expand hedging tools and expand market efficiency

As Brazil starts its journey to overcome the current economic challenges and restore investors’ confidence, it is also taking another step forward to improve market efficiency with more precise hedging options. Cetip, Latin America’s largest depositary of private fixed income securities, and Brazil’s largest private assets clearinghouse, in late August entered an agreement that makes the physical market price assessments of S&P Global Platts available as settlement mechanisms for the development of domestic derivatives contacts.

The agreement paves the way for Brazil’s financial institutions to offer over-the-counter (OTC) commodities derivatives contracts as hedging instruments against future price fluctuations. Historically, Brazil’s only hedging tools tended to be similar, but not necessarily matching commodities indexes and/or non-domestic contracts.

The new indexes available to underpin new derivatives include Brent crude oil, oil distillates including jet fuel, fuel oil and kerosene, and iron ore and aluminum. Potential benefactors include a full range of companies, such as commodities producers, refiners, exporters and importers.

‘With this agreement, financial institutions are now able to register derivatives linked to commodity prices published by S&P Global Platts, which is well known internationally and will now help facilitate the Brazilian market. We see this agreement helping to reduce hedging costs since the end user does not need to access the foreign market directly,’ explains Fabio Zenaro, Superintendent of Products at Cetip.

One financial institution that sees the benefit of this agreement is Citi Brazil. Luis Kondic, the company’s Treasury Products Manager, says: ‘In a demonstration of innovation and efficiency capacity, the partnership between Cetip and S&P Global Platts allows Citi to expand its offering of commodities derivatives, add new indexes, and serve its customers with local solutions to manage the exposure to price fluctuations in foreign markets.’

Cetip registers all types of OTC derivatives practiced in the country. In Brazil, the main underlying assets (indices) of these agreements are currencies, followed by interest rates. The derivatives contracts made possible by the clearinghouse can be customised according to the needs of each company, and this latest index portfolio expansion gives Brazilian investors and domestic businesses greater risk management precision, which is strongly pursued in times of high market volatility.