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Dodd-Frank 30 Day Countdown: Day 16

Insight Robin Powers Robin Powers · June 30, 2011

Brazil and Argentina lead South America in Derivatives Regulation

In the midst of the sweeping global financial reform, U.S. regulators could look to Brazil for some guidance on the derivatives market. The Brazilian monetary authorities regulate and supervise the financial sector tightly and have always adopted a very restrictive approach in the derivatives market.   Brazil has operated under strict regulation since 1994 when OTC derivatives were first required to be registered with trade repositories. The country has one central clearing house in which all listed derivatives, as well as some OTC derivatives, are cleared. All OTC derivatives that have not been cleared through the clearing house must be reported to a local data repository so that swaps may be monitored by regulators for excessive market risk. After the global financial crisis of 2007, Brazil undertook additional prudential initiatives to monitor and control the risks assumed by Brazilian participants in derivatives transactions.

Across the border in Argentina, bilaterally traded and settled derivatives comprise only about one-quarter of the market, as the other three-quarters of the market are centrally-cleared and either traded on exchange or on the Mercado Abierto Electrónico S.A. (MAE) electronic platform, which is regulated by the Argentine market regulator.  A regulation adopted in 2007 provides capital incentives for trading derivatives on an exchange or an electronic trading platform that also provides for guaranteed settlement. Argentina’s central bank also monitors notes in the quarterly financial statements generated by financial institutions in order to track derivatives activity. The central bank then published a public report on its findings which it posts on its website.

Both Argentina and Brazil noted in the Financial Stability Board’s OTC Derivatives Market Reforms Progress report on Implementation dated April 2011 that trading in derivatives in their respective markets takes place in a far greater proportion in standardized, exchange-traded form (estimated at over 70% in Argentina, and approximately 90% in Brazil). Neither country has plans to introduce mandatory central clearing requirements, given the high level of standardization, exchange and electronic platform trading and central clearing that already takes place in those markets.

U.S. regulators will continue to cooperate with all of the G20, of which Brazil and Argentina are a part, in order to achieve continuity and prevent regulatory arbitrage across borders. But whether U.S. market participants would consider moving their derivative transactions off-shore to South American markets such as Brazil or Argentina is questionable. 

-Stephanie Kane co-authored this post