BM&F’s Board of Governors approved on February, 16th the implementation of the spot dollar pit at the Exchange’s trading floor. The model that was accepted by the Board of Governors is a negotiation system linked directly to BM&F’s Foreign Exchange Clearinghouse.
This initiative complements the product offers related to foreign exchange at BM&F – the derivatives products (futures, options, swaps and FRAs) and the FX Clearinghouse, launched on the 22nd of April, 2002.
A specific pit will be created for this new market. The pit’s access will be exclusive to member brokerage houses which, simultaneously, are authorized to mediate FX transactions according to the terms of the Brazilian foreign exchange legislation. However, the Board of Governors has established rules to allow non-member brokerage houses, which have been trading in this market, to participate in the spot dollar pit.
It is worth stressing that the mechanisms of monitoring and control of the open outcry trading floors, already in practice for the derivatives market, will be applied to the new pit. This represents an advance in relation to transactions that currently occur in the over-the-counter market.
This new product will allow the convergence of liquidity, with the increase of traded volume and the better definition of spreads; more efficient price formation; and a significant reduction of both market and operational risks. Additionally, information regarding transactions will be made available to the market through BM&F’s authorized Vendors – in real-time – or the Exchange’s website, augmenting transaction disclosure.
The settlement of spot dollar transactions carried out at the trading floor will be done exclusively by BM&F’s Clearinghouse. Currently, the Clearinghouse settles approximately 90% of T+2 transactions of the Brazilian foreign exchange interbank market, having surpassed one trillion dollars in financial volume since its inauguration. The FX Clearinghouse eliminates the principal risk and significantly reduces market and operational risks of transactions.
Furthermore, the Clearinghouse settles transactions by net volumes, reducing the capital need and back office costs. Around 85% of values are settled by the netting process, in other words, without the flow of dollars and reals.
The project of spot dollar trading at BM&F will be submitted to the Brazilian Central Bank for approval.