BRAZILIAN MERCANTILE AND FUTURES EXCHANGE GROWTH AND

UNCLAS SECTION 01 OF 02 SAO PAULO 000551

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/BSC, WHA/EPSC, AND EB/OFD/OMA
STATE PASS TO USTR FOR SCRONIN
STATE PASS EXIMBANK
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
NSC FOR TOMASULO
USDOC FOR 4332/ITA/MAC/OLAC
USDOC FOR 3134/USFCS/OIO
TREASURY FOR JHOEK
AID/W FOR LAC/AA
PARIS FOR ECON - TOM WHITE

E.O. 12958: N/A
TAGS: EFIN ETRD EAGR SENV ECON BR
SUBJECT: BRAZILIAN MERCANTILE AND FUTURES EXCHANGE GROWTH AND
ETHANOL TRADING

SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY

SUMMARY
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1. (SBU) In a June 15 meeting with the Ambassador, Brazilian
Mercantile and Futures Exchange (BM and F) President Manoel Felix
Cintra Neto and Government Relations Director Joao Lauro Amaral gave
an overview of the institution and presented an optimistic outlook
of derivatives and commodity trading in Brazil. With its volume
doubling in the last two years and its position as the largest
derivatives market in South America, the BM and F is set to become
an increasingly important commodity trader in the international
arena as a whole. Noting that the exchange recently began trading
ethanol, Cintra laid out steps for making the product an
"international fuel." End Summary.

BM&F Overview
--------------


2. (SBU) In a June 15 meeting with the Ambassador, Brazilian
Mercantile and Futures Exchange (BM and F) President Cintra stated
that the BM&F is the primary derivatives market in Brazil and the
largest derivatives market in South America. With the average daily
trading volume doubling in the past 24 months, trading peaked on
June 8 with 3.9 million contracts, worth USD 167 billion. Although
interest rate futures represent the largest share of traded
contracts, roughly 75 percent, spot market contracts are also traded
on several instruments (e.g., gold, FX). Trading occurs
electronically (e.g., interest rates) or in open pits (e.g.,
agricultural commodities) depending on the contract, Cintra said.
The BM and F is regulated by the CVM (Comisao de Valores Mobiliares,
the Brazilian equivalent of the Securities and Exchange Commission).
The BM and F has nearly 100 members authorized to trade. The most
recent set of financial statements (June 30, 2006) indicate that the
BM and F had total assets worth USD 750 million and a net income (H1
2006) of approximately USD 52 million.


3. (SBU) According to Cintra, the BM and F began operations in
January of 1986. A significant expansion in activity occurred in
2002-03 when the Brazilian Central Bank authorized inter-bank
foreign exchange transactions to be made through the BM and F.
Additional fixed income contracts began to be traded and foreign
investor interest in Brazil began to increase. Foreign investor
participation has now risen from less than 5 percent to
approximately 20 percent.


4. (SBU) Cintra added that the BM and F is currently a trading
platform for a wide range of derivative contracts, including
currencies, fixed income, equity indexes, and commodities (cattle,
coffee, corn, gold, soybean, sugar). Swaps, options and futures are
available. In September 2005, carbon emissions contract trading
began.

Ethanol is the Future
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5. (SBU) Cintra noted that on April 24 of this year the BM&F began
to trade ethanol. The BM&F expects ethanol contracts to become a
key source of future growth, he commented. While trading volume
thus far is light, public interest is substantial. BM and F
management has already scheduled road shows in Europe, Asia and
North America to promote ethanol contracts. Cintra views the
development of a derivatives market as essential for promoting the
future global use of ethanol. A derivatives market will assist

SAO PAULO 00000551 002 OF 002


suppliers and purchasers in managing their risks, reducing
transaction costs through increased liquidity and providing a means
for price discovery at regular intervals, he stated. He presented
increasing liquidity as a major challenge for ethanol trading.


6. (SBU) When the Ambassador noted the growth of interest in
ethanol and biofuels in general, Cintra stated that ethanol trading
must be internationalized. Cintra called for technology transfer,
new facilities to produce ethanol and increasing trade as the next
steps. He said ethanol will become an "international fuel" only
when more countries begin to produce.


7. (U) This cable was coordinated with Embassy Brasilia and
approved by Ambassador Sobel.

SOBEL