VZCZCXRO2084
RR RUEHRG
DE RUEHSO #0551/01 1721517
ZNR UUUUU ZZH
R 211517Z JUN 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 7156
INFO RUEHBR/AMEMBASSY BRASILIA 8258
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RUEATRS/DEPT OF TREASURY WASHDC
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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 
------- 
 
¶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 
--------------------- 
 
¶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