Brazil’s BM&F in 1999: a central counterparty near-failure case?

Norberto Montani Martins

Abstract

The failure of central counterparties became a major concern to regulators and supervisors after the 2008 global financial crisis. Few events of this type have been registered in the past, and the case of the Brazilian Mercantile and Futures Exchange (BM&F) in 1999 is usually referred to in the literature as a near-failure event. We analyze the details behind BM&F’s supposed near-failure based on the minutes of the Brazilian Congress Investigative Commission on the subject. More specifically, we depict the events that led to the bailout of two minor banks, Marka and Fonte- Cindam, by Banco Central do Brasil (the central bank of Brazil), and discuss its reasons for supporting the two banks. We argue that, despite some concerns on systemic risk expressed by high-level Banco Central do Brasil officers, the (potential) defaults of Marka and FonteCindam would not have been sufficient to lead BM&F to a failure. Rather, the bailout was related to a failed attempt to maintain the administered exchange rate regime then in force. We also draw some regulatory lessons from the episode in areas such as trade reporting, supervision and mandatory limits on financial fragility.