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ÍndiceThe previous studies undertaken by market and CVM officials
The beginning of the Asian crisis in July aroused the debate
around volatility control mechanisms, whether they were needed and what
would be the best implementation procedures. Through all of July and August,
regulators and market officials gathered to discuss the matter.
During the meetings, market officials voiced the general belief
that circuit-breakers could be harmful to the price discovery process and,
in a sense, may end up increasing volatility instead of reducing it. They
were also fearful that excessively restrictive circuit-breakers could drive
market participants away to over-the-counter markets or even to markets
abroad. On the other hand, there was unanimous agreement on the need of
adoption of circuit-breakers in order to protect the integrity of the system.
Based on historical studies on Ibovespa volatility, a two-tier
circuit-breaker was considered, under which trading would stop for half
an hour in the event of a 15% fluctuation over the previous day’s close,
and for one hour in the event of a 25% fluctuation. Another option would
be an individual circuit-breaker per stock, which would cause a ten-minute
open-outcry auction to be initiated every time a stock price varied more
than 10% over last day’s close.
As far as index futures are concerned, BM&F mantained that
its system of margin requirements and collaterals was enough to deal with
volatility uprisings. However, it favoured the interruption of futures
trading whenever the spot market’s circuit-breaker was activated.
Finally, a narrow range circuit-breaker, such as NYSE Rule 80-A,
was discarded. Such a mechanism aims at temporary disequilibriums caused
by program trading, which is inexistent in Brazil for all practical purposes.
Spot and futures markets establish circuit breakers for the first
time in Brazil
Many forms of circuit-breakers and other volatility checks were
still being studied by the Securities Commission and the representatives
of the exchanges, when the crisis struck the Brazilian markets with full
force at the end of October. In face of imminent generalized panic and
acute loss of value in the whole market, authorities decided, on an emergency
basis, to implement a two-tier circuit-breaker on the morning of October
28th (cf. Chronology of the Crisis, above). The model adopted in São
Paulo Stock Exchange would stop trading for 1 hour in the event of a 10%
drop of Ibovespa and would close trading for the day if after that the
index fell 5% more. The first level was activated right after the opening
of the market: Ibovespa fell 10% in four minutes. The second level was
not reached. BM&F Ibovespa futures followed the halt.
On the next day, the circuit-breaker was modified so that trading
would stop for 30 minutes if the index fell 10% and for 1 hour if it fell
5% more. It was also decided that in case of triggering at the end of regular
trading time, the closing of the market would be postponed so that a final
30 minutes of trading would be guaranteed. Rio de Janeiro Stock Exchange
adhered to these rules.
On October 30th rules were altered again. Rio de Janeiro Stock
Exchange moved to a point-variation circuit-breaker: 4,000 points drop,
trading stops for 30 minutes; 6,000 points, trading stops for 1 hour. (Two
weeks later it reduced those limits, to 3,500 and 5,250 points.) BM&F
adopted a 10% limit for Ibovespa futures contracts and suspension of trading
in case of a break in the spot market.
Until the settling down of volatility in mid November, the circuit-breaker
was used again twice, on November 7th and November 12th.
Synchronizing the markets
After the -15% market close on October 27th, Telebrás American
Depositary Receipts (ADRs) traded in New York continued falling
for two hours more. As Hong Kong closed -14% early in the following morning
(Brazilian time), authorities, market officials and participants faced
the possibility of a full disruption. CVM officials decided that a pause
was needed, so that participants could get hold of the situation and also
a much-needed positive lead from the ADR market could come through. Therefore
it was decided that the exchanges (both spot and futures markets) would
delay opening until 12:30 pm local time and postpone closing to 6:30 pm.
On the following day these times were advanced half an hour, to 12:00 pm
and 6:00 pm.
This measure synchronized Brazilian markets with New York ones, which
helped to calm down the former. The North American markets have been for
the last five years strongly correlated with Brazilian market moves. This
correlation is due to the amount of direct foreign investment in Brazilian
equities and to the growing number of Brazilian stocks traded in North
America in the form of ADRs, which includes Telebrás shares. This
means that intense ADR trading in New York may affect the Brazilian market
index itself.
At the beginning of 1998, trading hours returned to the old norm, from
10:00 am to 5:00 pm.
The change in share buyback rules
A third measure taken by the governmental authorities was the
change in share buyback rules. On November 12th Ibovespa closed -10.2%,
having the circuit-breaker being activated for the third time since the
beginning of the crisis. On the next day, the Brazilian Securities Commission
issued an Instruction raising the maximum limit of own shares that companies
could keep in treasury. In addition, the Central Bank lowered the minimum
term for Brazilian bonds issued in foreign markets from 3 years to 1.
On that same day, Ibovespa closed with a 3.2% gain.
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