B O V E S P A 1 A n n u a l R e p o r t

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3 Contents Message from the Chairman 5 Message from the CEO 8 Overview of the Brazilian Economy 12 Behavior of the Capital Markets 14 Popularization of the Stock Market 20 Trading and Development of the Market 26 Relation with Companies 30 Presences at BOVESPA 35 Institutional Relationship 38 3 Educational Program 40 International Inclusion 42 Self-Regulation 44 Technology 46 SOMA 48 Financial Statements and Auditors Report 50 BOVESPA Member Firms and SOMA Associated Institutions 60

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5 Message Chairman Raymundo Magliano Filho T he Italian philosopher Norberto Bobbio once said that civil society and its members usually emphasize only their own rights, and, never, or almost never, their duties. The São Paulo Stock Exchange BOVESPA, the main capital markets institution in Brazil, fought for its legitimate interests in, but it did not forget its duties. This was the tone of the year. We showed that BOVESPA, in keeping with its natural function of offering a visible and transparent environment for trading securities, is an organization that is increasingly part of society and aware of its social responsibility. BOVESPA has, for many years, been collaborating with social welfare organizations. But in, we deepened this policy with two outstanding projects: the Bolsa de Valores Sociais - BVS (Social Values Exchange), raises money from people and companies for educational projects; and the multi-sport court built in the community of Paraisópolis, in São Paulo, which offers thousands of children in this neighborhood free lessons of tennis, soccer, handball and basketball. In, we kept and extended the popularization program of the stock market, making it ready for a new step, namely - a campaign intended to encourage companies to go public and issue shares and other securities. The innovation in 2004 is this. We want a greater supply of securities and more companies on BOVESPA, because this will help the companies themselves, strengthen the market and create jobs. We also need new listed companies, and old ones too, to exercise their so-called corporate citizenship, a concept that asks for a more sustainable and inclusive global economy, in social terms. Like ourselves, most exchanges have been making every effort with regard to good corporate governance in recent years and some have even developed social responsibility indices, but the time has come to be bolder. In a word, it is necessary that the market power and its ability to generate wealth become more appropriate to its social responsibility. BOVESPA the Brazilian Stock Exchange is aware of its duties to the country and has sought to redouble its efforts to strengthen the market with initiatives in favor of social inclusion and encouragement of citizenship. We are convinced that this is the right way and we exhort companies whether they are listed on the exchange or not to accept their duties to society. Raymundo Magliano Filho Chairman of the Board of Directors 5

6 Represen Deputy Re B O V E S P A Raymundo Magliano Filho Chairman Eduardo Brenner Vice-chairman Anibal Afonso Arno Arnhold Representative of Member Firms Alvaro Augusto Vidigal Representative of Member Firms Carlos Duarte C Representative of 6 Sérgio Machado Dória Representative of Member Firms Morvan Figueiredo Paula e Silva Representative of Publicly-held Companies Thomas Carlos Alberto da Silveira Isoldi João Carlos de Magalhães Lanza Deputy Representative of Member Firms Deputy Representative of Member Firms Antônio Carlos Deputy Represent

7 Directors Board César Jesus dos Santos tative of Member Firms Fernando Ferreira da Silva Telles Representative of Member Firms Francisco de Paula Elias Filho Representative of Member Firms aldas Institutional Investors Humberto Casagrande Neto Representative of Individual Investors Alexandre Koch Torres de Assis Deputy Representative of Member Firms 7 Ricardo Auerbach presentative of Publicly-held Companies Eduardo Penido Monteiro Deputy Representative of Institutional Investors Selmo Nissenbaum Deputy Representative of Member Firms Borges Camanho ative of Individual Investors Gilberto Mifano Chief Executive Office

8 Message CEO Recovery of Confidence Gilberto Mifano 8 T he improvement in market conditions, reflected in the excellent performance of the Bovespa Index and in the recovery of the financial volume traded, was the result of favorable background factors on the international scene, the recovery, even though incipient, of the United States economy with the maintenance by the Federal Reserve of an extremely low basic interest rate strict control of macroeconomic policies, accompanied by a gain in credibility for monetary authorities and consequently a trend to lower the internal interest rate, inducing a slow change to the makeup of investors portfolios. In fact, the recovery of investment in stocks in Brazil has taken place against a background of extremely strict monetary and tax policies and, for this reason, it has been one of low economic growth. The outlook for improved conditions in the so-called real economy has created the expectation, even though only gradually, that this will be an factor driving the stock market forward. Primary Market: Ongoing Challenge In this context, BOVESPA, which is part of a regulated environment in which its Member Firms interact with investors, listed companies and regulatory bodies, is a key participant and it will be able to offer the necessary infrastructure to ensure the progress of the secondary market and, as a result, give support to the primary market. Although extremely vulnerable to the economic scenario, the secondary market has remained reasonably active, in contrast to the primary market. It is increasingly clear that the reduction in the number of listed companies has to be reversed, because otherwise it the will harm the ability of the market to grow, and, strictly speaking, will damage the very essence of the capital market. The decision to go public demands greater trust by the company, both in the local and international economies and in the ability of the market to meet its cash needs. We are optimistic that the conditions for

9 companies to begin using the stock market more deeply for their capitalization needs are maturing. BOVESPA has, for years, taken an active part in attracting new companies. In addition to introducing a Corporate Governance Program by creating special listed segments for companies, it makes constant visits to companies, whether listed or not, takes part in business seminars and has a close relationship with risk capital fund managers. Our business also includes conducting surveys to establish a profile of potential companies likely to go public so as to work better. The establishment of the Comissão de Abertura de Capital (a Committee to deal with companies intending to go public), in, added the experience of professionals from various underwriting institutions who are helping to seek the best solutions to the tangible problems that inhibit the process of going public. Technology and Services At the same time, BOVESPA has, for a long time, sought to guarantee state-ofthe-art trading systems, and the corporate and services networks, not just as a way of carrying out deals with securities but also to provide services to publicly-held companies, investors and other market participants. For this reason, investment in this field is essential to BOVESPA s operations. Of these, that which stands out the most was the introduction of the new version of the MEGA BOLSA 380 trading system, which required the replacement of the technical infrastructure of the central computers and servers. It also required an expansion of the capacity of the communication links with the Brokers. Thanks to this, we were able to bear, in March, the increase in the volume of business, which took place in the second quarter of that year, and the continuous breaking of records for the number of trades. We also introduced a procedure for monitoring the MEGA BOLSA s response time, from the time the order comes in from the operator until the return of the reply on his screen. As a result of this, we calculated that at present 99.5% of offers are replied to in less than two seconds. Widening the Shareholders Base Popularizing the capital market was one of the great challenges of the Exchange in. Its results are being felt in the growth of the individual investor s and investment clubs share in the volume traded on BOVESPA. For most people affected by the BOVESPA WHERE YOU ARE program, this was their first contact with the market, whether through talks at colleges, clubs, condominiums and associations, or through visits to the Exchange itself. In addition to personal talks, educational activities, the distribution of leaflets and answering the telephone, we increasingly used the Internet to reach an unspecialized audience. Hence, nowadays, our website contains virtual talks and books on the stock market and gives a great deal of information on listed companies and on BOVESPA s markets. Taking part in trade fairs and congresses has also provided good results 9

10 10 and this should continue into As well as this, the integration of the Member Firms with the BOVESPA WHERE YOU ARE program has given importance to the program, since it promotes direct contact between the public and the intermediaries. Services for Intermediaries and Institutional Investors Regarding serving the more specialized public, we emphasize the development of the Cadastro Central de Investidores CCI (Central Investors Register), in. In adhering to the strategy, long ago adopted by BOVESPA, of providing shared and high quality services to Brokerage Firms, other financial intermediaries and to institutional investors, the CCI, with its launch planned for the beginning of 2004, will centralize in BOVESPA the maintenance of registers of institutional investors, as a result, lowering participants costs, as well as making it easier to comply with legislation on money laundering. As for foreign investors, who account for approximately a quarter of all deals struck on BOVESPA, considering the obvious restoration of interest in Brazil, the Brazilian market s improvement led to the recovery of part of the liquidity lost to New York. BOVESPA s share of the total trading in Brazilian stocks went from 59% in 2002 to 65% in. This also marked the recovery of business on BOVESPA in the release and development of services to this type of investor. Financial Performance Benefiting from the market s recovery and from the increase in the volume traded, BOVESPA also achieved good financial performance. Its operating result grew by 33% over 2002, reaching R$ 19 million. In this context, the Stock Exchange s operating revenues (R$ million) came to 20.8% more than those of the same period last year; and operating expenses, in turn, were 19% higher (R$ million). In addition to the substantial operating result there was also a rise of 35.1% in the net income (R$ 56.8 million). As a result, the year s final surplus reached R$ 76.4 million, 33% more than in The projects and the activities of the Stock Exchange s professional staff were always in tune with the guidelines of the Board of Directors, keen to continue with the technological updating of the Exchange and the modernization of its operating and administrative structure. Undertaking this task would not be possible were it not for the dedication and the professionalism of BOVESPA s employees. We ended with high expectations, not just with regard to the stock market s performance, but also to the Brazilian economy as a whole. BOVESPA has been working to establish the notion that the capital market not just can, but should, be the most important financing instrument in this new stage. Gilberto Mifano CEO

11 BOVESPA Executive Officers Marcos A. Costa e Silva Administration Executive Officer Ricardo Pinto Nogueira Operations Executive Officer Maria Helena Santana Corporate Relations Executive Officer Luis Gonzaga de Oliveira Simões Systems Director Izalco Sardenberg Advisory to the Chairman Advisor Helcio Fajardo Henriques Advisory to the CEO Advisor 11 Luis A. O. Abdal Marketing and Communications Advisor José Roberto Mubarack Institutional Relations Advisor Odilson Lírio Moré Auditing Consultant Luiz Eduardo Martins Ferreira Legal Consultant Romeu Pasquantonio SOMA Director

12 Overview Economic Exchange Rate Free Selling Exchange Rate Interest Rate - Selic Annualized Monthly Rate (%) The Brazilian Economy 12 O The year was marked by the adjustment of the Brazilian economy with the intention of establishing a sustainable basis for the restoration of long-term growth. The renewal of the agreement with the IMF, and the voluntary government policy of raising the primary surplus to 4.5% of GDP, sticking to high interest rates and the floating exchange rate system were important measures in securing the new government s commitment to macroeconomic stability. The results of the policies introduced appeared swiftly with the success in lowering inflation to one digit, in the dynamic trade balance surplus, the reduction of the countryrisk and the reduction of the economy s basic interest rate from 26.5% to 16.5% in only seven months. The restoration of investors confidence in the Brazilian economy allied to the considerable liquidity in the international market, helped raise the flow of capital into the country, which enabled the Central Bank to lower the pace of rollingover the dollar-denominated internal debt and to reinforce foreign currency reserves without putting pressure on the exchange rate. On the contrary, the Brazilian real appreciated against the US dollar throughout the first half of and ended by stabilizing at around R$ 2.90 to the dollar. The December closing position of R$ 2.89 to the dollar, represented an appreciation of 18.2% over the end of the previous year. The reduction of that part of internal debt indexed to foreign currencies, allied to the fall in interest rates, the exchange rate and exchange rate volatility, stabilized the debt/gdp ratio. It also worked to reduce the perceived risk of investing in real-denominated assets and led to a saving of public money that could be used to restore public investment. Nonetheless, the bulk of the adjustment fell on the shrinking economy. The GDP growth rate in the full year of was - 0,2%. The farming and livestock sector was

13 IGP-M % a month performance of the trade balance. The balance of payments was also in surplus with regard to current transactions to the tune of US$ 4.1 billion, around 0.8% of GDP. Foreign direct investment fell by 38.9% to US$ 10.1 billion, following an international trend. The fall was offset by money raised abroad, which came to US$ 23.0 billion in. The balance of payments ended the year with a surplus of US$ 8.5 billion. the only one to achieve convincing growth in, namely 5.0%, while the growth rate for manufacturing was -1.0% and that of services was -0.1%. The Trade Balance The convincing trade surplus of US$ 24.8 billion in was the largest ever recorded by the Brazilian economy. The amount, which was 89.2% higher than the US$ 13.1 billion recorded in 2002, was the result of the robust progress in exports, which were US$ 73.1 billion compared with imports of US$ 48.3 billion. The rise in exports reflected the increase in the volume shipped, with significant progress in new markets, in particular those of Asia, together with the firm recovery of various commodity prices. The weak performance of manufacturing, accompanied by a rise in the exportable surplus and a slowdown in the demand for imported products, also helped the good Monetary Policy and Inflation Following the monetary policy squeeze at the beginning of the Lula administration, with the rise in the basic interest rate to 26.5% a year in January the Central Bank, progressively lowered the basic rate until it ended the year, in December, at 16.5%. The reduction of interest rates was the result of improved expectations, of the substantial international liquidity and of the decline of pressure on prices. In fact, in establishing the fight against inflation as a priority in the first year of the government, economic policy achieved considerable success, to the point of coming in below the inflation target by 0.8%, as measured by the IPCA, which came to 9.3% in the year. Another important indictor, the IGP-M, ended the year at 8.71%, a substantial fall over the 25.31% recorded in The good agricultural harvest, the lower exchange rate and pressure on prices undoubtedly helped achieve this good result. 13

14 Behavior Capital Market 14 T he São Paulo Stock Exchange was the outstanding profitability feature of the Brazilian financial market in. The Bovespa Index (Ibovespa) ended the year standing at 22,236 points, the highest achieved since it was established in 1968, recording an increase of 97.3% in nominal terms and 141.3% in dollar terms. The market s encouraging performance was also reflected in the other BOVESPA indices. The Brazil Index (IBrX) rose by 78.5%; the Valor Bovespa Index (IVBX-2), by 97.2%; the Telecommunications Sector Index (Itel), by 66.8%; the Electric Power Index (IEE), by 107.2%; and the Special Corporate Governance Stock Index (IGC), by 79.7%. Seeking to offer investors and portfolio managers a good reference instrument, and, which enables the launching of derivatives, BOVESPA created the IBrX-50 in January. This Index measures the total return on a theoretical portfolio made of the 50 most liquid stocks traded on BOVESPA, weighted by the market value of shares available for trading. The IBrX-50 also performed well, with a rise of 76.2% in the year. Progress in Trading The price rise in becomes particularly important when we see that it was accompanied by an increase in the value traded. The total value traded on BOVESPA rose by 47.2% over the previous year, coming to R$ billion. This represents an average daily value of R$ million. The number of trades also rose significantly. Deals representing 9,899,229 trades were carried out, resulting in a daily average of 39,597 transactions, 40.5% higher than the daily average of 2002 and the highest daily average ever achieved by BOVESPA. With the expansion of the number of transactions in, the historic record of the number of trades was broken four times, coming to 79,139 trades on October 15.

15 The liquidity indicator, represented by the ratio of the cash volume traded and the market capitalization, confirmed the growth in the liquidity levels, rising from 0.24 in 2002 to 0.33 in. Electronic Trading System leapt to R$ 42,208,000 in, reflecting a growth of 151% in the period. The daily average number of orders executed and of customers represented growth of 72.4% and 58.9%, respectively, when compared with Transactions carried out on the Electronic Trading System in, still gained ground on BOVESPA, recording an 86.7% share in the total financial volume turned over (compared with 67.1% in 2002) and a 98.2% share in the total number of trades (compared with 93.8% in 2002). The average number of deals traded on the Electronic System rose by 47.2% over 2002, amounting to 38,894 transactions a day. The trading value came to R$ million a day, 92.6% above the daily average seen in Transactions carried out after normal business hours (After-Market) resulted in 59,513 trades and a financial value of R$ million in. BOVESPA FIX Launched in April 2001, the BOVESPA FIX, the integrated environment for trading, settlement and custody of fixed income securities, has been increasing the number of securities listed for trading. The number of debentures, promissory notes and Real Estate Receivables Certificates (CRIs) issuers listed for trading on the BOVESPA FIX went from 26 in 2002 to 41 in. The number of trades involved 694,505 corporate fixed income securities, amounting to R$ 1,132.9 million. Derivatives Markets 15 Home Broker The BOVESPA s derivatives markets, keeping up with the growth of the total volume traded, also increase their trading. The Home Broker the trading system under which investors send orders directly to BOVESPA s electronic trading session via the Internet also rose significantly. Launched at the end of March 1999, the system has been continually progressing in financial volume and number of transactions. The daily average value, which was R$ 16,817,000 in 2002, Options Trading on the stock options market, accounting for 7.3% of the total volume traded on BOVESPA, amounted to R$ 14,876.4 million in, 95.7% up on The number of trades increased by 56.2%, rising from an average of 10,833 trades a day in 2002 to 16,853 trades a day in.

16 The options on indices segment also rose in the year, recording a total volume of R$ 1,325.7 million, compared with R$ million in Trading in options on the IBrX-50 began in October. Options on the IBrX-50 have similar features to the options on the Ibovespa, except that their maturity falls on the first business day of the month. Ibovespa 16 Forward Market Trading on the forward market also grew in the year. The number of trades rose from 90,458 in 2002 to 108,427 in. The volume came to R$ 6,443.8 million, 26.1% up on Of the total trades carried out on this market, 61.0% were for up to 30 days, 27.4% were for periods of from 31 to 60 days and 11.6% were for periods of longer than 60 days. BOVESPA authorized trading on the Termo Flexível (Flexible Forward Contract) in January. The main feature of this new type of forward transaction is that the buyer can substitute the contract s underlying shares, by selling cash the shares purchased on the forward market, and by using the proceeds to buy shares in other companies on the cash market. The newly purchased shares then become the new underlying shares of the contract. Market Capitalization IBrX 50 IEE Itel The market value of BOVESPA listed companies came to R$ billion in December, 54.4% higher than the figure registered in December Companies comprising the Ibovespa

17 IBrX IVBX IGC 17 Average Daily Volume

18 portfolio accounted for 72.9% of the total market capitalization. The five business sectors with the highest market capitalization in were: telecommunications with R$ billion (17.9% of the total); banks with R$ billion (17.7%); chemicals and petrochemicals with R$ billion (15.8%); electric power with R$ 70.8 billion (10.4%); and mining with R$ 69.5 billion (10.3%). Trading Per Type of Investor An increase in the number of individual investors, institutional investors, individuals and public and private companies trading on BOVESPA was registered in. Institutional investors accounted for 27.7% of the total volume traded in (16,5% in 2002). Individual investors accounted for Market Capitalization 18 Investor Participation (%)

19 26.3% (22.0% in 2002) while companies accounted for 3.7% (3,4% in 2002) The continuing increase in the share of investments by individuals in the total volume traded on BOVESPA the result of the efforts undertaken by the Exchange to attract individual investors to investing on the Brazilian stock market merits emphasis. This increase is also reflected in the growth of the number of individual customers of the CBLC s custody services, which rose from 90,196 in December 2002 to 94,652 in December. As a result, the two other large groupings financial institutions and foreign investors reduced their trading on BOVESPA. The former declined from 32.1% of the total volume traded in 2002 to 18.0% in. Foreign investors had a lower share of 24.3% compared with 26.0%. In spite of the relative fall of foreign investors investment, the net inflow of foreign investment on BOVESPA came to R$ 7,495.0 million in. This was the result of purchases of R$ 52,849.5 million and sales of R$ 45,354.5 million. This represents the largest balance ever recorded in the history of BOVESPA in nominal terms. 19

20 Popularization Stock Market T he activities aimed at getting the Stock Exchange closer to civil society continued throughout. The BOVESPA WHERE YOU ARE project was, undoubtedly, the one that was most visible. Together with the Brokerage Firms, it sponsored talks in factories, colleges, condominiums and visited places where lots of people congregate such as passenger boats in Guanabara Bay, subway stations and others. In addition, the Exchange also went to the House of Representatives and to trade fairs, and also sponsored an event especially for the female audience. BOVESPA WHERE YOU ARE 20 The chairman of BOVESPA, Raymundo Magliano Filho, talks to the employees of the Brasilata. On the left is the president of the Metal Workers Union, Eleno Bezerra. The Workers of the Brasilata visit the Bovmóvel. The BOVESPA WHERE YOU ARE program was also striking in the year and was consolidated in. This generated great visibility and got the Stock Exchange closer to the people. One difference this project has is that it gets the public closer to Brokerage Firms. The project takes place in theaters, factories, clubs, subway stations, airports, boats and other places where large numbers of people congregate, such as fairs and tourist destinations. Through a customer service center or by you can request a visit from a business promoter, presentations, and the dispatch of teaching materials, or merely resolve doubts about the market. The BOVESPA WHERE YOU ARE project also visited several companies that requested visits, among which are: the Pão de Açúcar Group, Volkswagen, Xerox, Siemens, Sabesp, Vivo, Intelig, Ultrapar, Telefonica, Petrobras,

21 BOVESPA takes part in the May Day celebrations promoted by the Força Sindical. In the small picture is the Bovmóvel. 21 Employees of Olimpus obtain information from the Bovmóvel, parked in front of the factory. Employees of the Brasilata get information on the stock market.

22 Interested parties visit the Stock Exchange s stand at Congonhas airport. Dixie Toga, Eberle, Gerdau and Unilever. One of the most successful features of the program, the BOVESPA AT THE BEACH consists of holding a succession of games in the coastal towns of São Paulo and Rio Grande do Sul, attracting the attention of summer visitors to the Bovmóvel, from where explanatory leaflets are handed out and where professionals from Brokerage Firms were on duty to serve interested parties. BOVESPA s cabin at Expointer, in RS. 22 The Bovmóvel team meets the public in Campos do Jordão. The BOVESPA AT THE BEACH program served the public in several states in the country.

23 Joint Activities with Labor Unions The result of a partnership between union leaders and Member Firms, progress was made with the BOVESPA AT THE FACTORY program by means of which how to invest in shares is explained to workers, through company visits. Some factories had already been visited, always monitored by representatives of the unions. In addition, BOVESPA entered into a partnership, in, with the Workers Central Union (CGT), which permitted an office to be set up in the organization s building to provide information on the stock market to union leaders, as well as scheduling visits to plants and organizing courses for workers, along the lines of what was already being done at the headquarters of the Força Sindical (the Trade Union Council). For the third year in a row, BOVESPA took part in the May Day celebrations, promoted by the Força Sindical, which brought together more than a million people in the North Zone of São Paulo. House of Representatives With the intention of making its relationship with the Legislature closer, the Stock Exchange held an event in the House of Representatives of the State of São Paulo, where those interested could gain access to the BOVESPA website, institutional videos, explanatory leaflets and talks on the stock market. Participation in Fairs BOVESPA has always taken part in the main events held by the financial market, such as the congresses held by the Associação Brasileira de Entidades de Previdência Suplementar Abraap (the Brazilian Association of Supplementary Pension Organizations), the At a meeting held at BOVESPA, from left to right, Fernando Ferreira da Silva Telles, board member; the presidents of Abrasca, Alfried Plöger, and of Sindcor-SP, Homero Amaral; the generalsecretary of the CGT, Francisco Canindé Pegado; the Finance Secretary of the CGT, Valdir Vicente de Barros; the chairmen of BOVESPA, Raymundo Magliano Filho, and of the CGT, Antonio Carlos dos Reis; the Steering Plan coordinator, Thomas Tosta de Sá; board member Carlos Alberto da Silveira Isoldi; the president of Ancor, Paulino Botelho de Abreu Sampaio; and board member Alvaro Augusto Vidigal. 23 On the left, union members accompanied the presentation on the stock market at the CGT s 7th National Congress. The chairman of BOVESPA, Raymundo Magliano Filho (at left), welcomes the president of the SP House of Representatives, Congressman Sidney Beraldo (center), and the leader of the Alckmin government, Congressman Vanderlei Macris (on the right).

24 Associação dos Profissionais do Mercado de Capitais Apimec (the Association of Capital Market Professionals) and others. These events are dedicated to market professionals and it is through them that BOVESPA publicizes its new products and services. BOVESPA expanded its participation, in, in events focusing on a wider audience, setting up stands at fairs such as Expointer, an agribusiness event held in Esteio (in the state of Rio Grande do Sul). We also took part with a stand in Cosmoprof Cosmética International Beauty Fair; and in Brasiltec, a technological innovation forum, both held in São Paulo. We also participated in the important Expo Money fair, which brought together, for the first time in Brazil, several financial institutions, service providers, capital market organizations and companies listed on the Stock Exchange, in order to show people the ordinary means of investing their savings better. Women in Action In an event held in June, which brought together more than 1,500 people at our trading session, we launched the program Women in Action, intended to bring women to the capital market, supplying them with, among other items, further explanations on the stock market. In order to establish the strategy to be adopted with regard to this audience, BOVESPA ordered an opinion poll to trace out the profile of Brazilian women. The opinion poll, widely publicized in the media, covered 1,500 interviewees, most of them women, in four major cities, and it revealed the growing part played by Brazilian women in establishing the domestic budget, the education of their children and in administering their own careers. 24 Interested parties visit the BOVESPA s stand at the Cosmoprof Cosmética. The Stock Exchange s stand at the Expo Money fair.

25 Women s party at trading room. 25 On the left, the BOVESPA building decorated for the launch of the Women in Action program. Magliano emphasizes the business nature of women. Journalist Gloria Maria, alongside, presented the results of the survey. Coral of the USP welcomes guests.

26 Trading Market and Development Member Firm takes, on average, less than two seconds to appear on the screens of all Brokers. New modules for the options market were also introduced, allowing for: trading, exercise, automatic blocking, specific blocking, cancellation of the exercise, cancellation of trading options, cancellation of blocking and market control parameters. 26 B OVESPA s trading and market development activities aim to offer greater ease and speed in trading, new products and services and improved liquidity for the securities traded, thus serving the interests of investors, intermediaries and companies. Equities New Version of the MEGA BOLSA (MEGA 380) With the purpose of offering a highperformance trading platform, broadening the present trading functionality, and keeping the BOVESPA s trading systems upto-date with the most modern versions in use in European countries, BOVESPA introduced the latest version of its trading system, the MEGA BOLSA 380. This version has made buying and selling transactions faster and more efficient and has enabled the registration of new types of offer, as well as other innovations. All these functions implied modernization and electronic trading facilities, as well as an improvement in the system s performance, placing BOVESPA among the most modern exchanges in the world. For example, an order placed by a Market Maker The Market Maker for equities was introduced to provide the market with instruments that enable an increase in liquidity of the assets traded. The institutions wishing to act as market makers undertake to register, daily and constantly, firm bid and offer prices in a given number of shares and

27 to accept a maximum spread between the bid and offer prices. The model adopted was the result of an extensive survey with Member Firms and issuers, in such a way as to find a formula best adapted to market participants requirements and needs. Based on this survey, BOVESPA submitted a series of suggestions for regulating the new function to the CVM, which were accepted almost in its entirety. New Index Calculating Platform PFI-2 BOVESPA introduced the most modern index calculating platform, which had more resources than the one used to date. This platform, in addition to making the creation of new indices easier, enables the supply of new services to the market, such as acting as a calculating agent and publicizer of index fund shares and, even calculating indices developed by other institutions. BOVESPA s tradition and credibility in calculating indices, as well as its ability to publicize these indicators online, are considerable advantages in furnishing these services to the market. IBrX-50 Continuing its policy of providing the market with new analysis and reference tools, BOVESPA introduced the IBrX-50. Developed based on the requirements of various segments of the market, the IBrX-50 is a total return index, weighted by the capitalization of the companies making it up, which, in turn, are chosen for their liquidity. Its method was developed based on a broad process of consultation, which included holding a forum over the Internet, open to all investors. It has the advantage of being readily reproduced by the market, enabling the launch of derivative products and making it easier to use as a reference for portfolio managers and for investors in general. 27 BOVESPA promoted the launch of options on the Brazil Index 50 (IBrX-50). Audience listens to the presentation on the new investment option.

28 28 Options on the IBrX-50 Options trading on the IBrX-50 was authorized as from October 17. This option has similar features to options on the Ibovespa, except that its maturity falls in the first business day of the month. Through this launch, the ability to form hedged portfolios and the supply of new products to investors, is extended. Standardization of Price Quotations BOVESPA reviewed the standardization of price quotations, with the purpose of eliminating price quotation based on round lots of a thousand shares. Jointly with Abrasca, it is working with companies so that they all carry out the necessary grouping by the end of The great beneficiary will be the investor, who will find it easier to understand the quoted prices. BOVESPA as National Numbering Agency (NNA) As a numbering agency in Brazil, BOVESPA conducted a technical and explanatory task with the Secretaria de Previdência Complementar SPC (the Secretariat of Supplementary Pension Plans), with the purpose of consolidating the Isin coding in the Brazilian market. This work led to the issue of Resolution no. 3,121 by the National Monetary Council, which ruled that closed supplementary pensions organizations will have to invest money solely in securities holding the Isin code identification. BOVESPA began attributing Isin codes to options and futures contracts traded on its systems, to assets and contracts traded on the BM&F and most of those registered on the Cetip, in December. Fixed Income BOVESPA FIX BOVESPA sent a proposal for the regulation of standardized debentures, to the CVM. The standardization of this security will make it easier for investors to compare different issues and will encourage a more active secondary market, with the obligatoriness of a market maker. The proposal was the result of various meetings with issuers, financial institutions and investors. We also worked on the improvement of the legislation on Real Estate Receivables Certificates (CRIs), so as to enable a greater dilution of this security, thus helping develop the secondary market for CRIs. The Fundos de Investimento em Direitos Creditórios - FIDCs (Credit Rights Investment Funds), recently regulated by the CVM, began being listed on the BOVESPA FIX and may become one of the main securities traded under this system. BOVESPA also included a development commission for Real Estate Funds that has been conducting studies for possible changes to CVM Instruction no. 205, with the intention of constantly developing the product. New Version of the BOVESPA FIX The trading system was updated by the introduction of the new version, which has

29 a succession of improvements and new functions. Among these, the Price Limit function stands out. This enables the participant to place an offer at a better price, which is not announce to the market, but which can close the deal. This should help increase the liquidity of fixed income securities. SOMAfix The launch of SOMAfix is part of BOVESPA s strategy of serving other private fixed income market participants. In addition to extending the trading environment for participants in SOMA, it enables securitization companies to place CRIs directly on the market. Another innovation that accompanied the launch of SOMAfix was the introduction of a device that enables the recording of deals closed by telephone. ebookbuilding BOVESPA FIX Website Launched in 2002, the website was improved in. A section for CRIs was introduced with the features of these assets. In addition, an area was established with information on the trading system, the parameters of each of the securities and their reference prices, making the work of investors that need to mark to market easier. The system of determining the interest in buying securities over the Internet was improved by the inclusion of allocation options with a firm guarantee, the participation of individual investors, control of internal demand and partial closing by the participants in the distribution pool. These developments were intended to serve the underwriting market, making it possible to carry out any bookbuilding transaction swiftly, flexibly and securely. 29

30 with Relations Companies B OVESPA s Company Relations activities involved surveys, prospecting companies, studies, and proposals for lowering barriers for companies to go public, as well as seminars, strengthening companies relationships with the market, encouragement for adopting best corporate governance practices and making available the largest possible amount of information to investors. These activities helped strengthen listed companies and helped establish favorable conditions for attracting new companies, BOVESPA s primary objectives, and essential activities for the development of the Brazilian capital markets. 30 Surveys Throughout the year, BOVESPA carried out an extensive survey to identify companies with the potential to go public. The first stage, completed in the first half of the year, was carried out by FGV/Ibre and pointed to 75 private companies, who would be willing to go public. Based on these results, the stage of interviews with the selected companies was begun to establish their view of the capital market, the degree of information available on money raising and their perception of problems that might arise on the way to going public. The completion of this task will produce a report containing a diagnosis of the situation and any initiatives that can be taken to encourage companies to go public. Partnership with Finep In, BOVESPA took part in the prospection for, selection and preparation of companies for Stage II of the 9th Venture Forum, held by Finep in São Paulo. The event, developed for companies interested in, and with good conditions for, going public on the Novo Mercado (new market), took place in December and three companies took part in it. They submitted their business plans and their strategies for adding value for institutional investors, underwriters, asset managers and private equity investors. BOVESPA was the outstanding feature of the Brasiltec, an event promoted by the Financiadora de Estudos e Projetos Finep (Studies and Projects Finance Company), an

31 organization associated with the Ministry of Science and Technology. The Brasiltec brought together private and governmental companies, financial institutions and universities, among others, with the intention of exchanging experiences. The Stock Exchange set up a stand at the place wherever the event was held. Comissão de Abertura de Capital The initiatives picked out by the committee generated an action plan to be implemented by BOVESPA, involving proposals to solve the barriers to going public, dealing with the following aspects: finance and costs, the process of originating and distributing, associated with the cultural and economic demand. Adhesions the Special Listing Segments in 31 BOVESPA s Board of Directors set up the Comissão de Abertura de Capital, made up of members of the Board and of market professionals interested in the subject, to discuss the barriers to companies going public and to establish strategies to promote the listing of new companies on the exchange. The political and economic uncertainties created an unfavorable atmosphere for companies to adhere to special listing segments, in particular for those associated with issuing. This explains why there were no switches or listings on Nível 2 (level 2) and on the Novo Mercado. Nevertheless, ten

32 Adhesions to Nível 1 Rossi Residencial February João Rossi, president. Braskem February José Carlos Grubisich Filho, president director. Mangels Industrial March Robert M. Mangels, president. Cia. Brasileira de Distribuição April Abílio dos Santos Diniz, presidente do Conselho de Administração, e Augusto Marques da Cruz Filho, president director. 32 Cia. Suzano de Papel e Celulose May David Feffer, president of the holding company, and Murilo Passos, CEO. Metalúrgica Gerdau June Osvaldo Schirmer, vice-president of the Gerdau Group. São Paulo Alpargatas July Fernando Tigre de Barros Rodriguez, president director. Cedro e Cachoeira October Fernando Bicalho Dias, chairman of the Board of Directors, and Aguinaldo Diniz Filho, president. Cia. Vale do Rio Doce December Roger Agnelli, president. Confab Industrial December Roberto Vidigal, president.

33 companies adhered to the BOVESPA s Nível 1 (level 1) of the Special Corporate Governance in, bringing to 31 the number of companies in this segment. At the same time, in May, the companies Varig S.A. Viação Aérea Riograndense, Varig Participações em Serviços Complementares S.A. and Varig Participações em Transportes Aéreos S.A. had their contracts terminated because of failure to comply with BOVESPA s minimum requirements for listing on Nível 1. Development of Investor Relations Among the listed companies there are many that have good financial fundamentals, but which have a weak performance on the secondary market. The identification of some of these companies enabled a process of collaboration with their DRIs to begin so as to rectify any deficiencies in investor relations. BOVESPA analyzed the listed companies concentrating in particular on aspects of their financial performance and the liquidity of their shares on the market. Based on this, companies were identified that had good fundamentals and that showed an interest in working jointly with BOVESPA to improve their investor relations and to rectify any deficiencies that may be damaging to their shares liquidity. Holding of Sectoral Seminars BOVESPA expanded the scope of sectoral seminars in to include sectors that have no listed companies, or less liquid companies, whose individual presentations might not attract a significant audience. The first seminar was on the petrochemical sector; the second discussed the new rules for the electric power sector. Review of the Sectoral Structure for Classifying Companies BOVESPA studied the need for and the feasibility of reviewing its structure of sectoral classification of listed companies, as well as the effect of this review on various internal areas that use the present model. Models used by other exchanges, governmental bodies and the main institutions operating on international capital markets were examined for the study. The present classification is by business activity, in other words, it takes the products and services produced, the raw materials used and the production process. The structure to be introduced employs a classification by type and use of products and services, grouping companies that, although having different businesses, operate at similar stages of the production chain or with associated products and services, and which tend to respond in a similar fashion to economic conditions. Following market consultations, including both restricted and public hearings, it was shown that the change was necessary, because that was how it would meet the needs of the capital market professionals. The new sectoral classification was planned for the beginning of

34 34 Information on Listed Companies on the BOVESPA Website Periodic and Ad Hoc Information (IPE) In the same way as the Quarterly Information (ITR), the Standardized Financial Statements (DFP) and the Annual Information (IAN), that for some time has been sent over the Internet by companies, the IPE System was put into operation, enabling the dispatch of all periodic and ad hoc information over the Internet, through a secure website, at the same time to the CVM and to BOVESPA. Through this system, information such as material facts, invitations to meetings and minutes of meetings, notice to shareholders and financial data, among other items, is now available for consultation in real time on this website. In addition, it is now possible to consult as well the history of the information received. Home Companies Home Companies is a new page on the BOVESPA website, fully concentrating on organizing and giving greater visibility to information of interest to investors on traded companies. This page was also included in the product Plantão Empresas, which shows, in real time, the news on listed companies distributed by BOVESPA. Up to then, this information was distributed only through the terminals of the MEGA BOLSA and by vendors. It will also be possible to conduct research into the information released by the companies in the last 90 days. New Guideline Supplement Together with the new Home Companies, a new Guideline was made available, with a new table showing the evolution of the stock capital of companies. This Guideline Supplement now has more information and corporate events on all the companies traded on the BOVESPA.

35 BOVESPA Presences A dding weight to the activities of BOVESPA, various authorities were present at events held by the Stock Exchange during. These events commemorated the launch of new products, new stages in the program of popularizing the capital market, social events and other matters to do with the market. Raymundo Magliano Filho, chairman of the Stock Exchange, welcomed the vice-president of the Republic, José Alencar, who gave a presentation on the Steering Plan. From left to right, senators Marco Maciel, Jorge Bornhausen and José Agripino; congressman Carlos Melles; and the chairman of BOVESPA, Raymundo Magliano Filho. 35 From left to right, Carlos Alberto da Silveira Isoldi, Nelson Bizzacchi Spinelli, Geraldo José Guimarães Isoldi, Paulino Botelho de Abreu Sampaio, Humberto Casagrande Neto, Francisco de Paula Elias Filho, Ney Castro Alves, Eduardo Brenner, Alfredo Rizkallah, Luiz Roberto de Souza Sampaio, Robert John Van Dijk, Henrique Molinari, Sérgio Machado Dória, Alvaro Augusto Vidigal, Gilberto Mifano, Manoel Pires da Costa, Raymundo Magliano Filho, Paulo Roberto Levy, Arthur Celso Dias de Souza, Eduardo Alfredo Levy, Homero Amaral, Anibal César Jesus dos Santos, Fernando F. da Silva Telles, Mônica Saccarelli and Carlos Arnaldo Borges de Souza.

36 The governor of São Paulo, Geraldo Alckmin (on the right), lent weight, alongside the chairman of the Stock Exchange, Raymundo Magliano Filho, to the launch of the São Paulo Economics School. From left to right, the director of the São Paulo Economics School, Yoshiaki Nakano; the minister of agriculture, Roberto Rodrigues; the International Affairs Secretary of the Finance Ministry, Otaviano Canuto; and the chairman of BOVESPA, Raymundo Magliano Filho. The president of the Getulio Vargas Foundation, Carlos Ivan Simonsen Leal, on the left, and the Education minister, Cristovam Buarque, during the cocktail party at the trading room. 36 From left to right, the mayoress of São Paulo, Marta Suplicy; the chairman of BOVESPA, Raymundo Magliano Filho; and the Finance minister, Antonio Palocci, at the launch of the FIDC Caixa Brasil Construir. The São Paulo Education secretary, Gabriel Chalita, receives from the hands of the chairman of the Stock Exchange the Bovespa Educational Program kit. The chairman of BOVESPA, Raymundo Magliano Filho (center), and the vicepresident Eduardo Brenner (on the right), welcome the CVM s chairman Luiz Leonardo Cantidiano.

37 On the left, the chairman of the Bolsa de Valores Sociais, Alvaro Augusto Vidigal, and the vice-chairman of BOVESPA, Eduardo Brenner, listen to the thoughts of the vice-governor of São Paulo, Cláudio Lembo, at the launch of the BVS. The chief-minister of the General Secretariat of the Economic and Social Development Council (CDES), Tarso Genro (on the left), and the chairman of BOVESPA, Raymundo Magliano Filho. Raymundo Magliano Filho welcomes the Supplementary Pensions secretary, Adacir Reis at BOVESPA. 37 The Youth, Sport and Leisure secretary of São Paulo, Lars Grael and Raymundo Magliano Filho, during their meeting at BOVESPA. From left to right, economist Carlos Rocca; the CEO of BOVESPA, Gilberto Mifano; the president of Apimec, Humberto Casagrande Neto; congressmen Delfim Netto (PP-SP) and Walter Feldman (PSDB-SP); and the executive coordinator of the Capital Market s Steering Plan, Thomás Tosta de Sá, take part in a debate at the Stock Exchange.