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Latin American exchanges adapt global practices to meet the needs of domestic and foreign investors.
Latin America has weathered a series of economic crises over the years that have caused the popularity of the region’s markets to wax and wane. But for now, Latin America is in vogue. As with other emerging markets, a growing middle class is searching for diversified investment opportunities. The potential for high returns is attracting foreign investors, and local companies are more amenable to raising capital in their own markets instead of abroad. In response, exchanges are bolstering their infrastructure to accommodate the demand.  |
| Economic stability and proximity to the US makes México one of Latin America’s premier markets, and Bolsa Mexicana de Valores (BMV) is among the most active equities markets in region. In 1998 BMV created Mercado Mexicano de Derivados (MexDer) as a futures exchange. “Over the past few years, we’ve been hearing about how markets such as China and India will have much to offer in the future,” says Jorge Alegría, CEO of MexDer. “But México has a lot to offer now.” MexDer’s flagship contract is the TIIE, México’s short-term inter-bank rate. The TIIE is one of the world’s most popular contracts, with more than 250 million contracts traded annually.
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Mexican banks use the TIIE to manage their interest rate exposure and as a benchmark for corporate loans and mortgages. International players use it to hedge their Mexican bond and peso risk.
MexDer ’s goals are to become recognized as the reference for the pricing of both exchange traded and OTC derivatives in México, and to increase participation from arbitrageurs, hedge funds and algorithmic traders. To turn this dream into a reality, México has made some radical changes in its tax and regulatory environments. Specifically, foreign investors do not have to pay withholding tax on their holdings, and MexDer is open to remote members.
México is advanced, compared with many other Latin American markets such as Costa Rica. The Bolsa Nacional de Valores (BNV) in Costa Rica is the largest exchange in Central America. About USD 35 billion worth changes hands on the exchange annually. Most trading on the exchange is in tripartite repos and bonds. It is the main source of financing for the Ministry of Finance and the Central bank through public bonds. The market is focused in public bonds (91 percent of trading), and the remainder is issued by state entities such as utilities.
The equities market is tiny compared with the bond market. Currently, it is valued at USD 75 million a year, the market capitalization is about USD 2 billion, and some 10 securities are traded regularly. “Our equity market and other markets in the region, are significantly smaller than they should be,” says Matthew Sullivan, director of markets and strategy at BNV. “It is something that requires urgent work, given the fact that the markets should be an engine for development.”
To build up its equities market, BNV has taken steps to change to a hybrid model with market makers on an automatic execution platform similar to the offerings at OMX, the London Stock Exchange and Deutsche Börse. It has worked with companies to create voluntary codes for investor relations and corporate governance. In addition, the exchange developed its own qualification exams for local brokers.
In February 2008, BNV will launch a new equities market called MAPA, which will be similar to London’s PLUS. The exchange is working closely with the local chambers of commerce to educate their members about the opportunity. “MAPA is just the sort of thing the region needs,” says Sullivan. “It takes ideas from outside and adapts them to meet the requirements of the local market.”
In addition to developing the equities market, BNV is introducing new foreign exchange derivatives and fixed income products. The exchange recently launched an OTC Contract for Difference (CFD) on the country’s currency, the Colón. In 2008, BNV will launch a commercial paper product as well as a repo/securities lending market.
Finally, BNV is working to build critical mass through regional alliances. Using the OMX Nordic Exchange as a model, Costa Rica is working with Panamá and El Salvador to establish a regional alliance and attract a larger number of investors and issuers. The Inter-American Development Bank is financing the project, and OMX is providing technical support and helping to develop corporate governance and a regulatory framework. “There is a tremendous amount of interest in regional alliances,” says Sullivan. “An executive at a massive regional company recently commented that he can’t come to any of the local markets at the moment because they’re too small, but if we put together a regional market, he would want to be our first issuer.”
Latin American exchanges are finding innovative ways to survive and thrive in an era of intense competition, consolidation, demutualization and rapidly rising volumes. “We see great potential for market growth throughout Latin America,” says Steve Phillips, Latin American account manager at OMX. “The exchanges are actively pursuing new business and operating models that will increase their business and lead them to become more cost-effective and efficient.”
By Sherree Decovny Photo Getty Images
MarketView 2008:1
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