Collaboration is key
02 October 2018
As the likes of Mexico and Brazil are well established, other countries in the Latin American region, such as Chile and Argentina, are well on their way to successfully expanding their securities lending programmes
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As it stands, Brazil is the largest market in Latin America, with Mexico following behind. Although individual countries are all experiencing some economic and/or political challenges, they are, for the most part, all emerging markets with promise.
Mexico and Brazil are the only markets in Latin America to count for equity finance at the moment, and though Colombian, Peruvian and Argentine markets are at different stages of development, they are all working towards having more functional securities lending markets.
As Roberto Belchior, managing director and Latin America market development head at Brazil’s B3, explains: “Latin American markets present enormous opportunities for local and foreign investors.”
Belchior adds: “Despite the volatility that has been shaking emerging markets across the globe, regional markets have proven resilient and have been enduring these difficult times. Political and macroeconomic stability should ultimately result in tangible progress in the coming years.”
Brazil
“Brazil has thrived in the last decade, becoming a leading listed derivatives market and [also has] a strong and deep equity market”, according to Belchior.
And as claimed by a recent publication, ‘Purple’ by DataLend, the Brazilian economy has rebounded strongly in the last two years, but the country’s politics is putting pressure on growth.
It says: “The general population is disenchanted with its political class and will likely use the general elections in October 2018 to express that view. The run-up to the election and the result is likely to increase market jitters.”
However, despite these upcoming doubts and worries concerning politics, Brazil is still leading the Latin American region for securities lending.
Belchior says with markets rebounding from the worst financial crisis in its history, B3 in particular “has invested massively in renovating its trading and post-trading infrastructure and has been working closely with its client base”.
B3 are pushing a new initiative aiming at facilitating the matching between lenders and borrowers with a new trading screen. The new electronic platform will be available to both buy and sell side.
Furthermore, there is an ongoing addition to the list of securities available for lending, this includes the addition of the Unsponsored Brazilian Depositary Receipts, planned to be released in December 2018 and the Fixed Income Instruments, expected to be launched by mid-2019.
In addition, the Banco Central do Brazil announced its release of a range of operations, including repo and bond sales, of which DataLend states has fed through into the securities lending market.
Mexico
For the first time in over four decades, Mexican voters have elected a left-wing president. This political anomaly, coupled with US President Donald Trump’s choice to rewrite the North American Free Trade Agreement (NAFTA), have made Mexico’s market uncertain and volatile.
To a certain extent, there is a ‘wait and see’ attitude in terms of confidence in the markets, and this may not change for a while, until Andrés Manuel Lopez Obrador is well into his first year with his party, Morena.
Though where securities lending is concerned, Nacional Financiera, a development bank, wholly owned by the Mexican government has utilised a working group, in association with the Risk Management Association (RMA) to promote foreign participation at the securities lending market in Mexico.
However, there is currently a significant demand to borrow securities that isn’t currently being met, with more than 60 percent of the outstanding amount being held by foreigners.
But moves are being made to improve this. Bolsa Institucional de Valores (BIVA), for one, was launched in July. BIVA trades the same instruments as the other exchange in Mexico (Bolsa Mexicana de Valores) which includes covering equities.
As Federico Ortega Gilly of Mexico’s Nacional Financiera, explains: “We are keen to improve the Mexican market’s liquidity by adding more securities to the pool.”
Gilly Ortega adds: “It’s in everyone’s interest to see the securities lending market grow in an efficient way that draws in more market participants. We have been working with the RMA and the central bank to design a new model to see if foreign entities can do more in local markets.”
Chile
Chile is a “fairly thinly traded market”, according to DataLend, with approximately 125 securities on loan on any given day, almost all of which are fixed income.
DataLend comments that these securities on loan consist of “a mix of corporate, agency and sovereign bonds”.
Chile’s securities lending model is only utilised to cover fails or facilitate short selling of equities. While short selling is permitted, this is only via an authorised local broker-dealer. Fail coverage can be executed by the Bolsa de Comercio de Santiago—Chile’s dominant stock exchange.
But despite this diversity in types of securities, Chilean equities are underperforming after a stellar 2017.
In a blog by Brown Brother Harriman, it was stated that in 2017, MSCI for Chile was up 39 percent versus 34 percent for MSCI emerging markets.
So far this year, MSCI revenue for Chile is minus 14 percent year-to-date and compares to minus 9 percent YTD for MSCI emerging markets.
But, let’s not forget, Latin America is an emerging market and change is coming to the region.
Chile’s Santiago Exchange, the largest exchange in the country, recently announced a partnership with computer manufacturing firm, IBM to introduce blockchain technology across the country’s financial sector.
The agreement makes the Santiago Exchange the first stock market in Latin America to apply IBM Blockchain technology to its short-selling system for securities lending.
The solution is designed to help reduce errors, possible fraud and processing time for each transaction, while also improving transaction management and lowering costs.
Argentina
Having spent the last few decades under the strict control of the local regulatory authority, the country’s financial market is gradually getting freed, but is currently facing high inflation and has a generally weak peso.
Because of this, the future remains unclear for now, while Argentina’s National Securities Commission still remains cautious on short selling.
However, Argentina’s stock exchange, Bolsas y Mercados Argentinos (BYMA) has recently updated its trading rules and incorporated securities lending to the regular cash settlement process.
As Belchior explains: “As part of a complete revamping of its processes, BYMA has launched initiatives that now enable investors trading onshore Argentine equities to short and lend/borrow equities at BYMA.”
He adds: “The new securities lending feature is also aimed at strengthening the settlement process. BYMA continues to work on the enhancement of trading functionalities and the development of new products.”
Peru and Columbia
Peruvian Lima Stock Exchange has been working on the development and implementation of a functional securities lending market that is expected to become operational in coming months.
Peru’s securities lending programme was recently shaken up by North American securities markets shortening their settlement cycle to T+2 from a T+3 cycle last year.
This affected securities across equities and corporate and municipal bonds, and unit investment trust trades in Peru, as well as in Mexico, and Argentina.
The transition aimed to reduce operational and systemic risks by forcing securities through the market infrastructure quicker, thereby allowing counterparties to avoid trade failures.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework, which is regulated by Bolsa de Valores de Colombia, The Office of the Financial Superintendent of Colombia and The Securities Market Self Regulator.
Operationally, securities lending is administered by The Deposito Centralizado de Valores de Colombia.
Alike it’s neighbour, Chile, it remains very regulated and “local” in nature, according to the RMA.
Everybody needs good neighbours
A good example of collaboration between Latin exchanges has been the agreement entered by the Brazilian company, B3 and Argentina’s BYMA.
The two have collaborated, which has enabled BYMA to launch a newly created listed derivatives market.
Belchior says: “[This has] proven to be a perfect way of leveraging the tremendous operational capacity created by B3 as a result of massive investments over the years.”
He adds: “Financial markets infrastructures should seek to cooperate and collaborate more as a way of reducing costs and leveraging operating capabilities.”
“Investors with large long positions should feel comfortable with using existing securities lending mechanisms available in Brazil, Chile and Argentina as a way to shore up revenues and manage risks adequately. That would certainly help with increasing activity in local securities markets.”
This sentiment is also reiterated by Gilly Ortega. From a Mexican perspective, but with collaborative hopes for the region, Gilly Ortega says: “Our efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.”
He adds: “Independently, other South American countries are starting to dig into securities lending markets, they want to settle.”
Mexico and Brazil are the only markets in Latin America to count for equity finance at the moment, and though Colombian, Peruvian and Argentine markets are at different stages of development, they are all working towards having more functional securities lending markets.
As Roberto Belchior, managing director and Latin America market development head at Brazil’s B3, explains: “Latin American markets present enormous opportunities for local and foreign investors.”
Belchior adds: “Despite the volatility that has been shaking emerging markets across the globe, regional markets have proven resilient and have been enduring these difficult times. Political and macroeconomic stability should ultimately result in tangible progress in the coming years.”
Brazil
“Brazil has thrived in the last decade, becoming a leading listed derivatives market and [also has] a strong and deep equity market”, according to Belchior.
And as claimed by a recent publication, ‘Purple’ by DataLend, the Brazilian economy has rebounded strongly in the last two years, but the country’s politics is putting pressure on growth.
It says: “The general population is disenchanted with its political class and will likely use the general elections in October 2018 to express that view. The run-up to the election and the result is likely to increase market jitters.”
However, despite these upcoming doubts and worries concerning politics, Brazil is still leading the Latin American region for securities lending.
Belchior says with markets rebounding from the worst financial crisis in its history, B3 in particular “has invested massively in renovating its trading and post-trading infrastructure and has been working closely with its client base”.
B3 are pushing a new initiative aiming at facilitating the matching between lenders and borrowers with a new trading screen. The new electronic platform will be available to both buy and sell side.
Furthermore, there is an ongoing addition to the list of securities available for lending, this includes the addition of the Unsponsored Brazilian Depositary Receipts, planned to be released in December 2018 and the Fixed Income Instruments, expected to be launched by mid-2019.
In addition, the Banco Central do Brazil announced its release of a range of operations, including repo and bond sales, of which DataLend states has fed through into the securities lending market.
Mexico
For the first time in over four decades, Mexican voters have elected a left-wing president. This political anomaly, coupled with US President Donald Trump’s choice to rewrite the North American Free Trade Agreement (NAFTA), have made Mexico’s market uncertain and volatile.
To a certain extent, there is a ‘wait and see’ attitude in terms of confidence in the markets, and this may not change for a while, until Andrés Manuel Lopez Obrador is well into his first year with his party, Morena.
Though where securities lending is concerned, Nacional Financiera, a development bank, wholly owned by the Mexican government has utilised a working group, in association with the Risk Management Association (RMA) to promote foreign participation at the securities lending market in Mexico.
However, there is currently a significant demand to borrow securities that isn’t currently being met, with more than 60 percent of the outstanding amount being held by foreigners.
But moves are being made to improve this. Bolsa Institucional de Valores (BIVA), for one, was launched in July. BIVA trades the same instruments as the other exchange in Mexico (Bolsa Mexicana de Valores) which includes covering equities.
As Federico Ortega Gilly of Mexico’s Nacional Financiera, explains: “We are keen to improve the Mexican market’s liquidity by adding more securities to the pool.”
Gilly Ortega adds: “It’s in everyone’s interest to see the securities lending market grow in an efficient way that draws in more market participants. We have been working with the RMA and the central bank to design a new model to see if foreign entities can do more in local markets.”
Chile
Chile is a “fairly thinly traded market”, according to DataLend, with approximately 125 securities on loan on any given day, almost all of which are fixed income.
DataLend comments that these securities on loan consist of “a mix of corporate, agency and sovereign bonds”.
Chile’s securities lending model is only utilised to cover fails or facilitate short selling of equities. While short selling is permitted, this is only via an authorised local broker-dealer. Fail coverage can be executed by the Bolsa de Comercio de Santiago—Chile’s dominant stock exchange.
But despite this diversity in types of securities, Chilean equities are underperforming after a stellar 2017.
In a blog by Brown Brother Harriman, it was stated that in 2017, MSCI for Chile was up 39 percent versus 34 percent for MSCI emerging markets.
So far this year, MSCI revenue for Chile is minus 14 percent year-to-date and compares to minus 9 percent YTD for MSCI emerging markets.
But, let’s not forget, Latin America is an emerging market and change is coming to the region.
Chile’s Santiago Exchange, the largest exchange in the country, recently announced a partnership with computer manufacturing firm, IBM to introduce blockchain technology across the country’s financial sector.
The agreement makes the Santiago Exchange the first stock market in Latin America to apply IBM Blockchain technology to its short-selling system for securities lending.
The solution is designed to help reduce errors, possible fraud and processing time for each transaction, while also improving transaction management and lowering costs.
Argentina
Having spent the last few decades under the strict control of the local regulatory authority, the country’s financial market is gradually getting freed, but is currently facing high inflation and has a generally weak peso.
Because of this, the future remains unclear for now, while Argentina’s National Securities Commission still remains cautious on short selling.
However, Argentina’s stock exchange, Bolsas y Mercados Argentinos (BYMA) has recently updated its trading rules and incorporated securities lending to the regular cash settlement process.
As Belchior explains: “As part of a complete revamping of its processes, BYMA has launched initiatives that now enable investors trading onshore Argentine equities to short and lend/borrow equities at BYMA.”
He adds: “The new securities lending feature is also aimed at strengthening the settlement process. BYMA continues to work on the enhancement of trading functionalities and the development of new products.”
Peru and Columbia
Peruvian Lima Stock Exchange has been working on the development and implementation of a functional securities lending market that is expected to become operational in coming months.
Peru’s securities lending programme was recently shaken up by North American securities markets shortening their settlement cycle to T+2 from a T+3 cycle last year.
This affected securities across equities and corporate and municipal bonds, and unit investment trust trades in Peru, as well as in Mexico, and Argentina.
The transition aimed to reduce operational and systemic risks by forcing securities through the market infrastructure quicker, thereby allowing counterparties to avoid trade failures.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework, which is regulated by Bolsa de Valores de Colombia, The Office of the Financial Superintendent of Colombia and The Securities Market Self Regulator.
Operationally, securities lending is administered by The Deposito Centralizado de Valores de Colombia.
Alike it’s neighbour, Chile, it remains very regulated and “local” in nature, according to the RMA.
Everybody needs good neighbours
A good example of collaboration between Latin exchanges has been the agreement entered by the Brazilian company, B3 and Argentina’s BYMA.
The two have collaborated, which has enabled BYMA to launch a newly created listed derivatives market.
Belchior says: “[This has] proven to be a perfect way of leveraging the tremendous operational capacity created by B3 as a result of massive investments over the years.”
He adds: “Financial markets infrastructures should seek to cooperate and collaborate more as a way of reducing costs and leveraging operating capabilities.”
“Investors with large long positions should feel comfortable with using existing securities lending mechanisms available in Brazil, Chile and Argentina as a way to shore up revenues and manage risks adequately. That would certainly help with increasing activity in local securities markets.”
This sentiment is also reiterated by Gilly Ortega. From a Mexican perspective, but with collaborative hopes for the region, Gilly Ortega says: “Our efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.”
He adds: “Independently, other South American countries are starting to dig into securities lending markets, they want to settle.”
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