Bringing up sparks
01 October 2013
The wheel is turning for the Latin American lending market—but expect a few sparks of friction along the way. SLT takes a look
Image: Shutterstock
Growth projections have been slower recently (the IMF cut its growth forecasts for Latin America in July to 3 percent from 3.4 percent), and unfortunately, lending is another cog that is struggling to turn smoothly in the region.
Aware of an uncertain 2013, the US decided to extend its hand out to the region for a little longer. After Federal Reserve chairman Ben Bernanke said the central bank may taper its bond buying programme later this year if the economy continues improving, the markets pushed up the dollar against emerging markets currencies and Latin American stock markets started falling.
In June, the Mexican peso lost 8 percent and the Brazilian real shed 10 percent against the dollar.
The US Federal Reserve then decided to not scale back its bond-buying programme in September, leaving investors and policymakers in the region temporarily reassured.
But while Brazil struggles with interest rates that have been raised four times since April, soft consumer demand and dwindling investor appetite—lending and borrowing has not died out in the country just yet.
In his analysis of the difference between frontier and emerging markets, Paul Wilson, global head of agent lending product and portfolio analysis at J.P. Morgan, used Brazil as an example of an emerging market.
He illustrated that there is a significant revenue opportunity in an emerging market, which can demand fees that are “multiples” of those found in a more developed lending market. In addition to the commercial benefits, there is a positive perception to be gained not only from beneficial owners, but within the local market, Wilson said—citing fewer failed trades and supported risk hedging as consequences particularly welcomed by the local market.
However, there can be sizeable barriers to entry into an emerging market. Wilson included tax and regulation clarity, local market efficiency, foreign investor participation restrictions, central counterparty settlement structures, commercial risk, and economic stability as just some of the issues to consider.
In a 2012 interview, Judy Polzer, global head of securities lending product at J.P. Morgan, said that securities lending throughout Latin America has been developing at a relatively slow pace, in part due to the CBLC (Brazilian Clearing and Depository Corporation), which acts as a central counterparty from which securities lending transactions are executed through.
“This CCP model has historically limited participation to onshore institutions only,” said Polzer.
“Offshore lenders are slowly warming to the idea of accepting the CBLC model with certain modifications or concessions. Borrowers are generally averse to making such concessions, as their needs can often be satisfied locally through the CBLC.”??
Key figures provided by DataLend show that Mexico has the lion’s share of securities lending inventory, at just over 54 percent. Brazil, which has been widely feted as a vibrant market, takes 17 percent. Mexico, which embraced securities lending years ago, is a specials market with few stocks that contribute significantly to revenue. The primary source of growth came from the international players who leveraged their experience and capabilities from other markets to lend and borrow major companies of Mexico, as well as telecoms, oil and mineral stocks.
Fixed income securities lending inventory by type revealed sovereign and corporate debt to compile most of the region’s stock hold, followed by other fixed income and agency debt.
Aware of an uncertain 2013, the US decided to extend its hand out to the region for a little longer. After Federal Reserve chairman Ben Bernanke said the central bank may taper its bond buying programme later this year if the economy continues improving, the markets pushed up the dollar against emerging markets currencies and Latin American stock markets started falling.
In June, the Mexican peso lost 8 percent and the Brazilian real shed 10 percent against the dollar.
The US Federal Reserve then decided to not scale back its bond-buying programme in September, leaving investors and policymakers in the region temporarily reassured.
But while Brazil struggles with interest rates that have been raised four times since April, soft consumer demand and dwindling investor appetite—lending and borrowing has not died out in the country just yet.
In his analysis of the difference between frontier and emerging markets, Paul Wilson, global head of agent lending product and portfolio analysis at J.P. Morgan, used Brazil as an example of an emerging market.
He illustrated that there is a significant revenue opportunity in an emerging market, which can demand fees that are “multiples” of those found in a more developed lending market. In addition to the commercial benefits, there is a positive perception to be gained not only from beneficial owners, but within the local market, Wilson said—citing fewer failed trades and supported risk hedging as consequences particularly welcomed by the local market.
However, there can be sizeable barriers to entry into an emerging market. Wilson included tax and regulation clarity, local market efficiency, foreign investor participation restrictions, central counterparty settlement structures, commercial risk, and economic stability as just some of the issues to consider.
In a 2012 interview, Judy Polzer, global head of securities lending product at J.P. Morgan, said that securities lending throughout Latin America has been developing at a relatively slow pace, in part due to the CBLC (Brazilian Clearing and Depository Corporation), which acts as a central counterparty from which securities lending transactions are executed through.
“This CCP model has historically limited participation to onshore institutions only,” said Polzer.
“Offshore lenders are slowly warming to the idea of accepting the CBLC model with certain modifications or concessions. Borrowers are generally averse to making such concessions, as their needs can often be satisfied locally through the CBLC.”??
Key figures provided by DataLend show that Mexico has the lion’s share of securities lending inventory, at just over 54 percent. Brazil, which has been widely feted as a vibrant market, takes 17 percent. Mexico, which embraced securities lending years ago, is a specials market with few stocks that contribute significantly to revenue. The primary source of growth came from the international players who leveraged their experience and capabilities from other markets to lend and borrow major companies of Mexico, as well as telecoms, oil and mineral stocks.
Fixed income securities lending inventory by type revealed sovereign and corporate debt to compile most of the region’s stock hold, followed by other fixed income and agency debt.
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