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TRADING AND EXCHANGES: Joined-up thinking

Joined-upLatin American stock exchanges are improving the automation of their post-trade services, finds Nick Fitzpatrick, and Chile may emerge as a regional leader.

This year should be remembered as the one in which Latin American stock exchanges made great advances in linking up with their users, with the world, and with each other.

Whereas in places like Europe, different players provide a discrete part of the hidden operational process involved with the buying and selling of securities, Latin America is already very joined-up at a national level. Most of its stock exchanges, central counterparties (CCPs) and central securities depositories (CSDs) all sit in “vertical silos”, meaning that share dealing, the matching of shares to prevent counterparty defaults, and settlement are carried out in one place.

The Santiago Exchange, Chile’s stock exchange in Santiago de Chile, the capital, is an example. As well as being a stock exchange, it also runs post-trade services such as settlement. By contrast, in London there is more than one CSD providing settlement, including the London Stock Exchange itself.

But this year, certain exchanges in South America have taken greater steps towards automation of their post-trade processes that could help them gain better links with international investors, as well as smooth out intra-regional trade.

Undoubtedly, the biggest event of 2011 was the May 30 integration of the Santiago Exchange, the Colombia Exchange and the Lima Exchange (Peru), together with their respective depositories (DCV, Deceval and Cavali) to form the Latin American Integrated Market (Mercado Integrado Latinoamericano, or Mila).

Mila forms the second largest Latin American stock market by capitalisation after Brazil and ahead of Mexico. The integration is expected to diversify, expand and improve the attractiveness of trading of equities listed in these three countries for both local investors and foreigners.

“Historically, there has not been any regional harmonisation or groupings, but these countries are now looking for more regionalisation,” says Tony Freeman, executive director of industry relations at Omgeo, a specialist in post-trade processes and risk management.

“They want to be as attractive as possible to foreign investors and to remove barriers and costs. The good thing is that they can move fast because they are centralised, very joined-up.”

The Ucits funds industry could have been a factor in pushing policy-makers in the direction of harmonisation, Freeman believes. The inevitable links between Ucits funds sold in Latin America with processing centres such as Dublin and Luxembourg mean these markets will have seen the advantages of being able to support high-volume flow and of adopting straight-through processing (STP).

Mila has also adopted Fix (Financial Investment eXchange) Protocol, a messaging standard for electronic trading.

Kevin Houstoun, Fix Protocol’s global technical committee co-chair, says adoption of Fix elsewhere in the region has “proven to be an important factor as Latin American markets have become increasingly attractive to foreign investors”.

He adds: “Using Fix has allowed international firms interested in investing in the region to route their flow to the local markets with a standard they are familiar with and experienced in using.”

Mila will be the first market of the region with potentially 565 companies. Its capitalisation was expected at the time of launch to be around $691 billion (€519 billion) once shares become fully cross-listed.

For investors in the region, Mila could make diversification easier and improve liquidity.

Peru has a number of listed mining companies which have a strong presence in Chile, while Colombia has a robust energy sector.

For Omgeo, the development of Mila has a particular significance. In June, it partnered with the Santiago depository, the DCV, to increase post-trade automation by installing its Omgeo Central Trade Manager system into DCV’s institutional delivery system. Omgeo’s systems should increase STP, thereby lowering operational risk and costs.

An Omgeo discussion paper earlier this year detailed a direct correlation between same day affirmation (SDA) and settlement efficiency. SDA is defined as verifying trades on the day of execution. Chile’s local SDA rate (67.4%) is above average for the Americas region of 53.8%, but is below Europe and Asia where averages are 81.4% and 94.4% respectively.

Markets that embrace higher levels of post-trade automation typically demonstrate higher SDA and settlement efficiency scores, Omgeo claims. It believes that the partnership should greatly improve the SDA rate and further position the DCV of Chile as a regional leader.

Brazil may be the leading market in the region, in terms of technology as well as market-cap, but Chile appears to be building a major foothold in the Spanish-speaking part of the continent. Whether Mexico will respond in kind remains to be seen.

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