OPERATIONS: Well-oiled gears

GearsThe international ambitions of various markets are underlined by the efforts to establish a more automated and efficient operating environment discovers Nicholas Pratt. The strong economic fundamentals of many Latin American countries lie at the heart of their attractiveness to international investors. However, there is a growing realisation that an efficient market infrastruture is integral to enabling the region’s investment activity to grow further. This realisation is especially acute within some of the smaller markets. Colombia and Chile do not have the size of Brazil or Mexico but they do have the ambitions to establish themselves as fund servicing centres within the region and to act as gateways for international participants, whether investors, fund distributors or promoters. In order to fulfil these ambitions, an adoption of global operating standards will be integral to strategy. In June 2011, the Chilean central securities depositary (CSD), Deposito Central de Valores (DCV), announced a partnership with post-trade services provider Omgeo to make its central matching system, Omgeo CTM, available to local brokers via the DCV. Since the announcement, the interface has gone live and so far three Chilean brokers – Larrain Vial, Celfin Capital and IM Trust – are using the solution for the central matching of cross-border equities transactions with investment managers outside Chile.  “We are continuing to work very closely with the DCV to bring the solution to additional community members, as well as more efficiency to the local market,” says Sheldon Warrick, executive director, global head of relationship management at Omgeo. “We are focused on where the majority of volume is coming from and exploring how the service can be enhanced to further meet the needs of community members.” According to Warrick, Chile has shown a firm commitment to making its financial market more efficient and operationally less risky, to the extent that it is now at the forefront of implementing best-practice processes within the region. However, other local markets in Latin America are increasingly interested in the steps that Chile and, in particular, the DCV is taking. “I believe that we will start to see additional markets increasingly focused on making improvements to their post-trade infrastructure.” While regulation can often be useful in providing incentives for improved operational efficiency and greater levels of automation, however, Warrick says Chilean market participants have shown an acute understanding of the opportunity they have to implement best-practice processes in the trade life cycle, irrespective of regulatory mandates. And because Chile operates on a T+2 settlement cycle it is already ahead of markets that operate on T+3 globally where regulatory mandates for shorter settlement cycles are being introduced, for example in Europe’s CSD Regulation. However, despite the participants’ understanding and the T+2 settlement cycle, some obstacles to greater efficiency do still remain, says Warrick and there are two correlated factors that Chile and other markets across Latin America should continue to address: firstly, the anticipated growth in trade volume as a result of the Mercado Integrado Latinoamericano (Mila), the combined Andean stock exchanges of Colombia, Peru and Chile and, secondly, an increase in trade confirmations taking place cross-border. “When you combine these two factors, manual processes will not be sufficient enough to process volumes in a timely and accurate manner. Firms will need to achieve higher levels of automation in the middle office to be able to support growth in cross-border trade confirmation, and achieve trade volume scalability,” says Warrick. More recently, in May 2013, the DCV released the first stage of a process to automate the International Operations Registry (FROI) which is used for fund managers to issue custody instructions to international custodians. An electornic interface will enable clients using an international custodian to issue their instructions electronically regardless of the country where they are investing. The intention is to run the electronic FROI alongisde the physical FROI while participants become accustomed to the process, then it will become compulsory, which the DCV estimates will take three months. According to Mirna Fernandez, operations and customer service assistant manager at the DCV, the automation of the FROI will “reduce risk and operational cost and genrate collateral benefits for the participants as well as the for the DCV”. Fernandez added that the development is part of a larger project to create a new DCV for the international market. In addition to the efforts of Omgeo in Chile and other regional markets, the banking co-operative and market infrastructure body Swift is also targetting Latin America. “Our engagement is more advanced in Brazil and Mexico. We like to target markets where we can expect a reasonably high level of adoption,” says says Paul Taylor, director, global matching and post-trade, Swift.   The organisation’s first priority is to ensure user groups have access to the Swift infrastructure and it has put a lot of effort into promoting its latest offering, Swift Access Lite 2, which relies on cloud rather than physical implementation. “The days of lower-volume users needing to physically implement [ a physical connection to Swift] has passed.”   A typical barrier to Swift adoption over the years for non-bank users, such as investment managers, has been the volume of activity needed to justify the cost of physical implementation, so the cloud-based structure of Access Lite 2 is designed to overcome this barrier for Latin American markets where volumes may be relatively modest. In Europe, the operations teams of investment managers are preoccupied with a growing amount of regulatory requirements and, in the post-trade context, the European Central Bank’s Target 2 Securities project, which will create one centralised settlement platform across all European securities markets, is the dominant issue. In Latin America the main operational objectives are still more general: to achieve greater efficiency and reduce costs through streamlined processes and replacing the fax with more robust automated systems.
Efficiency and cost are ever-present concerns for investment managers but in the current low-return environment, these concerns have become more pronounced, says Taylor. Additionally, there is the need for more scalability. “Automating and getting more STP [straight-through processing] is a great way to achieve this.” MILA INITIATIVE
Any effort to improve operational efficiency on a market-wide level is dependent on a certain level of co-ordination between investors, managers and regulators. The clearest example of this effort within Latin America’s financial markets is the Mila initiative in which the national exchanges of Chile, Colomba and Peru have integrated to offer investors a greater supply of securities and a larger supply of funding. There are also plans to include the Mexican stock exchange. That would increase Mila’s market cap beyond $1 billion and also surpass the region’s largest stock exchange, Brazil’s BM&F Bovespa. However, the activity on Mila has been underwhelming to date and indicative of the relatively low level of trade between different Latin American countries, which accounts for 8% of total trade. Furthermore, there is no equivalent of the European funds passport whereby once a fund is registered in one EU country it can be freely marketed across the EU. Such a development would be an important step in creating a harmonised investment market from a sales perspective at least. Nevertheless, there is a recognition among the post-trade service providers that the Mila project is indicative of a wider campaign to make the Latin American market place more efficient and appealing to international players. “The goal of Mila is to bring more liquidity and volume to its member markets, whereas the DCV’s partnership with Omgeo is focused on making the market more efficient in anticipation of this increase in volumes,” says Warrick. “The two are closely inter-related; as volumes increase, market participants will start to review the robustness of their internal processes, and many will adopt increased levels of post-trade automation, thereby bringing more efficiency to the market and its participants.” “A shared vision of where the market should be always helps,” adds Taylor. “If a community can come together in defining requirements helps, but the challenge is to make sure that everyone agrees on what these standard practices should be and this can take time.” ©2013 funds global latam

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.