MILA: Cross-border momentum behind Mila’s success

Juan Pablo Córdoba Garcés, chief executive of the Colombian Securities Exchange, and other market participants, talk to Nick Fitzpatrick about the first year of trading for the Latin American Integrated Market.

Just over one year on from the creation of Mila – the stock exchange that traverses Colombia, Chile and Peru – the main signs for the future were positive.

Over the six months from the beginning of January to July, there was a 14.22% growth in the combined capitalisation of its listed companies to $684.46 billion. Mila was launched in May 2011.

Further, Mila – which stands for Mercado Integrado de Latina America, or the Latin American Integrated Market – is expecting the Mexico Stock Exchange to join its project and that would expand Mila by another $409 billion, which was the combined capital value of companies listed on Mexico’s exchange at December 2011.

Mila is already the second-largest market in Latin America, and Mexico’s involvement would take it closer towards becoming the largest stock exchange in the region. Brazil, which currently has that title, was capitalised at $1.22 trillion as of December 2011.

The share of the Colombian Securities Exchange (CSE) in the project is 36.40% by portion of listed companies – second after Chile.

Juan Pablo Córdoba Garcés, chief executive of the CSE, regards the first year of Mila as a success, saying that a momentum has built behind the project.

Part of the way in which this is seen, he tells Funds Global, is through brokers which have built cross-border businesses in the three countries.  

“Mila has been very successful. An integration process like this will take time but we have got a momentum in terms of market and investor interest and we have the commitment from regulators, which is critical,” says Córdoba Garcés.

“We are seeing intermediaries take determined action in the market – for example, three brokerages have already positioned themselves as players.”

He says other intermediaries are creating an environment where they can gain “incremental knowledge” about each other’s markets.

Larrain Vial, one of the largest financial services companies in Chile, has been opening offices beyond its home country since 2007. Its offices include Peru and Colombia.

For brokers and investors alike, the three markets covered by Mila are sometimes said to complement each other. Colombia has oil companies, Peru has miners, and Chile is more diverse with banking and retailers, among others.

Córdoba Garcés also says the fact that there is not a single currency across the three Mila countries is a diversification opportunity and not an obstacle. However, he notes that the separate currencies can be an operational challenge. “The changing of currency creates some friction but we are creating the ability to quote prices bilaterally in ]Chilean] pesos and [Peruvian neuvo] sols,” he says.

He shrugs off the suggestion that differences in tax are a problem too, saying the differences are not major and that there is competition between the countries.

These challenges should certainly not be problems for global investors, he says, who are used to allocating between portfolios of disparate assets.

However, there are some infrastructural considerations for local authorities when trying to attract foreign capital. Although clearing and settlements and trading should all look familiar,

Córdoba Garcés notes that the preference for some fund mangers to have individual accounts for each country they operate in could be a complication.

But he adds: “We are working to create the concept of a global custodian.”

This means creating a regulatory framework in which a custodians could be appointed to cover all Mila markets for a client, making fund managers’ transactions more seamless. The timeframe for the introduction is the “middle of next year”.

A mutual fund industry sprung up around Mila. The exchange reports that as of July closing, the total amount collected by the eight mutual funds in the market reached $57 million – a 0.24% increase over the month before.

The combined exchange has 553 issuers. At launch in May last year the exchange said there were potentially 565 issuers.

“As more issuers become known in the region this will feed awareness,” says Córdoba Garcés.


What are back- or middle-office operational aspects that fund managers have to confront?
There is a process in place that allows for the cross-border settlement of trades within Mila. This process utilises the existing infrastructures of the member countries. The issue for fund managers is the lack of standardisation and communication as brokers have to navigate in their middle and back offices between different jurisdictions. This could impact on Mila’s ability to deliver on its promise of reducing costs and increasing efficiency. It can be better dealt with by further integration of the settlement structures and, more importantly, by having a consistent cross-border allocation and matching system.

Do you think confidence in Mila is likely to grow?
The challenge of integrating disparatemarkets is not a simple task – as we have seen recently in Europe. Generating higher volumes and attracting more liquidity to Mila will take time, but the signals have, so far, been positive. The fact that other countries – including Brazil – have shown interest in joining the initiative is perhaps  the most positive sign of all.

Is the evolution ofMila outpacing the evolution of the supporting infrastructure, such as technology or a sizeable pool of brokers to connect fund managers with the exchange?
If Mila is to succeed in the longer term, then it will need to put in place a flexible, sophisticated and robust infrastructure, in both the pre- and post-trade space. This will be crucial in helping it to grow. While the existing infrastructure is acceptable, as we see with emerging markets all over the world, Mila could benefit from the ability to leapfrog inefficiencies and implement best practice standards, such as central matching, early on in its development. AsMilamatures, there is an opportunity to deliver on its promise of greater efficiencies by encouraging standardisation in the front, middle and back office.

On a micro level, local market  participants will need to embrace automation locally before this can be achieved, however this is already beginning to happen in Latin America.


Has the first year of regional trading on the Mila stock exchange been successful?
While trading volumes remain small, the Mila initiative linking three Andean stock exchanges can still be considered successful for a number of reasons: the initiative increased investors’ interest in the constituent countries, allowed the launch of a lot of sub-initiatives (for example, exchange-trade funds and indices), and led to new client connectivity projects. Mila has the second highest number of listings in Latin America, and the initiative has created tremendous interest and goodwill from people who probably would not have been able to find Colombia on the map a few years ago.

What will Mila have to do to increase participation? Are the obstacles of disparate currencies and tax regimes a chronic problem?
If Mila’s goal was simply to facilitate trading from one market into another, then everything is in place and all they need to do is continue promoting the link. However, if Mila wants to become an integrated stock exchange group, then we are just at the start of the adventure. Certainly, the different currencies and tax regimes will have to be resolved, though there are already examples of integrated exchange groups managing this kind of issue, such as Nasdaq OMX Baltics and CEE Stock Exchange Group. As Mila matures, the integration of the stock exchanges could be the first step of a broader evolution in how the different economic markets interact with each other.

Beyond that, Mila will need to consider how they want to expand. Will it add more countries? Cover additional asset classes? Implement a common trading platform? Offer clearing and settlement?

Is the evolution of Mila outpacing the evolution of the supporting infrastructure, such as technology or a sizeable pool of brokers to connect fund managers with the exchange?
No – if anything, it is the opposite.Mila is still in the infancy stage, and the large pool of brokers is already there. However, fund managers in each of the three countries still see three  separate markets rather than one global pool of investment. The same thing happened in Europe, where it took two to three years for brokers and fund managers to see Euronext not  as an alliance of the French, Dutch or Belgian exchanges but as a truly integrated market with a common rulebook and a single technical [application progamming interface]. That will happen with Mila, even if it remains just a link between independent exchanges.

What are back- or middle-office operational aspects that fund managers have to confront?
There are  several middle- and back-office operational issues to consider. For instance, there are multiple currencies and different jurisdictions. In addition, fund managers may currently trade with a different broker in each country rather than a single broker that provides access to all three markets. One can expect significant downstream operational difficulties with clearing and settlement taking place in different jurisdictions and with different rules. Trading across these markets remains complex, and that is why Mila’s continued development may facilitate further regional trading.

Do you think confidence in Mila is likely to grow?
Confidence in Mila is likely to grow, especially if the exchanges can express a strategy and clear goals for the medium-term. What is Mila 2.0? Will it remain as it is, or are the exchanges more ambitious? Certainly, Mexico is already interesting in joining the alliance, and I would not be surprised to see Argentina, Venezuela and even Brazil joining.

©2012 funds global



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