Andean exchange link takes first small step

Access to the Chilean, Colombian and Peruvian stock exchanges will be possible from a single, local access point from Monday 30 May, reducing the costs of trading into the markets for non-domestic investors.
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Access to the Chilean, Colombian and Peruvian stock exchanges will be possible from a single, local access point from Monday 30 May, reducing the costs of trading into the markets for non-domestic investors.

The opening of an order routing connection is the first stage of the Mercado Integrado Latinoamericano (MILA), an integration project that allows brokers to route orders to Chile's Bolsa de Comercio de Santiago, Colombia's Bolsa de Valores de Colombia (BVC) and Peru's Bolsa de Valores de Lima (BVL) via a FIX connection maintained by all of the exchanges.

For a broker to connect to the hub and offer trading for buy-side clients across each market, it must have operations that are licenced by each of the exchanges, or signed a memorandum of understanding with licenced brokers in the other participating countries that are licenced. Trading and post-trade procedures will be conducted according to the rules of the national exchange that lists the stock being traded.

“Bringing the markets together will provide more liquidity, attracting more issuers and overseas capital flows for all of the exchanges,” said Carlos Barrios, head of investor relations, BVC. “This will create critical mass, creating a huge opportunity for the three countries to become an alternative investment option to Brazil.”

According to Barrios there are 75 brokers have signed up to MILA, however Salvador Palma, president at Alyar, a US firm that provides access to the Latin American market for overseas firms, says only a four or five sell-side firms in each market will be able to take full advantage of the link.

“Brokers that have people who have worked in the United States and have seen how working on multiple markets works – those are the brokers who will lead the effort,” he says.

He adds that order routing should be seen as a first step in this process, and points out that there is more integration work to be carried out, particularly around rules and procedures, before trading can flow efficiently across borders.

Currently trades must be settled in the currency of the country that a stock is listed in, adding foreign exchange costs, and trades are subject to domestic tax regime and market rules.

Changing these will mean the second phase of the MILA integration is more complicated than the first. “Tax is not a market decision, it is a political decision,” Palma observes. “Governments will look at their own country's commercial balance before making setting taxes, and so it will not be easy to balance the regime across the three countries,” he said.

Barrios acknowledges that there is more work to be done, and that much of it is out of the hands of the exchanges, but said that if they had waited for rules to be harmonised, “MILA might not have started for another 20 years.”

Philippe Carré, global head of client connectivity at technology provider SunGard, says that, when compared to the integration of European Bourses, such as the Franco-Belgian-Dutch-Portuguese market of Euronext or Nasdaq OMX in the Nordic region, MILA phase one is a very small step. “A lot of people are waiting to hear about the next phase,” he said. “There is an interest amongst traders in Santiago, Bogota and Lima to see if regulatory authorities and political authorities have the appetite for a full merger.”

A full integration between two of the exchanges has already been proposed; BVC and BVL signed a memorandum of understanding on 20 January with the aim of combining their markets by the end of 2011. The merger is still waiting on approval by shareholders and regulators in both Peru and Colombia.

It would be the first combination of its kind between two stock exchanges in Latin America. Under the agreement, the relative contribution of the BVC and the BVL will be 64% and 36% respectively and shareholders of both companies will become shareholders of the merged entity. Based on end-of-year figures for 2010, the combined Colombian and Peruvian market had a market capitalisation of US$378 billion.

Carré says that integration will be hampered by the lack of regional political union, and claims that many brokers are sceptical of the project's success. But he also notes that that the potential exists for further integration between MILA and other exchanges such as Brazil's BM&F Bovespa, and that from 30 May, such a proposition will look much more attractive than before.