The introduction of competing trading platforms and clearing houses (CCPs) in Brazil could provide net benefits for end-investors, a new report by financial research firm Oxera has found, but costs related to fragmentation could outweigh the benefits.
Commissioned by Brazilian securities regulator Commissão de Valores Mobiliarios (CVM), the report, ‘What would be the costs and benefits of changing the competitive structure of the market for trading and post-trading services in Brazil?’ contains a detailed cost-benefit analysis on the likely consequences of introducing trading venue competition in Brazil.
Noting that that the current price for trading services in Brazil is close to that of other developed international markets, Oxera suggests that the introduction of multiple competing trading platforms may not result in sufficient savings that offset the extra costs of connecting to new platforms. This could be a problem for the sell-side, particularly if the available liquidity is stretched too thinly over several competing venues. But if Brazil’s trading volumes continue to grow significantly, then trading competition could have net benefits, the report says.
The report also claimed that the establishment of a competing CCP would further add to the connectivity costs incurred by brokers in Brazil, which it said would be passed through to the buy-side and eventually the end investor. However, the benefits could be greater, because of the potential for significant reductions in the prices paid by investors for post-trade services.
“Carefully managed evolution of the regulatory framework may be required to realise the benefits of this option,” read the report. “For example, the extent to which the total cost of post-trading services would fall is dependent on how Bovespa unbundles the prevailing settlement fee into a CCP clearing fee and a CSD settlement fee.”
US exchanges BATS Global Markets and rival Direct Edge have both separately expressed interest in setting up in Brazil, but both have faced difficulties, as the incumbent exchange BM&F Bovespa, which also runs the Brazilian clearing house, indicated that it would not clear for a rival. That leaves any would-be entrant in need of a separate clearing solution, unless CVM steps in and forces BM&F Bovespa to offer open access.
Oxera concludes that CVM should ensure that the primary exchange offers open access to clearing for all market participants, including rival trading platforms. It also recommends that BM&F Bovespa should introduce price monitoring to engage with its stakeholders about the charges it levies for using its services. The prices could then be compared with fees charged in comparable markets such as the US, Germany and Australia.
The study also suggests that CVM should also prepare the development of the regulatory framework to deal with multiple infrastructures in advance of their arrival, such as best execution rules for brokers, access conditions for the incumbent CCP and interoperability for CCPs.