 |
"Countries in this region have been moving towards better regulations"
Michela Scatigna, BIS |
Despite investors in Latin America trading $20 billion-worth of the securities backed by assets such as mortgages and credit card payments in 2006, almost triple the $6 billion traded in 2002, the market is still in its infancy.
"Although the market has been developing quite strongly in the past five years, the overall size is still quite small when compared with other emerging markets," says Michela Scatigna, one of the authors of the BIS Quarterly Review report. "Countries in this region have been moving towards better regulations to help develop complex structured finance products but the laws and regulations are still not well understood or well implemented."
"There is a sum of different factors that are putting sand on the wheels of growth for this market but fine-tuning the regulations and legal framework is the main reason we haven’t seen huge growth."
One key example of this issue is seen in Brazil. The RMBS market is still very small. According to Scatigna, this is because the laws on house repossession, after a loan has fallen delinquent, are still not implemented correctly, even though new regulations were introduced in 2002.
Antonio Neto, head of structured finance at Banco Société Générale in São Paulo, says: "I agree with the BIS about the way regulation has been built. Unfortunately, local regulation has a lot of deficiencies, including the lack of standard Isda agreements. In the local debt capital market, the main issue is related to a limited CDS market. Unfortunately, only banks are allowed to participate in this market in Brazil while the main potential counterparties, the institutional investors, are not allowed to enter into these transactions. This has somewhat jeopardized the development of an active secondary market."
Camilo Tovar, another author of the BIS article, says: "Beyond just the legal issues, it is also important to consider other factors, such as costs of issuance and the size of the pool of assets that could potentially be securitized." In Brazil, for example, banks are only just starting to consider issuing mortgages. In other countries the market is in the very early stages of development, with the authorities in Colombia, for example, offering tax incentives to get the market moving. Unfortunately, as a result of unclear laws, when the incentives decreased so the market reduced in size.
In Mexico another issue is prominent. "Mexico is a federal state and so all states need to agree on a certain set of regulations," says Tovar. "For the authorities, it is a challenge to make sure that the legal system is integrated in order for the derivatives market to grow further. For instance, it is important to ensure that credit guarantees and foreclosure procedures can be exercised equally in all states."