The Inter-American Development Bank is working with the stock exchanges in El Salvador, Costa Rica and Panama to try to define a convergence strategy with the long-term objective of a single stock exchange.
"There is consensus among the stock exchanges on how the [convergence] process will begin," says Juan Ketterer, a senior financial specialist at the IADB. "It will be done by progressively sharing certain market facilities, such as trading platforms, IT, clearing and settlement facilities, and adhering to the same international standards, easing the information flows and promoting the cross-membership of brokerage houses." The development bank was one of the initial forces behind the idea of a single merged exchange in the region.
Initially the bank granted non-reimbursable technical assistance to the stock exchanges by hiring consultants to advise on the general strategy and a time line for the process. The IADB expects to continue to offer technical assistance for the project.
The IADB, as well as bankers and stock exchange officials, is confident this is an important project. At the moment investors in El Salvador have to place orders with their local brokers that then go to Panama to complete the order – a new, merged exchange would ease the flow of these transactions. It is clear there are also sizeable benefits to concentrating market liquidity in the region and the reduction in long-term costs through sharing market infrastructures.
"The successful stories of market convergence experienced in Europe and the US are recent and undisputable confirmation that a merger [will work]," says Ketterer. "The IADB is committed to supporting the development of capital markets, in order to enlarge the financing alternatives available to member countries. Concentrating market liquidity and sharing market infrastructures will bring, beyond doubt, substantive benefits to the capital markets of the region."
Agreement needed
But there are still some problems to overcome before the final merger is possible. First, the three stock exchanges need to agree upon budget appropriations to finance the investments required for the project. Second, and more important, the regulatory boards in each country need to implement a new set of standards.
On March 24 the three exchanges, Panama’s Bolsa de Valores, El Salvador’s Bolsa de Valores and Costa Rica’s Mercado Nacional de Valores announced a set of uniform exchange rules that would be adopted.
The merger model was largely adopted from OMX, which provided the regulations, software and equipment standards that allowed the merger of nine stock markets in the Scandinavian and Baltic countries into Norex. The European Union’s moves toward a unified securities trading industry also served as a point of reference.
In contrast to regional players, Fitch analyst Casey Reckman is more sceptical. "I doubt that a merged stock exchange of this nature will have a significant effect in the region," he says. "The DR-Cafta, [a free trade pact including countries in central America, the US and the Dominican Republic] agreement applies across central America, whereas the planned merger will only include three countries. Right now I think this merger will have little near-term impact on the region."