Biggest Latin American exchanges integrate


Sudip Roy
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Latin America’s two biggest equity markets have agreed to integrate as part of a pilot scheme to bolster liquidity in the region. Brazilian and Mexican investors to gain access to each other’s markets.

Latin America’s two biggest equity markets have agreed to integrate as part of a pilot scheme to bolster liquidity in the region. The São Paulo stock exchange (Bovespa) and its Mexico City counterpart (Bolsa Mexicana de Valores – BMV) will allow investors in the two countries to buy shares in each other’s markets. It will be the first example of market integration in Latin America.

Under the scheme, which should get under way in January, Brazilian investors will be able to buy Mexican stocks from Brazilian brokers, and vice-versa. Most important, the Brazilian broker would purchase the stock first from a Mexican counterpart registered at the BMV, and vice-versa. This correspondent broker model will ensure that the local broker is not squeezed out.

“We believe the scheme will work well as we are respecting the local brokers,” says Gilberto Mifano, chief executive at the Bovespa. “We are still a mutual exchange and the brokers own it. Under this model, we are giving them a special role to play in the integration.”

Shining example

“The idea is not to split the liquidity,” he adds. “The idea is to keep liquidity in the main market of each country.” Initially, Brazilian and Mexican investors will have access to 10 to 15 stocks in each other’s stock markets, although the number might be increased if the scheme proves successful.

Mifano says that talks on the subject have been in progress for 20 years but that Brazil and Mexico’s first step should prove an example to the rest of the region. One of the biggest problems is a lack of uniform regulation. Brazil and Mexico, for example, are currently making some changes to allow investors to buy shares of non-registered companies.

In recent years, Bovespa has been at the forefront of reform. In 2000, the exchange introduced the Novo Mercado (New Market) and Levels 1 and 2 as special categories for companies with much higher standards of corporate governance than the law requires. These reforms were “crucial”, says Mifano. With company valuations more transparent and the trading environment much improved, Bovespa is the leading stock exchange in Latin America and represents 64% of the region’s liquidity.

Issuance activity has picked up. Over the past two years, there have been 24 new offerings on Bovespa, including 12 IPOs. In total, they have raised R$14.35 billion ($6.5 billion). But Mifano argues that Brazil’s equity culture is still at an early stage. “It’s a process that’s starting,” he says. “Brazilian investors understand they need to diversify their portfolios.”

Another obstacle is that many of the country’s biggest companies are family-owned and do not want to go public.

For that reason, the exchange plans to put in place another special segment, Bovespa Mais, this time to encourage smaller companies. Mifano says it should be launched some time in the first quarter of next year.