PROFIT-LOSS: Brazil transfers know-how to Chile

Brazil’s exchange, BM&FBOVESPA, and the Santiago Stock Exchange recently signed an agreement to develop Chile’s derivatives market that will lead to more efficient practices, reducing costs and risk. The technology and know-how deal is part of a far-reaching drive for more cooperation between Latin exchanges and shows how Brazil is now a recognized center for best practice, especially in risk mitigation.

Brazil has been through a number of crises and its securities trading model has withstood all these tests and evolved, making it a logical place to look for examples, notes Andre Hubner, head of emerging markets, LatAm, at HSBC in New York. The agreement is: “a good and useful step on the technical level but it doesn’t lead to a faster evolution of the market,” he says.  Brazilian players can clear trades through a central counterparty, a model now being looked at by a number of markets, he notes. By enhancing confidence, a central counterparty for OTC derivatives can lead to deeper markets, he adds. If the agreement leads to a combination of the collateral management system, between OTC and futures markets, the result could lead to smaller collateral costs to the market participants.

Chile has an OTC model for its most popular trades: FX forwards and interest rates swaps, says Rodrigo Couto, director of fixed-income trading for Latin America at BNP Paribas in New York. These are traded dealer to dealer or dealer to investor and the market has developed few standardized products, creating problems including a lack of transparency and counterparty risks. The Brazilian model would change that, he believes. Chilean investors sometimes exhaust credit with their brokers and face a situation where they cannot trade. “It’s much easier to pledge collateral through a central clearing house. You increase price transparency and you remove credit risk,” notes Couto. 

It is unclear just how fast the Chilean derivatives markets might develop. Hubner sees the agreement between the two exchanges as a regulatory and technical development. “I don’t see a lot of changes in the product mix. This is more about infrastructure changes,” he says. One major advantage of Chile adopting this model will be in calculating initial margins: “"Market participants would like to see improvements on the netting rules for derivatives in Chile,” he says.  

Couto thinks that the agreement could really help develop the Chilean derivatives market. The exchange set up a new product committee and will be developing FX futures, currently mostly in Chilean peso to US dollar trades, which should be launched in the second half of the year. “Right now, there is no volume so we expect this product to be very well received,” says Couto. Trading volumes in the CHP-USD spot market fluctuate between $1-2 billion per day, he notes.

Chile is different to Brazil in some fundamental ways: the former is much more of an equities than a fixed-income market. Indeed, the equity market in Chile has been growing fast and is now almost neck-and-neck with Mexico. In Brazil, not only equity but fixed-income derivatives have taken off and US dollar futures trade in volume and have proven popular with foreign investors as have interest rate swap futures. That will take more time in Chile where bond futures are likely to prove popular although they will not be launched until 2013.

Despite the different market profiles, the relationship between the two Latin exchanges is deepening. An alliance between them began in 2010 and other strategic projects are in the pipeline, such as connectivity and order routing and market data distribution. BM&FBovespa announced last month [Julie – April] that it is in talks to participate in the integrated Latin American market, MILA, which would move it closer to the exchanges of Chile, Colombia, Peru and Mexico.

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