At least three Latin nations are forging ahead with closer links via a common FX trading platform in a move that reinforces their growing financial market and trade connections. The question remains just how fast the take-up of the FX platform will be and how quickly other products can be rolled off it, given difficulties in building a joint equity market between the three signatories and with a darkening background of global financial instability.
Chile, Colombia and Peru, along with potential member of the FX platform Mexico, are committed to much closer economic ties: they signed a wide-ranging agreement in April this year designed to create one of the largest free trade blocks in the region, creating a tailwind for the FX market venture.
The three south American countries already use common FX technology originally developed by ICAP and plan to start trading their respective currencies on the new FX platform in May next year. Mexico has a similar platform through SIF-ICAP, a subsidiary of ICAP and the Mexican exchange, and is in talks to sign up to the initiative.
The FX initiative is not just a natural outcome of shared FX technology, but the launch of a new, common equity platform, the Integrated Latin American Markets structure (MILA) , which was inaugurated May 30. Mexico confirmed it would sign up to MILA this month [December].
Inter-dealer broker ICAP developed the FX platform for the three original signatories in 1992-3. The new initiative will bring together Integrados FX, administrator of the currency trading platform SET-FX in Colombia; the Bolsa Electrónica de Chile, which administers the currency system Sistema de Divisas Datatec; and Datatec Perú.
Broker-dealers in each country will be able to access the platform via split screens and the initiative will allow equity transactions to move from phone based to electronic. Brokers will set up credit lines with each other and these will be adjusted as positions between them are netted.
The platform will allow broker dealers to trade in any of the three currencies on-line and in real time, eliminating the need for intermediaries, notes Enrique Seguel Steuer, marketing director of the Bolsa Electrónica de Chile in Santiago.
Managers are playing down the immediate ambitions of the initiative. “Each time you open up a new market, it’s a slow process to build volume. It takes time to build trust with investors,” concedes Andres Macaya, the business manager of SET FX in Bogotá. The same will probably be true of the FX platform, he reasons. Still, daily FX volumes between the three countries have already reached a chunky $4.5b per day.
Mr Seguel Steuer is confident that volumes will grow over time. “The interesting thing is that this platform will not only be useful for financial transactions, but will certainly be used for trades involving other goods and services,” such as exports and imports, he says. That would connect well with the governments’ big trade push.
Still, the pan-regional FX initiative is being undertaken cautiously partly reflecting the slow take up of MILA as well as restrictions in local legislation. Trading will be confined to spot transactions in the three currencies. Over time, that could ripen to offering NDFs (non-deliverable forwards) said Mr Macaya, although he did not felt comfortable in providing a time frame.
Moreover, transactions will be more cumbersome as they will have to be converted through the greenback as there are no legal provisions for direct currency transactions between each country. Given the proposed closer economic ties, restrictions may be loosened and “we could see direct trades between the currencies of the three markets,” believes Mr Macaya.