Brazil Gearing Up For Exchange Competition

Terry Flanagan

At least two U.S.-based exchanges are looking to establish footprints in Brazil, as they aim to add greater competition to the nation’s capital markets.

The BM&FBovespa exchange, based in São Paulo, currently holds a monopolistic grip over the Brazilian stock market.

“Brazil is clearly ready for exchange competition,” said William O’Brien, chief executive of U.S. exchange operator Direct Edge to Brazilian policymakers on Friday.

O’Brien appeared before the Comissão de Valores Mobiliários (CVM), the securities market regulatory body in Brazil, to discuss the potential benefits competition would have to Brazilian investors and other market participants. One of the main points of discussion at the meeting was a study conducted by European consulting firm Oxera Consulting. The consultancy was tapped by Brazilian policymakers to determine what effects competition would have in the local marketplace.

Although Oxera concluded that more competition could bring about lower fees for trading and post-trading services, that could be outweighed by the cost of existing firms adapting to the potential new venues to conform to the specific requirements of Brazilian regulation. The consultancy recommended to the CVM to take a gradual approach to any changes to the current exchange market structure.

Brazil needs a “carefully managed evolution of the regulatory framework” in order to realize the benefits of new competition, according to Oxera. It also said that the Brazilian exchange industry needs a “managed evolution, and not revolution”, in order to balance the need for more competition and for proper regulatory standards.

“There is sufficient scale for multiple trading platforms to compete efficiently in Brazil,” said O’Brien. “The benefits of competition are clear and achievable.”

Among the other benefits of increased competition in the exchange space in Brazil is a trickle-down effect, in that it will also lead to increased competition between broker-dealers and between technology vendors. With the introduction of new exchanges, new and existing brokers and vendors will have more ways to differentiate between each other with new products and services.

In order for the transition from a monopoly to a competitive market to be successful, there will need to be some co-operation between the existing market participants, including BM&FBovespa. To date, the incumbent exchange has been reluctant to open up its clearing infrastructure to any potential new competitors. That would need to change if there is to be a smooth transition to a competition exchange structure in Brazil.

“Exchange competition, done right, will improve the Brazilian market,” said O’Brien.

Direct Edge announced late last year that it would look to enter the Brazilian market with Direct Edge Brazil, an all-electronic platform for the trading of Brazilian equities. The exchange is expected to go live later this year, pending CVM approval.

Brazil has been one of the most attractive of the emerging markets in recent years, as the local market structure, sophisticated investor base and abundance of liquidity has brought in interest from overseas.

Earlier this year, Jose Marques, global head of electronic equity trading at Deutsche Bank, said that the Brazilian market was attracting a lot of investors from overseas due to the favorable macro-economic conditions, improvements to trading technology and demographics.

“The speed of this change is controlled in part by the extent that the investment infrastructure has sufficiently high capacity and sufficiently low friction cost to support new activity,” said Marques at the time.

In February, U.S. exchange operator Bats Global Markets, based in Kansas, announced a partnership with Brazilian asset manager Claritas Investments to launch a new equities exchange. While nothing has been finalized, the memorandum of understanding called for the two parties to “explore opportunities in the Brazilian market”. However, if Bats were to enter the region, it would do so with its own clearing and depository services, challenging the established vertically-integrated silo set by BM&FBovespa.

While global futures exchange operator IntercontinentalExchange (ICE), based in Atlanta, is set to partner with Brazilian clearing house and custody provider Cetip to build a new fixed income trading platform for Brazilian corporate and government fixed income instruments. Under the partnership, the Brazilian firm will develop product strategy and promotion of its usage in Brazil while ICE will provide technological expertise. The new platform is expected to be launched in the second half of this year.

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