04.26.2012
By Terry Flanagan

Brics Exchanges Build Foundation

The alliance of exchanges from several of the leading emerging markets is beginning to lay the groundwork for long-term partnerships.

The Brics exchange alliance was formed late last year by exchanges from Brazil, Russia, India, China and South Africa. The first stage of the tie-up has recently gone live, with the launch of cross-listed derivatives products on each exchange’s benchmark index.

Through an initiative called Bricsmart, the exchanges have begun to cross-list futures on Brazil’s Bovespa Index, Russia’s Micex Index, the BSE India Sensitive Index, Hong Kong’s Hang Seng Index, the Hang Seng China Enterprises Index and South Africa’s JSE Top40 Index. Traders engaged in arbitrage will be able to buy and sell futures based on the same index on multiple venues, boosting liquidity.

“The exchanges in the alliance are very excited at the initiative,” Graham Smale, director of bonds and financial derivatives at the Johannesburg Stock Exchange, told Markets Media.

“The cross-listing of our benchmark products give local investors access to market exposures that are difficult to access because of exchange control or other restrictions on foreign investment. The local listing means that local investors can access these exposures through their existing channels and in local currency.”

While trading of the products has thus far been light, the exchanges expect liquidity to grow over time.

“New derivative products take time to become successful,” said Smale. “The current focus is two-fold; to work on the inter-exchange linkages between members to facilitate market-making in the cross-listed indices and FX hedging, and to market the product to investors. As more clients are aware of the product and more members are participating, volume should naturally increase.”

Each of the exchanges has been growing within their local markets in recent years and now want to be seen as international players for their local investors, who can then trade securities from other Brics countries easily. It is a few steps removed from a full-on exchange merger, but still offers some of the cross-border, international connectivity investors are looking for.

The Brics exchange alliance is what many industry observers believe will be the way to go in the future, as the large full-on cross-border merger seems to have died, with many high-profile deal failures.

The next stage for the Brics alliance is on the development of more products, and also the possibility of further connectivity.

“The Bricsmart Alliance will be working towards a combined index,” said Smale. “This will lead to further product development being futures and options and exchange-traded funds.”

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