04.26.2012
By Terry Flanagan

Traders Look To Tap Emerging Brazil

Brazil has quickly become the next frontier for global market participants seeking growth opportunities.

“The reason Brazil is attractive is because it has top-rated listed companies and traders are operating in an open market, unlike in markets in China and Russia,” said Flavio Lobato, co-head of business development for Latin America at fund of hedge funds manager Liongate Capital Management. “From an emerging market perspective, investing in Brazil makes a lot of sense.”

Atlanta-based global futures exchange operator IntercontinentalExchange (ICE) will 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.

“The choice to select ICE came not only from the fact that they are a globally recognized company, but also because of their outstanding technology and OTC market expertise,” said Luiz Fernando Fleury, chief executive of Brazilian post-trade group Cetip. “A major reason for this partnership is ICE’s demonstrated ability to successfully deliver liquidity and pricing transparency in other less liquid markets, similar to the scenario we currently have with our local corporate debt. The speed with which they can deliver the product to our market was another key factor.”

ICE last year acquired a 12.4% stake in Cetip for $512 million. This made ICE the largest shareholder in Cetip. The move was made to help ICE penetrate deeper into the rapidly emerging Brazilian markets. It also launched BRIX last year, a Brazilian marketplace for electric power.

Brazil’s economy has been strong over the past few years. Together, with a vibrant agricultural and commodities sector, a high interest rate and a solid Brazilian real, it was able to power out of the global recession quicker than other developed nations.

Brazil provides a strong linkage to emerging markets as well as its fellow Brics country China, with which a quarter of its trading is done. Another half of its trading activity is split between North America and Europe, so there is clearly a diversified approach to its growth.

ICE’s stateside counterparts, Direct Edge and Bats Global Markets, are also looking to get a slice of the Brazilian pie. Direct Edge announced late last year its intentions to enter the booming Brazilian markets with a new, all-electronic equities exchange. The trading platform, to be based in Rio de Janeiro, will operate as an independent local company majority owned by New Jersey-based Direct Edge and run by a Brazil-based chief executive. It would be the first stock exchange to be based in Rio since 2002, when BM&F Bovespa acquired the now-defunct Rio de Janeiro Stock Exchange, or Bolsa de Valores do Rio de Janeiro.

Direct Edge’s announcement comes several months after its closest rival by U.S. equities market share, Bats Global Markets, made public its own plans to enter Brazil. Last February, Kansas City-based Bats 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, according to its initial announcement, 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&F Bovespa. Since launching in 2005, Bats has achieved a 12% market share in U.S. equities trading volume.

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