The panellists discussed the state of securities lending in the main regional markets of Latin America.
Tony Kim, executive director at Morgan Stanley, outlined the market capitalisation and average traded volume of the regional markets, stating that Brazil is way ahead of other markets and is similar in size and activity to Taiwan and Korea.
Brazil’s market capitalisation of $1,000bn and average daily traded volume was $4bn. He noted that the securities lending market in Brazil is growing and is up around 30% over the past four years.
Carey Chamberlain, head of equity finance, HSBC Securities, added that Brazil is the most important market from a securities lending point of view. He added that the new Brazil Securities Lending Association (Brsla) will lead to more liquidity and aims to achieve a free flowing equity market for clients. “The market is becoming more liquid and attracting more investors.”
Kim stated that market participation is fairly evenly split between offshore investors, the local mutual fund industry and the local private wealth network in Brazil. “The market may lose liquidity from offshore investors but there is enough interest from onshore clients.”
Brazil is different to many markets in that all trades go through a central counterparty (CCP) that provides a guarantee to the lender that stocks are returned and all corporate actions are delivered. By September 2013 there was $20bn in outstanding loan securities, which is three times 2009 levels.
Julio Carlos Ziegelmann, managing director of equity products, BM&FBOVESPA, added that one third is foreign investors, one third retail and a third mutual funds which also include hedge fund strategies. On the borrower side, foreign investors take a 22% market share, while Brazilian mutual funds dominate with 70%.
There is a final beneficiary model where collateral is posted in the name of the investors and placed under BM&FBOVESPA’s custody. The clearinghouse maintains records of each beneficial owner’s collateral, thus avoiding commingling of assets.
“It was built for systematic risk and clearing of the Brazilian financial system. Collateral is not commingled between different clients.”
BTC is the securities lending system. Ziegelmann said that improvements would be introduced to remodel the securities lending service. These include operational enhancements, product improvements such as early return deadline, recall settlement cycle and delivery failure treatment.
Additional new features will include new statistics, such as average rate disclosure of 1, 3 and 15 days and also a ranking of brokers (loans outstanding).
Also included are a trading screen release of the order book and a standardised 30-day contract. These improvements will all “lead to a more transparent market… a consistent and diversified supply of securities…and availability via web trading.”
James Gerspach, executive director at JPMorgan, and Jill Rathgeber, managing director at BNY Mellon, discussed the non-standard attributes of Brazilian equity lending, highlighting the central counterparty model, documentation, settlements, collateral management, asset servicing and revenue calculation.
However the panel noted that Chile, Peru and Columbia have not seen a huge amount of activity on the short side but more on the long side. This is due to the smaller market capitalisation of these markets.
Mexico has a $500bn market capitalisation and $1.5bn average daily traded volume. Chile has $300bn market capitalisation and $200m average daily traded volume, with most of the trades being conducted in the local markets.
Chile publishes a list of shorted securities and shorting stocks outside this list is prohibited, although short interest is heavily focused in just one name CENCOSUD (60%), followed by LAN (17%). Colombia has a market capitalisation is $250bn, $100m in average daily traded volume and short interest has been allowed since 2011