The Andean exchanges of Peru, Colombia and Chile have reacted to the increased regulation and technological advances that have been felt across Latin America by embracing regional co-operation. This approach is designed to boost liquidity and exploit economies of scale, allowing these smaller exchanges to punch above their weight. With five percent and three percent of the entire Latin American market respectively, Chile and Colombia have formed an integrated group, along with Peru, as a means to raise the profile of their individual exchanges. The resulting Mercado Integrado Latinoamericano (MILA) allows the individual exchanges of Santiago, Bogota and Lima to compete with larger rivals.
It is expected that the MILA initiative will increase the liquidity of locally listed companies by providing local brokers and investors with easier access to these markets, with the increase in volume also attracting more foreign investors to the Andean region. MILA can also be seen as a ground-up creation of a pan-national market which echoes what we are seeing with the recently launched ASEAN exchange in South East Asia, which was created to promote growth in the region by driving cross border collaboration and improved market access. This is quite different to Europe, where political unity, extensive monetary union, pan-regional regulators and a drive towards closer financial co-operation created the context in which top-down pan-regional activity has been encouraged.
So far, MILA participation has been slow due to disparities among the three countries’ tax regimes, currencies and securitization rules. However, early signs are that the trading community has responded positively to its establishment: it began as the largest public equity market in the region in terms of total listed companies, with more than 560; and the second largest in terms of market capitalization at $578 billion compared to Mexico’s $387 billion and Brazil’s $1.2 trillion.
The past 12 months have seen the launch of the S&P MILA 40 index, tracking the initiative’s 40 most liquid companies; the Global X FTSE Andean 40 ETF, the first targeting the region to be traded on the NYSE; and the creation of Blackrock’s ETFs in Colombia and Chile to be traded locally.
Leveraging shared goals
These are indications of a continuing and increasing confidence in MILA and the Andean region as a whole – thus fulfilling at least one of the initiative’s main goals. In November 2011, Mexico signed a letter of intent to join MILA, which represents a very significant addition to the initiative, and there has been widespread discussion regarding the inclusion of Panama and other Central American countries. Even Brazil is being discussed as a potential partner at a later stage of the MILA integration process, and BM&FBovespa has already signed a knowledge sharing agreement relating to derivatives with the Santiago exchange.
Trading will be managed through brokers listed on each exchange with shares held in custody in the local markets and local currency. MILA runs on a FIX-based message routing network that allows information exchange between the liquidity venues, managers and participating brokers, and foreign investors will have access to the exchange through a broker.
The arrival of MILA makes it easier and more affordable for local brokers to maintain a pan-regional presence, and develop a proposition that enables them to attract international flow, and perhaps more significantly, local retail investors. Provided they can augment their research coverage to encourage investment and offer services supported by the necessary technology, MILA offers an opportunity to, if not rival, then at least gain ground in the face of international players in the market.
The Andean region is showing great potential to become a key force in Latin America as the region as a whole establishes its global presence. The Andean region is asserting a unique identity and success here, as elsewhere, will be dependent on sophisticated technology tailored to meet specific local needs. Support for multi-regional, multi-currency and FX functionality is required and since securities are held in custody in local currency, investors actively need to decide on the amount of desired currency exposure and take necessary precautions to hedge currency risk.
The rapid pace of change that we will inevitably continue to witness means firms need to be flexible in order to adapt and scale to meet the needs of tomorrow.
Alice Botis is head of business development in Latin America for Fidessa.