Brazil
30 September 2014
Brazil鈥檚 market is growing despite many being wary of its CCP model
Image: Shutterstock
There is no market in Latin America quite like Brazil. Primarily specials-driven, there is, on average, approximately $3.7 billion on loan at any given time. Ask any agent lender where it is looking to do business next and Brazil is usually top of the list.
And it鈥檚 clear why. Chris Benedict, director and lead analyst at DataLend, says: 鈥淏razil鈥檚 overall volume-weighted average fee across all securities on loan is approximately 153 basis points (bps), which is high compared to the rest of the region and most other markets around the globe.鈥�
Brazil has also had an overall average utilisation of approximately 20 percent over the past 12 months, 鈥渨hich is also high compared to the region鈥�, says Benedict.
Some of the most profitable Brazilian stocks for securities lending participants in the past 12 months have included B2W Companhia Digital, Kroton Educacional, Lojas Renner, Oi preferred shares and BTG Pactual. 鈥淭hese stocks together yielded approximately $9.6 million in securities lending revenue in the past 12 months.鈥�
Despite some market participants being weary of Brazil because of its central counterparty design, the country鈥檚 CCP, BM&FBovespa, sees securities lending as a rapidly growing business.
A BM&FBovespa spokesperson comments: 鈥溌槎勾� lending is a rapidly growing business at BM&FBovespa, with a 32 percent compound annual growth rate in terms of opened positions in the last six years.鈥�
Indeed, the CCP processed 121,284 securities lending transactions in July, beating June鈥檚 total of 108,422.
But there is still work to be done to attract lenders to Brazil. The spokesperson says: 鈥淲hile already healthy and attractive for players, BM&FBovespa has also been working to improve its CCP securities lending programme further in order to attract equity holders to lend in this environment. In 2013, the programme still had excess borrowing demand in comparison with the lending supply.鈥�
Among the changes were enhanced corporate action treatment and new delivery failure procedures, as well as an improved trading screen for agents that register transactions on behalf of lenders and borrowers.
Agent perspective
Paul Wilson, global head of agent lending product at J.P. Morgan Investor Services, says that his bank is the only non-domestic agent lender currently active in Brazil, which is somewhat unique because the country鈥檚 CCP collects collateral in a variety of forms from borrowers.
鈥淐ollateral is not passed on to the lenders, so for all intents and purposes they appear to be uncollateralised.鈥�
鈥淭hat being said, the CCP is also the central securities depository (CSD), so by virtue of investing in the Brazilian market in the first place, investors would have had to take into account.鈥�
How is Brazil aiming to make more lenders 鈥渃omfortable鈥� with its CCP model?
The BM&FBovespa spokesperson says: 鈥淚nternational investors in Brazil hold 40 percent of the assets in the BM&FBovespa CSD and their access to the lending market is growing at a lower rate when compared to local players.鈥�
鈥淎s the CCP model for securities lending is mandatory in Brazilian regulation, these international investors need to understand the system鈥檚 safeguards, a process which may take some time, as well as understand access to such a model vis-脿-vis their own regulatory framework and modus operandi.鈥�
鈥淭o overcome this issue BM&FBovespa has been working along to major international associations, intermediaries and the beneficial owners to engage the market participants on the discussion of the CCP model and the regulatory framework in Europe and the US.鈥�
鈥淩egardless of these challenges, high return for lenders in the Brazilian market seems to be an additional stimulus for them to start doing business in it. The only institution currently authorised to provide securities lending in Brazil is BM&FBovespa.鈥�
鈥淎s the CCP model has proved extremely reliable even in stress situations like the 2008 financial crisis, it is unlikely that regulators in Brazil will accept a different model than a CCP-based one for the market.鈥�
Clearinghouse overhaul
Changes are afoot with BM&FBovespa鈥檚 clearinghouses. It currently has four鈥攆or equities and corporate bonds, derivatives, foreign exchange, and federal government bonds鈥攖hat it is combining. Announcing the project in August, BM&FBovespa CEO Edemir Pinto said: 鈥淪ometimes the market goes for several years without any changes. In this case we鈥檒l leap forward several years in a single day.鈥�
鈥淭he single clearinghouse and Closeout Risk Evaluation (CORE) [risk management system] represent a revolution in modernity, security and efficiency in central counterparty and risk management services.鈥�
鈥淎s was the case with the Brazilian Payment System (SPB), the market will be divided into before and after the new clearinghouse and CORE.鈥�
C铆cero Vieira, COO of BM&FBovespa, added: 鈥淭his pioneering project will result in one of the most secure and sophisticated clearing systems in the world. The new clearinghouse will reduce the market鈥檚 back-office costs and make trade settlement and the allocation of collateral more efficient.鈥�
鈥淚t will also bring greater flexibility and reduce time frames for the launch of new products.鈥�
The BM&FBovespa spokesperson stresses that the project will benefit securities lending participants. 鈥淥ne of the major benefits for the investor is the more efficient use of capital for collateral thanks to the new margin calculation model, which will allow risk to be offset across different asset classes and between open interest and pledged collateral, while preserving the security of the system.鈥�
鈥淔rom a securities lending perspective, as long as the product is integrated and controlled along with other contracts (foreign exchange, derivatives, etc), it will allow borrowers to have a more efficient offset on calculation of margin calls and deposited collateral.鈥�
鈥淔rom the lender鈥檚 perspective, securities lending contracts that are already accepted as collateral for some operations will become accepted for a longer list of trades, facilitating capital allocation and leveraging the possibility of new trades.鈥�
As Brazil attempts to attract more lenders to its shores, it will be interesting to see how long it will remain a specials market, and when other emerging jurisdictions will step in to take its crown as an 鈥榓ttractive possibility鈥�.
And it鈥檚 clear why. Chris Benedict, director and lead analyst at DataLend, says: 鈥淏razil鈥檚 overall volume-weighted average fee across all securities on loan is approximately 153 basis points (bps), which is high compared to the rest of the region and most other markets around the globe.鈥�
Brazil has also had an overall average utilisation of approximately 20 percent over the past 12 months, 鈥渨hich is also high compared to the region鈥�, says Benedict.
Some of the most profitable Brazilian stocks for securities lending participants in the past 12 months have included B2W Companhia Digital, Kroton Educacional, Lojas Renner, Oi preferred shares and BTG Pactual. 鈥淭hese stocks together yielded approximately $9.6 million in securities lending revenue in the past 12 months.鈥�
Despite some market participants being weary of Brazil because of its central counterparty design, the country鈥檚 CCP, BM&FBovespa, sees securities lending as a rapidly growing business.
A BM&FBovespa spokesperson comments: 鈥溌槎勾� lending is a rapidly growing business at BM&FBovespa, with a 32 percent compound annual growth rate in terms of opened positions in the last six years.鈥�
Indeed, the CCP processed 121,284 securities lending transactions in July, beating June鈥檚 total of 108,422.
But there is still work to be done to attract lenders to Brazil. The spokesperson says: 鈥淲hile already healthy and attractive for players, BM&FBovespa has also been working to improve its CCP securities lending programme further in order to attract equity holders to lend in this environment. In 2013, the programme still had excess borrowing demand in comparison with the lending supply.鈥�
Among the changes were enhanced corporate action treatment and new delivery failure procedures, as well as an improved trading screen for agents that register transactions on behalf of lenders and borrowers.
Agent perspective
Paul Wilson, global head of agent lending product at J.P. Morgan Investor Services, says that his bank is the only non-domestic agent lender currently active in Brazil, which is somewhat unique because the country鈥檚 CCP collects collateral in a variety of forms from borrowers.
鈥淐ollateral is not passed on to the lenders, so for all intents and purposes they appear to be uncollateralised.鈥�
鈥淭hat being said, the CCP is also the central securities depository (CSD), so by virtue of investing in the Brazilian market in the first place, investors would have had to take into account.鈥�
How is Brazil aiming to make more lenders 鈥渃omfortable鈥� with its CCP model?
The BM&FBovespa spokesperson says: 鈥淚nternational investors in Brazil hold 40 percent of the assets in the BM&FBovespa CSD and their access to the lending market is growing at a lower rate when compared to local players.鈥�
鈥淎s the CCP model for securities lending is mandatory in Brazilian regulation, these international investors need to understand the system鈥檚 safeguards, a process which may take some time, as well as understand access to such a model vis-脿-vis their own regulatory framework and modus operandi.鈥�
鈥淭o overcome this issue BM&FBovespa has been working along to major international associations, intermediaries and the beneficial owners to engage the market participants on the discussion of the CCP model and the regulatory framework in Europe and the US.鈥�
鈥淩egardless of these challenges, high return for lenders in the Brazilian market seems to be an additional stimulus for them to start doing business in it. The only institution currently authorised to provide securities lending in Brazil is BM&FBovespa.鈥�
鈥淎s the CCP model has proved extremely reliable even in stress situations like the 2008 financial crisis, it is unlikely that regulators in Brazil will accept a different model than a CCP-based one for the market.鈥�
Clearinghouse overhaul
Changes are afoot with BM&FBovespa鈥檚 clearinghouses. It currently has four鈥攆or equities and corporate bonds, derivatives, foreign exchange, and federal government bonds鈥攖hat it is combining. Announcing the project in August, BM&FBovespa CEO Edemir Pinto said: 鈥淪ometimes the market goes for several years without any changes. In this case we鈥檒l leap forward several years in a single day.鈥�
鈥淭he single clearinghouse and Closeout Risk Evaluation (CORE) [risk management system] represent a revolution in modernity, security and efficiency in central counterparty and risk management services.鈥�
鈥淎s was the case with the Brazilian Payment System (SPB), the market will be divided into before and after the new clearinghouse and CORE.鈥�
C铆cero Vieira, COO of BM&FBovespa, added: 鈥淭his pioneering project will result in one of the most secure and sophisticated clearing systems in the world. The new clearinghouse will reduce the market鈥檚 back-office costs and make trade settlement and the allocation of collateral more efficient.鈥�
鈥淚t will also bring greater flexibility and reduce time frames for the launch of new products.鈥�
The BM&FBovespa spokesperson stresses that the project will benefit securities lending participants. 鈥淥ne of the major benefits for the investor is the more efficient use of capital for collateral thanks to the new margin calculation model, which will allow risk to be offset across different asset classes and between open interest and pledged collateral, while preserving the security of the system.鈥�
鈥淔rom a securities lending perspective, as long as the product is integrated and controlled along with other contracts (foreign exchange, derivatives, etc), it will allow borrowers to have a more efficient offset on calculation of margin calls and deposited collateral.鈥�
鈥淔rom the lender鈥檚 perspective, securities lending contracts that are already accepted as collateral for some operations will become accepted for a longer list of trades, facilitating capital allocation and leveraging the possibility of new trades.鈥�
As Brazil attempts to attract more lenders to its shores, it will be interesting to see how long it will remain a specials market, and when other emerging jurisdictions will step in to take its crown as an 鈥榓ttractive possibility鈥�.
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