Argentina
05 February 2019
Following the launch of BYMA鈥檚 securities lending programme, the road to success is well underway for Argentina鈥檚 finance sector
Image: Shutterstock
Argentina鈥檚 financial markets have experienced adjustments and developments in its securities lending sector over the past few years as its ambitious plans unfold.
Following a long-awaited launch of a securities lending and short selling infrastructure, Bolsas y Mercados Argentinos (BYMA) launched a securities lending programme in April last year, while Argentina鈥檚 broader financial market adopted the integration of exchanges and markets in order to boost scale and improve trading efficiency. Now Argentina looks to further improve and develop its finance sector.
In line with the development in Argentina鈥檚 markets, several exchanges offer a variety of products and services. BYMA provides services and products for stocks, fixed income securities and derivatives. Other exchanges in Argentina consist of: Mercado Abierto Electr贸nico, for public and private fixed income securities; Mercado a T茅rmino de Buenos Aires, for spot and futures on commodity products; and Rosario Futures Exchanges, for financial derivatives. The variety of exchanges contributes to the consolidation within Argentina鈥檚 industry.
Today, Latin America remains a key foreign-investment target with a host of local economies once again on the rebound. And, while Brazil and Mexico top the region, Argentina, Colombia, Chile, Peru and Ecuador are all thriving.
Get with the programme
The launch of BYMA鈥檚 securities lending programme follows the enactment of Law No. 26.831 (Capital Markets Law) in 2012, which created a new legal and regulatory environment, and caused the industry to undergo significant change. It led to the removal of the definition of securities loan transactions, which had discounted lending activity. Therefore, with the reintroduction of the definition of and conditions for operating a securities lending programme in 2017, BYMA were able to launch their own programme last year.
Since the launch of the first version of the securities lending programme 10 months ago, BYMA is working hand to hand with market participants and the whole capital market industry to improve any aspect where needed. Commenting on the developments, Alejandro Berney, CEO of BYMA (Argentina鈥檚 central securities depository (CSD), says: 鈥淔irst and foremost, it is worth mentioning that after many years of banning short selling operations the new authorities of the Comisi贸n Nacional de Valores (CNV) allowed it, and that was a remarkable progress that will contribute in the future to the gradual adoptions of these combined strategies (short selling and securities lending) in our market.鈥�
Berney continues: 鈥淲e are working from BYMA to foster the adoption of these practices in the normal trading activities of local brokers as well as institutional investors who hold a large position on securities, such as mutual funds and insurance companies.鈥�
鈥淚f we see the evolution of securities loan only, we鈥檝e observed a positive trend in volume traded as well as a number of securities used.鈥�
However, although there were many successes for Argentina鈥檚 securities lending market last year, such as the launch of the programme, other areas such as emerging markets suffered slightly. Berney noted that last year was a tough one for emerging markets, and for Argentina in particular.
He says: 鈥淏YMA have the commitment to set the ground for the marketplace and develop and improve any aspect of the industry that can foster local and foreign investors participation. Not only BYMA but also the CNV worked hand to hand for the MSCI re-categorisation, so as in many other areas as well. We are confident that this year should see a reversal of capital flows to emerging markets and part of them will hopefully come to our local market.鈥�
Bringing in the benefits
Discussing the benefits of the lending programme, Berney explains: 鈥淲e can agree that the most visible benefit of the new lending programme (that was in place before April [2018] but limited to cover failures at settlement) comes from the investor side. Also, having an extended acceptance of the programme among local participants ensures an orderly settlement of trades and in this way contributes to an increase in the overall volume traded.鈥�
In terms of the securities lending market structure, Argentina operates on a central clearing counterparty (CCP), with all securities borrowing and lending transactions guaranteed by BMYA, acting as a CCP. Borrowers must meet margin requirements established by the exchange based on securities shorted. Commenting on why BYMA decided to use a CCP model, Berney states: 鈥淚t was a natural process since most of our volume traded is settled in a CCP environment.鈥�
鈥淭his is particularly important for foreign investors who are not used to trading in local markets or through local intermediaries, so having a CCP model gives them a clear signal that all the obligations will be fulfilled by the counterparties.鈥�
Turning to the equity space, Berney highlights that there could be some opportunity there this year. In the past, Argentinian companies had to rely on retained earnings or short-term bank loans for financing, which was due to macroeconomic volatility and high inflation. It has been noted that reforms undertaken beginning in the 1990s permitted large firms to access international equity financing through the issuance of American Depositary Receipts (ADRs), and today nearly 90 percent of the country鈥檚 equities trading volumes derive from that source.
BYMA aims to repatriate some of that volume back to Argentina to be traded locally and act as a hub for firms seeking access to equity financing.
Berney says: 鈥淲e are optimistic about the gradual increase in the securities lending programme, not only in government securities but also on equities. Last year Morgan Stanley Capital International granted Argentina the emerging market label, so we are waiting for a sustained increase in local trading volume as well as arbitrage opportunities against listed ADR鈥檚. Having a solid and robust securities lending would allow us to materialise those perspectives.鈥�
There鈥檚 a long road to success
Challenges with the current securities lending model revolve mainly around supply constraints. EquiLend and RMA cited in its new user guide that as it is still early days for the programme, supply levels are currently low, with retail and some institutional investors accounting for the ARS 18 billion in availability.
It was also stated that to help boost supply, BYMA has petitioned the local regulator to allow insurance company participant.
In terms of the main strengths and weaknesses in Argentina鈥檚 securities finance industry, Berney states: 鈥淲e are at the very beginning of a long way, trying to foster local and foreign investor鈥檚 participation. At the local level, there are big portfolios of government securities that are not yet fully optimised by means of our lending programme, so it鈥檚 part of the challenge to increase the universe of securities and investors so the whole industry can progress on solid bases.鈥�
According to the RMA and EquiLend Latin America guide, Argentina officials are optimistic that an initial securities lending CCP launched in 2017 will ultimately evolve into a globally accepted platform.
Following a long-awaited launch of a securities lending and short selling infrastructure, Bolsas y Mercados Argentinos (BYMA) launched a securities lending programme in April last year, while Argentina鈥檚 broader financial market adopted the integration of exchanges and markets in order to boost scale and improve trading efficiency. Now Argentina looks to further improve and develop its finance sector.
In line with the development in Argentina鈥檚 markets, several exchanges offer a variety of products and services. BYMA provides services and products for stocks, fixed income securities and derivatives. Other exchanges in Argentina consist of: Mercado Abierto Electr贸nico, for public and private fixed income securities; Mercado a T茅rmino de Buenos Aires, for spot and futures on commodity products; and Rosario Futures Exchanges, for financial derivatives. The variety of exchanges contributes to the consolidation within Argentina鈥檚 industry.
Today, Latin America remains a key foreign-investment target with a host of local economies once again on the rebound. And, while Brazil and Mexico top the region, Argentina, Colombia, Chile, Peru and Ecuador are all thriving.
Get with the programme
The launch of BYMA鈥檚 securities lending programme follows the enactment of Law No. 26.831 (Capital Markets Law) in 2012, which created a new legal and regulatory environment, and caused the industry to undergo significant change. It led to the removal of the definition of securities loan transactions, which had discounted lending activity. Therefore, with the reintroduction of the definition of and conditions for operating a securities lending programme in 2017, BYMA were able to launch their own programme last year.
Since the launch of the first version of the securities lending programme 10 months ago, BYMA is working hand to hand with market participants and the whole capital market industry to improve any aspect where needed. Commenting on the developments, Alejandro Berney, CEO of BYMA (Argentina鈥檚 central securities depository (CSD), says: 鈥淔irst and foremost, it is worth mentioning that after many years of banning short selling operations the new authorities of the Comisi贸n Nacional de Valores (CNV) allowed it, and that was a remarkable progress that will contribute in the future to the gradual adoptions of these combined strategies (short selling and securities lending) in our market.鈥�
Berney continues: 鈥淲e are working from BYMA to foster the adoption of these practices in the normal trading activities of local brokers as well as institutional investors who hold a large position on securities, such as mutual funds and insurance companies.鈥�
鈥淚f we see the evolution of securities loan only, we鈥檝e observed a positive trend in volume traded as well as a number of securities used.鈥�
However, although there were many successes for Argentina鈥檚 securities lending market last year, such as the launch of the programme, other areas such as emerging markets suffered slightly. Berney noted that last year was a tough one for emerging markets, and for Argentina in particular.
He says: 鈥淏YMA have the commitment to set the ground for the marketplace and develop and improve any aspect of the industry that can foster local and foreign investors participation. Not only BYMA but also the CNV worked hand to hand for the MSCI re-categorisation, so as in many other areas as well. We are confident that this year should see a reversal of capital flows to emerging markets and part of them will hopefully come to our local market.鈥�
Bringing in the benefits
Discussing the benefits of the lending programme, Berney explains: 鈥淲e can agree that the most visible benefit of the new lending programme (that was in place before April [2018] but limited to cover failures at settlement) comes from the investor side. Also, having an extended acceptance of the programme among local participants ensures an orderly settlement of trades and in this way contributes to an increase in the overall volume traded.鈥�
In terms of the securities lending market structure, Argentina operates on a central clearing counterparty (CCP), with all securities borrowing and lending transactions guaranteed by BMYA, acting as a CCP. Borrowers must meet margin requirements established by the exchange based on securities shorted. Commenting on why BYMA decided to use a CCP model, Berney states: 鈥淚t was a natural process since most of our volume traded is settled in a CCP environment.鈥�
鈥淭his is particularly important for foreign investors who are not used to trading in local markets or through local intermediaries, so having a CCP model gives them a clear signal that all the obligations will be fulfilled by the counterparties.鈥�
Turning to the equity space, Berney highlights that there could be some opportunity there this year. In the past, Argentinian companies had to rely on retained earnings or short-term bank loans for financing, which was due to macroeconomic volatility and high inflation. It has been noted that reforms undertaken beginning in the 1990s permitted large firms to access international equity financing through the issuance of American Depositary Receipts (ADRs), and today nearly 90 percent of the country鈥檚 equities trading volumes derive from that source.
BYMA aims to repatriate some of that volume back to Argentina to be traded locally and act as a hub for firms seeking access to equity financing.
Berney says: 鈥淲e are optimistic about the gradual increase in the securities lending programme, not only in government securities but also on equities. Last year Morgan Stanley Capital International granted Argentina the emerging market label, so we are waiting for a sustained increase in local trading volume as well as arbitrage opportunities against listed ADR鈥檚. Having a solid and robust securities lending would allow us to materialise those perspectives.鈥�
There鈥檚 a long road to success
Challenges with the current securities lending model revolve mainly around supply constraints. EquiLend and RMA cited in its new user guide that as it is still early days for the programme, supply levels are currently low, with retail and some institutional investors accounting for the ARS 18 billion in availability.
It was also stated that to help boost supply, BYMA has petitioned the local regulator to allow insurance company participant.
In terms of the main strengths and weaknesses in Argentina鈥檚 securities finance industry, Berney states: 鈥淲e are at the very beginning of a long way, trying to foster local and foreign investor鈥檚 participation. At the local level, there are big portfolios of government securities that are not yet fully optimised by means of our lending programme, so it鈥檚 part of the challenge to increase the universe of securities and investors so the whole industry can progress on solid bases.鈥�
According to the RMA and EquiLend Latin America guide, Argentina officials are optimistic that an initial securities lending CCP launched in 2017 will ultimately evolve into a globally accepted platform.
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