Argentina
03 January 2018
After a decade-long isolation under the interventionist Fernandez鈥檚 administration, Argentina鈥檚 securities lending activity almost here at last
Image: Shutterstock
Under the current Macri presidency, drastic capital market boosting initiatives are being pushed through, including the long-awaited launch of a securities lending and short selling infrastructure. The service is expected to get the green light from the local National Securities Commission any time now, says Alejandro Berney, CEO of Caja de Valores, and there is a lot more to come.
As part of an ambitious reform package, designed to revamp the underutilised Argentinian capital market, the country鈥檚 current cabinet is determined to push through a reform package at the beginning of this year. One of its key elements is the withdrawal of the levy on closed mutual investments funds.
Hopes are high
Argentinian investors cannot only be upbeat about the planned elimination of the fund tax but there is a series of pro-market reforms to come in the Latin American country. PwC鈥檚 Argentina report, published in December 2017, outlines the further reforms that are set to modernise the capital market of the South-American country.
If the Argentinian Congress bows to the will of the cabinet, whose confidence was boosted by the electoral victory in November last year, private and international investments banks will be allowed to operate in Argentina from abroad. At the same time, in an attempt to overcome the interventionist approach of the former government and regulatory bodies, such as the National Securities Commission (CNV), their powers will be cut back.
According to Berney, the securities commission is set to have a limited power to 鈥渋ntervene in the affairs of publicly traded companies, including its veto power鈥�, CNV will also have less authority in separating 鈥渢he administrative bodies of publicly traded companies鈥�. Barriers are also set to come down 鈥渙n the issue of negotiable bonds by the board of directors of companies鈥�.
The head of Argentina鈥檚 central securities depository (CSD) says: 鈥淩egarding regulatory activity, there is a bill in Congress, it has the approval of the lower house and we are waiting for the approval of the Congress. This new bill removes the authority of the local regulator to intervene the board of a listed company, this is important for the companies that want to raise capital through the capital market.鈥�
Lending in Argentina
Berney notes that Argentina鈥檚 鈥渟ecurities lending programme has not been launched yet鈥�. The framework of the programme has already gained the approval of the local regulator, Comisi贸n Nacional de Valores (CNV). But the National Securities Commission has not given its consent to the Argentina stock exchange鈥檚 (BYMA) regulation on securities lending and short selling yet. Berney expects the CNV鈥檚 final blessing to the programme will be given in the last days of January or in the first days of February.
Argentina鈥檚 CSD head revealed that despite the pro-market moves, the National Securities Commission remained cautious on short selling and it intends to limit its negative impact. The local regulator 鈥減referred an on-exchange programme with higher visibility and limits to on-loan amounts鈥�.
Giving further insights into Argentina鈥檚 lending programme, Berney explains the country鈥檚 securities lending framework is based on the Brazilian model. 鈥淚t is an on-exchange programme where the exchange as a central counterparty (CCP), by law in Argentina all the exchanges are obligated to have a CCP that guarantees all the loans鈥�. This means 鈥渁ll the loans have to be traded in the exchange and BYMA is going to be the CCP to these loans. Every participant will be able either to bid or offer in BYMA麓s trading platform鈥�.
Further, each party 鈥渨ill have the opportunity to be a lender of their own securities and the investor who want to short sell is also going to be able to do it with a loan associated to the sale鈥�.
Berney added: 鈥淭his is important because no short selling is going to be allowed if it does not have a loan associated. The investor asking for the loan is going to be required to put collateral for 105 percent of the total amount of the operation.鈥�
鈥淭his is going to be monitored by the exchange at all times so the short is always going to be covered. The guarantees will be provided by the broker-dealer, and will be deposited with the CCP, commingled with the collateral necessary for all of the activity that the broker has with the exchange.鈥�
Moving on up
Main changes announced by the government are aimed to attract foreign investors into the isolated market and to gain the long-awaited MSCI benchmark equity index upgrade. According to the MSCI latest quarterly equity index, Argentina is still relegated to the less prestigious group of frontier markets, by sharing the status with countries like Bangladesh, Kenya, Romania
and Vietnam.
The failure in November to win back its status as an emerging market could be the main driver for Argentina to keep its financial market鈥檚 doors wide open to global investors and to take extra efforts, including introducing short selling.
Argentina found itself under the spotlight when news first appeared on the country鈥檚 upcoming securities lending rollout. After functioning in a decade-long isolation and under the strict control of the local regulatory authority, the country鈥檚 financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
Commenting on the regulatory overhaul, the Berney says: 鈥淭he local regulator understood that securities lending and short selling were those issues that would help to develop the local capital market, it was also one of the recommendations of MSCI for Argentina to be included in the emerging markets index.鈥�
Berney explains: 鈥淪hort selling will provide the market more transparency, allowing to incorporate bearish expectation to the prices. Subsequently, the price discovery of the securities will be more accurate.鈥�
The grass is always greener
Berney also disclosed, besides the framework of securities lending and short selling, that Argentina has also used their neighbours鈥� established model on 鈥渋ncorporating market makers for their products鈥�. Currently, the Argentinian exchange BYMA is also working on the introduction of 鈥渁 new segment for companies with higher corporate governance standards鈥�.
The initiative is similar to Novo Mercado in Brazil that was released in 2000. The listing segment of the Brazilian stock exchange, B3, formerly known as BM&F Bovespa, is required by investors to new initial public offerings. The Novo Mercado lays down, among other things, that listed companies in this segment can issue only common voting shares.
Argentina鈥檚 securities lending programme is not only based on the Brazilian model, but also the expectations around the lending volume is similar. Berney estimates that the Argentinian market can achieve 3 percent of the market cap, which is the lending programme in Brazil. Nevertheless, he warns against the temptation to 鈥渢hink no less than three years鈥� into the future. 鈥淪ince this is a new programme, we cannot be certain of the volume we can reach,鈥� he adds.
Any time now, the short-selling ban will be the past in Argentina and the barriers stretch all the way around the Argentinian financial market border are about to come down.
As part of an ambitious reform package, designed to revamp the underutilised Argentinian capital market, the country鈥檚 current cabinet is determined to push through a reform package at the beginning of this year. One of its key elements is the withdrawal of the levy on closed mutual investments funds.
Hopes are high
Argentinian investors cannot only be upbeat about the planned elimination of the fund tax but there is a series of pro-market reforms to come in the Latin American country. PwC鈥檚 Argentina report, published in December 2017, outlines the further reforms that are set to modernise the capital market of the South-American country.
If the Argentinian Congress bows to the will of the cabinet, whose confidence was boosted by the electoral victory in November last year, private and international investments banks will be allowed to operate in Argentina from abroad. At the same time, in an attempt to overcome the interventionist approach of the former government and regulatory bodies, such as the National Securities Commission (CNV), their powers will be cut back.
According to Berney, the securities commission is set to have a limited power to 鈥渋ntervene in the affairs of publicly traded companies, including its veto power鈥�, CNV will also have less authority in separating 鈥渢he administrative bodies of publicly traded companies鈥�. Barriers are also set to come down 鈥渙n the issue of negotiable bonds by the board of directors of companies鈥�.
The head of Argentina鈥檚 central securities depository (CSD) says: 鈥淩egarding regulatory activity, there is a bill in Congress, it has the approval of the lower house and we are waiting for the approval of the Congress. This new bill removes the authority of the local regulator to intervene the board of a listed company, this is important for the companies that want to raise capital through the capital market.鈥�
Lending in Argentina
Berney notes that Argentina鈥檚 鈥渟ecurities lending programme has not been launched yet鈥�. The framework of the programme has already gained the approval of the local regulator, Comisi贸n Nacional de Valores (CNV). But the National Securities Commission has not given its consent to the Argentina stock exchange鈥檚 (BYMA) regulation on securities lending and short selling yet. Berney expects the CNV鈥檚 final blessing to the programme will be given in the last days of January or in the first days of February.
Argentina鈥檚 CSD head revealed that despite the pro-market moves, the National Securities Commission remained cautious on short selling and it intends to limit its negative impact. The local regulator 鈥減referred an on-exchange programme with higher visibility and limits to on-loan amounts鈥�.
Giving further insights into Argentina鈥檚 lending programme, Berney explains the country鈥檚 securities lending framework is based on the Brazilian model. 鈥淚t is an on-exchange programme where the exchange as a central counterparty (CCP), by law in Argentina all the exchanges are obligated to have a CCP that guarantees all the loans鈥�. This means 鈥渁ll the loans have to be traded in the exchange and BYMA is going to be the CCP to these loans. Every participant will be able either to bid or offer in BYMA麓s trading platform鈥�.
Further, each party 鈥渨ill have the opportunity to be a lender of their own securities and the investor who want to short sell is also going to be able to do it with a loan associated to the sale鈥�.
Berney added: 鈥淭his is important because no short selling is going to be allowed if it does not have a loan associated. The investor asking for the loan is going to be required to put collateral for 105 percent of the total amount of the operation.鈥�
鈥淭his is going to be monitored by the exchange at all times so the short is always going to be covered. The guarantees will be provided by the broker-dealer, and will be deposited with the CCP, commingled with the collateral necessary for all of the activity that the broker has with the exchange.鈥�
Moving on up
Main changes announced by the government are aimed to attract foreign investors into the isolated market and to gain the long-awaited MSCI benchmark equity index upgrade. According to the MSCI latest quarterly equity index, Argentina is still relegated to the less prestigious group of frontier markets, by sharing the status with countries like Bangladesh, Kenya, Romania
and Vietnam.
The failure in November to win back its status as an emerging market could be the main driver for Argentina to keep its financial market鈥檚 doors wide open to global investors and to take extra efforts, including introducing short selling.
Argentina found itself under the spotlight when news first appeared on the country鈥檚 upcoming securities lending rollout. After functioning in a decade-long isolation and under the strict control of the local regulatory authority, the country鈥檚 financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
Commenting on the regulatory overhaul, the Berney says: 鈥淭he local regulator understood that securities lending and short selling were those issues that would help to develop the local capital market, it was also one of the recommendations of MSCI for Argentina to be included in the emerging markets index.鈥�
Berney explains: 鈥淪hort selling will provide the market more transparency, allowing to incorporate bearish expectation to the prices. Subsequently, the price discovery of the securities will be more accurate.鈥�
The grass is always greener
Berney also disclosed, besides the framework of securities lending and short selling, that Argentina has also used their neighbours鈥� established model on 鈥渋ncorporating market makers for their products鈥�. Currently, the Argentinian exchange BYMA is also working on the introduction of 鈥渁 new segment for companies with higher corporate governance standards鈥�.
The initiative is similar to Novo Mercado in Brazil that was released in 2000. The listing segment of the Brazilian stock exchange, B3, formerly known as BM&F Bovespa, is required by investors to new initial public offerings. The Novo Mercado lays down, among other things, that listed companies in this segment can issue only common voting shares.
Argentina鈥檚 securities lending programme is not only based on the Brazilian model, but also the expectations around the lending volume is similar. Berney estimates that the Argentinian market can achieve 3 percent of the market cap, which is the lending programme in Brazil. Nevertheless, he warns against the temptation to 鈥渢hink no less than three years鈥� into the future. 鈥淪ince this is a new programme, we cannot be certain of the volume we can reach,鈥� he adds.
Any time now, the short-selling ban will be the past in Argentina and the barriers stretch all the way around the Argentinian financial market border are about to come down.
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