Chile
18 September 2018
IBM and Santiago鈥檚 Exchange are Chile鈥檚 biggest securities lending hubs, showing signs of growth, receiving high revenues in one hand, and embracing technology with the other
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The Bolsa de Comercio de Santiago and IBM have been working together for around 20 years and are the main financial hubs in Chile, currently.
Chile鈥檚 securities lending model is only utilised to cover fails or facilitate short selling of equities. While short selling is permitted, this is only via an authorised local broker-dealer. Fail coverage can be executed by the Bolsa de Comercio de Santiago鈥擟hile鈥檚 dominant stock exchange.
But Latin America is an emerging market and change is coming to the region. Chile鈥檚 Santiago Exchange, the largest exchange in the country, recently announced a partnership with IBM to introduce blockchain technology across the country鈥檚 financial sector.
The agreement makes the Santiago Exchange the first stock market in Latin America to apply IBM Blockchain technology within its short-selling system for securities lending.
Built by IBM and Chile鈥檚 Santiago Exchange, the solution is designed to help reduce errors, possible fraud, and processing time for each transaction, while also improving transaction management and lowering costs.
But despite this promising element, Chilean equities are underperforming after a stellar 2017.
In a blog written by Brown Brother Harriman it was stated that in 2017, MSCI for Chile was up 39 percent versus 34 percent for MSCI emerging markets.
So far this year, MSCI revenue for Chile is minus 14 percent year-to-date and compares to minus 9 percent YTD for MSCI emerging markets.
Looking at the numbers
DataLend has reported, as of 30 August, average daily on-loan balance thus far for 2018 stands at $696.64 million on loan/day, with equities standing at $12.26 million and fixed income at $684.38 million. The average daily lendable balance thus far for 2018 is $12.84 billion in lendable per day, while equities are currently $550.83 million and fixed income stands at $12.29 billion. DataLend found some 56.6 percent of the on-loan balance for Chilean assets is booked versus cash collateral, while the remaining 43.4 percent is booked against non-cash collateral.
Chile is a fairly thinly traded market, according to DataLend, with approximately 125 securities on loan on any given day, almost all of which are fixed income.
DataLend comments that these securities on loan consist of 鈥渁 mix of corporate, agency and sovereign bonds鈥�.
DataLend states: 鈥渋t is important to note that the fixed income activity seen in Chile is likely to be traded out of The Depository Trust Company or Euroclear, not domestically.鈥�
The average utilisation for the Chilean market is 5.42 percent so far in 2018.
Thinking outside the box
As it stands, Mexico is the second largest market in Latin America, with Brazil being the largest.
Mexico and Brazil are the only markets in Latin America to currently count for equity finance.
Mexico has had a securities lending market since the 1990鈥檚. Regulation in the jurisdiction meets international standards and there are currently a couple of ways to access the market鈥攍ocal bilateral agreements and electronic platforms with authorisation from the Comisi贸n Nacional Bancaria y de Valores鈥攁n independent agency.
In addition, there are two authorised platforms for securities lending鈥擵ALPRE and MEIPresval.
Brazil鈥檚 first securities lending association was launched in August 2013. It is charged with improving communication between international players, local participants and the exchange, which oversees transactions through a central counterparty model.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework which is regulated by Bolsa de Valores de Colombia, the Office of the Financial Superintendent of Colombia and the Securities Market Self Regulator.
Argentina鈥檚 securities lending framework is largely based on the Brazilian model. Having spent the last few decades 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.
Though facing current high inflation and the generally weak peso, the future remains unclear for now, while Argentina鈥檚 National Securities Commission still remains cautious on short selling and it intends to limit this negative impact.
But to add to the uncertainty, Argentina鈥檚 central bank is said to be discussing a repo loan of as much as $5 billion with foreign banks.
With the aforementioned models in mind, Federico Ortega Gilly of Mexico鈥檚 Nacional Financiera, explains: 鈥淥ur efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.鈥�
He adds: 鈥淚ndependently, other South American countries are starting to dig into securities lending markets, they want to settle鈥攖he cards are in place to make things good in Mexico.鈥�
Chile鈥檚 securities lending model is only utilised to cover fails or facilitate short selling of equities. While short selling is permitted, this is only via an authorised local broker-dealer. Fail coverage can be executed by the Bolsa de Comercio de Santiago鈥擟hile鈥檚 dominant stock exchange.
But Latin America is an emerging market and change is coming to the region. Chile鈥檚 Santiago Exchange, the largest exchange in the country, recently announced a partnership with IBM to introduce blockchain technology across the country鈥檚 financial sector.
The agreement makes the Santiago Exchange the first stock market in Latin America to apply IBM Blockchain technology within its short-selling system for securities lending.
Built by IBM and Chile鈥檚 Santiago Exchange, the solution is designed to help reduce errors, possible fraud, and processing time for each transaction, while also improving transaction management and lowering costs.
But despite this promising element, Chilean equities are underperforming after a stellar 2017.
In a blog written by Brown Brother Harriman it was stated that in 2017, MSCI for Chile was up 39 percent versus 34 percent for MSCI emerging markets.
So far this year, MSCI revenue for Chile is minus 14 percent year-to-date and compares to minus 9 percent YTD for MSCI emerging markets.
Looking at the numbers
DataLend has reported, as of 30 August, average daily on-loan balance thus far for 2018 stands at $696.64 million on loan/day, with equities standing at $12.26 million and fixed income at $684.38 million. The average daily lendable balance thus far for 2018 is $12.84 billion in lendable per day, while equities are currently $550.83 million and fixed income stands at $12.29 billion. DataLend found some 56.6 percent of the on-loan balance for Chilean assets is booked versus cash collateral, while the remaining 43.4 percent is booked against non-cash collateral.
Chile is a fairly thinly traded market, according to DataLend, with approximately 125 securities on loan on any given day, almost all of which are fixed income.
DataLend comments that these securities on loan consist of 鈥渁 mix of corporate, agency and sovereign bonds鈥�.
DataLend states: 鈥渋t is important to note that the fixed income activity seen in Chile is likely to be traded out of The Depository Trust Company or Euroclear, not domestically.鈥�
The average utilisation for the Chilean market is 5.42 percent so far in 2018.
Thinking outside the box
As it stands, Mexico is the second largest market in Latin America, with Brazil being the largest.
Mexico and Brazil are the only markets in Latin America to currently count for equity finance.
Mexico has had a securities lending market since the 1990鈥檚. Regulation in the jurisdiction meets international standards and there are currently a couple of ways to access the market鈥攍ocal bilateral agreements and electronic platforms with authorisation from the Comisi贸n Nacional Bancaria y de Valores鈥攁n independent agency.
In addition, there are two authorised platforms for securities lending鈥擵ALPRE and MEIPresval.
Brazil鈥檚 first securities lending association was launched in August 2013. It is charged with improving communication between international players, local participants and the exchange, which oversees transactions through a central counterparty model.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework which is regulated by Bolsa de Valores de Colombia, the Office of the Financial Superintendent of Colombia and the Securities Market Self Regulator.
Argentina鈥檚 securities lending framework is largely based on the Brazilian model. Having spent the last few decades 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.
Though facing current high inflation and the generally weak peso, the future remains unclear for now, while Argentina鈥檚 National Securities Commission still remains cautious on short selling and it intends to limit this negative impact.
But to add to the uncertainty, Argentina鈥檚 central bank is said to be discussing a repo loan of as much as $5 billion with foreign banks.
With the aforementioned models in mind, Federico Ortega Gilly of Mexico鈥檚 Nacional Financiera, explains: 鈥淥ur efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.鈥�
He adds: 鈥淚ndependently, other South American countries are starting to dig into securities lending markets, they want to settle鈥攖he cards are in place to make things good in Mexico.鈥�
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