Latin America Panel Highlights Unique Structure of Brazilian Market

In the first session at the 30th annual RMA conference on securities lending, panelists discussed the state of securities lending in Latin American market with a particular emphasis on Brazil.

As Latin America’s largest economy, Brazil’s capital markets lead the way with a market capitalization of around $1 trillion and the most securities lending activity in the region. Monthly securities lending volume in the nation is currently around $2 billion, and the total value of securities on loan has reached $19.61 billion as of September 2013. This value has nearly tripled since 2009.

However, panelists stressed the need for more liquidity in Brazil. “A free-flowing liquid market is what we need to achieve,” said Carey Chamberlain, head of equity finance, HSBC Securities. The panelists referenced the recent creation of a Brazilian securities lending association, which should help grow the activity, and thus introduce more liquidity into the market.

Brazil also differs from other markets because of the requirement to use a CCP in securities finance transactions. As Tony Kim, executive director, Morgan Stanley, explained, beneficial owners need to note that collateral sits at the exchange, as opposed to with the agent lenders in other markets. In Brazil, exchange operator BM&FBOVESPA owns the CCP. And as the collateral sits with the exchange, “all the collateral will be in the name of the borrower,” said Julio Carlos Ziegelmann, managing director, equity products, BM&FBOVESPA. “If the borrower did not fail, [the lender] can not access the collateral.”

Another unique feature in Brazil is that hedge funds, which account for 70% of securities borrowing in the country, exist in a mutual fund structure—something that is beginning to happen in the U.S. but has not been fully transformed.

Aside from Brazil, panelists noted other issues such as an underperforming market in Chile and very low levels of securities lending activity in Columbia; pension funds in Columbia hardly lend, and securities finance transactions are mainly used to cover fails.

These differences in Latin America compared to the U.S. and Europe may affect the levels of securities lending activity in the region, but panelists noted the area’s potential, and if outside investors understand the area better, there can be more growth.