Dan Dougherty, EquiLend
What were your motivations behind the Latin America Securities Finance User Guide?
Fran Garritt: The 2017 Risk Management Association (RMA) Conference on Securities Lending featured a panel on the Latin America market that was well received, and which led to a follow-up web seminar in February of 2018 that many in the industry also found valuable. Based on that feedback and the growing interest in the region, RMA and EquiLend determined that a research paper was needed.
Thankfully, we were able to rely on contributions from industry experts like Jill Rathgeber of BNY Mellon, who co-chaired the conference, and Gene Picone of Scotiabank, who moderated the seminar. The guide is meant to be a “living document” that will bring both a continued focus on the markets and hopefully productive discussions on how foreign investors can comfortably execute their investment strategies. We see what the work of the Pan Asia Securities Lending Association (PALSA) has done for the Asian markets as a good example of how such communication can invigorate a market. PASLA has managed to bring players together and to work effectively with the local regulators and central banks to structure working models, which provide easier entry for participants without necessarily compromising local risk management requirements.
Dan Dougherty: The Latin American region is perhaps one of the least understood by global securities finance market participants—it has been called one of the “final frontiers” by some in our industry. As we discuss in our user guide, various countries in the region boast considerable GDPs yet their stock markets pale in volume to comparatively sized countries elsewhere. This dynamic results in tremendous opportunity for the future growth of the region’s exchanges and, in turn, securities finance markets. From our ongoing discussions in Latin America, it is clear many of the markets in the region understand the benefits of a thriving securities finance industry and are making strides in establishing the necessary infrastructure to support the growth of the industry.
EquiLend and RMA joined forces to produce the user guide to give global market participants a comprehensive view of the status quo in the Latin American securities finance markets, the first time this information has ever been compiled all in one place. We look forward to continuing to work with our partners in the region and collaborating as the industry continues to advance in the coming years.
What trends are you currently seeing in the Latin America securities lending market?
Dougherty: As we cover in the user guide, significant advancements are being made in Latin America, including regulatory changes, alignment to international best practices and technological advancements. Our contacts across the region have been incredibly engaged with us and have a real desire to encourage more domestic and international market participants to enter the securities finance markets in Latin America.
Garritt: Across all of the markets, there is a desire to get investors more involved in the region and to add liquidity within the markets. The nations are at varying stages of market development, with Brazil and Mexico moving at a rapid pace and others making significant strides. Brazil continues to fine-tune its equity stock loan processes in the quest to attract more foreign participants and has announced it is looking to launch a fixed income model in the next year. Mexico recently announced some broad financial changes which include revisions to securities lending to increase liquidity and foreign investment. Peru, with the help of industry participants, has revamped its modified central counterparty (CCP) model and is looking to launch before this summer. At the end of 2017, Argentina went headlong into the product with the goal of refining the process to include foreign players over the next couple of years. Chile has announced its intent to move its local securities lending product into a blockchain-based CCP, while Colombia has recently seen an increase in securities lending activity locally.
What countries would you say are currently set up to excel in securities lending markets?
Garritt: It’s hard to predict which countries will excel individually. If you exclude Brazil they are all very linked, not only to each other but to what is transpiring in the global economy. However, given its attractiveness to investors today and the aforementioned regulatory proposals, it would appear that Mexico is poised to take a leap forward in its quest to increase liquidity.
Dougherty: Brazil has the biggest and most seasoned securities finance market in the region. What we were especially impressed with while producing the user guide, however, is just how motivated other markets across Latin America are—particularly Mexico, Peru, Argentina and Chile, all of which participated in the development of the user guide—to build up their own securities finance markets. In the past year, we have seen a noticeable shift across the region where there is now real investment being made to grow the securities finance markets in these countries.
What challenges do you think the region faces?
Garritt: To attract the critical mass of US and European beneficial owners necessary to establish Latin America as a robust market for securities finance, several rules that are in force throughout the region will have to be amended, particularly in regards to indemnification, collateral, and clearance and settlement. These markets may continue to find themselves struggling to access foreign supply if the regulators are slow to approve proprietary rule changes. But the potential is huge. With access to the global depositary markets and the ever-increasing trend toward passive investing including mutual funds and exchange-traded funds (ETFs), a considerable amount of local investment resides in the hands of some as-yet very regulated investors.
What developments do you expect to see over the next 12 months? And what role could MILA play?
Garritt: The pace of development of Latin American markets has been slower than the securities finance industry would care for. We hope the user guide will make more people aware of the potential, and will allow the industry to address issues that will transform Latin America to an increasingly robust market. This would make it more accessible to beneficial owners in Europe and the US. Continued discussions with local regulators and exchanges could also quicken the pace of development, especially if it highlights the success some Asian markets experienced when they collaborated with industry participants to create a model that works for all participants as well as regulators.
Dougherty: In addition to the aforementioned regulatory and infrastructure changes currently going on across the region, we see a growing interest among agent lenders and brokers in Latin America to adopt global standards, making it easier to transact with counterparties across the globe. One of the ways they can do this is through investment in technology.
From an EquiLend perspective, we very much look forward to continuing our work with Latin America market participants and connecting the region to the world through our industry-leading trading and post-trade platforms. There remains a lack of transparency in most of these markets on market volumes and activity, so we also look forward to working with entities in the region to incorporate even more robust Latin American market data into DataLend.
Mercados Integrados Latinoamericanos (MILA) was developed to link the exchanges and central securities depository and harmonise best practices across the Latin American region. It has made strides on that front.
While the impact on the securities finance markets of the region has been minimal to date, our analysis, published in the user guide, suggests MILA has helped lay groundwork important for fostering greater cross-border securities lending activity.
