SECURITIES LENDING IN LATIN AMERICA: (PRÉSTAMOS DE VALORES EN AMÉRICA LATINA / EMPRÉSTIMO DE ATIVOS NA AMÉRICA LATINA)

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Emil Barnett
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1 SECURITIES LENDING IN LATIN AMERICA: (PRÉSTAMOS DE VALORES EN AMÉRICA LATINA / EMPRÉSTIMO DE ATIVOS NA AMÉRICA LATINA) Contributors to the presentation were: Enterprise Risk Credit Risk Market Risk Operational Risk Regulatory Compliance Securities Lending JOIN. ENGAGE. LEAD.

2 TRODUCTION ine years since the last dedicated forum to discuss the LatAm region RMA 2008 Brazil and Mexico remain the two most developed markets Chile & Colombia remain very regulated and local in nature Peru is looking to grow overall foreign investment using SBL as one of the drivers Argentina recently announced plans to initiate an on-exchange program (TBD) ommon Themes: Market Growth, Increased Foreign Involvement, Willingness to work with regulators and Industry Groups : Is there enough growth and opportunity to establish an industry orking group (ala PASLA) to aid in the development of these markets

3 ENDA anel Introductions hile Update olombia Updates rgentina Update exico Update razil Update eru Introduction &A

4 ILE UPDATE BL is utilized to cover fails or facilitate short selling of Equities only Fail coverage can be executed unilaterally by the SSE (Bolsa de Comercio de Santiago) SSE effectively acts as an Agent to the transaction hort selling / SBL is permitted but only via an authorized local broker dealer. SSE dictates which stock are available for shorting (List A) Transaction must be executed through a local broker dealer which is a member of the SSE or the BCE (Bolsa Electronica de Chile) Maximum loan term is 360 days Subject to the uptick rule SSE is responsible for mark to market, collateral management and daily calls Loans are collateralized at 125% and blocked at the exchange in a segregated account Cash collateral is permissable 0% haircut for CLP, 10% haircut for US$ Equity Collateral us permissible, local shares only, 20-50% haircut depending on the name Daily mark to market (mandatory)

5 ILE UPDATE egal Framework The industry does have a formal legal agreement that is used locally There is no formal appendix to the GMSLA as in other markets Local Lending broker guarantees the trade ntitlements Borrower is responsible for payment of dividends on pay date directly to the lender Stock Splits / reverse splits will we adjusted accordingly as part of the loan urrent Issues: In order for a foreigner to lend shares must be transferred to a local lending broker Free delivers are frowned upon given the market is beneficial owner only Reporting is minimal

6 LOMBIA UPDATE SBL is utilized to cover fails or facilitate short selling Legal Framework The product is collectively regulated by; The BVC Bolsa de Valores de Colombia, The Office of the Financial Superintendent of Colombia and The Securities Market Self Regulator Operationally securities lending is administered by; The BVC Bolsa de Valores de Colombia and The DVL Deposito Centralizado de Valores de Colombia (Deceval) Short selling / SBL is permitted but only via an authorized local broker dealer. BVC dictates which stock are available for shorting (List A thru E) Transaction must be executed through a local broker dealer which is a member of the BVC Loans must be pre collateralized prior to the consummation of the loan Maximum loan term is 365 days Subject to the uptick rule Loans are collateralized at 120 to 150% depending on the type of collateral approved (List A thru E) Daily mark to market (mandatory) BVC maintains the collateral in segregated accounts f/b/o the Lender. I the event of a non fullfilment (default) the collateral becomes the property of the beneficial owner.

7 COLOMBIA UPDATE MARKET STATISTICS TOP ISSUES ON LOAN AS OF 8/31/17

8 COLOMBIA UPDATE MARKET STATISTICS TOP MARKET PARTICIPANTS 8/31/17

9 LOMBIA UPDATE (CONT D) Current challenges to Foreign Participation Lack of transparency in spite of beneficial owner structure Lack of control over collateral (sits on the exchange) Lack of a uniform legal agreement Changes underway Citi, as custodian, has implemented a shadow posting process to help increase transparency Local brokerage association, lead by CreditCorp Capital, has been attempting to educate the regulators on what happens in the OTC market and why changes need to happen if the market wants to grow. Indicated they would welcome associations like the RMA to help implement the changes.

10 GENTINA On September 25, the local securities regulator, Comision Nacional de Valores (CNV), announced they intend to approve an on-exchange securities lending program No official communication has been released, but decision expected before year end Part of initiatives for capital market development, in line with MSCI & foreign investor demands (move towards Emerging from Frontier status) Partnership between Bolsas y Mercados Argentinos (BYMA / stock exchange) and Caja de Valores (central securities depository) Goal is to facilitate short selling of equity and fixed income instruments Investors (through their local broker), would be able to borrow & lend Lending program guaranteed by the BYMA and collateral posted by the borrower Caja de Valores will show securities on-loan at lender s account, and have responsibility for returning corporate actions to the beneficial owner Initial details point to a similar model to Brazil

11 XICO UPDATE Mexico has a securities lending market since the 90 s. Regulation is according to international standards There are 3 ways to access the market: Local bilateral agreements Electronic platforms: Regulation allows platforms previous authorization from the CNBV. At this stage there 2 authorized platforms: VALPRE and MEIPresval. International agreements: MSLA & GMSLA

12 XICO UPDATE (CONT D) VALPRE Data 2016 Revenue in equities: USD$3.05 Million Amount traded equities: USD$13.6 Billion Average fee: 238bps (324bps as of July 2017) Most loaned stocks: Mexico vs International MEXICO NAFTRAC ALSEA ASUR GCARSO GFNORTE VOLAR TLEVISA FUNO GRUMA FEMSA INTERNATIONAL IENOVA FIBRA UNO TLEVISA VOLAR GFINBUR GMEXICO FEMSA LIVERPOOL COMPART ELEKTRA

13 XICO UPDATE (CONT D) MEIPresval is a securities lending platform that facilitates securities lending transactions between counterparts as well as collateral management trough a trust. MEIPresval Data 2016: Amount traded fixed income: USD$86.6 Billion Average fee: 25bps Most traded instruments: Mexican M Bonos & Mexican inflation linked Bonds Udibonos.

14 XICO UPDATE (CONT D) Ventanilla Banco de Mexico: Exclusively for Market Makers on Mexican Government Bonds. Revenue in Gvt. Bonds: USD$12.7 Million Average daily balance on loan: USD$1.7 Billion Average fee: 28bps Most loaned Bonds: M BONOS M BONOS M BONOS M BONOS M BONOS This 5 bonds represent 84% of the outstanding amount on loan

15 XICO UPDATE (CONT D) Important Facts: 63% of the outstanding amount issued on Mexican government bonds is in hands of foreign investors We have a lack of supply locally both for fixed income & equities: A few numbers of Mutual Funds are active lenders. The Mandatory pension Funds (Afores) can only lend fixed income.

16 XICO UPDATE (CONT D) Future Objectives: August 29: The Ministry of Finance launches a program to boost and develop further the financial market. NAFINSA will play an important role in this program with the objective to improve liquidity in both the capital and fixed income markets. Have foreign lenders/borrowers participate in the local market. Work towards accepting collateral in MXN denomination (Cash, Bonds, Equities). At this point collateral is managed by Indeval but the figure of a 3 rd party Agent could be explored.

17 AZIL UPDATE otal Securities on Loan approximately 13 Bn USD ll trades must be cleared, according to local regulation CCP structure ne of the greatest challenges is to increase the supply attracting dditional lenders to the Brazilian market ecent improvements Settlement window for the cash market matched in most cases with the sec lending recall window Acceptance of collateral offshore for all derivative contracts, including sec lending* 3 recognized as a third-country qualified CCP QCCP by ESMA (March 017) n going discussions with US and EU regulators - the objective is to permit 940 Act and UCITS funds to lend securities via a CCP structure in Brazil.

18 AZIL UPDATE (CONT D) arameters for Acceptance of collateral offshore for all contracts The collateral deposited offshore is now accepted for all products on B3 s portfolio. There is a limit set by the Central Bank allowing the CCP to receive collateral abroad up to 8% of the CCP s total required margin. The 8% in current values is around USD 5.1 billion. The Non Resident Investors from UK, France and the US are the ones initially allowed to post collateral offshore. The accepted collateral are: USTs, German Gov. Bonds, ADRs and US Dollars Deposited at DTCC and Euroclear. Every 3 months there is a book building process where the CCP receives the requests for limits from each investor. Then the CCP grants the limits based on some factors such as size of the limit requested, type of investor (eg. Market Makers), among others.

19 RUVIAN UPDATE istory of the Product launched in January, 1999 Resolución CONASEV N EF/94.10 CONASEV = former name of SMV (regulator) Official re-launch through Regulator's resolution was in May 2015 Resolución SMV Nº SMV/01 AFPs approved for lending SCI demands on the overall Peruvian markets re-launch of the PDV product in 2016 to attract foreign short sellers Market is over supplied by the AFP s Minimal, if any, short selling transacted by local participants escription of the model as follows;

20 Agenda Main characteristics Rules of Operations Rights, protection, collateral Operational flow First transaction (loan) Second transaction (settlement) Collateral Default Borrower agent Lender agent Limits for trading Peruvian stocks available to lend

21 Main Characteristics Stock loan model Rules of Operations RulesofOperationsofBolsa Internal Rules of CAVALI Rules of Broker Agents On the exchange transaction that replicates a stock loan. CAVALI acts as an administrative third party. Local brokers are the counterparties, acting as agents. Parties can choose broker agents to trade with (up to five). Purpose of the loan: short sales and settle pending transactions. Lendable assets: stocks set by Bolsa. First, short sale. Then, stock loan. Up tick or at tick short sale rule First transaction settlement up to t+2 as cash equities. Second transaction up to 360 days. Early settlement at any time, only if agreed at the beginning.

22 Main Characteristics Stock loan model ghts, protection, collateral Securities Market Law Law of Repo Transactions Law of Payment and Settlement Systems Rules of Operations of Bolsa Internal Rules of CAVALI Rules of Broker Agents Lent stock: Economic rights remain with the lender. Political rights are transferred to the borrower. Collateral: Economic rights remain with the borrower. Political rights are transferred to the lender. Transactions on the exchange are irrevocable and irreversible. Local brokers acting as agents (broker agents) are responsable for the continuity of its ongoing clients transactions, always. Intangible collateral: Nobody can touch it. Freezed in the benefit of each party. Separated accounts per participant and per transaction at CAVALI. Daily valuations and margin call managed by CAVALI, but always separated from its balance sheet. Borrower s collateral freezed in CAVALI. Lender cannot trade it during the term of the loan. Nobody can touch it.

23 Operational flow First transaction (loan) 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING Stocks nder Broker agent Broker agent Borrower Collateral

24 Operational flow Second transaction (settlement) Stocks nder Broker agent Broker agent Borrower Collateral

25 Collateral 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING Collateral freezed under CAVALI s administration Daily mark to market by CAVALI Margin call requests by CAVALI if necessary Additional collateral (100%) Cash Equities Debt Letter of guarantee Haircuts applicable according to liquidity Equities from the Bolsa Reference List For short sales, only lists 1 and 2 are allowed. Lent stock (100%) Collateral (120%) Main collateral (100%) Cash Equities Debt Valuation at 100%

26 Default of borrower agent CAVALI informs the default to Bolsa and to the affected party. Affected broker agent chooses the process to follow. 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING At settlement date: securities, interest, economic rights At any time: margin call rced Execution ii. Abandonment Cash collateral is used to buy securities to return to lender. Securities collateral are sold to buy securities to return to lender. The main and additional collateral are adjudicated to lender agent up to the amount that covers the settlement of the transaction. In the case of lack of resources to cover the transaction, CAVALI asks the borrower agent for the difference. Borrower agent is suspended until the transaction is covered In the case of excess of collateral, CAVALI returns it to borrower agent. End of process The excess collateral is returned to the borrower agent. End of process

27 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING Default of lender agent Lender agent cannot be in default Lender agent cannot use the borrower s collateral This

27 27 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING Default of lender agent Lender agent cannot be in default Lender agent cannot use the borrower s collateral This collateral is freezed at CAVALI Lender is not subject to margin calls Lender cannot free up the collateral at settlement. CAVALI does. Borrower agent does not face counterparty risk

28 Limits for trading 34 TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING Per stock Broker agents will be allowed to trade repo, stock loans and short sales, and delivery collateral with up to 20% of total registered securities at CAVALI (USD 59 b) Per broker agent Each broker agent will be allowed to trade repo, stock loans and short sales, and delivery collateral with up to 50% of the limit per stock. (USD 29.5 b) Per AFP fund Up to 30% of each fund valuation (USD 1.2 M).

29 Peruvian stocks available to lend Free float and AFP holdings (USD) VOLCABC ,593 ALICORC1 2 1,232 IFS FERREYC INRETC1 CVERDEC1 CPACASC1/ CPAC UNACEMC1 GRAM/ GRAMONC1 MILPOC Free float (millions USD) AFP holdings (thousands USD) Source: Bloomberg, SBS. AFP Holdings as to April 2017 (SBS). Market cap as to October 2017 (Bloomberg).

30 uestions? Miguel Ángel Zapatero Gerente Central de Desarrollo de Negocios Bolsa de Valores de Lima

31 , targets, calculations and all information indicated by the Lima Stock Exchange are estimates and not statements. The information contained or exposed in this document is informational and reference purposes. ical information, data and analysis contained in this document should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. rmance does not guarantee future results. e information constitutes an offer to sell or a request of an offer to purchase.

Public CSD Rating Report

CHILE Public CSD Rating Report Publication Date: August 2011 Deposito Central de Valores SA Thomas Murray CSD Public Rating for: Deposito Central de Valores SA is A+ Chile DCV Rating: A+ AA A+ A+ AA- AA-