Colombia, Chile and Peru

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1 Colombia, Chile and Peru Project for the integration of stock exchanges. Sergio J. Galvis October 5, 2010 NY12534:

2 Contents I. Introduction II. Issues and Incentives Related to Integration III. Colombia-Chile-Peru IV. Comparative Case Study Euronext V. Conclusions 1

3 I. Introduction 2

4 I. Introduction Objective of Stock Exchange Integration Objective This constitutes an ambitious project to reshape the capital markets of Colombia, Chile and Peru on a scale not seen before in Latin America. With the integration of the Bolsa de Valores de Colombia, the Bolsa de Comercio de Santiago and the Bolsa de Valores de Lima. Investors will have greater investment options. Issuers will benefit from lower cost of financing. The exchanges will experience enhanced efficiency. Compete head-on against the Bovespa and the Bolsa de Valores Mexicanos. The three markets will be fully integrated, but will continue to exist separately. The three countries securities regulators have agreed to work with each other to harmonize regulations. 3

5 I. Introduction The Three Stock Exchanges Member Stock Exchanges The composition of the three exchanges provides both exciting opportunities and challenges to the integration process. Bolsa de Valores de Colombia Market participation mostly from domestic investors with few investment funds as investors. Half of the issuers of the main index are energy companies. Bolsa de Comercio de Santiago Market participation mostly from domestic investors with few investment funds as investors. Most of the main stock index is composed of service-related, retail and industrial issuers. Bolsa de Valores de Lima Increased participation of foreigners (almost 20%), but still with few investment funds as investors. Issuers tend to be in mining industry. 4

6 II. Issues and Incentives Related to Stock Exchange Integration 5

7 II. Issues and Incentives Related to Stock Exchange Integration Issues Exchange Rate Will lack of common currency affect trading and clearance and settlement function? Pricing in the effect of exchange rate shocks? Regulatory Differences Potential differences in views about the role of government in regulation of stock exchange, intermediaries and issuers. Sovereignty issues. Principle based vs. enforcement by single agency. 6

8 II. Issues and Incentives related to Stock Exchange Integration Issues Ownership of Exchanges (continued) The change from member based organizations to demutualization. Not an issue in Columbia. Technology Shift in trading floors to electronic trading. 7

9 I. Issues and Incentives related to Stock Exchange Integration Incentives Increased liquidity. Increased accounting integrity. Increased disclosure integrity. Reduction in market fragmentation. Competition. 8

10 III. Colombia, Chile and Peru 9

11 III. Colombia, Chile and Peru Negotiations Mesa de Trabajos and MOUs First Mesa de Trabajo and First MOU (October 2009) Agreement among the Superintendencia Financiera de Colombia (SFC), the Superintendencia de Valores y Seguros de Chile (SVS) and the Comisión Nacional Supervisora de Empresas y Valores de Peru (CONASEV) to collaborate to develop the integration project. Second Mesa de Trabajo and second MOU (January 15, 2010) Agreed that the first phase of implementation would occur by the end of 2010 with the second phase beginning at the end of The second memorandum of understanding established a mechanism to exchange information among the SFC, the SVS and the CONASEV. Third Mesa de Trabajo (June 22, 2010) Issued a statement that they would continue to work on the various issues related to the integration of the three markets, discussed future cooperation for steps to integration and discussed analytical tools with which to study the results of the integration. 10

12 III. Colombia, Chile and Peru Phase I Phase I is set to begin in November 2010 and will continue until implementation of Phase II. Goals are to align the three exchanges and increase the coordination of regulators and other market participants. Listing of the entire market will be available in a single screen and order placement can occur from a single screen. Phase I and II are composed of plans under the following areas: Trading Clearing and settlement Intermediaries Securities and Issuances Institutional Investors Regulators 11

13 III. Colombia, Chile and Peru Phase I Trading and Clearing and Settlement Trading. (continued) A routing system is to be established, in which local intermediaries (e.g., broker/dealer) will initiate a local order and place the order with a sponsoring intermediary with which they will have a contractual relationship. The markets will in essence continue to operate under their current system and rules, with each stock exchange administering its own market. The integrated market will not include short sales, fixed income securities, derivatives, repos and TTVs. Clearance and Settlement Clearance and settlement will occur similarly to the trading function in that it will initiate locally and be handled in a foreign market by a sponsoring entity. Custody accounts will be based in the country where the security is listed. The laws governing shareholder s rights will be local law and intermediaries will act as conduits of information of the shareholder by passing along instructions of the shareholders, but will never be considered to act as representatives of the shareholders. 12

14 III. Colombia, Chile and Peru Phase I Intermediaries; Securities and Issuances; Institutional Investors and Regulators (continued) Intermediaries (Broker/dealers, depositaries, etc.) Will be able to participate in other markets through service agreements with sponsor entities in other countries. Securities and Issuances Securities will be recognized for public offers. Institutional Investors Institutional investors will be able to participate in all markets and any such investment will be treated as a local investment. Regulators Enter into memorandum of understanding on several broad areas including information sharing, securities and issuers. 13

15 III. Colombia, Chile and Peru Phase II Trading Direct access to each market with uniform rules across the three exchanges. Clearance and Settlement Create a trans-border clearance and settlement system to allow direct access to each market. Uniform rules for clearing and settlement functions. Intermediaries Intermediaries will be recognized to operate across all three markets. Securities and Issuances Will be given the treatment of local securities. Institutional Investors Will be treated as local investors and tax treatment will be the same as a local investment. Regulators Will enter into agreement as to the supervision and regulation of intermediaries. 14

16 IV. Comparative Case Study Euronext 15

17 IV. Case Study Euronext Membership composition Paris Bourse, Amsterdam Stock Exchange and Brussels Stock Exchange (September 22, 2000). Added London International Financial Futures (LIFFE) and Bolsa de Valores de Lisboa e Porto. Close to three-quarters of Euronext is composed of French issuers. Integration Within 2 years, all Euronext members were able to access all equity securities listed on Euronext. By November 2003, Euronext Lisbon fully integrated into trading and clearing and settlement system. Equity products traded via Nouveau Système de Cotation and cleared through Clearnet. 16

18 IV. Case Study Euronext (continued) Regulatory Framework Rule books Rule Book I Harmonized set of rules across all exchanges. Rules enforced via contractual agreement among market participants. Threat of delisting as enforcement mechanism. Developed over time. Now includes membership rules, listing requirements, enforcement rules and trading rules. Rule Book II Rules that differ across the markets (e.g., financial reporting requirements). 17

19 IV. Case Study Euronext (continued) Market Segments NextEconomy and NextPrime Voluntary segments. About half are French issuers; Dutch issuers make disproportionate part of segment in comparison with their participation in Euronext. Favored by smaller issuers that do not already have the ability to get funding. Imposes corporate governance practices. Financial reports must be provided on quarterly basis. Financial reports must be provided in compliance with IFRS. Issuers required to have an investor relations website. Must provide news releases about company events. 18

20 V. Conclusions 19

21 V. Conclusions Harmonization of laws and regulation Voluntary market segments Exchange rate mechanism\macro-economic concerns 20

International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom 25 April 2011, Madrid

Santiago Cuadra Secretario General International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Email: commentletters@iasb.org 25 April 2011, Madrid Exposure Draft ED/2011/1