The integration of the stock markets of Chile, Colombia and Peru, which started in 2018, is progressing. The new holding company should be authorised by the Chilean authorities within the next few months, after which the real integration process will begin. It is expected that the entity will be operative at the end of 2024.
The first step was to get the project approved by the shareholders of the three exchanges and value the companies to see the position of each of the shareholders. The Chilean exchange will control 40% of the holding company, Colombia’s bourse another 40% and Peru’s the remaining 20%.
The holding company, which is going to be located in Chile, will have Juan Pablo Córdoba, currently president of the Colombian stock exchange, as chief executive officer (CEO).
The merger’s plan is to increase the liquidity and depth of the markets and turn the new stock exchange into an attractive alternative to Brazil and Mexico, the region’s two larger markets.
In 2020, stock market capitalisation as a share of gross domestic product (GDP) was 43.2% of GDP in Peru, 39.3% in Colombia and 73% in Chile, according to World Bank data. Total value of stocks traded amounted only to 1% of GDP in Peru, 3.7% in Colombia and 15.7% in Chile.
Challenges ahead
The three stock markets are characterised by a high level of ownership concentration and the existence of large industrial and financial conglomerates, resulting in low liquidity and low levels of free float, making it difficult to attract foreign investment.
“In the Colombian stock market, for example, we have 62 issuers; the new entity is going to have around 465 issuers. Right now, in Colombia, we have 16 brokers; with the market integration [that] will become more than 50. We will get more pension funds and other types of investors creating a bigger pool of liquidity,” says Mauricio Rosillo, corporate vice-president at Bancolombia and chairman of the Colombian Stock Exchange.
“The Peruvian stock market is kind of stagnant and even reducing in terms of traded volumes. For companies it is easier to raise bank financing,” adds Luis Chavez-Bedoya, professor at ESAN Graduate School of Business.
The huge challenge right now is to create the right environment to bring the new companies to the stock market.
“In Colombia, the last initial public offering was 10 years ago, and there was more liquidity six years ago than now,” says Hugo Abreo, CEO of BBVA Valores. “Big changes related to political and economic reforms are affecting the way that foreigners are seeing our market. The same is happening in Peru and Chile. These are the reasons why the creation of a common and bigger market is so important.”
the integration of the capital markets will offer further possibilities and opportunities to find financing, especially for long-term projects
Regulatory harmonisation will be the biggest hurdle for the new entity. These include financial disclosures, the prerequisites for listing, the frequency with which information is presented and how to deal with deposit custodians.
“There are going to be agreements between the custodians in each market to facilitate trading,” says Mr Abreo. “They are trying to create a common trading community in this new holding and it is still too soon to anticipate what other difficulties we will find.
“We know there will be the possibility of trading in three different currencies or trade in dollars, and that creates new opportunities. We don’t know how easy that will be for clients, however we are confident about the new possibilities that more and different issuers bring.”
Each of the three countries has a different regulation with regards the possibility of allowing foreign currency deposits.
There is also the consideration that brokerage firms are important shareholders of the stock market, notes Mr Chavez-Bedoya. “If you want to make a stock market transaction in Peru, you have to pass it through an authorised broker and most of the amount traded is generated by brokerage firms belonging to important banks. This affects competition.
“There also needs to be more emphasis on the retail investor. The Chilean market has a similar shareholding structure but the situation is somehow different in Colombia,” Mr Chavez-Bedoya adds.
Edmundo Lizarzaburu, professor of finance at ESAN University, adds that this merger is more commercial as it aims to create efficiencies, rather than new products.
“In Colombia and Chile, you have more than 25 players that include not only banks, but also other entities. This is a very important difference,” he explains. “There is an important negotiation with the central bank of each country to understand how the spot market is going to be in order to avoid foreign exchange arbitrage.”
Mr Córdoba notes: “We have initiated preliminary discussions with regulators to construct this unified market. The good thing is that the rules that need to be changed can be changed by the regulators independently without having to go to Congress in any of the three countries.”
Learning from the past
The Colombia, Lima and Santiago stock exchanges joined together to begin operation of the Integrated Latin American Market (Mila) in 2011, seeking through the unification of their platforms to increase the range of options and liquidity they offer to issuers and investors. The Mexican stock exchange joined in 2014.
This recent initiative can be considered as the brother of this merger as it showed the potential of a bigger market. Mila works, for example, by allowing a Colombian investor to purchase shares in a Chilean listed company using a broker in Bogotá. However, the three founding members’ market capitalisation and trading volumes have remained well below what some had hoped for.
Mila was not a full integration of capital markets as the different currencies, tax regimes, commissions, and investment rules of each country still apply. All markets maintained their own domestic clearing houses.
The problem was actually operational as it was easier for each investor to go directly to the other market instead of going through Mila. As such, the project has never had a huge success or impact on the market.
“There is a lot of scepticism, but we are confident about the benefits and the necessity of a common market between the three countries,” says Mr Abreo. “The experience seen in the Mila market created a big exception, but it couldn’t materialise those benefits.
“When Mila was launched 12 years ago, everyone was very excited. But after that we did not see a real increase in trading at all. We need to see changes in the regulation that accompany and facilitate the creation of this new market and that avoid arbitration between countries. This is going to be the main challenge.”
Mila was also a very different proposition. “We are building a single market, instead of three markets that are interconnected,” says Mr Córdoba. “One thing that is different today … is that we now have the commitment of our shareholders. The other element that is going to be different is that we were looking to create a single regulatory rulebook for a unified market. So, it is a completely different approach, which makes the value proposition much more appealing and beneficial for all market participants.”
Opportunities
The idea is to have all securities available in the three countries on a single trading platform, with a single rulebook and single rules of operation with regards to the clearing and settlement process.
“One of the main concerns of international investors in this region has been the lack of assets and the reduction of liquidity. We are working very hard to improve liquidity and make a more appealing proposition to new issuers coming to market, so that the market becomes more appealing,” adds Mr Córdoba.
The plan is to first create a regional market for the stock market, followed by a derivatives market and fixed-income market.
“We believe the equity market is the one that will benefit the most from having the economies of scale and a larger market with more assets,” says Mr Córdoba. “The fixed-income market will probably maintain certain differences because [they] are very much local.”
“At the moment there are three companies and therefore different corporate strategies. In the future, there will be only one actor interacting with the governments. This should allow the system to evolve in a more coordinated way,” says Guillermo Larraín, economist and former superintendent of Superintendencia de Valores y Seguros, a financial regulatory agency in Chile.
Finding ways to attract new issuers and securities instruments to the market must also be part of the integration efforts. In Colombia and Chile, the market offers more instruments and products, says Mr Lizarzaburu. Success in doing so should also have a positive impact on attracting new investors to the market.
“It would be a good thing to identify 10 or 20 relevant Peruvian companies that have the opportunity to list 10% or 30% of their equity and start to have more companies in the stock market. This is going to increase the value of the Peruvian market and, in turn, the entire holding,” suggests Mr Lizarzaburu.
The transformation will probably happen one step at a time, but we are committed to doing this as quickly as possible
The stock markets have different revenue sources. The Peruvian market income comes mostly from the companies that are listed. In Chile, one of the main sources of income is selling market data. In Colombia the biggest revenue is in the post-trade space. “When you put all these things together, you get a well-diversified stock market in terms of income sources,” says Mr Chavez-Bedoya.
Another issue to highlight is the diversification of the three markets: in Colombia, the stock market has important components of public services and energy. Chile, in turn, is the strongest of the three in retail, while Peru is very strong in the mining sector.
All three countries are very rich in mineral resources and could try to develop a sizeable competition to the Toronto Stock Exchange (TSX) for the mining sector. “The mining sector requires some services that can be provided by the stock exchange. And this has been developed quite successfully by the TSX,” says Mr Larraín .
The three countries are going through stressful political and social conditions, to different degrees. The solution to these problems will not be solved only through political and legal reforms. “It also needs a new dynamism by the private sector and this initiative has the potentiality to show a new form of deal, so to speak, between the private sector and the local authorities,” Mr Larraín notes.
At the moment, the idea is to create a stock market for the Andean region. This does not exclude, in the long term, the creation of a broader Latin American market, adds Mr Rosillo.
Finally, a single capital market could be especially important for achieving better risk diversification within the locally concentrated regional pension fund industry.
Bank lending
Banks have displayed a fear of lending over the years, which to some extent has slowed the development of the securities market. However, banks and securities markets may be considered complementary as firms need different services at various stages of their development.
“Bank lending is still going to be relevant following the merger, but the integration of the capital markets will offer further possibilities and opportunities to find financing, especially for long-term projects, small and medium-sized enterprises (SMEs), and entrepreneurs,” adds Mr Rosillo. “It is also going to be also a huge opportunity for international investors and intermediaries to find diversified options and manage risks.”
While the banking sector in these countries is very developed to serve big corporations, the merger could also be beneficial to SMEs that find it harder to get financing.
“Banks themselves are users of capital markets for their own funding,” says Mr Córdoba. “As capital regulation of banks becomes stricter, they are less likely to retain risk on their balance sheets and they will need capital markets to lay off part of that risk to other investors that are better qualified to handle those risks. As a matter of fact, banks are very important shareholders of our exchanges.
“Everyone gets excited that we are going to have a single market, and people want everything to happen overnight. It is a complex process. Similar projects were within a single country or within markets adopting the same currency.
“The transformation will probably happen one step at a time, but we are committed to doing this as quickly as possible while delivering value.”
