The Latin American Integrated Market, or Mercado Integrado Latinoamericano (Mila), is the product of a strategy designed by the Santiago Stock Exchange (Bolsa de Comercio de Santiago - BCS), the Lima Stock Exchange (Bolsa de Valores de Lima – BVL) and the Colombian Stock Exchange (Bolsa de Valores de Colombia - BVC) together with the local central depositories in order to enhance economic growth through the unification of local capital markets and foster the development of such markets. The integration of the Chilean, Colombian and Peruvian stock markets was conceived to overcome the obstacles that result from the individual markets' small size and their limited growth potential in the medium term.
The purpose of Mila is to effectively merge local capital markets through the progressive integration of trading platforms, thus creating a larger, deeper and more liquid market (even larger than the sum of its individual components), that is more visible in the international arena and is more attractive to a greater number of issuers, investors and intermediaries. Given the increased market size (Mila will be the largest Latin American stock market in terms of traded companies with 565 issuers; the second-largest in terms of market capitalisation, with $720 billion, following Brazil and followed by Mexico; and the third-largest in terms of traded volume, with $87 billion), the integration will allow market actors to enjoy the advantages of economies of scale and scope.
From the investors' point of view, the integration increases the offer of available securities and products, allows greater diversification, fosters better balance between risk and return and facilitates the design of new and more diversified portfolios. Moreover, given the individual strengths of each of the merging markets (for instance, BCS' emphasis on retail and financial services, BVC's strength in energy, oil and gas and BVL's focus on the mining sector) their unification will probably be complementary and will allow investors to gain exposure to different industries and risks.
From the issuers' perspective, Mila allows them to enter a wider market (with three-country distribution for new IPOs). Additionally, the integration grants issuers access to new retail and professional investors: in other words, issuers have a broader investor base for their financing needs, thereby capturing the interest of new investors. This, in turn, is likely to reduce the costs of financing for companies, thus contributing to market development and economic growth. In short, the unification of the Chilean, Peruvian and Colombian stock markets is likely to result in additional and more diverse sources of financing for issuers. Mila is likely to be a more attractive market for a wider range of companies.
Finally, from the intermediaries' viewpoint, the integration will foster more attractive and competitive stock markets. Mila will allow intermediaries to expand their clientele and create and offer new products and investment vehicles to their clients.
Nevertheless, as necessary and convenient as this project is, putting it into practice requires a great amount of coordination and involved a series of practical, technological and legal challenges for regulators, supervisors, the stock exchanges, the central depositories and the rest of market actors. In fact, for the integration to be successful, regulatory standardisation and flexibility is necessary.
Implementation of the integration model
The implementation of the project will be conducted in two progressive phases. The execution of Phase I (which included a series of trials) started in 2010 and will be finalised on May 30 2011, when Mila starts operating. Phase II should be completed between 2012 and 2013.
In Phase I, only shares (not debt securities or derivatives) will be considered as admissible to be traded in Mila; the integrated market will be open for all kinds of investors (retail and professional). Additionally, shares and issuers participating in the integrated market will enjoy full recognition for public offerings in three markets. However, each exchange will operate with independent technology platforms.
Foreign intermediaries will have access to the local market through mechanisms developed by the participating stock exchanges and central depositories and the local intermediary will be responsible for the settlement and clearing obligations associated with the transaction.
Trading operates as follows: traders will have access to the foreign market from the local market through an automated and intermediated routing model; each exchange manages its own market; trading operates under the market rules where the shares are listed; only cash equity transactions are permitted; to act in a foreign market, local brokers have to enter into a service agreement with a foreign intermediary that will act as its sponsor (in other words, to act in a foreign market, the local intermediary has to be sponsored by a foreign broker); and intermediaries have access to a screen through which they can place orders and see the depth of the participating markets.
As far as clearing and settlement are concerned, transactions will be cleared in local currency. Therefore, local intermediaries have to manage foreign exchange, counterparty and other transaction risks. The clearing and settlement process of transactions traded in the unified market requires that the central depositories are interconnected. To materialise such interconnection, the participating depositories have to open reciprocal omnibus accounts that are transparent for end users. The direct depositors will be the other central depositories.
A local depository's omnibus account will serve as a vehicle to administer the local investors' relations with the foreign issuers (through the foreign depositories' omnibus accounts), and the foreign investors' relations with the local issuers (through the local depository's omnibus account). Finally, the custody of securities will also be carried out by local depositories, which will manage accounts according to the rules of the country where the shares are listed.
Phase II is more aggressive than Phase I. In Phase II foreign intermediaries will have direct access to local markets. Therefore, foreign intermediaries will have full power to operate locally and service agreements with local sponsors will not be necessary; foreign issuers will have full local recognition; other securities (for instance, debt securities and derivatives) will be admitted for trading; the trading system will support non-cash transactions, such as repos and term repurchase agreements; finally, trading rules will be standardised and a cross-border clearing model will be implemented. However, the specific details of this integration model still have to be defined.
Regulatory framework
For the Phase I integration of the Chilean, Colombian and Peruvian stock markets to be successful, regulatory standardisation and flexibility was necessary. Therefore, before implementing the proposed integration model, local rules had to be adjusted and a series of regulatory challenges had to be overcome.
Supervision model
Although – as explained above – the integration of the Chilean, Colombian and Peruvian stock markets represents a growth opportunity and has several associated benefits for the three economies and their participants, it also poses a series of risks. The unification of stock markets leads to a higher interdependence, thereby facilitating the likelihood of a contagion effect in case of a financial crisis. It is not surprising, therefore, that the definition of regulatory and supervisory powers to effectively supervise market actors within Mila has been an issue of discussion.
Considering the nature of the integration model that was adopted for Phase I, the local agencies keep the power to supervise local issuers and securities. In other words, issuers are supervised by the entity of the country where such issuer and its securities are listed.
In order to facilitate supervision of Mila's participants, the regulators of the three countries entered into supervision and control agreements. The memorandum of understanding entered into by and among the Chilean Superintendence if Securities and Insurers (Superintendencia de Valores y Seguros de Chile), the Colombian Superintendence of Finance (Superintendencia Financiera de Colombia) and the Peruvian Companies and Securities Supervisory Commission (Comisión Nacional Supervisora de Empresas de Valores de Peru) on January 15 2010, sets forth a series of requirements and criteria in terms of information exchange, assistance and cooperation between the three entities. According to the agreement, the three supervisors and the investors will have total information availability.
Additionally, to implement the integration local regulators had to:
- authorise the implementation of Mila in each jurisdiction;
- authorise the local stock exchanges' and central depositories' functioning rules;
- issue necessary regulations regarding minimum content of integration agreements, recognition of foreign markets and issuers, information disclosure standards, and foreign securities' valuation requirements;
- define Mila's supervision model and procedures; and
- define information sharing criteria.
Foreign securities and issuers: foreign issuers' registries
Despite the fact that the listing, offering and trading of foreign securities will be ruled by local regulations, the listing, offering and trading of foreign securities had to be authorised. Therefore, applicable laws had to be adjusted in order to recognise the foreign markets and facilitate the listing, offering and trading of foreign issuers (for example, by creating and/or regulating foreign issuers' registries and trading systems).
Furthermore, new laws had to be issued, in order to set forth the minimum contents of integration agreements executed between stock exchanges, central depositories and intermediaries and their foreign counterparts, and to allow the listing and trading of foreign securities in foreign issuers' registries and trading systems. Each stock exchange is a sponsoring agent for the purposes of listing the foreign securities in its own market.
Disclosure requirements and information availability
A precondition for the efficient functioning of an integrated market is adequate information flow and the absence of regulatory arbitrage in this regard. Hence, although the disclosure standards in terms of relevant information are the ones applicable in each issuer's jurisdiction, investors in all three markets must have total information availability. The stock exchanges are the entities in charge of disclosing foreign issuers' relevant information and have to guarantee access to such information in each market through their web pages.
Trading of foreign securities
As explained above, trading operates under the market rules where the shares are listed. Nevertheless, the implementation of the automated and intermediated routing model had to be authorised in the three countries. Additionally, the regulators had to issue the rules defining the characteristics and conditions of the trading system.
Investors
As far investors are concerned, the following legal issues had to be taken into account:
- For issuers and investors to take real advantage of Mila's benefits, institutional investors' (especially pension funds) investment regimes had to allow the acquisition of foreign Mila securities in equal conditions. Further reforms are required in this regard in Colombia.
- Investors who make transactions in Mila are subject to the settlement country's taxation rules. Further reforms in this regard would be desirable in Peru.
- With regard to foreign investment, Colombian rules had to be reformed and allow more flexibility in order to: (i) eliminate existing restrictions to make portfolio investments; (ii) limit the obligation to register any foreign investment made in the country and introduce alternative registration mechanisms; and (iii) eliminate target companies' joint liability with regard to shareholders' foreign investment registration obligations.
Clearing and settlement
Given that central depositories will act as direct depositors before the other depositories and that, although the omnibus accounts are transparent for final users, they are not transparent for the other depositories, these entities will have to provide information regarding the identity of the ultimate beneficial owner to the competent authorities and the issuer. On the other hand, considering that the central depositories will custody the securities acquired by foreign investors and manage the omnibus accounts, they must define the procedures that guarantee that investors in all jurisdictions may exercise the economic and political rights associated to their shareholding. This, in turn, requires the development of effective proxy-voting mechanisms to effectively represent local investors' interests abroad and foreign investors' interests locally.
The next phase
Although Phase I of Mila is now a reality, to achieve a true integration of the Chilean, Colombian and Peruvian stock markets and enjoy the greatest benefits of such integration, Phase II has to be accomplished. In order to do so (for instance, for local intermediaries to be able to trade directly in foreign markets and expand Mila's scope in terms of admissible securities and transactions), true regulatory standardisation and harmonisation will be needed. Although achieving such result may not be easy, and there may be some costs associated thereto, it is very likely that the unification of the capital markets will lead to a deeper economic integration, thereby strengthening the region's economic power. The effort is worth it.
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About the author
Claudia Barrero is a partner of Prieto & Carrizosa. Since 2005, she has headed the capital markets and securities practice. She also co-heads the M&A practice. Barrero specialises in mergers and acquisitions of listed companies and has extensive experience in infrastructure projects and corporate governance matters, and the incorporation of private equity funds, pooled portfolios and other collective investment vehicles.
She has acted as adviser to issuers on IPOs and debt issues, as well as to several Colombian and international clients in cross-border mergers and acquisitions and all related capital markets aspects. She has also advised the Colombian government in various privatisation processes, especially in the energy sector.
Barrero obtained an LLB from the Universidad Externado de Colombiain 1990, and in 1994 obtained a post-graduate degree in Commercial Law at the Universidad de los Andes. She continued her education with an LLM in International Business Legal Studies from the University of Exeter in 1995. In 2003, Barrero was certificated on Stock Market Operations by the CESA – Incolda – Colombian Stock Exchange (Bolsa de Valores de Colombia). She joined Prieto & Carrizosa as an associate in 1997 and became a partner in 2005. Before joining Prieto & Carrizosa, Barrero was a lawyer at Araujo Ibarra & Associates Law Firm (1993-1994) and Colombian Project Advisers (1996).
She is a member of the board of directors of State Capital Global Law Firm, and an adviser to the Colombia Capital programme run by the Colombian Stock Exchange and the Andean Development Corporation, a project for the development of awareness strategies regarding the importance of corporate governance. Barrero recently advised on the acquisition of a controlling interest in Empresa de Energía del Pacífico by Colinversiones, and is advising the Colombian Stock Exchange in relation to a corporate merger with the Lima Stock Exchange, the first international merger between stock exchanges in Latin America.
Barrero is fluent in Spanish and English. |
Contact information
Claudia Barrero
Prieto & Carrizosa
Cra. 9 # 74-08 Of. 305
Bogotá, Colombia
Postal Address: 76600
T: +57 1 326 8600
W: prietocarrizosa.com.co |
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About the author
Estefania Molina Ungar is an associate lawyer at Prieto & Carrizosa. Her practice specialises in capital markets and securities, corporate law, commercial law and mergers and acquisitions. Molina joined Prieto & Carrizosa as an associate in 2008 and since then has advised Colombian and Latin American securities issuers on various matters, including compliance with disclosure requirements and applicable corporate governance standards, and worked on several projects involving private and public companies, as well as on other transactions and issuances in the Colombian Stock Exchange and abroad.
Between 2004 and 2006, Molina carried out a specialisation in Advanced Social, Political and Economical Studies at the University of Notre Dame Du Lac/Phoenix Institute. In 2005 she participated in the Harvard Negotiation Workshop at the University of Notre Dame Du Lac. She obtained her law diploma (LLB, 2009) and her economics diploma (BA in eEconomics, 2009) from the Universidad de los Andes in Bogota, and in 2010 finished a post-graduate degree in Financial Legislation at the same university. She was also a teaching assistant on the Monetary Theory and Policy course.
She recently advised on the acquisition of a controlling interest in Empresa de Energía del Pacífico by Colinversiones , and worked as a member of the team advising the Andean Development Corporation and the Colombian Stock Exchange within the framework of the Colombia Capital programme. More recently, she has worked on the corporate merger between the Colombian Stock Exchange and the Lima Stock Exchange.
Molina is fluent in Spanish, English and German. |
Contact information
Estefania Molina Ungar
Prieto & Carrizosa
Cra. 9 # 74-08 Of. 305
Bogotá, Colombia
Postal Address: 76600
T: +57 1 326 8600
W: prietocarrizosa.com.co |