Brazil competition offers mixed blessings - Oxera
The introduction of competing trading platforms and clearing
houses (CCPs) in Brazil could provide net benefits for end-investors, a new
report by financial research firm Oxera has found, but costs related to fragmentation could outweigh
Commissioned by Brazilian securities regulator Commissão de
Valores Mobiliarios (CVM), the report, ‘What would be the costs and benefits of
changing the competitive structure of the market for trading and post-trading
services in Brazil?’ contains a detailed cost-benefit analysis on the likely
consequences of introducing trading venue competition in Brazil.
Noting that that the current price for trading services in
Brazil is close to that of other developed international markets, Oxera suggests
that the introduction of multiple competing trading platforms may not result in
sufficient savings that offset the extra costs of
connecting to new platforms. This could be a problem for the sell-side, particularly if the
available liquidity is stretched too thinly over several competing venues. But
if Brazil’s trading volumes continue to grow significantly, then trading
competition could have net benefits, the report says.
The report also claimed that the establishment of a competing CCP would further add to
the connectivity costs incurred by brokers in Brazil, which it said would be passed through to the buy-side and eventually the end investor. However,
the benefits could be greater, because of the potential for significant reductions in the prices paid by investors for post-trade services.
“Carefully managed evolution of the regulatory framework may
be required to realise the benefits of this option,” read the report. “For
example, the extent to which the total cost of post-trading services would fall
is dependent on how Bovespa unbundles the prevailing settlement fee into a CCP
clearing fee and a CSD settlement fee.”
US exchanges BATS Global Markets and rival Direct Edge have both
separately expressed interest in setting up in Brazil, but both have faced
difficulties, as the incumbent exchange BM&F Bovespa, which also runs the Brazilian clearing house, indicated that it
would not clear for a rival. That leaves any would-be entrant in need of a
separate clearing solution, unless CVM steps in and forces BM&F Bovespa to
offer open access.
Oxera concludes that CVM should ensure that the primary exchange
offers open access to clearing for all market participants, including rival trading
platforms. It also recommends that BM&F Bovespa should introduce price
monitoring to engage with its stakeholders about the charges it levies for
using its services. The prices could then be compared with fees charged in
comparable markets such as the US, Germany and Australia.
The study also suggests that CVM should also prepare the
development of the regulatory framework to deal with multiple infrastructures
in advance of their arrival, such as best execution rules for brokers, access
conditions for the incumbent CCP and interoperability for CCPs.