The stock exchanges in four of Latin America’s most dynamic and open economies – Mexico, Colombia, Peru and Chile – have joined forces to integrate securities trading. The project still faces technical obstacles, but holds the potential to become one of the region’s major trading venues – particularly with the addition of Mexico as its newest partner.
In a major milestone for financial markets in Latin America, late last year Mexican companies executed their first trades on the common equities market known as MILA, the Latin American Integrated Mar-ket, or Mercado Integrado Latinoameri-cano in Spanish.
Launched in 2011, MILA has grown into the region’s largest exchange by number of listed companies, and now links together bourses in four of the region’s most open and dynamic economies: Chile, Mexico, Peru and Colombia. Together, they account for more than one-third of the region’s total economic output.
The addition of Mexico comes after years of negotiations, and nearly doubles MILA’s size, giving it a combined market capitalization of about $1 trillion and nearly 1,000 issuers, a figure that surpasses Brazil’s Bovespa, which has long held the title of being Latin America’s largest and most liquid financial exchange.
The inclusion of the region’s second-largest economy is already breathing new life into the international trading plat-form. MILA’s trading volume went from $6.9 million in November, 2014 to $18.8 million the following month, with the Bol-sa de Valores de México making up more than 79% of the total.
“It’s a matter of leadership. Having a new player is interesting,” says Mauricio Baquero, a Professor of Banking and Fi-nancial Regulation at the Universidad Externado de Colombia, who was involved in early discussions that led to the creation of the common exchange. “The Mexican stock exchange is big. They do interesting things. They can become the new leaders and they can do more to move MILA for-ward. Mexico might create a new energy in the process. It may give a new impetus, but it also adds complexity.”
Adding another financial market, with its own set of laws, regulations and distinct culture, presents further difficulties for a system that has struggled to get off the ground. Despite its size and the number of firms listed on the common exchange, MILA has so far failed to attract significant activity. To be sure, there have been some impressive gains; its monthly trading vol-ume of $18.8 million is triple that of three years ago. However, MILA is still dwarfed in this category by Chile’s Bolsa de Santiago, Mexico’s Bolsa de Valores and Brazil’s Bovespa.
MILA’s proponents hoped to achieve greater liquidity, larger economies of scale, and a system of uniform and harmonized information and regulatory updates. Its leaders also saw the opportunity to achieve a greater diversity of listed firms, and the creation of new financial products, as well as the potential for exposure to markets in each individual country that are typically known for being heavily concentrated in specific areas: Chile in retail, services and mining, Colombia in energy, insurance and finance, and Peru in mining and mineral extraction.
In theory, the market would facilitate investors’ access to a much wider mar-ket while opening up the potential for IPOs to an expanded investor base in all four countries. Other benefits of having a common financial market for four of Latin America’s best-performing economies include increased competitiveness and broader international visibility, and the attractiveness of a single entry point to four distinct markets. Yet even as stakeholders in the respective countries tout MILA’s achievements, experts point to various obstacles to reaching a fully func-tional, integrated market.
“I am a bit less optimistic than be-fore,” says Professor Baquero. “MILA was structured in phases,” he explains. “They haven’t been able to fin-ish the first phase, which was supposed to be the exchange payment and settlement systems connections.”
Problems emerged in the early stages of MILA’s development, as organizers grappled with the task of producing a common trad-ing system that links exchanges built on fundamentally different models. What emerged is a series of mechanisms built on top of the existing structures of each country, instead of a separate exchange.
“It’s not a fully integrated system,” says Professor Baquero. “It’s a way of doing business internationally through an intermediary. That’s how MILA works today.”
The idea was to use these initial linkages to spur activity and bring the exchanges closer together through an ongoing process of streamlining and harmonization, but progress on this front has been slow.
“[The organizers] were very optimistic from the beginning,” Professor Baquero explains. “They thought that it would take 2-3 years at the most to get to full integration. It’s been about five years now and they haven’t finished the first phase yet, and I don’t see a fully integrated MILA coming in the near future. It’s not only the exchanges that need to come together, but also the regulators, the ratings agencies and the relevant public sector entities. It’s a matter of putting together all of these institutions and regulations and public and private supervisory authorities that are all involved in trading activities. It’s one of the difficulties that MILA has. The member governments are not following up on the major changes that this integration needs.”
Despite the difficulties involved, the upside remains tantaliz-ing. “They put this together and said, we’re going to do it slowly, says Professor Baquero. “I think it’s the right move, but they were overoptimistic. There are more issues that have to be dealt with. It’s very difficult to reach the confidence that is essential in all financial markets, to have that environment where everyone feels safe. Investors must understand what their rights are locally and in the other MILA member countries. Who is going to enforce these rights? How protected are international investors? But the beauty of MILA is that it’s the first private attempt in Latin America to create an integrated financial market. It’s not forced or created by the government. It was created by the stock exchanges. It means a lot. The private sector needs to come together.”
“The potential is there,” says Steve Phillips, head of Latin America and Caribbean new business development and a Latin America area expert for NASDAQ OMX. “There are some great companies in every country. The largest cement company in the world is actually Cemex, a Mexican company. There are some fantastic companies in Colombia. There is a lot of untapped potential. The strength is that they got an agreement. The weaknesses are still in the harmonization area. This is an ongoing process. These kinds of things take time.”
While activity has until recently been minimal, other signs have emerged that the process is indeed moving forward. “What MILA has also done is open up a lot of other successes besides trading volume,” says Phillips. “The major brokerage houses in all of the MILA countries have all opened brokerage offices across the region.” Many observers also see the attempt of Brazil’s Bovespa to obtain a stake in the main exchanges of Mexico, Colombia, Chile and Peru as an acknowledgement of a threat to its predominance.
Ongoing tax, regulatory, and currency exchange issues still present obstacles, while a lack of analyst coverage for many of the listed companies on the exchange prevents many of them from grabbing the attention of major outside investors. But as they struggle with the complex task of creating a common legal, financial, and regulatory infrastructure, MILA’s member countries have the added benefit of belonging to the Pacific Alliance trade and economic bloc, a set of agreements and policy framework that can be used to further the development of the common financial exchange. “The potential to leverage that bigger scope agreement would obviously help,” Phillips says.
The Pacific Alliance countries also happen to have well-fund-ed institutional investors that could become major assets for MILA, according to Phillips. “If I were running these exchanges, I would be going to these pension funds and pitching my country and my listed companies. We’re talking billions of dollars of potential trading volumes,” he says. “The money is there. The key is the implementation. If you look at Latin America as a region, there is a lot more strength in alliances than in going it alone”.
By John J Gallagher