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RMA: Brazil sec lending is flourishing
17 October 2013
Brazil was the focus of the Latin American panel at the RMA’s annual securities lending conference. Hardeep Dhillon reports
The Brazilian securities lending market is growing, according
to a panel at the Risk Management Association’s
(RMA) annual securities lending conference.
The panellists discussed the state of securities lending in the
main regional markets of Latin America.
Tony Kim, executive director at Morgan Stanley, outlined the
market capitalisation and average traded volume of the regional
markets, stating that Brazil is way ahead of other markets and
is similar in size and activity to Taiwan and Korea.
Brazil’s market capitalisation of $1,000bn and
average daily traded volume was $4bn. He noted that the
securities lending market in Brazil is growing and is up around
30% over the past four years.
Carey Chamberlain, head of equity finance, HSBC Securities,
added that Brazil is the most important market from a
securities lending point of view. He added that the new Brazil
Securities Lending Association (Brsla) will lead to more
liquidity and aims to achieve a free flowing equity market for
clients. "The market is becoming more liquid and attracting
Kim stated that market participation is fairly evenly split
between offshore investors, the local mutual fund industry and
the local private wealth network in Brazil. "The market may
lose liquidity from offshore investors but there is enough
interest from onshore clients."
Brazil is different to many markets in that all trades go
through a central counterparty (CCP) that provides a guarantee
to the lender that stocks are returned and all corporate
actions are delivered. By September 2013 there was $20bn
in outstanding loan securities, which is three times 2009
Julio Carlos Ziegelmann, managing director of equity
products, BM&FBOVESPA, added that one third is foreign
investors, one third retail and a third mutual funds which also
include hedge fund strategies. On the borrower side, foreign
investors take a 22% market share, while Brazilian mutual funds
dominate with 70%.
There is a final beneficiary model where collateral is posted
in the name of the investors and placed under
BM&FBOVESPA’s custody. The clearinghouse
maintains records of each beneficial owner’s
collateral, thus avoiding commingling of assets.
"It was built for systematic risk and clearing of the Brazilian
financial system. Collateral is not commingled between
BTC is the securities lending system. Ziegelmann said that
improvements would be introduced to remodel the securities
lending service. These include operational enhancements,
product improvements such as early return deadline, recall
settlement cycle and delivery failure treatment.
Additional new features will include new statistics, such as
average rate disclosure of 1, 3 and 15 days and also a ranking
of brokers (loans outstanding).
Also included are a trading screen release of the order book
and a standardised 30-day contract. These improvements will all
"lead to a more transparent market… a consistent and
diversified supply of securities…and availability via
James Gerspach, executive director at JPMorgan, and Jill
Rathgeber, managing director at BNY Mellon, discussed the
non-standard attributes of Brazilian equity lending,
highlighting the central counterparty model, documentation,
settlements, collateral management, asset servicing and revenue