Korea Capital Market Institute

This report provides detailed information about the macro-structure and the micro-structure of the stock markets of Latin America and Caribbean region focusing on Brazil, Mexico, and Chile. They are the top 3 countries among Latin American and Caribbean countries in terms of stock market capitalization. They account for 87% of market capitalization and 68% of GDP of this region. Ⅰ. Brazil 1. Stock Markets The Sao Paulo Stock Exchange (hereafter Bovespa) is the biggest stock exchange in Latin America and Caribbean. It has 392 listed companies and the market capitalization is $588 billion. In 2007, $29 billion was financed through 64 IPOs, which was the fifth largest amount in the world. The daily trading value and daily number of trades were $3 billion and 245,000 respectively in 2008. In terms of investor identity, foreign investors have made up the largest group since 2005 and the number of individual investors has recently increased. Bovespa publishes several indexes including market-wide indexes such as IBovespa, IBrX-50, and IBrX; sector indexes such as ITEL, IEE, and INDX;and corporate governance indexes such as IGC, ITAG, and ISE. The merger between Bovespa and BM&F resulted in BM&FBovespa which ranks seventh in the world in derivatives trading. It accounts for 25% of foreign currency derivatives trading and 7% of interest rate derivatives trading in the world. Recently, BM&FBovespa formed an alliance with the CME group that allows Brazilian investors to trade CME derivatives products freely through Bovespa’s GTS. 2. Market Macro-structure Brazilian capital markets are regulated by the Securities Market Act, Corporation Law, and CVM Instructions. The Brazilian stock market is supervised by the National Monetary Council (in Spanish: Conselho Monetario Nacional, CMN) and the Securities and Exchange Commission of Brazil(Comissao de Valores Mobiliarios, CVM). Bovespa and BSM have self regulatory roles over the stock market. Bovespa was demutualized in October 2007 and became a subsidiary company of Bovespa Holding Group. In May 2008, Bovespa merged with BM&F to form BM&FBovespa. At the moment, BM&FBovespa is the sole regulated exchange in Brazil and covers a wide variety of exchange products including domestic stocks, foreign stocks, options, futures, forwards, commodities among others. Bovespa has special listing segments, Novo Mercado, Level 1, and Level 2 in which companies with high corporate governance standards are exclusively allowed to list. Bovespa introduced these to enhance the corporate governance of the Brazilian stock market. At the end of 2008, 41% of all listed companies were listed in these three segments. Bovespa established BVS&A in 2003 to facilitate the financing of social and environmental projects and companies. 3. Market Micro-structure On the Bovespa, trades are executed through an electronic trading system, MEGA BOLSA, which adopts a bilateral continuous auction system with a price-time priority rule. For some assets, a market maker may intermediate trading. The minimum price increment is 0.01 real and official trading lots are applied to all trades. After-market trading is also available and traders may execute trades at the range of ±2% of the daily closing price. Bovespa provides full information about order-book and transactions on a real-time basis. Bovespa requires traders to pay two types of explicit fees, exchange fees and a brokerage commission. Price limits, trading halts, and circuit breakers are adopted to control the volatile movement of asset prices. Finally, Bovespa has a stock lending program and allows short selling. CBLC performs clearing and settlement for all transactions of Bovespa. The settlement cycle is T+3 for most assets. Bovespa does not have excessively strict listing rules. Instead, companies have to follow listing procedures outlined by the CVM. However, Novo Mercado has stricter listing, maintenance, and disclosure requirements and does not allow listed companies to issue stock with multiple voting rights. Level 2 has lower listing requirements than Novo Mercado. Level 1 has even lower requirements than Level 2 in terms of corporate governance practices and minority investors` rights. In contrast to Novo Mercado, Level 2 companies may give voting rights to preferred shareholders at the time of a merger and acquisition, spinoff, and contracts between affiliated companies which are approved by shareholders. All information about public companies is instantly available through an electronic disclosure system provided by the CVM and Bovespa. Disclosure standards differ among listing segments. Brazilian GAAP is converging to IFRS and consolidated balance sheets will follow the International Accounting Standards Board (IASB) standards from 2010. Every investor must report the details of change in stock ownership to the authorities when ownership of a listed company goes over 5%. In the early 2000s, the National Monetary Council abolished the discriminatory rule against foreign investors. Since then, nonresident investors can invest in all investment products available to resident investors. There are no limits for overseas remittance of capital gains, dividends, and interests and unless foreign investors reside in a tax haven, they are exempt from taxation of capital gains and dividends. However, interest from stockholder`s equity is subject to a 15% withholding tax. Ⅱ. Mexico 1. Stock Markets The Mexican Stock Exchange (Bolsa Mexicana de Valores S.A.,BMV) is the sole stock exchange in Mexico. 376 companies (122 domestic and 254 foreign companies) are listed. Market capitalization and yearly trading values are $411 billion and $142 billion respectively. The representative indexes of BMV are BOLSA, IPC, and INMEX. The proportion of foreign investors was 47.1% at the end of 2008, which ranks fourth in the world and has increased since the financial crisis. BMV went public and listed in June 2008. 2. Market Macro-structure The Mexican securities market and industry are regulated by the Securities Market Law. The National Banking and Securities Commission (CNBV) is the regulatory authority for the securities markets. The amendment of the Securities Market Law in 2003 promoted the expansion of Mexican securities markets and related industries, and after the amendment, the BMV introduced the Global Market platform and venture capital activity increased significantly. BMV has two sub markets, Capital Market and Global Market; and three services functions, trading services, post-trading services, and Data/IT/other services. Stocks, bonds, mutual funds, stock warrants, and ETFs are traded on the BMV while currency futures, index futures, gold futures and stock options are traded on Mexder, the derivatives market. Fixed income securities and swaps are traded on SIF-ICAP which is an independent dealer-broker market. 3. Market Micro-structure The BMV utilizes a continuous bilateral auction system using an electronic order book. BMV operates the BMV-SENTRA Capitales system to process every electronic order in aggregation and the SETRIB system to route orders from brokers to the BMV central system for transactions between dealers. Trading sessions are open from 8:30 to 15:00 and the closing call auction session is executed for 10 minutes before market close. After-market trading is available for 30 minutes before opening and after closing at the previous day`s closing price. Trading lots are 100 shares if the price is below 200 pesos and 5 shares otherwise. The tick size is 0.01 peso. In the BMV, block orders have priority to normal orders in execution and the processing of a normal order after a block order is delayed for 20 seconds. BMV does not impose trading fees and does not have guidelines for brokerage fees. To control the volatility of securities prices, BMV makes use of daily price limits (±15% of previous day`s closing price) and trading halts. Instead of using a continuous auction algorithm, a batch auction algorithm is used for a stock when it is not traded for 20 consecutive days. The BMV allows some liquid stocks to be sold short. CCV clears while Indeval deposits and settles securities transactions. The settlement date is T+2 for domestic stocks and T+3 for foreign stocks. A company that wants to be listed on the BMV’s Capital Market has to register at the Registry of Securities (RNV) and comply with the prescribed listing process through a brokerage firm. A candidate for the Global Market has to be listed on the foreign stock exchange authorized by CNBV or another registration authority. In this case, listing fees, RNV registration, and submission of documents are exempt. BMV listing standards require a company’s stockholder`s equity over 79,200,000 pesos and positive operating income over 3 consecutive years. If floating shares are below 12% of total shares outstanding and number of shareholders goes under 100, a company will be delisted. Article 239 of the Mexico Securities Market Act prevents any individual or groups from acquiring 10% or more ownership of a domestic listed company directly or indirectly and the Laws of Mexican Stock Exchange prohibits all investors from acquiring 5% or more ownership of some representative domestic listed companies. To protect against a hostile takeover by a third partyor shareholders, any change in ownership of all affiliates and other friendly shareholders must be reported. In principle, there are no limits on securities that foreign investors are allowed to trade. But, for foreign direct investment, there is an investment quota for each industry. Ⅲ. Chile 1. Stock Market Three stock exchanges operate in Chile. The Santiago Stock Exchange (SSE) is the largest stock exchange of the three. At the end of 2008, 238 companies (235 domestic and 3 foreign companies) were listed on the SSE. Market capitalization was $129 billion and $28,660,000 is newly financed in 2008. Annual growth rates of trading value and number of trades are 74% and 42% respectively, which shows faster growth than any other exchange in the world. The SSE publishes IGPA, IPSA, and Inter-10 indexes. 2. Market Macro-structure The Chilean stock market is regulated by Securities Market Law N18.045 and SVS instruction (D.L. N3.538) and supervised by the Chilean Securities and Insurance Supervisor (SVS). The SSE consists of 7 sub-markets which are: stock market, bond market, Investment Funds Quotas market, currency and precious metals market, futures market, option market, and money market. The SSE does not have an in-house settlement system. 3. Market Micro-structure All trading on the SSE are intermediated by brokers. Floortrading and electronic trading run parallel to each other. The Pregon system supports floor trading and the Telepregon system process electronic orders with a continuous auction mechanism. Trading hours are from 9:00 to 16:30 (9:00 to 17:30 in the summer) and pre-opening trades are executed from 9:00 to 9:25. Tick sizes vary from $0.001 to $1 depending on the price level. Explicit trading costs consist of brokerage fees, exchange commissions (proportional to trading volume), and tax. Clearing and settlement are conducted by the DCV which is an independent organization outside the exchange. Settlement dates are T+0 for OTC trading, T+2 for stock, T+1 for bond, T+0 for money market, T+5 for foreign stocks, and T+3 for foreign depositary receipts. To be listed on the SSE, a company needs to register with the SVS and apply for listing to the SSE within 30 days. According to the Securities Market Law, a listed company must have more than 500 shareholders or have more than 100 shareholders whose ownership exceeds 10% collectively. A listed company will be delisted if it does not provide information that the exchange requests, suffer from significant legal and structural changes such as bankruptcy, merger, and acquisition, or voluntarily requests delisting. Every listed company should immediately disclose annual and interim financial statements, important news, and other information requested by the SVS. Audited financial statements should be reported to the SVS which will then post them on the SVS website. Chile plans to change the accounting standard from Chilean GAAP to IFRS under the supervision of the SBIF. Foreign investment over $5 million must be examined and approved by the Foreign Investment Committee and the investment horizon should be longer than 3 years. However, there is no limit on the foreign investor`s stock ownership. Chile prevents foreign investors from investing in the fishing and media industry and requires foreign investors to obtain a license to invest in the communication industry.