If you don’t know Juan Pablo Cordoba you probably should. As the CEO of the Bolsa de Valores de Colombia (Colombia Securities Exchange) and chairman of the World Federation of Exchanges, he is one of the exchange executives who has a unique perspective on emerging exchanges such as those in Latin America and beyond. Yet, he also has a firm understanding of the G20 market reforms that have filtered throughout the world in the form of Dodd-Frank, Basel III, MIFID and EMIR.
Cordoba spoke with Jim Kharouf, editor-in-chief of John Lothian News, at the World Federation of Exchanges/IOMA conference in Sao Paulo, Brazil about the challenges and opportunities for the -year-old Colombia exchange, including regional efforts such as MILA, the Latin American Integrated Market. He also provides a credible voice regarding the unintended consequences of applying a host of clearing, capital and compliance hurdles that could stifle the growth of such new markets.
Q: Where does your exchange stand in today’s regional and global landscape?
If you look at the big picture for developing markets, and Colombia is no exception, there has been a rapid development over the last ten to twelve years. It’s been a very positive dynamic in the domestic markets – large liquidity, new products, more participants, more professionals and in some cases the development of derivatives markets. So if you look at the economic story, we’re very satisfied.
But there is another way to view things, if you look to the future. Where does a small and open country stand in an open, global market with all these regulatory winds? And will those winds enable or disable all the progress that you’ve made? And the concerns are there. I think we’re going to have a difficult time continuing our development process.
Q: These new regulations apply to smaller markets as well and are forcing them into the same Basel III and other requirements, which is driving up costs and compliance for your participants. Where does that leave you?
The very strong message that has come out of this WFE/IOMA conference, is that there are unintended consequences of the regulation. The post-2008 rules are designed to address safety, particularly in the banking sector. But when you look at all the details of that regulation and the affect it has had, I think in some aspects we’ve gone overboard and there are serious risks to the well-being of liquid markets.
Just to mention a few. One is about concentration. You start by saying there is too much risk in the global financial institutions, so we’re going to put regulation on it. One consequence is that you’re going to raise the cost. And because the cost of regulation becomes so much higher, you will concentrate the liquidity in far fewer liquidity pools. And in some of those markets, because of the national regulatory scheme, you will actually split liquidity. So there are a lot of contradictions.
The other is that the CCP risk model was based on who, in that pool, has access to the CCP. Your first line of defense is your clearing members. The consequence is that fewer and fewer firms are willing to become clearing members. And those that remain are less and less willing to keep those clients who have traditionally been customers of clearing members. So we’re all for safety but if it creates so much disruption to the function of global, liquid, cost-efficient markets, maybe we should stop and think again if the outcome is going to be right outcome. Because in the end, the question is – is the market serving the economy appropriately? So if you are getting more concentration, higher costs, less access, you may want to ask the question – are we, for the sake of safety, doing too much.
Q: So where does your exchange fit in, given these headwinds?
I joined the exchange 10 years ago and we said “Let’s do the checklist of all the things an open economy has to do to develop their own market.” And we’ve gone one by one. Ten years later, when you look to the future, the checklist is clearly not enough. Now it is even more clear, that if you do not have the size to be a global clearer, then you’re just not going to be in it. That is a big question – not for the global market – but for a country like Colombia.
Will Colombian firms be served better by accessing the market in New York or London? Probably not. So how can we build scale, but maintain the local flavor to service local clients. That’s one new piece we have to consider.
That’s why efforts like MILA are trying to build scale in a very complex environment, while catering to the local and international investor at the same time.
Q: So where does MILA stand today and go from here?
MILA was actually an experiment to demonstrate to regulators that you could actually integrate the markets without losing control of your local market. In that respect, MILA has served to build trust, and see there are right ways to approach more integration in Latin America, which we did not have. While that was very positive, it was a first step.
Now we really have to think about a broader international integration in Latin America. And that means being much more bold in the types of products that will be part of that integration. The role international investors need to play, and what happens with regulation, harmonization of investing and listing rules still need to be figured out. And finally, we have to have a difficult conversation about the different tax treatments in different jurisdictions. How do we harmonize that, at least in the scope of capital markets?
Q: So MILA is still a baby.
It is, but given that it was an experiment, I think it was successful in building the trust that is needed to go beyond. If we didn’t have that, we wouldn’t be open to where we are today. How long this will take? Integrations take a long time but I think there is very good political momentum right now.
Q: This brings us back to the start of the conversation, which is how do you scale up in this regulatory environment, especially for developing markets.
It’s a race against time. We need to prove it works and its efficient but at the same time the regulation is really concentrating on developed markets. The US is the obvious choice in terms of concentration and good for efficiency, but again, it won’t serve individual economies.
Q: Let’s look at Brazil. It is essentially, the anchor tenant for Latin America. They just took a larger stake in Chile’s exchange. What role will they play as they are not a member of MILA?
If Latin America as a whole wants to construct critical mass and be a player in global markets, we need Brazil, or it is not realistic in the short term. Sooner or later, Brazil will likely be part of the conversation. Its sheer size makes it attractive.
The four countries that make up MILA, Colombia, Peru, Argentina and Mexico, combined have the same market cap as Brazil. But Brazil, in terms of liquidity, is still three times larger. And if you look at derivatives markets, Brazil is number one. But first, that harmonization needs to happen.
Q: So you are still optimistic about MILA and Colombia?
You need a three-laned avenue – financial integration, while you develop your local market at whatever speed you can given the current circumstances, and we continue to open the market in Colombia to international participants amidst a very difficult environment.
From a general emerging market perspective the long-term growth, population growth, and catching up to global capital markets will be an important driver.