Patience Key for LatAm's Mila Going Forward

When Colombia Stock Exchange (BVC) president Juan Pablo Córdoba Garcés and then-CEO of Peru's Bolsa de Valores de Lima (BVL) Federico Oviedo Vidal first came to Steve Phillips, regional manager of Latin America and the Caribbean at Nasdaq, with the idea of integrating Latin America's stock exchanges, he tried to put things in perspective.

While Phillips did, and still does, believe that the Mercado Integrado Latinoamericano (Mila) is conceptually an incredible idea, he knew it wouldn't be easy.

"I reminded them that it took OM and OMX nine years after the announcement of their Nordic alliance to declare that the integration, cooperation was complete," Phillips tells Sell-Side Technology. "The message being: Manage expectations. To change rules and laws takes time. Building a consensus, you've got to deal with regulators that are very keen on having exclusive authority over their own marketplace, so you've got to get them talking to each other."

Long Road Ahead
It's been over three years since trading on Mila, which is made up of the Colombia's BVC, Peru's BVL, Chile's Santiago Stock Exchange (SSE) and Mexico's Bolsa Mexicana de Valores (BMV), officially began, and while BMV's addition last summer was a step in the right direction, there is still a long way to go. Many question the success of the integrated exchange thus far. Trading volumes have not been what expectations were for Mila at the outset, according to Phillips.

Bloomberg's report in early February that BMV would be open to Brazil's BM&FBovespa buying a stake in the Mexican exchange once again put Mila in the spotlight.

You can't just look at the numbers of shares traded through the Mila system. You have to look at all the infrastructure and the supporting mechanisms around that have come to reality. - Steve Phillips, regional manager of Latin America and Caribbean at Nasdaq

Taxation is one of the biggest issues affecting Mila, Phillips says. The different levels of withholding are a problem, as are each country's capital gains tax. Phillips also says Mila needs to make a better effort at getting more of the brokers in each country involved.

These issues need to be ironed out before Mila can look to add smaller-sized exchanges, of which, according to Phillips, there are plenty still interested due to the attraction of strength in numbers. Still, Phillips believes that'll happen later rather than sooner.

That all being said, Mila has still accomplished a great deal. Phillips points to the amount of cross-border investments and mergers between the countries since the inception of Mila as proof that the exchange is working.

"You can't just look at the numbers of shares traded through the Mila system," Phillips says. "You have to look at all the infrastructure and the supporting mechanisms around that have come to reality."

The Power of Brazil
One of the biggest factors in what will dictate the success or failure of Mila is BM&FBovespa. Latin America's largest exchange potentially holds a lot of power in deciding the fate of Mila.

In November, the Financial Times reported that BM&FBovespa plans to buy up to 15 percent of the four exchanges involved in Mila. The announcement came a month after BMV announced it would join Mila, adding a significant amount of power to the alliance.

"Now if I'm sitting in São Paulo, I'm thinking, I'm the big guy, but these guys that used to be a distant second or third are not so far off," Phillips says. "I think strategically, on the part of the BM&FBovespa complex, it's better to try and make friends than fight the trend of a collective alliance."

Regardless of what happens with Brazil, there is no denying the pieces are there from a technology standpoint. Phillips, who has worked in the region for a decade, says he's seen nearly all the exchanges improve their trading technology, post-trade capabilities and market surveillance over the years.

Phillips says things like quality of management, corporate governance and listing rules regarding standard transparency have also improved, as all the exchanges have shown they're tapped into the trends required to be a global market.

It's a necessary evolution for every growing exchange, as the ultimate goal is to increase trading volumes by pulling in nonlocal investors. Doing so, though, also exposes an exchange to firms trying to beat the system.

"You have to make sure that you put a yellow caution sign outside the market entry that says: You're welcome to come in and play in our market, but be careful. We're vigilant. We have state of the art surveillance systems. Come play by the rules. If not, preparete," as Phillips put it in the Spanish. "Be ready."

The Bottom Line

• The growth of Mila, now in its fourth year of existence, is a slow and steady process. Taxation and reaching out to more brokers remains one of the biggest issues going forward.

• Brazil, currently the largest exchange in Latin America, still holds a massive amount of power in how Mila will grow going forward.