After a decade-long isolation under the interventionist Fernandez’s administration, Argentina’s securities lending activity almost here at last

Under the current Macri presidency, drastic capital market boosting initiatives are being pushed through, including the long-awaited launch of a securities lending and short selling infrastructure. The service is expected to get the green light from the local National Securities Commission any time now, says Alejandro Berney, CEO of Caja de Valores, and there is a lot more to come.

As part of an ambitious reform package, designed to revamp the underutilised Argentinian capital market, the country’s current cabinet is determined to push through a reform package at the beginning of this year. One of its key elements is the withdrawal of the levy on closed mutual investments funds.

Hopes are high

Argentinian investors cannot only be upbeat about the planned elimination of the fund tax but there is a series of pro-market reforms to come in the Latin American country. PwC’s Argentina report, published in December 2017, outlines the further reforms that are set to modernise the capital market of the South-American country.

If the Argentinian Congress bows to the will of the cabinet, whose confidence was boosted by the electoral victory in November last year, private and international investments banks will be allowed to operate in Argentina from abroad. At the same time, in an attempt to overcome the interventionist approach of the former government and regulatory bodies, such as the National Securities Commission (CNV), their powers will be cut back.

According to Berney, the securities commission is set to have a limited power to “intervene in the affairs of publicly traded companies, including its veto power”, CNV will also have less authority in separating “the administrative bodies of publicly traded companies”. Barriers are also set to come down “on the issue of negotiable bonds by the board of directors of companies”.
The head of Argentina’s central securities depository (CSD) says: “Regarding regulatory activity, there is a bill in Congress, it has the approval of the lower house and we are waiting for the approval of the Congress. This new bill removes the authority of the local regulator to intervene the board of a listed company, this is important for the companies that want to raise capital through the capital market.”

Lending in Argentina

Berney notes that Argentina’s “securities lending programme has not been launched yet”. The framework of the programme has already gained the approval of the local regulator, Comisión Nacional de Valores (CNV). But the National Securities Commission has not given its consent to the Argentina stock exchange’s (BYMA) regulation on securities lending and short selling yet. Berney expects the CNV’s final blessing to the programme will be given in the last days of January or in the first days of February.

Argentina’s CSD head revealed that despite the pro-market moves, the National Securities Commission remained cautious on short selling and it intends to limit its negative impact. The local regulator “preferred an on-exchange programme with higher visibility and limits to on-loan amounts”.

Giving further insights into Argentina’s lending programme, Berney explains the country’s securities lending framework is based on the Brazilian model. “It is an on-exchange programme where the exchange as a central counterparty (CCP), by law in Argentina all the exchanges are obligated to have a CCP that guarantees all the loans”. This means “all the loans have to be traded in the exchange and BYMA is going to be the CCP to these loans. Every participant will be able either to bid or offer in BYMA´s trading platform”.

Further, each party “will have the opportunity to be a lender of their own securities and the investor who want to short sell is also going to be able to do it with a loan associated to the sale”.

Berney added: “This is important because no short selling is going to be allowed if it does not have a loan associated. The investor asking for the loan is going to be required to put collateral for 105 percent of the total amount of the operation.”

“This is going to be monitored by the exchange at all times so the short is always going to be covered. The guarantees will be provided by the broker-dealer, and will be deposited with the CCP, commingled with the collateral necessary for all of the activity that the broker has with the exchange.”

Moving on up

Main changes announced by the government are aimed to attract foreign investors into the isolated market and to gain the long-awaited MSCI benchmark equity index upgrade. According to the MSCI latest quarterly equity index, Argentina is still relegated to the less prestigious group of frontier markets, by sharing the status with countries like Bangladesh, Kenya, Romania
and Vietnam.

The failure in November to win back its status as an emerging market could be the main driver for Argentina to keep its financial market’s doors wide open to global investors and to take extra efforts, including introducing short selling.

Argentina found itself under the spotlight when news first appeared on the country’s upcoming securities lending rollout. After functioning in a decade-long isolation and under the strict control of the local regulatory authority, the country’s financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.

Commenting on the regulatory overhaul, the Berney says: “The local regulator understood that securities lending and short selling were those issues that would help to develop the local capital market, it was also one of the recommendations of MSCI for Argentina to be included in the emerging markets index.”

Berney explains: “Short selling will provide the market more transparency, allowing to incorporate bearish expectation to the prices. Subsequently, the price discovery of the securities will be more accurate.”

The grass is always greener

Berney also disclosed, besides the framework of securities lending and short selling, that Argentina has also used their neighbours’ established model on “incorporating market makers for their products”. Currently, the Argentinian exchange BYMA is also working on the introduction of “a new segment for companies with higher corporate governance standards”.

The initiative is similar to Novo Mercado in Brazil that was released in 2000. The listing segment of the Brazilian stock exchange, B3, formerly known as BM&F Bovespa, is required by investors to new initial public offerings. The Novo Mercado lays down, among other things, that listed companies in this segment can issue only common voting shares.

Argentina’s securities lending programme is not only based on the Brazilian model, but also the expectations around the lending volume is similar. Berney estimates that the Argentinian market can achieve 3 percent of the market cap, which is the lending programme in Brazil. Nevertheless, he warns against the temptation to “think no less than three years” into the future. “Since this is a new programme, we cannot be certain of the volume we can reach,” he adds.

Any time now, the short-selling ban will be the past in Argentina and the barriers stretch all the way around the Argentinian financial market border are about to come down.

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