E-Forex Regional Perspective Latam

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In many ways Mexico is the role model. TeMexican peso is now the ourteenth most tradedcurrency, according to the most recent Bank or

International Settlements riennial Central BankSurvey. Its share o average daily turnover in globaloreign exchange markets in April 2010 stood at1.3%, so while it is ar rom being a major currency,it does register alongside the Norwegian krone

and ahead o the Indian rupee, Russian rouble andChinese renminbi. Mexico leads the Latin Americanpack, and is the biggest o the big ve ollowed byBrazil, Chile, Colombia and Peru. Mexico leads notonly in terms o size o turnover, but as a countrythat over the last three decades has been through the

mill o indebtedness, deault and rehabilitation withthe most developed nations nancial communityand then ull currency liberalisation with

membership o the wealthier countriesclub, the Organisation o Economic

Co-operation and Development(OECD). It is a path that other

Latin countries have yet toollow to its end.

Lessons rom Mexico

Mexicos presence withinthe North American Free

rade Association (NAFA)denitely opened things up,

explains Simon Jones head o FX

e-trading at Citi. We treat Mexicojust as we would treat Swiss rancs orsterling.

Mexico is in many ways a developedcentre. I dont think we can call Mexico an

emerging market anymore, says Matt OHara,senior vice president and global head o business

operations at Tomson Reuters. Its an emerged anddeveloped centre. Tey have been aster adopters otechnology in order to enable their connectivity andinternationalisation. Tomson Reuters worked withthe Mexican authorities to help them meet theirinternationalisation goals. We helped them do that

with our matching service, our interbank electronicbrokerage platorm, which i you ast-orward to thepresent day is now seeing a signicant amount o

global liquidity. We are considered to be the primarypool o liquidity and the reerence rate or theMexican peso. Around 80% o all Mexican volume istraded outside Mexico which shows the power o theorex market when a domestic community that waspreviously closed, opens up and connects to the globalmarket place. It has grown hugely and is signicantlytraded in places like London and New York.

Tat said, even in Mexico, local regulations can seemcumbersome i you are used to market conditions inEurope or the US. For this reason, says Michael Bernal,sales director or Latin America at FXall, multibank

platorms have additional appeal. It is not only ortransparency and pricing that multibank platorms areused, but also or their pre- and post-trade executioncapabilities with end-to-end processing and connectivityto corporate treasury management systems. Tisenables them to reduce or eliminate manual interace

in the processing o the transactions. For example theknow your customer regulations in Mexico are quitedierent than they are in the US. You actually have tovisit the customer at their place o business as part othe process Tis is a theme that recurs again and again

when you examine orex trading conditions throughoutthe LAAM region.

Brazil

I Mexico is the role model, it is Brazil that thoseinside the Latin American theatre and in nancialmarkets worldwide are watching most attentively.

Te size o its economy, the power o its wealthgeneration capacity, its rich reserves o naturalresources and agricultural production and its boominginternational trade relations, particularly with China,point to a market that oers massive opportunities ororeign exchange trading. Tat the bulk o this will in

Regional e-FX

perspective on

Regional e-FX perspective on Latin America

Global trade, local politics and regulation are theactors that most infuence electronic oreign

exchange trading in Latin America, while south othe US border the market is as rich and diverseas the countries that comprise the region.

Richard Willsher

LatinAmerica

Mexicos presence within the North AmericanFree rade Association (NAFA) denitely openedthings up. We treat Mexico just as we would treat

Swiss rancs or sterling.

Simon Jones


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Regional -FX PeRsPective

turn migrate to electronic transacting seems inevitableand indeed the only practical way orward that caneciently handle demand. However, the Brazilianmonetary authorities are ully alive to the risks theyace in what they term currency wars.

Brazil is cautious because o the demand or infowo capital, says FXalls Michael Bernal. Brazil doesnot want the Real to appreciate so much that thecurrency becomes too strong. Over the next ve toten years regulation will slowly change to allow Brazilsown internal market to trade more reely but in themeantime regulation is protecting the economy romoverheating.

Which is by no means the same thing as saying theyare not open to ideas and progressive in their adoptiono technology.

Both Brazil and Chile are set to see urther growthin the use o electronic trading systems because theseare countries where volumes are growing at very astpace, according to Ernesto Semedo, Sales Manager

LAAM 360 T d ti t h l i

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O th t pl d p t l l

Debra Lodge


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Citis Simon Jones notes that while the Chilean pesois generally traded in the orm o non-deliverableorwards, he adds that Chile would be a great casestudy o a Latin America country i it opened itsmarkets up or deliverability. I and when Chilean,and indeed Brazilian currencies will become ullydeliverable is a moot point. But the consensus doesseem to be driving towards greater openness and lessregulation in due course.

Colombia and Peru

Both smaller in terms o potential market, Colombiaand Peru are ollowing a similar path to Chile in

terms o their commodity-dependent economiesand currency pursuing an internationalising agenda.Interestingly as Tomson Reuters Matt OHara pointsout, these markets already have a regulatory regime

which, when viewed positively, are ahead o marketsin Europe and United States. Latin America is inmany ways ahead o the game when it comes to theinrastructure and connectivity and the regulations,he explains. Tere is an OC spot market which is

then cleared through the local exchanges in Chile andColombia or example, and they are registered to thesuperintendencias, their regulators. Te same is true in

Argentina as well.

He adds that there has been a good deal o work donein countries like Colombia and Chile to overhaul theirregulatory regimes such that their ability to embracetechnological change and move towards open andtransparent international trading in their currencies

when appropriate, will be well advanced.

Meanwhile, although Peru may be urther behindthe curve than some o its bigger neighbours, itsprospects look encouraging. Peru presents an excitingopportunity or the uture or eFX channels, saysHSBCs Debra Lodge. A dual currency economy(USD and PEN), and as o 2011, one o the astestgrowing economies in the world, Peru remains oneo the largest commodities producers and exporters,attracting investment rom numerous multinationalcorporations.

Drivers and products

History plays an important role in understandingLatin American countries attitudes towards theircurrencies and to liberalising the markets in them.Tere is not a country in the region that has not atsome stage over the last three decades or so experiencedboom and bust. Boom in commodity prices; boom inoreign investment; boom in currency infows and theeuphoria associated with each o these. However, thesame countries have experienced political turbulence,commodity price collapse, over-indebtedness driven byinternational banks, corruption and exodus o fightcapital. Te way in which Latin American currencies areregulated today in all the signicant countries, with theexception o Mexico, needs to be viewed through thislens. Countries like Brazil, Chile and Colombia but also

Argentina and Venezuela, wish to be masters o theirown destinies rather than slaves o the international

markets. Only their methods o going about it and theirpolitical motivations may dier.

Having said this, the regions most successul economiesare dependent on primary industries o mining, oils andgas, and agriculture and livestock arming to generateoreign currency revenues. Hence the most importantdriver or oreign exchange trading is real trade.A large part o the commercial FX market in

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LAAM is driven by imports and exports, explainsHSBCs Debra Lodge, and having a good standingrelationship with a bank is one o the determiningactors or transacting business.

Spot and limited maturity orward transactions meetthe needs o most businesses. On the whole there isrelatively little speculative oreign exchange trading though there is some, o which more later.

Clients in Latin America use the same set o thingsclients in North America or Europe use, explainsCaio Blasco, Deutsche Banks director o LAAMe-commerce sales based in Sao Paolo. However, e-FXin the region is still some steps behind as clients arelearning about algorithmic execution. Usually, whatdierentiates them is the number o currencies theytrade, with the caveat that most currencies traded inLAAM are restricted by nature (BRL, CLP, COP, etc).

Banks such as Deutsche, Citi and HSBC, but alsoother platorm providers have combined their abilityto provide rst voice but then electronic platorms

with the ability to provide the administration that is

generated by the need to meet local exchange controlrestrictions.

Citis Al Saeed is project manager or their crossasset and research portal Velocity. o execute anFX transaction in these countries involves an entire

workfow. Tere may be heaps o documentation toprocess and approve and very ew people do that.Our corporate platorm, FX Pulse, automates all othe regulatory requirements or places like Brazil. Youhave to describe whether the underlying trade is animport or an export, theres tax to be calculated. Itsthe same in Colombia where there is a tax calculationo every FX transaction. In Argentina there is an entire

workfow or collecting documentation, making sureeverything is in order, that the FX transaction is othe back o genuine trade rather than speculation

beore its approved.FXalls Michael Bernal agrees with the premise o theimportance o value added beyond acilitating trading.Weve ound that corporates have been driven to ourplatorms by our automated processing which eliminatesthe need to send axes, phone or e-mail conrmations.Instead conrmation is sent rom the bank via SWIFs

messaging to the corporation. Tis means that paymentsare made automatically.

Against a background o the regulatory need or orextransactions to be linked to real trade fows, it is notsurprising that the range o instruments beyond spotand orwards are relatively undeveloped. Consequently,NDF products have grown up oshore. ICAP orexample oers NDFs in ARS, BRL, CLP, COP andPEN and Tomson Reuters has supported the largestcommunity o Latam and Global NDF traders onits Dealing platorm sinceNDFs were rst introducedto the market. But this is by

no means the whole storyas Tomson Reuters MattOHara explains.

Te oreign exchange marketin Brazil, or example, grewas a utures market, primarily


Latin America is in many ways ahead o thegame when it comes to the inrastructure andconnectivity and the regulations,

Matt OHara

o execute an FX transaction in these countries involves

an entire workfow. Tere may be heaps o documentationto process and approve and very ew people do that.

Al Saeed


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traded on the BM&F market. Tere is a domestic spotmarket and we see that growing, but the majority o theliquidity is in the utures market just as there is liquidityin the NDF market oshore. So there are domesticcapabilities in Brazil that work very well and electronicin nature. Ten in Chile there are domestic tradingplatorms that are or the domestic spot market whichhave relationships with the local bolsas or exchanges.

We will look at regulatory issues in more detaillater, but there are two other important areas thatare in growth phase as ar as electronic capabilitiesare concerned. Te rst is in speculative money andsecond is in retail. Tese are both emerging marketsin their own right.

Prime brokerage and hedge unds

Tere is not a lot o movement in the G10 space atthe moment, says Citis Simon Jones. Tere has beencentral bank guidance in CHF and JPY, EUR / USDhas hovered either side o 1.30 all year, threateningmuch but delivering little. For a long while nowour customers have been looking or other areas ointerest. Brazil, Chile, Colombia and Peru to someextent, while among the deliverables, Mexico is our

biggest pair in the emerging market space. Temajority o the market is Asset Driven or Speculativefow with spot and orwards against the dollaraccounting or the bulk o it.

He goes on to add that where such fows areprovided by hedge unds they are accustomed tousing electronic trading platorms and expect themto be available where Latin American currencies areconcerned.

FXalls Michael Bernal sees developments in the prime

brokerage area. On the prime brokerage side we aredenitely seeing more high requency traders (HF)using prime brokers or liquidity and credit purposes.

We are also seeing a very careul selection process withregards to who HFs are using or prime brokerage asthey tend to concentrate their exposures with only oneor two institutions. Tere has been a strong growth inPB business in LAAM over the last couple o years,oered by the 5 10 major US and global institutions

with a strong presence in LAAM.

We currently have a number o LAAM hedgeunds based mainly in Rio de Janeiro, So Paulo andSantiago trading FX through our platorm, says

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Deutsches Caio Blasco. We are experiencing decentgrowth rom those clients as it is a new asset class inthis region. In the HF space, there are ew players,as the restricted nature o their main currencies makeHF challenging. At the same time we believe thatprime brokerage is generally still under used in the

region. Te cross margin ability and netting acilitiesthat an FX prime broker can oer clients can makeexecution much smoother while requiring ewermargin allocated to dierent banks.

Tis view is corroborated by Joseph Conlan GlobalHead o Sales at New York-based FC Stone LLC

which provides clients with trading and executionservices in a range o asset classes. Prime brokerageis just gaining traction in the region, allowingparticipants to trade on the best rates market-wide,as opposed to being captive clients. HF and algotrading will have an impact as more participantsmigrate to open markets and dark pools.

Debra Lodge also notes that prime brokerage is

signicant growth area or HSBC, Prime Brokerageservices are beginning to emerge in Brazil, and weexpect this business to become more prevalent withthe local hedge und community in the near uture.HSBC is a large organisation with deep capabilitiesin a lot o geographies and products, we aim to beready with such products as and when these emerging


markets dictate. Her colleague Jacqueline Liau globalhead o FX prime product and service adds, We arealready live and servicing clients in Brazil with ourFX prime brokerage platorm and continue to expandour base. Local knowledge has been paramount toensuring our tools and technology are adequate orthis market.

Retail FX

I the smart money is just beginning to show aninterest in LAAM and accessing it by electronic

means, it is not surprising that the retail market seemsto be relatively undeveloped as yet. Tis is also amarket that brings with it some complexities.

In much o Latin America the retail FX marketis ed by remittances o emigrants, tourism and,

You see relaxation o regulations in Brazil, then you see

an increase in regulation in Argentina and Venezuela.Even in Mexico there are some regulations that are being

placed on unds or nancial reporting purposes.

Michael Bernal

Prime brokerage is just gaining traction in the region,allowing participants to trade on the best rates market-wide, as opposed to being captive clients. HF and algo

trading will have an impact as more participants migrateto open markets and dark pools.

Joe Conlan

..we believe that prime brokerage is generally still underused in the region. Te cross margin ability and nettingacilities that an FX prime broker can oer clients canmake execution much smoother while requiring ewer

margin allocated to dierent banks.

Caio Blasco


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when this will happen is very dicult. You aredenitely seeing steps in Brazil and China to pavethe way or the day when their currencies becomedeliverable as in Mexico, the United States and theUnited Kingdom etc.

However, the process need not be that traumatic orLAAM countries. Tere are many opportunities orcooperation in Latin America, says od van Name,global head o FX Products, Bloomberg LP, includinga new regional exchange created by the integrationo the exchanges o Chile, Colombia and Peru into asingle marketplace called MILA (Mercado IntegradoLatino Americano). Te Bolsa de Santiago (Chile) isalso speaking with Brazils BMF Bovespa about sharingtechnology. From an interbank perspective, manyLAAM countries already trade spot over interbankexchange platorms. Eventually as the markets growhere there will be room to expand to NDFs, uturesand options. It remains to be seen i this will be donevia an exchange or over the counter.

One encouraging actor is that most technologyproviders seem condent that the communicationsinrastructure is suciently developed throughout themajor LAAM markets to enable increasingly rapiddevelopment e-trading o orex.

Regional e-FX perspective on Latin AmericaRegional -FX PeRsPective

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has resuraced some ears among the most importanteconomies, that could set back the path towards aliberalization o the FX market.

FXalls Michael Bernal sees a divergence o regulation,with some countries loosening controls while othersare becoming more stringent. You see relaxationo regulations in Brazil, then you see an increasein regulation in Argentina and Venezuela. Even in

Mexico there are some regulations that are beingplaced on unds or nancial reporting purposes. Teposition reporting carried out in the US or in Europeis now being emulated in LAAM. Tis type oregulation is more o an accumulation o inormationo the nancial risks that a countrys institutions areacing. In places such as Argentina and Venezuelaregulation exists or purposes o expropriation andgovernment control. Tis sort o regulation is likely toimpact capital fows.

Te use o electronic trading platorms and capabilitiesis increasing in response to such regulation as well tocustomer demand. Greater compliance and reporting

demands more ecient connection rom ront to backoce using up-to-date electronic tools.

However, in some ways the development o reportingrequirements in Mexico and the move towards greatermarket transparency is waiting on the more developed

markets to provide a lead. Tis is surely comingaccording to Tomson Reuters Matt OHara. Shortterm I think the local market has to understand andprepare or the changes that are inevitably coming inthe uture. None o us know when these changes aregoing to happen or what exactly they will contain.But weve got a pretty good idea o what is going tohappen around certain OC derivative instruments.Te paradigm is going to change. And with LAAMthey trade with the regions and jurisdictions that aregoing to be impacted by these new regulations and sothey need to be ready or that.

Tis also impacts the rate o innovation in the regionas a whole. Te market has had to spend a lot o timeand money, resources and investment on making surethat they can continue to operate and comply with

the new regulations, OHara continues. Tat meansthat the balance o innovations, especially aroundproprietary trading platorms, macro-based electronictrading platorms has had to slow down to make surethey can be compliant. Tats something that the localmarket absolutely has to understand and be workingon. Teres a lot more education and awareness aroundand regulatory compliance to make sure that theyreready. Long term, when these regulations actually comein there are certain instruments that we believe andthe market understands are going to be caught up inthese regulations. NDFs or example. Tat is a primarytrading instrument and hedging tool or LAAM. INDFs have to be traded in a dierent way in order tomeet these regulations then this is something that thelocal market needs to be preparing or.

Price transparency

Citis Simon Jones says bodies o regulation such as,Dodd Frank and MiFID that aect developing worldcurrencies, as well as various localised regulations thatare coming rom Asia, will lead to price transparencythat we havent seen in LAAM beore. He says,Tis will open up the market or more hedge undinvolvement and will give price transparency to thecorporate and real money community that will begood or business. Tis will happen in the next 6-18months. Ultimately the liberalisation o currencies inthe BRICS or elsewhere is an inevitability. Knowing

From an interbank perspective, many LAAMcountries already trade spot over interbank exchangeplatorms. Eventually as the markets grow here therewill be room to expand to NDFs, utures and options.

It remains to be seen i this will be done via anexchange or over the counter.

Tod Van Name

Conclusion

Regulatory changes or not, clients throughoutthe region are beginning to warm up to the idea ousing eFX channels to transact business, concludesHSBCs Debra Lodge. ailoring, but not necessarilypersonalisation, is the name o the game, we have to

be able to support clients in a way they like to tradeand the way the market moves, this is certain ly not a -one size ts all type exercise.

Te outstanding questions acing electronic FXtrading in the region are very much those acing itin other regions o the world, including the majordeveloped centres: what will regulation look like oncethe politicians and regulators have put the nishingtouches to it? Secondly, when will new rules be put inplace?

Layer on top o this the history, traditions andrequirements o local economic management and theLAAM picture is ull o hope and opportunity whilecautiously reaching out to the rest o the global FXelectronic trading community. All market participants we

spoke to were ull o optimism or the promise that theregion oers or e-trading both or them and their clients.

Both Brazil and Chile are set to see urther growth in

the use o electronic trading systems because these arecountries where volumes are growing at very ast pace,

Ernesto Semedo

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E-Forex Regional Perspective Latam