Introducing competition into the capital market in Brazil? A cost–benefit analysis
Having grown rapidly over the past ten years, the Brazilian stock market is now close to the scale of the stock markets in Australia and some European countries such as Italy and Germany where competition has been introduced. The report concludes that:
- In principle, there is scope for multiple trading platforms in the Brazilian market, particularly if the growth of the Brazilian economy continues.
- However, with the possible exception of Australia, new entry that has achieved the level of market share that would be required to break even in a market of Brazil’s current size has been characterised by venues catering for a relatively specialised section of total trading. Typically, these trading venues are dark pools, crossing networks or similar, rather than reproducing the full characteristics of a typical regulated exchange. Such specialised trading has also developed in jurisdictions which have not got in place specific transparency requirements which exist in Brazil. The Oxera study takes into account the specific features of the Brazilian regulatory regime such as the beneficiary ownership model and the specific transparency requirements which prevents the use of crossing networks and dark trading pools.
- Assessing the benefits and costs of changing the competitive structure is far from straightforward—trading and post-trading are intermediary goods and therefore one should look at the benefits to the end-investors rather than intermediaries;
- Oxera’s analysis of the available evidence suggests that trading and post-trading fees in Brazil are higher but at the same time not significantly out of line with the fees charged in financial centres where competition has been introduced in particular when the scale of operations in Brazil and the main differences in the types of service provided are taken into account;
- introducing competition can potentially result in benefits to end-investors in terms of lower fees for trading and post-trading services and the introduction of new services. The impact on liquidity may be neutral or positive. It can also have a positive impact on the wider economy through reducing the cost of capital for listed companies and therefore stimulating investment;
- introducing competition is also likely to result in costs, for example for the brokers, the regulator and infrastructure providers. Overall, the cost-benefit-analysis suggests that at this point in time benefits may or may not yet outweigh costs. However, should the Brazilian market continue to grow significantly, it is expected that the benefits of introducing competition may outweigh the costs, and therefore it is important that consideration is given to options available to policy makers to ensure that such competition is designed to achieve better outcomes for end users;
- the Oxera study concludes that maintaining the status quo is not an option for Comissão de Valores Mobiliários (CVM), the securities and exchange commission of Brazil. BM&FBovespa would be likely to continue as the monopoly provider of services in Brazil, because entry by either a trading platform on its own or a trading platform with a linked central counterparty (CCP) would be difficult, if not impossible, without the cooperation of Companhia Brasileira de Liquidação e Custódia (CBLC) at either the CCP level or the central securities depository (CSD) level.
- the Oxera study evaluates a number of regulatory options and proposes a three-pronged approach that focuses on creating the pre-conditions for introducing competition thereby allowing for a managed transition:
- self-imposed price monitoring and benchmarking by the incumbent and developing a new regulatory regime to support entry, at either the trading platform or CCP level, is likely to take considerable time and effort. Putting in place a price monitoring and benchmarking regime would take far less time and would encourage more monitoring by investors and brokers. It could also improve the contestability of the market, by making clearer the incumbent’s costs of providing the services and therefore the potential economic space for an entrant to provide specific services;
- creating the pre-conditions for access to the (new multi-asset class) CCP. Options for entry by a trading platform with a linked CCP should be considered but there remains a high degree of uncertainty about the feasibility of entry of this kind. Therefore, other regulatory options such as giving access to the incumbent CCP need to be considered;
- developing market supervision and regulation. Over the next few years, the Brazilian market is likely to experience further growth, which may make the prospects for competition more real and concrete. In preparation for future competition, it would be advisable for the regulator to begin to consider the additional regulations that are likely to be required to ensure a well-functioning market given the introduction of competition.
Competition is not a goal in itself but a means to an end: improving market outcomes for end-investors. In developing the timetable for a managed transition to a more competitive structure, the regulators would need to look at a number of different dimensions, such as the benefits in terms of lower fees but also the potential risks in terms of impact on market stability. Carefully managed evolution of the regulatory framework will be required to realise the benefits of competition.
The Securities and Exchange Commission of Brazil will hold organise a consultation process where market participants will be invited to give their views.
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