Brazil delivers clearing blow to BATS

Brazil’s national exchange operator has said it will not share its vital clearing service with newcomers, dealing a huge blow to US rival BATS and other potential competitors hoping to break into the country’s fast-growing market,

BATS has looked to Brazil as growth slows across developed markets, working on the assumption that it is possible to set up a trading platform and pay BM&FBovespa to use the country’s existing clearing houses.

However, although recent legislation now permits BM&FBovespa to sell its services to third parties, Edemir Pinto, the head of the exchange, told the Financial Times he has no plans to do so, in a surprise move that effectively closes the door to competitors and will help to protect the company’s monopoly over Latin America’s main trading hub.

“If someone comes to me and asks to use our services, I won’t be able to help. They will have to construct their own complete exchange,” Mr Pinto said. “I have to prioritise the needs of the domestic market and I have to prioritise the technological improvement of our own systems,” he said.

For BATS, which in February announced plans to create a new Brazilian stock exchange, this means the only option now is to set up their own clearing house – a hugely costly and time-consuming process.

BATS is already facing delays in its planned $300m takeover of Chi-X Europe, Europe’s largest share trading venue by market share, which it also announced in February but has yet to complete.

Over the past year, a series of the world’s biggest exchange operators have signed cross-border deals as part of an unprecedented wave of consolidation in the sector.

However, many have since collapsed due to competition hurdles and nationalist opposition in the countries of the target exchanges.

In Brazil, BATS could bring in a foreign clearing house such as UK-based LCH Clearnet as a partner, but even then the group would encounter severe operational difficulties and resistance from regulators, analysts said.

“It’s very complex operationally speaking [to set up a clearing house] because all trades in Brazil are cleared at the final beneficiary level, not at the broker level. This means identifying hundreds of thousands of individual investors,” said Henrique Caldeira, an analyst at Barclays Capital in São Paulo.

Unlike in other countries, investors in Brazil can only post collateral in their own individual name – a market safeguard but a logistic nightmare for clearing houses.

“The only option really is for BATS to use BM&FBovespa’s clearing services,” he said.

However, BM&FBovespa’s Mr Pinto was resolute; adding that he also planned to see off competition from Direct Edge, another US exchange operator which he said had shown interest in coming to Brazil.

“They are very welcome to come here, but it’s going to be hard for them,” he said.