With listings, market capitalisation and liquidity in Mexico far below what would be expected in an economy of its size and development, financial market services firm Central de Corretajes (CENCOR) spotted a market opportunity and has been working to set up a second bourse to operate alongside the long-established Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV). Since 2013, CENCOR has been in close consultation with the regulator, the National Securities and Banking Commission (Comisión Nacional Bancaria y de Valores, CNBV), as well private sector players, with a view to launching the Institutional Stock Exchange (Bolsa Institucional de Valores, BIVA) in mid-2017. CENCOR applied to the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP) for a concession to run the second market in 2015.
Regulator At Work
CNBV’s regulatory preparations are well advanced, with rules for the operation of the new exchange expected to be published in the first half of 2017, after which the SHCP will be in a position to give the venture a green light. The new regulatory architecture requires the amendment of five circulars and the publication of a new one, including one on broker-dealer activity. It is anticipated that firms will be able to have parallel listings on both the BMV and BIVA, although there would only be reporting requirements for the market on which a firm has its primary listing. Santiago Urquiza, chairman of CENCOR, told OBG, “BIVA´s primary goal is to contribute to the growth of the Mexican stock market. We are projecting that the market will grow by around 50% in average daily volume in three years and by some 30% in the number of listed companies in the same period. In 13 of the 14 countries larger than Mexico, measured by GDP, there is more than one stock exchange, showing that competition amongst exchanges is the new normal.”
There are expectations for new listings of medium-sized firms with smaller issuances, as well as for companies outside the three centres of Mexico City, Monterrey and Guadalajara. Competition is also expected to stimulate service improvements and possibly cost reductions for listed companies, thereby increasing the attractiveness for firms going public. Rather than competing primarily on price, the BIVA is seeking a competitive edge through high standards of service provision. For example, the BIVA will rely on NASDAQ’s systems for trading, clearing and listing services, and on First Derivatives for data management. These partnerships are already well established, with testing of the infrastructure ongoing since mid-2016. Moreover, more efficient and transparent price discovery is foreseen, given that closing prices on the BIVA are to be determined via auctions.
The financial viability of the BIVA as an entity will not be initially dependent on attracting new listings, since it expects that most of its revenues will be derived from over-the-counter trading in listed debt. To ensure it has sufficient financing, CENCOR agreed in September 2016 to a MXN450m ($27.1m) line of capital with Latin Idea Ventures Capital, a private equity firm, that can be called on in case of need. In addition to the significant funds the firm has already invested in the project, CENCOR expects this will be enough to see the BIVA come to fruition, even in the case of adverse scenarios.
Once all the necessary regulatory hurdles have been cleared, the BIVA will need to not only to convince firms currently listed on the BMV to seek a parallel listing on the new market, but also to bring new firms to the market. The BIVA will still face challenges similar to those of the BMV in terms of overcoming a Mexican corporate culture that is often hesitant to seek a public listing, and the reporting and governance requirements that go with it. Gustavo Lozano, country manager of global asset management firm Pioneer Investments, told OBG, “There needs to be a fundamental change in the way family companies are governed. They tend to be bureaucratic, and need to be modernised by streamlining corporate governance.”