Latin America: Short of the goal in football and financial markets?

July 10, 2014

Latin America is home to expanding economies and football powerhouses, but remains underdeveloped in its capital markets compared to Asian emerging markets and certainly to developed countries. Capital markets across the region are still particularly restricted in a few areas. 

For example, short selling is unfeasible in many Latin American countries. From rules that prevent the non-delivery of stocks at settlement to those that allow short selling of only the most liquid securities, countries are often concerned with preventing leveraged speculation where market liquidity is structurally low.

Another underdeveloped area is domestic derivatives markets. While interest rate futures, currency futures, and equity options are becoming more popular, outside of Brazil’s BM&FBOVESPA many exchanges remain quite small and trading volumes low.

Also, securities lending is restricted. For example, securities lending in Brazil is limited to equities, and investor demand for fixed-income products outstrips available supply, leading to the creation of synthetic derivatives. Also in the past, global lenders bypassed Latin American securities lending markets. Global custodians who were accustomed to managing their own collateral pools balked at central counterparties taking control of collateral out of their hands.

If the countries can focus on fixing these weaknesses, the plausible gains would include improved exchange infrastructure and lower transaction costs, which could widen the flow of funding and investment.

View interactive chart.