|Edemir Pinto - Ready to buy|
The steps taken by the BM&FBovespa's CEO to transform it into a global stock exchange
He can't wait to launch the first attack. And he expects to do it sometime in the next 90 days. For BM&FBovespa CEO Edemir Pinto, acquiring a stock exchange will consecrate the exchange's partnership with the CME Group – the controller of the Chicago Mercantile Exchange – a partnership that became stronger last month. The Brazilian exchange expanded its stake in the American conglomerate from 1.5% to 5% and became its largest shareholder, in accordance with a project that's crystal-clear in Pinto's head. Side by side with the American company – "like a married couple", he says – he will go prospecting for exchanges in developing countries. As many of them put up barriers to acquisitions exceeding 20% of their equity (poison pills), the tactic of choice will be for the BM&FBovespa to buy 20% and the CME another 20%. This way, they can get shareholding control of other exchanges without a full-blown acquisition. And they'll plant their flags in the world map of capital markets, where the expectations are that there will be room for few. Very few. How many? "It's hard to pinpoint a number, but something between four and eight major regional liquidity centers", says Pinto.
The CEO reveals that he's already defined a target. Unfortunately, he won't reveal it to a journalist. His preference lies with Asia – "Everything's interesting there, people are dying to invest" – but that's not where the duet of exchanges will begin their ambitious acquisition program. It's not in the developed markets, either ("They're extremely competitive already"), nor Latin America, where their expansion strategy is different, involving partnerships ("It will take some time for them to accrue enough volume to justify an acquisition"). Ruling out the embryonic options of the Middle East, what's left by elimination are Africa and Eastern Europe. "Is that it, Edemir, are you going to buy in Africa?". He becomes evasive. Anxious to change the subject, he merely confirms, with a simple "yes", that the target is a mixed exchange – stocks and derivatives – with a poison pill in place. Period, no more hints.
Snapping up a deal in Africa doesn't seem like such a bad idea. The continent's leader – the Johannesburg Stock Exchange, in South Africa – is an integrated exchange (it has its own clearing house, the same model used by the BM&FBovespa), ranks 18th in the world (by market cap of listed companies), is a business partner of CME, is a mixed exchange, and presents strongly dispersed shareholding. According to its website, the largest stake in the JSE, 7.2%, is held by the Standard Bank of South Africa. With only 410 listed companies, it's currently a bargain compared to the prices it reached in 2007.
But for now, there are two concrete effects of the BM&FBovespa's increased stake in its American partner: a US$ 620 million investment and a director from the Brazilian exchange on the CME Group's board, to help make joint decisions on the next steps to take. The agreement also addresses the development of a new multi-market trading platform, jointly owned by the two exchanges and that may be commercially explored by both. The system will process trades in less than a millisecond and will serve the stock, derivatives, foreign exchange, private-sector fixed-income and government bond markets. "I have the intelligence from Globex (CME's system) in my hand, and I can do whatever I want with the information. And CME only agreed to it because we are now their partners, with 5%."
“LIGHT” POOLS — With that technology in his power, the BM&FBovespa CEO will bring to Brazil a lit-up version of the controversial "dark pools" – alternative platforms that popped up in the United States in recent years and have been criticized for their lack of transparency. Their name is explained by their allowing investors to buy and sell large amounts of stock anonymously and without affecting the stock's price in traditional markets. In Pinto's "tropicalized" version, the platform will be an alternative environment, using an organized OTC format, but inside the exchange. Anonymity will not be an option – "as this would go against the Exchange's spirit of transparency" – but major pension funds will be allowed to dispose of relevant shareholding positions without harming the market, for instance. "We'll create a barrier for anyone who wants to occupy that niche in Brazil", Pinto affirms. But won't that niche remain empty if the BM&FBovespa's dark pool isn't, well...dark? "That's true. But if foreigners come up and try to do that here, they won't have a clearinghouse, making things a lot harder for them."
PROTECTED MARKET —Having the country's only clearinghouse under his control is Pinto's greatest weapon to fend off the competition inside Brazil. Anyone wishing to plunge into Brazil's promising secondary securities market will first have to chat up the BM&FBovespa and procure its clearinghouse services. That player could even consider setting up another clearinghouse, but that would take a lot of time and a substantial investment. For Pinto, the only competition that matters is overseas, and he is working obstinately to defeat it as well. "China will be bigger than us in a lot of aspects, but not in the stock exchange segment, they won't", he asserts. On a piece of paper, he writes down in huge letters that BM&FBovespa (the company) is currently the third most valuable listed stock exchange in the world, behind only its partner CME and a contender, the Hong Kong Stock Exchange. "We'll be in second place by January 2012", he promises.
INTERNATIONAL RETAIL — Advancing faster than China and India is Pinto's obsession. And expanding the number of investors and listed companies seems to him the most simple and effective means to that end. His goal is to go from the current 556 thousand individual investors registered as of January to 5 million in five years. More investors attract more companies, leading toward his other aggressive goal: having 1.5 thousand listed companies in ten years, practically tripling the current number.
Multiplying the current investor base by ten means finding them both in Brazil and abroad. Domestically, the plan is to maintain all of the popularization programs created by the former Bovespa and add some initiatives on television – in addition to the programs already aired by the exchange on the Cultura and Futura channels, Pinto wants time on the Globo and Record networks – and the internet, with advanced simulations of stock operations. Even a frequent flier program is being envisaged, to guarantee investor loyalty. Looking overseas, the keyword is technology. "It'll be completely automatic", Pinto says. "Old ladies investing in the United States will be able to buy Petro and Vale shares from their own terminals, without having to calculate the exchange rate."
It's an ambitious project that puts a glint in Pinto's eyes. By the end of the year, he is promising to develop a new trading screen – which he calls a "book of offerings in dollars" – that will be user-friendly to individual investors from anywhere in the world and will come with the accompanying foreign exchange operation. How will those investors enter Brazil? Pinto guarantees that it won't be an issue. Everyone will enter with a CPF number (individual taxpayer identification) and without violating the Brazilian Central Bank's Resolution 2,689, which establishes a series of requirements for non-residents to invest in Brazil. "We are negotiating the necessary adjustments with the Central Bank and our proposal is being very well received."
With the problems of technology and entry into Brazil solved, Pinto wants to make his superscreen go global using a branched distribution network: The CME's 110 thousand terminals in five continents, plus those of Bloomberg, Reuters, and the order routing agreement with Nasdaq, signed near the end of last year. "We'll disseminate the exchange like 'margoso grass'‘", he comments, referring to a common herb in his home town, the city of São José do Rio Preto (SP). He has frequently been using this grass as a visual reference to represent the speed at which he dreams to see the BM&FBovespa spread out into the world.
BRAIN FOR THE SOUTHERN HEMISPHERE — Pinto is aware that his plans must extend beyond the Exchange, if he wants to achieve such widespread growth. He must gain ground in the political scene. For that, he has been working for over a year on a project to make Brazil a regional financial center, in a partnership with the Brazilian Association of Financial and Capital Market Entities (Anbima) and the federation of banks, the Febraban. By attracting South American and, later, African companies to issue bonds and stocks in Brazil, "we will be like London to Europe, Wall Street to America and Hong Kong to Asia", he declares.
The plan was initially called Omega and has now received the official name of Brain (Brasil, Investimento e Negócios, or Brazil, Investment and Business). It will be launched on March 25 in São Paulo, in an event attended by the Minister of Finance, Guido Mantega, and the president of Brazil's Central Bank, Henrique Meirelles. "A rise in business tourism will bring growth to the leisure, commerce and infrastructure segments, as happened in London. It's a public policy project." Upon its launch, the authors of Brain will present the entity incorporated to operate it, along with the Boston Consulting Group, the Lew Lara advertising agency, and a human resources company – all hired to help get the project on its feet. According to Pinto, they are seeking new partners because "a lot of money will be required" to make Brain happen. They've already managed to attract the Cetip - OTC Clearinghouse and now they're trying to convince the industry federations of the states of São Paulo and Rio de Janeiro (Fiesp and Firjan).
AN ENEMY CALLED ADR — The BM&FBovespa CEO's obsession with international expansion faces an enemy that he openly admits hating: depositary receipts traded in the United States, or ADRs. "I can't understand why Banco do Brasil is doing such a thing. That's bad for Brazil's image", Pinto complains, referring to BB's Level 1 ADR program launched last December. He believes Brazil already attracts much of the international visibility that issuers seek when they issue ADRs, and that visibility will tend to progressively increase. The only argument acknowledged by Pinto in favor of ADRs is an interest in attracting international retail. "When Roger (Agnelli, Vale CEO) told me that he was going to issue ADRs for that reason, I said: ‘okay, fine. Go ahead'." But Pinto is confident that his "margoso grass" project will soon annihilate that argument. And he's already putting another ace up his sleeve: he's going to negotiate a deal with the Hong Kong Exchange to allow stocks listed on the BM&FBovespa to be traded overseas while Brazilians asleep. "We'll offer our companies 24-hour trading, at no extra charge", he promises.
Pinto never loses an opportunity to pull the rug out from under ADR depositary banks. Last year, when he raised the Exchange's custody fees, he exempted foreign investors from the new rate if they invested directly in Brazil . Therefore, depositary banks that previously didn't even pass on the trifling cost of custody to their ADR investors would now incur an enormous extra expense. Estimates at the time revealed that the top three depositaries (Bank of New York Mellon, Citibank and J.P. Morgan) would have to foot a R$ 9 million bill. If they passed that cost on to their investors, their ADRs could become less attractive than trading directly in Brazil — exactly what Pinto wanted. However, the depositaries retaliated by canceling their contracts with the Brazilian Custody and Clearance Company (CBLC) and engaging the custody services offered by major banks. Was raising the custody rates so high worth it, Pinto? "No, it wasn't", the CEO concedes.
CHALLENGED TO CHANGE — The change in the custody rates caused him a lot of trouble. Not for the depositaries' outrage — after all, he's not too fond of ADRs anyway — but for the impact that the measure had on the market. "We communicated very badly at the time", he admits. It was a tough maneuver. In the role of a nonprofit, monopolistic company, the Bovespa was never concerned with making money from custody. It focused on its famously (and rightly) stratospheric transaction costs compared to the rest of the world. When it became demutualized and subject to competition after the Brazilian Securities and Exchange Commission (CVM) issued its Instruction 461, he saw that his pricing table wouldn't hold up. He urgently had to put a price on each provided service, both to make the transaction costs more competitive and to put a value on services provided by the CBLC, which could now be used even by a competitor.
But the price distortion was violent, as was the attempt to correct it. For instance, pension fund Previ – Brazil's largest institutional investor, with R$ 90 billion in equity investments – paid R$ 84 per year in maintenance fees, the same amount as an individual investor. When it saw it would have to start coughing up something like
R$ 1.6 million, it didn't think twice: it moved part of its positions to a custody agent (in this case, Banco do Brasil). Pinto negotiated, negotiated, and managed to bring Previ back into the CBLC. He slashed prices to half of what he had initially proposed. "The Exchange is doing well, the Ibovespa practically doubled in points, and that made me comfortable enough to renegotiate." He wants to release a new table with even lower prices in June. "We'll calculate an average of prices charged in the market and adjust everything accordingly. I have no interest whatsoever in making money off custody in the short term, only in redistributing the Exchange's revenues."
RETHINKING SELF-REGULATION — Adapting the BM&FBovespa to the role of a for-profit company is not easy, even when the subject is self-regulation. Regulating publicly-traded companies and being one at the same time is a delicate conflict. That's why Pinto believes that the Exchange should pull back from its role of corporate governance self-regulator. "The Exchange can't continue with all these rules. Many of them now have to be included in the Brazilian Companies Act or CVM regulations", he concludes, referring to the rules applicable to special governance-based listing tiers. "We're going to have a talk with the CVM and see what we can work out."
That's an idea for the future. His current priority is approving the ongoing Novo Mercado reform. But the future is what moves this CEO. After more than two decades of work — Pinto joined the BM&F in late 1985 —, he has been chosen to run the Exchange born from a merger between quasi-enemies (the Bovespa and the BM&F), with a vocation to take over the world. With his enthusiasm and passion for the idea, he may just pull it off.