Calypso intelligence editor looks at how new regulatory realities impact Chile and Mexico

Although the spotlight is often focused on the US and European new paradigms, Latin American regulators have also been capturing the headlines. This is particularly true in Chile and Mexico where reforms are altering the derivative and energy sector landscapes.

For example, Chile is hoping to make its mark with ComDer, its new central clearing counterparty (CCP). The aim is not to rival Brazil’s BM&F Bovespa, the world’s fifth largest derivatives exchange and the dominant regional player but to capture as much as 80% of the Chilean market when it launches.

Historically, the country’s derivative market is almost exclusively over the counter (OTC) and although volumes have risen over the past few years, the level of sophistication has remained static, according to a report last year by the Central Bank of Chile. The majority of derivatives traded are interest rate swaps and non-deliverable forwards (NDFs) with commercial banks being the most active. They account for a 61% of the market share while pension funds comprise around 19%.

The creation of ComDer, which has 17 banks participating, is in response to the G20 mandated recommendations and standardization for OTC derivatives. The platform which will offer innovation, affirmation, registration, limits, initial and variation margins, collateral management and default management, will also act as a trade repository. It also expects to be certified by the US Commodity Futures Trading Commission as a derivative clearing organization. The aim is to begin clearing NDFs in the fourth quarter of 2014 and interest rate derivatives (IRD) in the first quarter of 2015.

“We had spent two years conducting a feasibility study over the creation of a CCP for the OTC derivatives market,” says ComDer CEO Felipe Ledermann. “We decided that Chile needed a CCP that was not only aligned with BIS-IOSCO principles for market infrastructures but also equivalent to Dodd-Frank and the European Market Infrastructure Regulation because we have foreign banks operating in the country. Overall, the regulations have forced banks to redefine their business models and move from bi-lateral to multilateral trading with a CCP and we realized that we needed to provide a service to clients that was not needed in the past.

Also, when we looked at the capital requirements that could be reduced and the potential for the market, all the variables made sense. At the moment the outstanding notional trades in Chile is $250 bn which is large in terms of the size of the country but also gives us plenty of room to increase transactions.”

As with any project starting from scratch there were technological challenges. The biggest hurdles, according to Ledermann were moving from batch to online processing in terms of collateral management, confirmation, affirmation and trade reporting. “We chose Calypso Technology because it was able to provide all three components – confirmation, clearing and trade reporting – which reduced the risk and cost from having to use different providers.”

Daniel Subelman, Head of Capital Markets for Banco Penta, also sees the CCP as an important milestone in the country’s financial services landscape. “Although the main users of ComDer will be the banks, and interest rate futures and NDFs will be the first products it is only the first step. Implementation of the technology can be painful though and it is important to have a strong risk management system that can handle different market technology, contracts and agreements at the same time as complying with international standards. The reason why Calypso was chosen was because it is a global firm, with world class technology and best practices but at the same time can speak the ‘local language’ and understands local complexities.”

Banco Penta, which also selected Calypso for its platform, is an investment bank which has undertaken an aggressive five year expansion plan. Last May the bank carried out its first-ever bond issue when it placed US$97 m worth of debt domestically and this was followed in December by an almost doubling of its capital base to 224 bn pesos (US$423 m) from 114 bn pesos. The main areas of focus are building its interest rate and FX derivatives business as well as strengthening its commercial lending, private banking, corporate finance and treasury operations.

While economic growth in Chile has attracted global banks, the leading banks in the country are homegrown. The top five include Banco Santander Chile, Banco Estado, Banco de Chile, Banco de Credito e Inversiones and Banco Bilbao Vizcaya Argentaria Chile. Competition is tough although the market is segmented. “The vast majority of Chilean banks have become major corporations spanning across all market segments and covering all sorts of products. But in order to cover all commercial segments with a diverse range of products nationwide, they understandably became more complex organizations. This context has created new opportunities for niche banks,” says Subelman. “Top tier corporates such as Codelco, however, will turn to the international investment banks like JP Morgan while our main area of focus is the level below. The foreign investment banks are not in this space and we believe we are best placed to compete in this market.”

Chile is not the country moving ahead with G20 and other reforms. Mexican authorities are also developing new derivatives rules in line with international standards, which aim to boost transparency and limit risk. Late last year, the Bolsa Mexicana de Valores started talks with five local brokers to use the Mercado Mexicano de Derivados (MexDer) as a local version of a US swap execution facility. The aim is to not only enable them to comply with Dodd-Frank but also to prevent market liquidity draining to their North American neighbor. They want to protect the Mexican OTC market which has grown rapidly since the 1994 financial crisis and trades a notional value of about $10 bn a day, according to industry statistics.

Although derivatives are high on the agenda, it is not the only legislation on the radar screens. In fact, Juan Garrido, Head of Global Banking and Markets Mexico of Santander believes that the new energy rules, introduced last year by President Enrique Peña Nieto, are in fact top of mind of most banks. “It has been a long and drawn out process but in July, it looked like the shackles of state ownership would finally be loosened. Senate members approved key bills govern the new-look hydrocarbons sector, as well as the energy sector and the state utility, CFE, and oil company, Pemex, both of which will lose their monopolies.

The approved laws also regulate the management, functioning, operation, control, and evaluation of the two firms and their affiliates, as well as their salary structures, hiring policy and their evaluation of employee performance.

The hope is that this will translate into greater investment, lower electricity bills and state companies that are run less like government departments and more like private enterprises. CFE and Pemex will have competition for the first time in 76 years from private Mexican firms and international companies who now will be able to invest and produce oil, gas and electricity. The government has said it wants to garner more outside interest in energy production and increase Mexico’s gross domestic product by 1% by 2018. The CFE has wasted no time. It already announced it will hold tenders this year totaling $2.8 bn for natural gas and electricity infrastructure projects, including two new combined cycle power plants.

The sector will become much more competitive and capital intensive and the increased investment will lead to higher economic growth. It will also mean natural resources being exploited in a much more efficient way than in the past. The US Energy Information Administration (EIA) already signaled its confidence in the overhaul by raising its estimate for the country’s oil production by 75%. Last year, the EIA projected production would continue to decline from 3.0 m barrels per day in 2010 to 1.8 m bpd in 2025 and then struggle to remain in the 2.0 – 2.1 m bpd range through 2040.

Garrido expects banks such as Santander will be one of the main beneficiaries. “There will be billions of dollars’ worth of projects that will need to be funded and Mexican banks are well positioned to finance this long term structural change. There will be a lot of competition but we are the leading bank in energy financing in the country. We have the liquidity and the balance sheet to support this plus our global expertise in the sector.”


The slowing economy in Latin America should come as no surprise, following a decade in which the region has powered global growth. Gross domestic product (GDP) averaged 4.15% over the ten years compared to the world’s 3.8% and advanced economies’ 1.59%, according to data from the International Monetary Fund (IMF).

National coffers were boosted by the so called commodity super cycle which brought a longer than average period of price hikes across a divergent group including oil, metal and agriculture. The surge helped lift millions out of extreme poverty and paved the way for a growing middle class with money to spend.

Now however, the region will have to adapt to a more moderate rate of growth. The latest projections from the IMF put global growth at 3.4% this year and 4% in 2015. The emerging markets remain the main driver of global growth 4.6% and 5.2% respectively. However, Latin America is expected to lag behind at 2.0% for 2014 and 2.6% for 2015. This is only a shade better than the respective 1.8% and 2.8% of the advanced economies, highlighting in particular the slowdown in Brazil as well as in other commodity-reliant economies in the region.

International Monetary Fund

Slowing Growth

While the big regional picture shows a slowdown, it is important for investors and market participants to understand the individual and distinct nature of each country’s economy. For example, Peru, which until recently has been the economic star, has recently suffered a slew of downgrades, with the latest coming from its own central bank. Mexico, the previous strong performer has also seen growth forecasts scaled back by analysts since the start of the year due to falling public spending and construction activity as well as weak demand from the US.

Brazil, the B in BRIC, having been lauded for many years now faces the challenge of adapting its monetary policy – where interest rates already touch 11% – to rising inflationary pressures and almost non-existent growth. Colombia has stood apart as the only country in a monetary tightening mode given its more robust domestic demand dynamics, although signs of a slowdown are starting to emerge. Meanwhile, both Argentina and Venezuela continue to set an example of how not to run an economy.

Chile meanwhile appears to be setting the direction for the region once again. While the country faces a challenging macro economic environment, the arrival of a new center-left coalition has heralded a fresh chapter, not only for the country but for others in the region. Greater demands for a change in spending priorities to more long-term social projects such as education should lead to greater inclusion and a reduction in inequality.

These policies should not however, be confused with a move towards the socialism of old. While the resulting rise in social spending could portend higher taxation in the region, the increased investment in human capital should lead to more modest albeit sustainable growth rates in the long run.

Tackling the Challenges

Although extreme poverty has fallen significantly, inequality and a lack of financial inclusion remain serious issues. Further progress needs to be made in order to increase productivity and ensure future growth. Reforms for several countries must address the over-reliance on commodity exports in order to provide greater balance in the wider economy.

The focus for the region as a whole should also turn towards encouraging intra-regional trade through the removal of barriers – as the Pacific Alliance (Mexico, Peru, Colombia and Chile) is attempting to do. Combined with growth in the south-south trade among emerging markets this should help the region to reduce its reliance on developed markets.


These challenges will have to be handled carefully in light of the unprecedented external risks which face the region. These range from a slowing China and lower commodity prices to tightening fiscal conditions and normalization of monetary policy conditions in advanced economies. The 2008-09 crisis led to an unprecedented period of monetary easing across the developed world. The resulting falls in interest rates and the advent of quantitative easing triggered to record investment flows to emerging market assets as investors searched for yields.

In the short term, the region is likely to face significant risks from an outflow of funds given the elevated nature of both equity and bond markets, which seem ambivalent to the ongoing reversal in monetary conditions in developed markets. This in turn looks set to lead to greater uncertainty for the region’s currencies.

In summary, while significant headwinds are likely, the region is in an enviable position of being able to control its destiny to a much greater extent than advanced economies, given lower debt levels and healthier fiscal balances. Should it handle its windfall of the past decade wisely, it will continue to be a significant driver of global growth for many years to come.