Instructor’s Comment: This paper draws on rich information
and there are honest attempts to ‘integrate’ vast amount of
information from various ‘original’ sources. This project goes
byond just a summary of websites.
Peru, Colombia, and Chile
REGIONAL EQUITY MARKET INTEGRATION
REGIONAL INTEGRATION

Peru, Colombia, and Chile have begun to implement variable income equity
market integration

New market to be called the Integrated Latin American Market (Mercado
Integrado Latinoamericano)- MILA

Integration will take place in two stages, the first of which- termed “Intermediate
Routing”- began November 22, 2010

Investors have access to foreign securities through “an automated model of intermediated
routers”

Phase II of the integration will be completed by December 2011. At this time,
individual investors will have direct access to markets in all three countries

Does not represent full merging of stock markets, as the exchanges will operate
within their respective domestic regulatory frameworks

“...negotiations will be conducted under the rules of the market where the securities are listed.”
CHARACTERISTICS OF INDIVIDUAL STOCK EXCHANGES
Peru- Lima Stock Exchange



Total value of stocks traded (2009)- US $4.1 billion
Mining sector- copper, gold, silver- represents
56% of all stocks traded
Fishmeal


Peru’s third largest income source
Only 2 of 14 domestically-registered fishmeal companies
currently issue stocks on the Lima Stock Exchange


This is expected to rise significantly with stock market integration
Lima Stock Exchange has 17.5% of all listed companies in Latin America, but
only 0.6% of the trade volume
CHARACTERISTICS OF INDIVIDUAL STOCK EXCHANGES
Chile- Santiago Stock Exchange


Total value of stocks traded (2009)- US $34.7 billion
Relatively diverse stock offerings



Services- including financial services- (32%), retail, mining
Main index is IGPA
The largest and most globally integrated
stock exchange of the three countries
CHARACTERISTICS OF INDIVIDUAL STOCK EXCHANGES
Colombia- Colombia Stock Exchange



Total value of stocks traded (2009)- US $16.5 billion
Stocks listed are highly concentrated in energy
and manufacturing (representing 78% of market
capitalization)
Main index is IGBC


Largest company is Eco-Petrol, which constitutes over 1/3
of the value of the stocks on the IGBC index
Of Latin American countries, it has seen the largest
stock market growth over the last ten years (over 900%)
COMBINED

US $56-57 billion of stocks sold in 2009 (trading volume). In this sense, it will
be the third largest stock exchange in Latin America, behind Mexico and Brazil.

It is expected to eclipse the Mexican stock exchange as the second largest in
terms of total market capitalization in South and Central America, after Brazil’s
BM&F Bovespa.

Market capitalization estimates of MILA range:
 Financial Times- US $539 billion
 Dow Jones article- US $614 billion
 Bloomberg- US $647 billion
*All of these estimates put MILA ahead of Mexico, and far behind Brasil (1.7
trillion)

It will be the largest in Latin America in terms of number of companies listed
(563).
ANTICIPATED EFFECTS
We must look at what has happened as a result of similar integrations in the
past:
1) EuroNext integration
-integration of Amsterdam, Brussels, Paris stock exchanges in 2000 (Lisbon
incorporated in 2002)
-trading volume increased by about 800%
-thus, some expect that the value of stocks traded could increase from
$56 billion to US $460 billion as a result of the MILA integration
2) Nasdaq OMX merger (2008)
-led to large increases in transaction volume for listed companies
ANTICIPATED EFFECTS
Simple thought experiment (based on information in Reference (10)):
i1 stock issuers and n1 purchasers of stocks exist in Peru - i1*n1 transaction
opportunities
i2 stock issuers and n2 purchasers of stocks exist in Chile- i2*n2 transaction
opportunities
i3 stock issuers and n3 purchasers of stocks exist in Colombia- i3*n3
transaction opportunities
*Together, there are i1*n1 + i2*n2 + i3*n3 transaction opportunities
If the markets are integrated, transaction opportunities increase significantly
(i1 + i2+ i3)*(n1+n2+n3 ) opportunities
If a value of 10 is assumed for all variables, opportunities increase from
300 in the non-integrated market to 900 in the integrated market
BENEFITS OF INTEGRATION
Benefits for Investors
 Diversification of investment portfolios
 Reduction in transaction costs
Benefits for Share Issuers
 Greater access to capital markets
 Reduction in financing costs
General Benefits
 Potentially large and significant trading increases will be observed
 Attraction of foreign investment from abroad to the region
BENEFITS FOR INVESTORS

Portfolio Diversification



An increase in international investment opportunities naturally leads to the
potential for diversification
The potential for diversification with respect to this particular integration is
especially impressive, due to the specialization of Peruvian (mining, fishmeal),
Colombian (energy, manufacturing), and Chilean (service, retail, mining)
companies in largely different industries. The three exchanges are thus
complementary in nature.
Reduction in transaction costs

Currently exist logistical challenges to investing in neighbouring country


Peruvian investors looking to purchase shares in the Colombia Stock Exchange, for example, must
go through intermediaries that have relationships with partner brokers in Colombia. Nothing can
be done directly. Resultant opportunity and direct financial costs currently discourage
international investment.
Encourages the entry of small investors, who chose previously not to invest
internationally due to large transaction costs (barriers of scale)
BENEFITS FOR SHARE ISSUERS

Greater access to capital markets




Larger pool of potential investors (including small and medium-sized investors
who can now afford to invest)
Diversification of sources of financing may lead to the spread of companies’
work across international borders (i.e. If Chilean investors gain a large stake in a
Colombian energy company, perhaps this opens up the opportunity for
expansion in Chile)
New, diverse market more attractive to foreign investors from abroad
Reduction in financing costs


There currently exist logistical and financial costs to listing- issuing shares- in a
neighbouring country
The integration would eliminate the need for such costs. The issuer would
register domestically, then become immediately available to member traders of
the MILA exchange.
CHALLENGES OF INTEGRATION

There is currently no free market for capital flows among Peru, Chile, and
Colombia, meaning that tax disincentives for international investment may
persist

Differences in tax laws among the three countries must be either resolved
or more clearly explained to potential investors

Must ensure that asset prices remain related to the fundamentals of
economy and share issuers



i.e. That prospects for high-returns do not result in speculative bubbles
Initial period of integration may be most important with respect to this issue
Exchanges different in level of sophistication

Peru’s exchange has more foreign firms; in Chile, one can short-sell shares (one cannot do
so in Peru or Colombia); some differences in use of technology
CHALLENGES OF INTEGRATION

Lack of a common currency among the three countries
 Share prices will be quoted in one of three different currencies, depending on
the country in which the issuer is listed
 Large fluctuations in relative exchange rates may lead to excessive speculative
activity
 Transaction costs involved in currency exchange
 Countries in question have fewer monetary reserves relative to countries such as
Brazil
 Monetary reserves have obvious stabilizing value with respect to exchange
rates, if stabilization were to be necessary
*Throughout Phase I of the implementation (intermediate routing stage), the
specifics of the regulatory framework will emerge. Implementers will attempt to solve
technical and tax-related issues among the three markets.
NEED FOR EFFECTIVE REGULATION


In order to more effectively recruit international capital, international
standards of transparency & reporting among listed corporations in the
MILA must be established
Pownall et. al note that the Euro-Next integration attempted to regulate the
new capital market through firms’ voluntary participation in an initiative that
saw them recognized for their conformation to standard practice


Certain issues had arisen due to a lack of standard practice with respect to the
frequency and style of financial reporting, as well as accounting practices,
corporate governance, and general transparency
Pownall et. al found that the volume of trade of stocks of companies who
voluntarily conformed to standard international practices was higher, as was
their accounting quality

Thus, firms have an economic incentive to conform to standard international practice
if such a standard can be effectively established
SUMMARY






The MILA is poised to become the third powerhouse stock exchange in South and
Central America
By the time Phase II of the integration is complete, individual investors will have
direct access to markets in all three countries.
Benefits for investors include portfolio diversification & a reduction of transaction
costs, while stock issuers benefit primarily from greater access to capital markets.
Benefits to diversification have particularly strong potential due to the
complementary nature of the three exchanges.
Large increases in the volume of trading can be expected immediately as new buyers
and sellers interact with one another in a diverse market.
Nonetheless, there are challenges to the integration process. These include: a lack
of free flow of capital among the three countries, jurisdiction-related differences
among the domestic markets, technical issues in the sophistication level of the
exchanges, and the lack of a single currency in which to carry out transactions.
Finally, standard practices with respect to transparency need to be established
before the implementation of Phase II of the integration, scheduled for the end of
December 2011, can proceed. Firms have an economic incentive to conform to
standard international practice.
REFERENCES
(1) Emery, Alex. “Andes Stock Market Integration to Spur Peru Fishing IPOs, Bernales
Says.” October 18, 2010. Bloomberg. http://www.bloomberg.com/news/201010-18/andes-stock-market- integration-to-spur-peru-fishing-ipos-bernalessays.html.
(2) Esposito, Anthony. November 11, 2010. “Merged Chile, Peru, Colombia Bourse
Create Virtuous Cycle - Santiago Bourse CEO.” Dow Jones Newswires.
http://online.wsj.com/article/BT-CO-20101111-713954.html.
(3) Jordan, Levi. September 17, 2010. “Stock Market Integration: Chile, Colombia,
and Peru.” Americas Society. http://www.as-coa.org/article.php?id=2670.
To
REFERENCES
(4) Mapstone, Naomi. November 2, 2010. “Latin America: Andean trio plan market
alliance.” Financial Times.
http://www.ft.com/cms/s/0/bdafd2fa-e607-11df-9cdd00144feabdc0,dwp_uuid=f81d488c-e620-11df-9cdd00144feabdc0.html#axzz17PHKbyKi.
(5) Mercado Integrado Latinoamericano. Official Website.
http://mercadointegrado.com.
(6) Narayanan, Pratish. December 1, 2010. Andean Exchanges’ Integration to Be
Completed by End of 2011. Bloomberg.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avF_rd
y_y4EQ.
REFERENCES
(7) Pownall, Grace, Maria Vulcheva, and Xue Wang. 2010. “The Effects of the
Integration of the Euronext Stock Market on Financial Reporting Quality
and Liquidity of Listed Companies.”Goizueta Business School, Emory
University. 1-56.
http://acctwkshop.cox.smu.edu/acctwkshop/Euronext%20I_%209_23.pdf.
(8) Sanabria, Andrés Felipe. “ El camino de la integración bursátil.”
Corficolombiana, Investigaciones Económicas.
http://www.bnamericas.com/cgibin/getresearch?report=134413.pdf&documento=1016899&idioma=
E&login=.
REFERENCES
(9) Stone, Hannah. January 5, 2010. “Colombia's stock exchange leads Latin
America in growth.” Colombia Reports.
http://colombiareports.com/colombia-news/economy/7543-colombiasstock-exchange-has-largest-growth-in-latin-america.html.
(10) Universia Knowledge @ Wharton. November 17, 2010. “The Benefits of
MILA: Three Latin American Stock Exchanges Unite.” Wharton, the
University of Pennsylvania.
http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1979
&language=english.
(11) Wahba, Phil. May 8, 2008.“Nasdaq OMX profit jumps as merger benefits
kick in.” Reuters. http://uk.reuters.com/article/idUKN0729909220080508.