A Bigger Bolsa

Brazil’s stock and futures markets join forces to climb global exchange ranks.


Brazil’s stocks and agricultural commodities have been among the hottest investments on global markets of late. So it seems only natural that the country’s two leading exchanges are joining forces in a bid to exploit that popularity.

The merger of Bovespa Holding, which operates the local stock market, Bolsa de Valores de São Paulo, and the Bolsa de Mercadorias & Futuros, the country’s commodities and futures exchange, creates a powerful new player on the global stage, and one that is eager to flex its muscles. The new exchange — for now dubbed, appropriately enough, Nova Bolsa — will have a market capitalization of about $20 billion, good enough to rank third in the world, behind only Frankfurt-based Deutsche Börse and Chicago futures giant CME Group and ahead of Hong Kong Exchanges and Clearing and NYSE Euronext. It will boast a full range of products, from stocks and commodities to financial futures and options, and an integrated structure that includes a lucrative clearing and settlement arm as well as a securities trading platform.

“Brazil moves to [a position of] having a bourse as good as or better than any other in the world,” BM&F chairman Manoel Felix Cintra Neto said in announcing the deal.

Both exchanges have been on a roll since going public last year. Bovespa has benefited from a surge in global appetite for Brazilian stocks. The main Bovespa index has risen more than fivefold since a bull market began in mid-2003 — it surged 6.33 percent on April 30 after Standard & Poor’s raised Brazil’s credit rating to investment grade — lifting the capitalization of the market’s 451 companies to more than $2.4 trillion. São Paulo had a record 64 IPOs last year that raised $34 billion, and the flow looks likely to continue. “Future IPO volumes are expected to be high,” says Jerome Booth, head of research at Ashmore Investment Management, a London-based emerging-markets specialist. Bovespa’s net income rose nearly 800 percent in 2007, to 176.7 million reais ($99.6 million).

BM&F saw a 50.4 percent surge in trading volume in 2007 and posted a 48.7 percent rise in earnings, to 293.3 million reais. The exchange generates more than 90 percent of its revenues from futures and options on interest rates, currencies and stock indexes; the rise of the real and the narrowing of interest rate premiums on Brazilian debt have spurred the growth of trading. BM&F also introduced a dollar-denominated ethanol futures contract last year in a bid to capitalize on growing interest in the alternative fuel.

The two exchanges expect to achieve up to a 25 percent reduction in costs by 2010 by combining forces. “It puts markets with multiple infrastructures under a single platform and expands profitability,” says Larry Tabb, CEO of TABB Group, a financial markets research firm.

Under the merger agreement shareholders of each exchange will receive one ordinary share in Nova Bolsa for each existing share. In addition, BM&F will pay 1.24 billion reais to Bovespa holders. Many operational details remain to be decided, though, including the key question of which executives will run the new entity.

Nova Bolsa is likely to use its new clout to expand regionally, analysts and bankers say. “The consolidation is important to make Brazil a buyer of other exchanges, such as [in] Chile and Mexico, and boost regional integration as in the rest of the world,” says Álvaro Bandeira, chief economist for brokerage firm Ágora Corretora.

The exchange is also eager to develop ties farther afield, a recognition of the fact that foreign investors account for 75 percent of the trading at Bovespa and 17 percent at BM&F. NYSE Euronext took a 1 percent stake in Bovespa as part of its IPO last October, and BM&F last year swapped 10 percent of its equity for a 2 percent stake in CME, a deal that leaves Chicago sitting on a healthy paper profit. CME and BM&F are going ahead with an order-routing agreement that will enable members of each exchange to trade the other’s products on their existing screens later this year. The Brazilian merger will enable Nova Bolsa to negotiate with global rivals from a position of strength, says Carlos Coradi, CEO of Engenheiros Financeiros e Consultores, a São Paulo–based consulting firm.