Alejandro Reynoso Punta del Este, Uruguay October, 2005

1. Global Trends Effects on Central Securities Depositories, Clearing & Settlement Systems and Central Counterparties Alejandro Reynoso Punta del Este, Uruguay October, 2005

2. Index • Securities Markets Environment • Challenges & opportunities for the coming years • Effects on Central Securities Depositories, Clearing & Settlement Systems and Central Counterparties

3. An unprecedented global environment • This is the best period for the Equity Markets in Latin America in more than ten years. • However, at the global level, we see huge macroeconomic unbalances, rising energy prices of energy and the potential damage effects of terrorism…

4. But, let us start with good the news! • In first place, we underscore the rebound of net flows to the region & the improvement in key macroeconomic figures : • Capital flows of 53 USD billion: 20% of it allocated to emerging markets. • Record level of international reserves: 200 USD billion, almost half of the 460 USD billion total foreign debt. • The average financial deficit was around 2.9% five years ago, today it is only 1.6%.

5. But, let us start with good news! • On the stock markets side, it is remarkable the traded instruments sustained price growth: • The average Stock Exchanges Return for Latin America Index, published by the IMF, has shown an increase of 52.9% in the last 12 months; reaching an accumulated annual return of 145.4% since 2002. • The Dividend Yield : 3.26% vs 2.90% for the average emerging markets. • As a consequence of all the above, we are again in valuation levels which allows to attract new listings.

6. But, let us start with good news! • On the debt market side: improvements on the access to foreign financing. • The spread over US treasuries for the EMBI debt total return index for Latin America diminished from 1007 bps on 2002, to 280bps by September 2005. • Today we have the longest yield curves in local currency in history: more than 15 years to maturity in Brazil, Colombia, Chile, Peru, Mexico and Uruguay. • The foreign holdings of long term debt denominated in local currency represents 4% of the domestic debt in Brazil and more than 20% of the public long term debt in Mexico.

7. 1. Forgiveness of the original sin… • From 2004 and up to today of 2005 we have lived the years of forgiveness: during the past 18 months, Mexico, Colombia, Uruguay y Brazil have placed fixed rate bonds in local currency in the Euromarkets. • If we follow Haussman’s (& co-authors) line of reasoning, then the globalization of local markets has to be seen with benevolence because it reduces the convertibility risk, which is produced when the maturities of the foreign currency debt concentrate. However, the “forgiveness” gives birth to new problems regarding the monetary policy and the development of local markets. • The recent Mexican experience suggests it takes only few months to face competition of global players at least in three segments.

8. 1. Forgiveness of the original sin… • The interest rate derivatives markets and OTC listings are the first to thrive abroad. • Despite the fact that this takes a while to reach a significant scale, the Central Counterparties which make possible the clearing and settlement of domestic securities abroad are becoming an inevitable reality. • Last but not least, maybe at the beginning of 2006, we will witness the taking off of the OTC market for options on domestic shares abroad. • Taking into account this context, the worst that could happen is that the “forgiveness of the original sin” were followed by “the age of innocence”.

9. 2. The Financial Wal-Mart • Now, lets observe globalization from the opposite point of view: i.e. when globalization allows to bring foreign securities to our local markets. • Migration of securities trade to foreign countries is increased when domestic capital controls are eliminated. • The needed response to maintain domestic trading of such instruments has been to put in place mechanisms based on tax &/or regulatory incentives for the listing of international securities in local exchanges. • In some extent, financial openness could lead to transforming our markets in distribution centers of securities from all over the world; in fact, in something very close to, a sort of a… financial WAL-MARTs.

10. 2. The Financial Wal-Mart • The operational problems that necessarily arise when something new is put in place, give us interesting lessons worthy of further understanding. • One issue is the timing of settlement: the participant face the dilemma of either pay the cost of a pre-releases given by foreign brokers, or, to fall in delays with the Central Counterparties. • The practical answer in this case is to recognize that it is not possible to go faster than the rest of the world in some issues. At the end of the day, even when the local products are settled in t+2, the foreign securities traded domestically have to be settled according to the practices of the market of origin. • It becomes more important to have in place mechanisms that can offer Straight Through Processing to simplify the operative complexity of connecting local markets to foreign markets in several continents.

11. 3. An future full of energy …! • Regarding our situation, the prospective of local energy products will crucially depend on the regulation of every country. However, there are issues to be considered when designing our own strategies. • On the one hand, in contrast to other products of the stock market, the relatively smaller size of many of the local energy local users would allow the intermediation industry to develop a niche where the international competition would be less intense. • On the other hand, we have to put attention to the release of new products to the main markets, and to be ready and willing to distribute them or to replicate these products locally. • Let us underline this idea: the financial energy products listed and not listed are settled mainly through Central Counterparties. The most interesting cases of this trend are the Intercontinental Exchange and the NYMEX Clear Port.

12. 4. To aknowledge new conditions… REGULATION: • From the operational side, foreigners will need two years of good performance with the ones who participate from our market side. • This is an area where the operational improvement, the custody & settlement systems and the creation of Central Counterparties can contribute to reduce the local impact of these new requirements. TAXES: • We expect ( in our region) to see the elimination of tax withholdings to operations with foreign beneficial owners residing of countries with a signed agreement to avoid double taxation. However, this ideal scenario imposes new responsibilities to the custodians and clearing members, due to the identification of the participants as well as the total of the withholdings to be made. • We have to recognize, the instrumentation of new controls will be part of the functions of custodians and clearing entities, just in the middle of an environment which is threatened by money laundering, terrorism and tax evasion through off shore schemes.

13. 5. Better technologies with less money. • We know: the rise of streamers o program traders, the high costs of an outcry trading and the fierce competition of the electronic brokers, (framed the context described before), make unavoidable serious investments in technology in the near future. • Is it high time to look for a common strategy for a technologic platform?, Is it happening just when the environment asks for astronomical individual investments to be made. • Does it make sense to plan our own regional outsourcing scheme for ourselves? Do we share computing infrastructure to get economies of scale? Do we think in consolidate our computing purchases to lower our costs? Is it convenient to have a common software shop for all our exchanges, central counterparties and central depositories?

14. Index • Securities Markets Environment • Challenges & opportunities for the coming years • Effects on Central Securities Depositories, Clearing & Settlement Systems and Central Counterparties

15. Final Remaks • It is not possible to minimize the importance of Central Counterparties for fixed income securities. • We will need to think seriously in giving more flexibility for the time schemes for settlement. • Globalization pulls us towards the development of interfaces capable of offering to Straight Through Processing . • We will need to take advantage of the experience of our settlement systems and custodians to foster innovation, which is highly demanded to tackle new markets. • Give recognition and assimilate the responsibilities for intermediaries and custodians in a context threatened by money laundering, terrorism financing and abuse of off-shore schemes.

16. Global Trends Effects on Central Securities Depositories, Clearing & Settlement Systems and Central Counterparties Alejandro Reynoso Punta del Este, Uruguay October, 2005