On May 30, the Mercado Integrado Latinoamericano (MILA) an integrated stock exchange of three Latin American countries (Chile, Colombia and Peru), will be launched. It is a development that the TMX Group, which announced a merger in February with the London Stock Exchange (LSE), and its regulators should heed, in that it shows how to create real value for companies and investors when merging exchanges.
The objective of MILA is to create a single equity market that will be attractive to local and foreign investors. The impetus for this initiative was the move towards economic integration of the three economies and the challenges faced by the individual exchanges such as limited securities and lack of liquidity.
Once operational, MILA will be a trading system in which a stock broker in Chile, Columbia, or Peru will be able to execute trades in the securities issued by public companies of the three countries. Listed companies will be supervised locally by the authority of the country in which it is registered. The stock brokers in each country will be supervised by the local authority and operate through arrangements with the local branch of the exchange and the local deposit clearing agency.
The creators of MILA have described a number of benefits that will be achieved, including a more diversified market, improved liquidity, and a lower cost of capital for listed companies. MILA is also expected to be more competitive with larger Latin American stock markets such as those of Brazil and Mexico. The integrated market will become the largest in Latin America in number of issuers and second largest in market capitalization after Brazil. Now that the MILA platform has been created, other Latin American exchanges may join in the future.
The creation of MILA required a bold vision. Three exchanges, governments, and regulators needed to make a significant effort to facilitate its creation. In addition to harmonization of practices, standards, and market regulations, memorandums of understanding were established by the regulators for information sharing and collaboration on compliance and enforcement activities. All three jurisdictions had to amend their securities and foreign exchange regulations. All the logistical and regulatory requirements for MILA’s creation took place in less than two years.
The TMX Group, which is now fending off a hostile bid from a consortium of Canadian banks and pension funds, talks about benefits from the merger with the LSE such as “providing listed companies with access to a more flexible and deeper pool of international capital, investment expertise, and a lower cost of capital.” However, the TMX Group’s plan to achieve this is underwhelming compared to what MILA has accomplished. In its application to the Ontario Securities Commission (OSC) for approval of the merger, the case made for how the transaction will deepen liquidity for the TMX’s markets consists of greater visibility and improved connectivity. Other benefits described in the application, such as combining technology development and sharing information products may create value for the merged group of exchanges but will hardly do much for creating deeper pools of capital or lowering the cost of capital for listed companies.
The merger announcement by the TMX Group and LSE in February noted that each of the merged entity’s markets will continue to be regulated in accordance with local requirements by their existing regulators. Hence, public companies and investors in Canada and the UK can expect the status quo, rather than the seamless trading that will take place on MILA, which was made possible through regulators being flexible in exercising their jurisdiction through cooperation with each other.
Canadian policymakers have been obsessed over matters that neither investors nor public companies have any reason to care about. How many directors should reside in Canada? Should core operations be kept in Canada? Is the stock exchange a strategic asset? The Ontario Securities Commission released a request for comments in mid-May that confirmed that the regulator is more concerned about protecting its regulatory turf rather than what it needs to do to help investors and public companies capture the benefits of a merger.
The TMX Group and LSE need to move away from their endorsement of the existing regulatory structures, and propose changes that will meet regulatory objectives but also allow for the seamless trading that three Latin American countries have created.