Bolstering the Bolsa : Reform Plan for Mexico City Stock Exchange Seeks to Increase Trading Volume, Boost Stature

The buzzer drones. Men in pin stripes and ties rise from their seats and move toward the overhead monitors, shouting the names of stocks they are offering for sale. Thus trading resumed on the modernistic floor of the Mexican Stock Exchange one recent afternoon.

But without much enthusiasm.

Efrain Caro, strolling onto the floor, checks the computer monitors and shakes his head.

“The index is up a little but trading volumes are still low,” he says. “We have got to solve the problem of generating more business for our brokers by giving them more to trade.”

As the exchange’s vice president for international affairs, Caro has taken on a big share of the responsibility for creating new business for market. His solution is to make the Bolsa, as the Mexicans call the nearly 100-year-old exchange, an international financial center offering a variety of investment options from nations throughout the region. The government is cooperating by proposing a law that would give the exchange the technical tools to handle more foreign business, including new rules designed to bolster investors’ confidence in its operations.

Under the plan, the exchange’s gleaming glass rotunda on the fashionable Paseo de Reforma would become a place where money from industrialized countries could flow into capital-hungry companies from developing nations.

With its record of generating funds to pay for the expansion and modernization of Mexican industry, officials here believe the Bolsa has the know-how to share with the rest of the developed world. Already Latin America’s most active stock market, it has attracted a total of $6.2 billion in foreign investment.

U.S.-based brokerages such as First Boston recommend placing nearly two-thirds of their clients’ Latin portfolios in Mexican stocks. They cite the market’s stability in comparison with those of other countries in the region.

A more international Bolsa would also provide a new outlet for risk-oriented investors who are curbed by U.S. securities regulations but not eager to put money directly into the more distant, free-wheeling South American markets.

And it would solve a big problem for Mexican brokers, who are losing trading volume and commissions to their foreign counterparts.

The Bolsa has become a victim of its own success, or rather the success of Mexico’s largest corporations. Mexican stocks such as the phone company, known as Telmex, the engineering firm ICA and, most recently, truck maker Dina have become the stars among foreign stocks traded in the United States.

The eight stocks listed on U.S. exchanges and dozens of others traded less formally among U.S. investors accounted for nearly three-fourths of the foreign investment that flowed into Mexico last year. In dollar terms, almost half of the trading in Mexican stocks now takes place in the United States. Besides selling equity outside their country, Mexican firms bypassed the Bolsa to raise millions more in borrowed funds through bonds issued in Europe, where interest rates are far lower than at home.

That was good news for the companies and good news for the economy but bad news for the Bolsa and the brokers who own it. Mexican brokers usually help with the placements, but once securities are issued, they get left out of the commissions from trading.

While much of the foreign trading of Mexican stock involves a single issue--Telmex--Bolsa officials are beginning to worry.

“There has been a shift in the center of gravity” toward foreign markets, said one U.S. investor who spoke on condition of anonymity.

Mexican brokers are reluctant to talk about the problem, but clearly, the shift is hurting their wallets. “We had to do something to counterbalance that and compete,” said Caro, a UC Santa Barbara-trained economist.

The solution proposed by a committee of government financial officials, Bolsa executives and brokers is contained in the legislation pending before Congress.

The proposed law would permit:

* Public offerings in Mexico for foreign companies, with the same disclosure requirements Mexican companies must now meet.

* Over-the-counter trading in securities that Mexican companies issue abroad, as well as government debt issued in foreign countries, such as the so-called Brady bonds used to ease Mexico’s debt crisis of the 1980s.

* Computer trading in foreign issues not listed on the Bolsa. This category would be called the International Trading System, or SIC, for its Spanish initials. Officials expect it to be used initially for mutual funds of Mexican stocks listed on foreign exchanges, such as the Mexico Fund. Eventually, stock exchange officials expect it to allow foreign companies to gain exposure on the Mexican market before making public offerings.

The law would tighten restrictions on insider trading and allow investors to buy stocks on margin, or credit. It would also permit the introduction of securities, such as warrants (instruments giving holders the rights to buy certain securities), which are available in world markets.

Those provisions are expected to reinforce investor confidence in the market’s basic integrity and increase trading volume.

“Some of this is dreams, some is just making things fair,” said the U.S. investor. Creating a way for Mexican brokers to trade Mexican securities issued abroad is only fair, experts on both sides of the border agree.

But the goal of an international financial center in Mexico is, at best, a long-term one, foreigners familiar with the market say.

“I’m not expecting it to get off to a wild start,” said Susan Gilbertson, who trades on international markets for Santa Monica-based D.A. Campbell Co. “This is more the expression of an intent.”

Caro acknowledges that trading in foreign-issued Mexican securities will catch on before other kinds of deals that the law would permit. Information about those issues is more accessible in Mexico, he said, and brokers here are more comfortable with them.

Bringing in listings of foreign companies will take longer but is entirely feasible, he said. Bolsa officials plan this fall to promote the exchange to companies elsewhere in Latin America.

Caro sees potential clients among companies that would want to avoid the expense or the disclosure requirements of listing on a U.S. exchange. These companies generally seek to place shares with Americans under a special provision of the U.S. securities law that makes their stock available only to sophisticated investors, such as major pension funds or insurance companies.

Last year, 27 companies from 11 countries raised $3.8 billion under that rule. Mexican companies led those offerings, followed by Venezuelan and Argentine firms..

Based on that demand, Bolsa officials believe they can develop a market for foreign investors who are not big enough to trade under the special provision.

He is cautiously optimistic that Mexico’s congress will grant the concessions because they fit in well with the nation’s overall economic strategy of being making Mexico a crossroad of commerce in the Americas.

Mexico has entered a free-trade agreement with Chile and is negotiating agreements with Venezuela and Colombia to complement its highly publicized North American Free Trade Agreement with the United States and Canada, now pending legislative approval.

The idea is to ease restrictions on commerce with all trading partners in the region and thus encourage trade flow through Mexico. Providing a bridge between North American capital and South America’s chronic need for investment would add a financial component to the strategy.

It would also be a step forward in a nascent trend toward breaking down financial barriers among Latin American countries. Since last year, Venezuelan government bonds have been traded on the Colombian stock market, and similar deals are expected to develop in other Latin markets.

Latin America’s Biggest Stock Market The Mexican Stock Exchange dwarts other Latin American markets in terms of the total value of stocks traded.

Billions of dollars

Venezuela: 6.5

Argentina: 13.8

Chile: 30.3

Brazil: 62.5

Mexico: 124.1 Source: Bear Stearns