Chile, Brazil Weigh Capital Market Integration Rules

By James Attwood

July 24 (Bloomberg) -- Chile and Brazil started talks to coordinate stock market regulation and tighten insider trading rules, in a step toward allowing cross-border trading.

``We are discussing a memorandum of understanding with Brazilian authorities so we can foster integration between the two markets,'' Guillermo Larrain, Chile's chief regulator, said in an interview in Santiago yesterday.

Larrain and other Chilean regulators and exchange officials plan to discuss corporate governance, self-regulation and developing derivatives markets with their Brazilian counterparts in Sao Paulo today and tomorrow. Chile may cut bureaucracy and remove foreign investment restrictions such as taxes on asset management fees to make its market more appealing to Brazilian and other foreign investors, Larrain said.

The Chilean, Mexican and Brazilian stock markets signed framework agreements last year to allow cross-border trading and company stock listings among Latin America's three biggest markets. In April Chile, seeking to help pension funds diversify holdings, lifted the foreign investment limit to 45 percent from 40 percent.

``We've also had discussions with Peruvian and Colombian authorities and at some point these things will start moving,'' Larrain said.

Maturing Markets

Efforts to open capital markets to cross-border trading reflect the maturity of Latin American exchanges, said Greg Lesko, the head of equity at Deltec Asset Management in New York, which oversees $600 million in emerging market stocks.

``It's a sign that there's much more stability in the region,'' Lesko said by phone today.

The Chilean delegation to Brazil will discuss ways to stop insider trading to boost foreign investor confidence. Net foreign investment in Chilean stocks for the year through May was $1.13 billion, according to Banco Santander estimates. Foreigners bought $262 million directly on the Chilean exchange in May compared with $118 million in April, according to Santander.

Since taking his post in May last year, Larrain, 43, has created rules to improve disclosure and divisions to help police bad practices. The regulator fined eight people a total of $4.9 million last week in a probe into insider trading in last year's proposed merger of retailers SACI Falabella SA and Distribucion y Servicio D&S. It may hand down similar sanctions for trading before two other deal announcements last year.

Enforcement Division

Brazil, where regulators had said insider information is leaked before almost every takeover, said in February it would create an enforcement division including 30 investigators, to control insider trading on the Sao Paulo exchange.

Fines leveled since last year for inappropriate trading practices in Chile against high-profile company directors -- including Hans Eben, a D&S vice president, and Sebastian Pinera, a former presidential candidate -- are likely to help reduce trading risks and boost foreign investment, Larrain said.

``The fact we are enforcing insider trading activity now gives more confidence to foreign investors, most of whom are outside the networks where privileged information flows.'' he said. ``I would expect some premium for that for the market.

To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.net