(Adds appointment of new CEO, approval from CVM)
By Leonardo Goy and Guillermo Parra-Bernal
BRASILIA/SAO PAULO, March 22 (Reuters) - Brazil’s antitrust watchdog Cade on Wednesday approved financial bourse BM&FBovespa SA’s takeover of rival clearinghouse Cetip SA Mercados Organizados, and will not require any antitrust measures beyond those the firms proposed themselves.
Three of four Cade board members decided to endorse the 12 billion-real ($3.9 billion) deal, which will involve independent pricing monitoring and platform access to rivals in terms previously proposed by the companies to the agency.
Cristiane Alkmin, the case’s rapporteur, had sought tougher restrictions beyond those the companies agreed to.
Ultimately, the plenary of Cade voted 4-0 to approve the deal, with the self-imposed restrictions. Shares of both companies surged.
In a widely expected move, BM&FBovespa’s takeover of Cetip also received regulatory approval from the securities and exchange industry watchdog CVM on Wednesday, the body said in a statement.
The spike in shares was “mainly due to the approval of the deal with remedies that were not very onerous,” said Tito Labarta, an analyst with Deutsche Bank Securities in New York.
The deal will give BM&FBovespa control of Cetip, Latin America’s largest securities clearinghouse, with almost full control of Brazil’s market for registration and custody of local fixed-income instruments and over-the-counter derivatives.
The companies said in a joint statement that Gilson Finkelsztain, chief executive officer at Cetip before the merger, would take over as CEO of the new company from May 1.
Currently BM&FBovespa enjoys a near monopoly on all trading, clearing and settlement services for locally traded shares and bourse-traded derivatives. Trading transactions in Brazil are settled through a central counterparty clearinghouse, a complex and capital-intensive venture that for years has helped drive newcomers away from BM&FBovespa’s turf.
The so-called concentration control accord that BM&FBovespa presented to Cade agreed to create a committee to monitor pricing on some products and analyze requests from potential market newcomers to pay for the use of clearing and payment settlement platforms within the next 120 days.
Terms of self-imposed remedies will remain in place for five years.
Shares of BM&FBovespa closed 3.1 percent higher at 18.94 reais, after jumping as much as 7.1 percent during the session. Cetip’s stock added 1.4 percent to 48.30 reais.
BM&FBovespa announced the deal in April, following repeated attempts to buy Cetip. The transaction would create the largest market structure player in Latin America, with stakes in Mexican, Colombian, Peruvian and Chilean counterparts.
The accord has four main legs: implementing rules to access the combined entity’s post-trading capabilities in the equities segment; rules to treat clients equally; a compliance code for pricing for products and services, and; terms of access to the clearings and payment settlement platform.
Potential rivals demanded close monitoring of fulfillment of approval terms.
“Today’s historic ruling by Cade approves the BM&FBovespa-Cetip agreement but imposes important obligations on the firms that must be fulfilled in order to finalize their merger,” exchange operator ATS Brasil said in a statement.
ATS Brasil, which is still waiting for regulatory permission to start operations, said Cade’s ruling recognizes the shortcomings of Brazil’s market structure, such as high transactions costs. In September, ATS Brasil and parent company Americas Trading Group filed a complaint before Cade, alleging BM&FBovespa cut fees on cash equities trading and raised them for clearing and settlement services to discourage competition.
Alkmin argued against BM&Bovespa’s self-imposed remedies for the deal.
“The problem is not competition, but the significant entry barriers that the deal poses,” Alkmin said as she prepared to cast her vote on the deal in Brasilia. “By eliminating a competitor in a different market, in this case Cetip in the fixed income market, entry barriers will rise as a whole.”
The entity resulting from the combination of BM&FBovespa and Cetip is expected to generate some of the best operating readings among global exchanges, with margins and profit growth surpassing 70 percent and 10 percent a year, respectively, according to UBS Securities estimates.
Fee-related income at the combined entity could rise to 50- percent of revenues, from BM&FBovespa’s current 20 percent, with trading-related income representing the other 50 percent, UBS analyst Frederic de Mariz said in a February client note. ($1 = 3.0949 reais) (Additional reporting by Alberto Alerigi Jr and Bruno Federowski in São Paulo; Editing by David Gregorio and Lisa Shumaker)