ANALYSIS-Chile derivative regulation likely to boost peso

By Reuters Staff
August 11, 2010

By Simon Gardner

SANTIAGO, Aug 11 (Reuters) – A Chilean government plan to regulate taxation of derivatives to encourage currency hedging by smaller companies should boost currency liquidity, help clear uncertainty, lure investment and boost the Chilean peso.

The government is set to present a bill on derivative tax regulations to Congress within days, aiming to clear up legal uncertainties regarding hedging versus speculation and boost use of instruments to cover risk, Finance Minister Felipe Larrain said on Tuesday.

Analysts are hungry for details of the bills, which Larrain outlined at a seminar, but said they should be positive for Chile’s foreign exchange market, which is far less liquid than those of regional powerhouses Mexico and Brazil.

“Any piece of news that increase liquidity and reduces frictions in the FX markets is also good news for assets. In the case of Chile, I think this is good news,” said Diego Donadio, a Latin America strategist at BNP Paribas in Sao Paulo.

Clearer regulations would likely encourage foreign investment, which would mean inflows of dollars to an economy rebounding from the ravages of a massive February earthquake and the global financial crisis, which when converted into pesos would make the local currency appreciate.

“It can boost the internationalization (of the peso), the liquidity … we should see this as a positive factor and the currency should benefit, it should appreciate,” Donadio added.

PESO APPRECIATION A RISK

Chile’s peso is trading around 5 month highs after firming in recent weeks on the back of global bourse gains, stronger prices for main export copper and expectations the central bank will continue to raise rates.

Some market players suspect the central bank could seek to take measures to curb the currency’s strong gains, which are hurting exporters.

Larrain said on Tuesday new bills on regulation of both derivatives and insurance contracts, part of wider capital market reforms announced in May to boost liquidity and ensure the solvency of the country’s financial markets, would also help market transparency.

“We want competitive capital markets, both domestic and international,” Larrain said, outlining the regulation bills at a business seminar.

“The idea is for us to be competitive outside Chile, to be able to export financial services … and we think this market is key to increasing investment and productivity,” he added.

Larrain also said that the new regulations would also “treat options consistently with underlying assets”.

However, the bills have yet to pass through Congress, and while the plan will likely spur confidence, any impact on the peso is likely some months off.

“It’s not immediate in terms of flow. What it does is it adds to the positive sentiment in the market in relation to Chile,” said Flavia Cattan-Naslausky, a strategist at RBS Securities.

“If you have clarity on regulation, and you have volume, that in itself tends to lower operational costs. So it’s a move in the right direction.” (Additional reporting by Fabian Cambero; Editing by James Dalgleish) ((simon.gardner@thomsonreuters.com; +562-370-4250; Reuters Messaging: simon.gardner.reuters.com@reuters.net))

Wednesday, 11 August 2010 16:23:09RTRS [nN11223689] {C}ENDS

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