Buck up

Brazil’s stock exchange has more staying power than the country’s flagging economy. BM&FBovespa has been hit by delistings and a dearth of IPOs this year. Rival exchanges may soon arrive, too. But Bovespa has a lock on other business while expanding elsewhere.

This year has been unkind to the world’s third-largest exchange. By the end of July Bovespa had handled just $4.8 billion of initial public offerings and follow-on share sales. That’s less than a fifth of the total initially projected for the year. And some companies are pulling their shares from the exchange, such as billionaire Eike Batista’s troubled logistics company LLX Logistica, or the $11 billion card payment company Redecard, which is being swallowed by Banco Itau.

Bovespa also faces the prospect of more competition: U.S. exchanges Direct Edge and BATS Trading are both angling for a piece of Bovespa’s cash equities business.

But none of this is as bad as it sounds. Listing fees account for just 2 percent of the Brazilian bourse’s overall net revenue. And some 70 percent of equities income - which accounts for almost half of the top line - comes not from trading but from clearing and settling orders. All stock trades in Brazil must be settled by a unit with the cash to cover any mishaps. That adds a lot of extra costs for any players wanting to challenge Bovespa, which owns the only such securities clearing business in the country.

Moreover, Bovespa has a lock on exchange-traded derivatives, which made up 43 percent of revenue in the second quarter. And Chief Executive Edemir Pinto is challenging rival Cetip in over-the-counter derivatives. These are a generally higher-margin business than stock trading and clearing, so even modest success can boost earnings. The one wobbly spot is Bovespa’s operating leverage. Quarterly net income growth often doesn’t match revenue growth, implying a need to be more stringent with costs - something exchange officials are addressing.

Overall, though, Bovespa’s diversity and its hold on clearing remain its strengths. That should give it some cover from an economy suffering from slower GDP growth and problems with consumer credit.