Understanding Securities Markets: A Comprehensive Guide
National Securities Commission
Establishment and Role
In 1937, a national securities commission was established to advise the government on securities matters. Its role evolved over time:
- 1946: Became the national securities market regulator, overseeing the legality of government bond issuance.
- 1968: Achieved self-sufficiency and expanded its jurisdiction nationwide.
Today, the National Securities Commission operates as a self-sufficient entity under the Ministry of National Economy. It is led by a five-member executive board.
Responsibilities and Powers
The National Securities Commission holds several key responsibilities:
- Authorizes the public offering of securities.
- Advises the national executive on stock market regulations.
- Oversees the activities of stockbrokers.
- Registers individuals and legal entities authorized to trade securities.
- Approves stock exchange regulations.
- Monitors compliance with regulations.
- Can order the closure of stock exchanges.
The Commission sets standards for individuals and legal entities involved in public offerings of securities. To ensure compliance, it can:
- Demand reports, conduct inspections, and investigate individuals and entities.
- Request assistance from the armed forces.
- Initiate legal proceedings.
- Report crimes and participate in legal actions.
Sanctions for Non-Compliance
Individuals and legal entities that violate securities laws and regulations may face the following sanctions, in addition to civil or criminal proceedings:
- Warnings
- Fines ranging from one thousand to five million pesos (which can increase fivefold the amount of illicit gains)
- Suspension from making public offerings of securities for up to two years
- Prohibition from making public offerings of securities
Stock Exchange
History and Structure
Founded in 1854, the stock exchange serves as a central hub for trading products, stocks, and bonds. This self-regulated, non-profit organization is governed by a board comprising representatives from various economic sectors. The board includes members appointed by CONSEG (National Securities Commission) and representatives from stock exchange institutions and other sectors.
Functions and Responsibilities
The stock exchange plays a crucial role in the securities market:
- Lists and delists securities based on its regulations, which are subject to approval by the National Securities Commission.
- Facilitates trading through open outcry and electronic systems.
- Provides a platform for price discovery and liquidity.
Trading Mechanisms
Open Outcry
In open outcry trading, brokers or their representatives gather on the trading floor to execute trades through verbal bids and offers. This traditional method follows a price-time priority rule, where the best price and first-come, first-served basis determine trade execution. A written contract is drawn up for each transaction.
SINAC (Electronic Trading System)
SINAC is an electronic trading system operational between 10:00 AM and 5:00 PM. It allows participants to enter buy and sell orders through interconnected terminals. Orders are displayed on screens, ranked by price. The system automatically matches buy and sell orders based on price-time priority.
Competition and Integration
Both open outcry and electronic trading coexist, with SINAC gaining prominence for high-volume stocks. Operators can enter orders through SINAC from their offices. However, no trades can be executed through open outcry at prices less favorable than those available on SINAC.
Types of Securities
Shares
Shares represent ownership in a company. Shareholders contribute capital to the company and receive voting rights and potential dividends.
Bonds
Bonds are debt securities representing loans made to companies or governments. Bondholders receive regular interest payments and the principal amount at maturity.
Convertible Bonds
Convertible bonds offer the option to convert into shares of the issuing company at a predetermined price and time.
SME Corporate Bonds
These bonds are issued by small and medium-sized enterprises (SMEs) through a simplified public offering process and are traded on the BCBA (Buenos Aires Stock Exchange).
CEDEARs
CEDEARs (Certificados de Depósito Argentinos) are depositary receipts representing shares of foreign companies or other securities traded in Argentina without a public offering.
Government Bonds
Government bonds are debt securities issued by national, provincial, or municipal governments to raise funds.
Trading and Settlement
Cash
In cash transactions, securities are delivered, and payment is made on the third working day after the trade date.
Forward Transactions
Forward transactions involve an agreement to buy or sell securities at a future date and price. Both parties are obligated to fulfill the contract at the agreed-upon terms. Margin requirements may apply to cover potential price fluctuations.
Options
Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specific date (expiration date). The option buyer pays a premium to the seller for this right.
Futures
Futures contracts obligate parties to buy or sell an underlying asset at a predetermined price and future date. Unlike options, futures require daily settlement of gains and losses (marking to market).
Market Indices
Merval
The Merval index reflects the value of a portfolio of stocks listed on the BCBA. The weighting of each stock is determined by its trading volume and the number of transactions.
Burcap
The Burcap index tracks the performance of a portfolio of stocks selected based on their market capitalization and trading activity on the BCBA. The index covers up to 80% of the total market capitalization, and the weighting of each stock is adjusted quarterly based on its market share.
Mutual Funds
Open-Ended Mutual Funds
Open-ended mutual funds allow investors to buy or redeem shares at their net asset value (NAV) at any time. The fund’s portfolio is constantly adjusted based on the investment objectives.
Closed-Ended Mutual Funds
Closed-ended mutual funds issue a fixed number of shares that trade on stock exchanges like individual stocks. Their prices are determined by supply and demand and may differ from their NAV.
MAT (Mercado a Término de Buenos Aires)
The MAT is a private, for-profit futures and options exchange in Argentina. Membership is required to trade on the MAT, and participants must comply with its regulations. The MAT operates effectively in stable economic conditions with low inflation and interest rates. It ensures the clearing and settlement of trades executed on its platform.
Commodity Futures Contracts
Commodity futures contracts on the MAT have the following characteristics:
- Quantity: Each contract represents 100 tons of the underlying commodity.
- Quality: The commodity must meet the standards set by the National Securities Commission.
- Delivery Month: Specifies the month in which the contract expires and delivery is due.
- Place of Delivery: Designates the port or location for physical delivery.
- Price: Determined by supply and demand forces in the market.