(Corrects new fee to 0.5 basis point, instead of 5 points, in paragraph 2)
* BM&FBovespa cuts fees in cash equities by 28.5 pct
* Offers discounts in day trade, progressive fee cut
* Fee cuts spark biggest gain in shares in one month
By Danielle Assalve and Guillermo Parra-Bernal
SAO PAULO, March 5 (Reuters) - BM&FBovespa SA, Brazil's sole financial bourse, took a key step on Tuesday aimed at protecting its home turf by cutting trading fees and vowing to review custody and settlement pricing as foreign competitors prepare to enter the nation's buoyant exchange sector.
It reduced trading fees in the cash equities market by 28.5 percent to 0.005 percent, or 0.5 basis point, from 0.007 percent, Chief Executive Edemir Pinto said at an event. Assuming no additional volume stemming from the fee reduction, revenue could fall by as much as 20 million reais ($10 million,) he said.
The aim of the new policy is to "divide the gains in scale with all market participants" and not to discourage potential competition, Pinto noted.
Direct Edge Holdings LLC, the fourth-largest U.S. stock exchange operator, has announced plans to request a license to operate a Brazilian bourse.
Shares of BM&FBovespa posted their biggest intraday gain in about a month, adding 2.4 percent to 13.46 reais. The gains helped erase some of the 3.8 percent decline so far this year.
The bourse is analyzing a thorough revision of fees in the BM&F derivatives segment, including contracts for interest rates and currency futures, as well as for agricultural commodities, Pinto added. The BM&F segment makes up 41 percent of its net revenue, while the Bovespa equities segment contributes 48 percent.
BM&FBovespa will also offer discounts for day trades and progressive fee cuts based on market average volumes. In the case of day trades, which account for 35 percent of equities trading volume, clients will have access to the same pool of discounts available to investors in the high-frequency trading segment, executives said.
"Our main goal is to increase market liquidity," Marcelo Maziero, head of products at the bourse, said at the same event.
Retail and non-resident investors, as well as banks, will be beneficiaries of a full reduction in fees, while institutional investors will see the cost of post-trading fees move up to 2 basis points from 1.8 basis points. Between April 1 and Dec. 1, the fee cuts will be booked as a discount, while they will be effective from Dec. 2 onward.
Starting Dec. 2, BM&FBovespa will offer a reduction of 57 percent in fees, to 3 basis points, if average daily trading volumes are between 11 billion reais and 13 billion reais. If ADTVs top 13 billion reais, the discount could come at 2 basis points, the executives added.
With ADTVs between 9 billion reais and 11 billion reais, the fee would decline to 4 basis points. If trading volumes are up to 9 billion, the 5 basis points-fee will apply. Implementation of these specific cuts is pending determination of some details.
Under current rules, BM&FBovespa enjoys a near monopoly on all trading, clearing and settlement services for most locally traded shares. While depositary receipts in New York or other global financial hubs provide a possible alternative to trading on BM&FBovespa, many investors cannot trade them due to legal or tax restrictions.
BM&FBovespa is unlikely to share clearing, custody and settlement facilities with potential rivals until at least 2015, Pinto said. Direct Edge does not rule out working with other so-called post-trading platforms in case talks with BM&FBovespa over sharing clearing services fail.
There are no legal rules currently in place requiring BM&FBovespa to sell or rent clearing services, a strategic part of any trading business that requires a major investment.
Given Brazil's market structure, competitors would only rival BM&FBovespa's leading position by investing substantially in a post-trading platform or renting BM&FBovespa's. In both cases, newcomers may see a payback only after many years.
Pinto said a revision in pricing of custody and post-trading services for retail investors will soon be announced, without offering details.
He also said that, as of now, there are more than 40 plans for initial public offerings in the exchange in the pipeline. ($1 = 1.97 Brazilian reais) (Reporting by Danielle Assalve and Guillermo Parra-Bernal; Editing by Gerald E. McCormick, Jeffrey Benkoe, Dan Grebler and Dale Hudson)