UPDATE 3-Brazil's main stock index may change for the first time

Fri Aug 9, 2013 3:35pm EDT

* Bourse gauges changes to weighting, inclusion rules

* Changes discussed as exchange faces entry of rivals

* Trading volumes may slide sequentially this quarter

By Guillermo Parra-Bernal

SAO PAULO, Aug 9 (Reuters) - Brazil's 45-year-old benchmark Bovespa stock index could be subject to changes in its structure for the first time to better reflect new trends facing the country's economy, financial bourse BM&FBovespa SA said on Friday.

The bourse could announce changes as early as next month, Chief Executive Edemir Pinto told reporters at an event to discuss second-quarter earnings. The Bovespa currently comprises 71 stocks from 64 companies, mostly from the commodities, financial services and industrial sectors.

The issue is being discussed with market participants, Pinto said. He declined to elaborate on any potential specific modification to the Bovespa but said changes could be brought about in areas such as weighting and in rules for the inclusion and exclusion of companies in the index.

The decision underscores the growing pressure from international and local investors for a stock market gauge that better mirrors the new realities of Brazil's economy. During the past decade, more than 40 million people joined the middle class, driving a hefty expansion in services and helping re-balance the influence of commodity and industrial companies.

"The preoccupation of investors has always been ours too," Pinto said, referring to the structure of the index. "It is important that the market has a benchmark that is reliable, that is predictable and well structured."

The Bovespa, a gross total return index, has grouped the most-traded stocks in the São Paulo Stock Exchange with no technical change since its inception in 1968. The stocks forming part of the index account for more than 80 percent of trades in the equities cash market and 70 percent of the market value of the companies listed on the bourse.

The Bovespa index rose 2 percent on Friday to 49,915.50. It has lost about 20 percent of its value in the year - the worst-performing major stock index in Latin America.

COMPETITION

Potential changes in the Bovespa loom as the exchange faces the entry of new competitors in the equities trading business. A new pricing policy to lower trading fees, a weak economy and dwindling confidence have also weighed on volumes for months.

Pinto plans to deliver on Friday a set of BM&FBovespa's own recommendations for a new regulatory framework for competition in Brazil's exchange industry to securities watchdog CVM. He said competition is "healthy" for the industry and vowed to open access to BM&FBovespa's clearing and depositary unit to rivals by the end of next year at the earliest.

"Things still depend on the decision by regulatory agencies," he added.

NYSE Euronext and Rio de Janeiro-based trading system company Americas Trading Group are seeking approval from the CVM to open a new exchange in Brazil. For most of last year, BM&FBovespa officials said renting so-called post-trading facilities could be possible only after the bourse finalized the integration of its four clearinghouses.

The deadline to deliver recommendations for the new rules was extended to Sept. 11 from next Monday, the agency said in a statement. The CVM put the rules up for discussion with market participants in a public hearing.

BM&FBovespa's second-quarter profit slightly beat estimates. Net income reached 350.9 million reais ($154 million), according to a securities filing on Thursday. That was in line with the 350.5 million reais average estimate of five analysts in a Thomson Reuters poll.

The improved results, aided by a surge in demand for complex financial instruments to protect investors from interest-rate and currency swings, may only be temporary, analysts said. Preliminary July data at BM&FBovespa showed signs of a weaker economic and market backdrop as well as eroding investor confidence.

"Although second-quarter results were very good, latest volume data have been weak, which doesn't bode well for BM&FBovespa," Marcelo Henriques and Eduardo Rosman, analysts with Banco BTG Pactual in São Paulo, said in a Friday note.

Indeed, Eduardo Guardia, BM&FBovespa's senior vice president for products, added that trading volumes could drop in the third quarter from a record high in the April-to-June period. "It might be a little hard to sustain such levels, but we don't know yet," Guardia said.

Higher volume and the number of trades in the Bovespa equities segment were partly the result of more business days in the quarter, boosting revenue and profits.

Shares of BM&FBovespa shed 2.5 percent to 11.80 reais in afternoon trading on Friday. The stock has shed about 11 percent so far this year.

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