Expanding market access for investors: how exchanges can help increase investor choice

By: Samara Cohen and Themba Shongwe, Co-Head of ETF and Index Investing (EII) Markets and Investments and ETF Markets Advocacy, BlackRock, BlackRock Dec 2020

Investors seeking portfolio diversification may look to invest in international markets. However, regulations that restrict the flow of capital between markets for certain investor types can make this challenging or impossible.

Investors generally benefit from broad access to financial markets. By working with asset managers and stock exchanges, regulators may be able to improve existing regulation or create new regulations to pave the way for products that can help investors achieve their goals.

A recent regulatory change in Brazil provides a case study of how issuers of exchange-traded funds (ETFs), stock exchanges and regulators can work together to enhance investors’ ability to access international markets.

Historically, broad access to international markets has only been afforded to accredited investors (financial institutions, investment funds and individuals or legal entities with financial investments in excess of 1 million reais, or about US$ 200,000) in Brazil.(1) As a result, retail investors — who make up a majority of Brazil’s growing middle class — have faced barriers to accessing these markets.

In Brazil, investors can access international markets through three avenues: internationally domiciled brokerage accounts, commingled funds (ETFs and mutual funds) and Brazilian Depositary Receipts (BDRs). While investors can access international securities by opening a brokerage account outside the country, the tax implications may deter retail investors from accessing global markets this way.

To gain international exposure through commingled funds, Brazilian investors must rely on “wrapped” products, or locally listed funds that invest in internationally domiciled funds. Despite its popularity, this structure can be costly and pose operational challenges to fund issuers. Wrapped funds tend to be more expensive because they must use a local custodian and fund administrator, which adds a layer of cost.  As a result, the wrapped fund tends to have a higher management fee than the fund it holds.

As an alternative to wrapped funds, Brazilian investors can access locally listed stocks of international companies through BDRs. Retail investors, however, have only been able to buy “sponsored” BDRs, which has effectively limited the scope of products they can use to access global markets.(2)

There are two advantages to providing access to global markets via domestically listed products: Investors benefit from the ability to build diversified portfolios and the local capital market is bolstered by increased trading on the domestic exchange.

To expand market access for Brazilian investors, B3 used its local market knowledge to engage with the Securities and Exchange Commission of Brazil (CVM) on amending the existing BDR regulation to make ETFs and other securities eligible as underlying assets of BDRs. B3 also advocated for making BDRs more accessible to retail investors. To supplement their local market and market structure knowledge, B3 subsequently engaged BlackRock to leverage its technical expertise on cross-listing ETFs, which would hopefully become eligible for BDR investment.(3)

New opportunities for investor access to international markets

As a result of the discussions with B3, CVM put forth a proposal with a public comment period to gather feedback from industry participants and the general public.(4) After reviewing responses, CVM announced an expanded framework for BDRs in August 2020, allowing them to have ETFs, international bonds and shares of Brazilian companies listed abroad as underlying assets. The final regulation also expanded access to BDRs, making unsponsored BDRs eligible for investment by retail investors.

The expanded regulation in Brazil opens new opportunities to bring access to international markets to investors.

In response to the regulatory changes making ETFs eligible for BDRs, BlackRock plans to cross-list up to 100 ETFs to be held as underlying for BDRs on B3, five times more than the 19 equity ETFs currently available in Brazil’s market.(5) This will provide more cost-efficient access to global markets for retail and institutional investors in Brazil. To prepare for this, B3 and BlackRock are engaging with market makers and building sales distribution channels to help ensure a successful launch.

The result of this effort highlights the key role that exchanges play in strengthening and expanding access to financial markets. The positive outcome of this regulatory engagement in Brazil can serve as a model for other exchanges to work with regulators and asset managers to modernise regulatory frameworks and increase choice for investors.


1. Source: Brasil, Bolsa, Balcão (B3), as of November 13, 2020.

2. An unsponsored BDR is a certificate listed without the support of the underlying company. The issuer of an unsponsored BDR does not have to be registered with the Brazilian Securities Commission (CVM). A sponsored BDR is listed with the support of the underlying company, which is often required to be registered with the CVM

3. An unsponsored BDR is a certificate listed without the support of the underlying company. The issuer of an unsponsored BDR does not have to be registered with the Brazilian Securities Commission (CVM). A sponsored BDR is listed with the support of the underlying company, which is often required to be registered with the CVM

4. The public hearing for the proposal was opened in Q4 2019 and closed in February 2020. The proposal, all comments, the consultation report and the final rule are all available at: http://www.cvm.gov.br/audiencias_publicas/ap_sdm/2019/sdm0819.html  (in Brazilian Portuguese).

5. Source: Financial Times, “BlackRock plans huge expansion in Brazilian ETF market”, published October 19, 2020. Available at: https://www.ft.com/content/78ddd38e-7779-4621-add8-fe0a5ec05ab6

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