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Controlled by the sovereign fund Mubadala Investment Company – based in Abu Dhabi, United Arab Emirates, with an estimated wealth of US$ 400 billion – the Base Exchange operates in the country of Flowa Technologies, now under the leadership of Francisco Gurgel, replacing Claudio Pracownik, and promises to ‘shake up’ the Brazilian capital market and the absolute ‘reign’ of B3 (B3SA3), also known as the ‘Brazilian stock exchange’.
Watchword: drastic reduction of trading fees
The boldness of the Rio stock exchange has as its ‘flagship’ the strategy of drastically reducing trading and post-trading fees (own clearing), whose charges are a recurring source of dissatisfaction for large banks with the competitor B3. Another comparative advantage would be to offer the market a leaner, more transparent, and accessible cloud structure.
To ensure quick investor adherence, BE will employ a dual trading model (cross-listing), which allows investors to buy and sell exactly the same shares (PETR4, VALE3), BDRs, and ETFs already listed, as well as choose the platform with the cheapest execution at that moment.
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System is ‘designed’ to calculate risks in real-time
According to Pracownik, BE intends to use ‘more rational margins, through a system designed to calculate risks in real-time, to obtain faster release of financial guarantees by brokers.
Currently, the new Rio stock exchange is striving to complete the technical validation process, aiming to create its own clearinghouse (Base Clearing) with the monetary authority, eliminating dependency on B3’s clearinghouse by the new institution. The mentioned creation actually requires a prior investment in the order of hundreds of millions of reais, in fully paid-up capital, for its approval.
Crucial challenge is to prove ‘predictive capability’ of algorithms
It is important to highlight that, in the current homologation phase, the crucial challenge for Base Exchange is to mathematically (and systematically) prove to the Central Bank technicians ‘that the cloud algorithms of Base Clearing have the capability for ‘these real-time risk calculations without any margin of error’.
Right at its debut, Base Exchange intends to trade spot assets, such as stocks, FIIs (real estate investment funds), and ETFs (index funds), before offering derivatives.
As a means to dilute the majority stake (73%) of Mubadala, the project manager, Americas Trading Group (ATG) – now, Flowa Technologies – intends to encourage the creation of a consortium of at least ten global financial institutions and the so-called ‘major market makers’. The strategy here is to ensure trading volume and liquidity right at the start of operations.
Reduction of ISS rate is a comparative advantage
Still on the cost plan, which makes all the difference for the investor, the BE also obtained the reduction from 5% to 2% of the ISS (Service Tax) rate for stock exchange activities, after the approval of the respective bill 3276/2024 by the Rio City Council. The measure benefits not only brokerages but also technology providers and custodians.
In the same positive tax vein, another legislative initiative, the Neutral ISS (focused on carbon credit), will allow the Base Exchange to become a global hub for trading environmental and sustainable assets.
BE’s innovation is 100% cloud technology
In synergy with the principle of relieving the investor from the total carrying cost of operations, a 100% cloud technology will be adopted, with direct impacts on the final brokerage value.
As a Clearing House and Central Counterparty (CCP), Base Clearing will perform the function of “buyer of every seller” and “seller of every buyer,” thus assuming all risk if a brokerage fails during the session.
Another novelty in this process is the need for CVM and BC to ‘delve into’ the preparation of a specific evaluation manual for the entry of the new institution.
Clearing must comply with ‘Own Capital at Risk’
Similarly, Base Clearing will have to assimilate the principle of ‘Own Capital at Risk (Skin in the game), which requires reserving part of its share capital at the ‘front line’ of risk. In the event of a default that consumes a particular brokerage’s guarantees, Mubadala’s resources will cover this loss before it reaches other members.
As it does not work directly with cash, Base Clearing – which is limited to calculating who owes and who is to receive – will need to rely on clearing banks (connected to the Brazilian Payment System of BC), which act as a ‘financial bridge’ between this clearinghouse and the accounts of brokerages and investors.
B3 will need to cut ‘fat’ in fees
On the other hand, it is important to remember that B3 has more than enough financial margin to ‘cut the fat’ from its own fees, selectively, in addition to having to launch loyalty programs aimed at large institutional clients and offer exclusivity packages in products where BE is not able to operate immediately, such as complex derivatives.
