We can go our own way
24 July 2018
In the 1990鈥檚, Mexico鈥檚 securities lending market was in its infancy, now it鈥檚 one of the largest in Latin America. Amidst the election of Andr茅s Manuel Lopez Obrador and Trump鈥檚 renegotiation of NAFTA, what does the future entail?
Image: Shutterstock
For the first time in over four decades, Mexican voters have elected a left-wing president. This political anomaly, coupled with US President Donald Trump鈥檚 choice to rewrite the North American Free Trade Agreement (NAFTA), have made Mexico鈥檚 market uncertain and volatile.
As Rich Marquis, regional head of equity finance for the Americas at BNY Mellon Markets, explains: 鈥淢exican shares are being weighed down by concerns around NAFTA, as well as Mexico鈥檚 presidential election this year, which could usher in a less business friendly government, offsetting the positive earnings momentum.鈥�
The exchange rate of the peso has gone down with the dollar and the stock market has seen gains. But to a certain extent, there is still a 鈥榳ait and see鈥� attitude in terms of confidence in the markets, and this may not change for a while, until Andr茅s Manuel Lopez Obrador releases a confirmed mandate, at least.
Mexico has had a securities lending market since the 1990s. Regulation in the jurisdiction meets international standards. You can access鈥攍ocal bilateral agreements and electronic platforms with authorisation from the Comisi贸n Nacional Bancaria y de Valores鈥攁n independent agency. In addition, there are two authorised platforms for securities lending鈥擵ALPRE and MEIPresval.
Over the last 18 months, Nacional Financiera, a development bank, wholly owned by the Mexican government, has utilised a working group, in association with the Risk Management Association (RMA) to promote foreign participation within the securities lending market in Mexico. The market has now also been opened up to anyone that has a trading platform that facilitates securities lending.
However, there is currently a significant demand to borrow securities that isn鈥檛 currently being met. More than 60 percent of the outstanding amount is held by foreigners, which could provide liquidity to the Mexican market.
But moves are being made to improve this. Bolsa Institucional de Valores (BIVA), for one, is due to launch on 25 July. BIVA, authorised by the Financial Authorities last year, will be the second stock market in Mexico.
Once it begins operation, BIVA will trade the same instruments as the other exchange in Mexico (Bolsa Mexicana de Valores), covering equities, debts and warrants.
As Federico Ortega Gilly of Mexico鈥檚 Nacional Financiera, states: 鈥淲e are actively looking for global participants that want to take advantage of new opportunities and we are keen to improve the Mexican market鈥檚 liquidity by adding more securities to the pool.鈥�
Nacional Financiera is the country鈥檚 main government-owned bank and supports the financial market through re-stimulating securities lending.
Ortega adds: 鈥淚t鈥檚 in everyone鈥檚 interest to see the securities lending market grow in an efficient way that draws in more market participants. Some large market participants have tried for several years to encourage securities lending but it hasn鈥檛 yet fully realised its potential. The Mexican market still has a lot to offer in this regard.鈥�
鈥淚n the past 18 months, we have been working with the RMA and the central bank to design a new model to see foreign entities to do more in local markets.鈥�
Don鈥檛 stop thinking about tomorrow
LCH鈥檚 recognition as a foreign central counterparty (CCP) by Banco de M茅xico is a catalyst for enabling Mexican domiciles to benefit from a greater choice of CCPs.
The recognition means LCH can now expand clearing to Mexican-domiciled market participants to support their interest rate derivatives trading activity.
The clearinghouse will continue to offer clearing to global participants for Mexican peso-denominated interest rate derivatives as one of the 21 currencies offered by SwapClear.
LCH clears for members and their clients based in 55 countries.
Marquis says: 鈥淚n LCH鈥檚 capacity as a CCP, it could provide benefits for the Mexican securities lending market from the perspective of aligning the domestic Mexican and non-domestic Mexican lending markets.鈥�
However, he warns: 鈥淔or an agent lender the current disconnect between the onshore and offshore markets is palpable.鈥�
鈥淭he nuances regarding collateral requirements, restrictions for certain fund types regarding lendable assets, counterparty and country risk can all impact an agent鈥檚 ability to deal onshore.鈥�
Martin Pluves, CEO of LCH, says: 鈥淢exico and the Americas are important markets for us, and we are pleased to obtain recognition from the Banco de M茅xico.鈥�
In addition, LCH鈥檚 recognition as a foreign CCP by Banco de M茅xico, marks the first time that a Mexican participant has used LCH SwapClear.
This decision has come at the end of a long and winding road for Mexico鈥檚 securities lending as it first announced its determination of CCP equivalence back in October 2014.
Chain, keep us together
As it stands, Mexico is the second largest market in Latin America, with Brazil being the largest.
Mexico and Brazil are the only markets in Latin America to count for equity finance at the moment. Brazil鈥檚 first securities lending association was launched in August 2013.
It is charged with improving communication between international players, local participants and the exchange, which oversees transactions through a CCP model.
As Marquis states: 鈥淢exico is a fairly straightforward market to lend into from an offshore securities lending perspective. Brazil is still a challenge for broad-based agent lenders to lend into, given its central counterparty construct and, with the vehicle of choice being a swap.鈥�
As of 2017, Chile鈥檚 securities lending model only utilised to cover fails or facilitate short selling of equities, and while short selling is permitted, this is only via an authorised local broker dealer.
Fail coverage can be executed by the Bolsa de Comercio de Santiago鈥擟hile鈥檚 dominant stock exchange.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework, which is regulated by Bolsa de Valores de Colombia, The Office of the Financial Superintendent of Colombia and The 网爆吃瓜 Market Self Regulator.
Argentina鈥檚 securities lending framework is largely based on the Brazilian model.
Having spent the last few decades under strict control of the local regulatory authority, the country鈥檚 financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
However, Argentina鈥檚 National 网爆吃瓜 Commission still remains cautious on short selling and it intends to limit this negative impact.
With the aforementioned models in mind, Gilly Ortega, says: 鈥淥ur efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian 网爆吃瓜 Lending Association.鈥�
He adds: 鈥淚ndependently, other South American countries are starting to dig in to securities lending markets, they want to settle鈥攖he cards are in place to make things good in Mexico.鈥�
Mexico round-up: crunching the numbers
According to DataLend, Mexico鈥檚 average daily on-loan balance thus far for 2018 (as of 16 July) is $5.29 billion on loan per day, equities stand at $1.32 billion, and fixed income stands at $3.97 billion
Average daily lendable balance thus far for 2018 is $67.8 billion in lendable per day
Equities are $30 billion, and fixed income stands at $37.8 billion
Some 63.1 percent of the on-loan balance for Mexican assets is booked versus cash collateral
As Rich Marquis, regional head of equity finance for the Americas at BNY Mellon Markets, explains: 鈥淢exican shares are being weighed down by concerns around NAFTA, as well as Mexico鈥檚 presidential election this year, which could usher in a less business friendly government, offsetting the positive earnings momentum.鈥�
The exchange rate of the peso has gone down with the dollar and the stock market has seen gains. But to a certain extent, there is still a 鈥榳ait and see鈥� attitude in terms of confidence in the markets, and this may not change for a while, until Andr茅s Manuel Lopez Obrador releases a confirmed mandate, at least.
Mexico has had a securities lending market since the 1990s. Regulation in the jurisdiction meets international standards. You can access鈥攍ocal bilateral agreements and electronic platforms with authorisation from the Comisi贸n Nacional Bancaria y de Valores鈥攁n independent agency. In addition, there are two authorised platforms for securities lending鈥擵ALPRE and MEIPresval.
Over the last 18 months, Nacional Financiera, a development bank, wholly owned by the Mexican government, has utilised a working group, in association with the Risk Management Association (RMA) to promote foreign participation within the securities lending market in Mexico. The market has now also been opened up to anyone that has a trading platform that facilitates securities lending.
However, there is currently a significant demand to borrow securities that isn鈥檛 currently being met. More than 60 percent of the outstanding amount is held by foreigners, which could provide liquidity to the Mexican market.
But moves are being made to improve this. Bolsa Institucional de Valores (BIVA), for one, is due to launch on 25 July. BIVA, authorised by the Financial Authorities last year, will be the second stock market in Mexico.
Once it begins operation, BIVA will trade the same instruments as the other exchange in Mexico (Bolsa Mexicana de Valores), covering equities, debts and warrants.
As Federico Ortega Gilly of Mexico鈥檚 Nacional Financiera, states: 鈥淲e are actively looking for global participants that want to take advantage of new opportunities and we are keen to improve the Mexican market鈥檚 liquidity by adding more securities to the pool.鈥�
Nacional Financiera is the country鈥檚 main government-owned bank and supports the financial market through re-stimulating securities lending.
Ortega adds: 鈥淚t鈥檚 in everyone鈥檚 interest to see the securities lending market grow in an efficient way that draws in more market participants. Some large market participants have tried for several years to encourage securities lending but it hasn鈥檛 yet fully realised its potential. The Mexican market still has a lot to offer in this regard.鈥�
鈥淚n the past 18 months, we have been working with the RMA and the central bank to design a new model to see foreign entities to do more in local markets.鈥�
Don鈥檛 stop thinking about tomorrow
LCH鈥檚 recognition as a foreign central counterparty (CCP) by Banco de M茅xico is a catalyst for enabling Mexican domiciles to benefit from a greater choice of CCPs.
The recognition means LCH can now expand clearing to Mexican-domiciled market participants to support their interest rate derivatives trading activity.
The clearinghouse will continue to offer clearing to global participants for Mexican peso-denominated interest rate derivatives as one of the 21 currencies offered by SwapClear.
LCH clears for members and their clients based in 55 countries.
Marquis says: 鈥淚n LCH鈥檚 capacity as a CCP, it could provide benefits for the Mexican securities lending market from the perspective of aligning the domestic Mexican and non-domestic Mexican lending markets.鈥�
However, he warns: 鈥淔or an agent lender the current disconnect between the onshore and offshore markets is palpable.鈥�
鈥淭he nuances regarding collateral requirements, restrictions for certain fund types regarding lendable assets, counterparty and country risk can all impact an agent鈥檚 ability to deal onshore.鈥�
Martin Pluves, CEO of LCH, says: 鈥淢exico and the Americas are important markets for us, and we are pleased to obtain recognition from the Banco de M茅xico.鈥�
In addition, LCH鈥檚 recognition as a foreign CCP by Banco de M茅xico, marks the first time that a Mexican participant has used LCH SwapClear.
This decision has come at the end of a long and winding road for Mexico鈥檚 securities lending as it first announced its determination of CCP equivalence back in October 2014.
Chain, keep us together
As it stands, Mexico is the second largest market in Latin America, with Brazil being the largest.
Mexico and Brazil are the only markets in Latin America to count for equity finance at the moment. Brazil鈥檚 first securities lending association was launched in August 2013.
It is charged with improving communication between international players, local participants and the exchange, which oversees transactions through a CCP model.
As Marquis states: 鈥淢exico is a fairly straightforward market to lend into from an offshore securities lending perspective. Brazil is still a challenge for broad-based agent lenders to lend into, given its central counterparty construct and, with the vehicle of choice being a swap.鈥�
As of 2017, Chile鈥檚 securities lending model only utilised to cover fails or facilitate short selling of equities, and while short selling is permitted, this is only via an authorised local broker dealer.
Fail coverage can be executed by the Bolsa de Comercio de Santiago鈥擟hile鈥檚 dominant stock exchange.
In Colombia, securities lending is utilised to cover fails or facilitate short selling legal framework, which is regulated by Bolsa de Valores de Colombia, The Office of the Financial Superintendent of Colombia and The 网爆吃瓜 Market Self Regulator.
Argentina鈥檚 securities lending framework is largely based on the Brazilian model.
Having spent the last few decades under strict control of the local regulatory authority, the country鈥檚 financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
However, Argentina鈥檚 National 网爆吃瓜 Commission still remains cautious on short selling and it intends to limit this negative impact.
With the aforementioned models in mind, Gilly Ortega, says: 鈥淥ur efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian 网爆吃瓜 Lending Association.鈥�
He adds: 鈥淚ndependently, other South American countries are starting to dig in to securities lending markets, they want to settle鈥攖he cards are in place to make things good in Mexico.鈥�
Mexico round-up: crunching the numbers
According to DataLend, Mexico鈥檚 average daily on-loan balance thus far for 2018 (as of 16 July) is $5.29 billion on loan per day, equities stand at $1.32 billion, and fixed income stands at $3.97 billion
Average daily lendable balance thus far for 2018 is $67.8 billion in lendable per day
Equities are $30 billion, and fixed income stands at $37.8 billion
Some 63.1 percent of the on-loan balance for Mexican assets is booked versus cash collateral
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