Mexico
02 November 2010
Although Mexico has been hit hard by the economic downturn, its
securities lending business has flourished
Image: Shutterstock
With an economy so dependent on the United States, it was perhaps inevitable that Mexico has found the past couple of years a struggle. Around 80 per cent of the country鈥檚 exports go to its neighbour, and it also receives significant inflows from tourism and other leisure activities.
So as the US entered a slowdown, so too did Mexico. Fewer consumers were buying the goods that were produced in the country, and fewer holidaymakers were visiting the resorts. Tourism, in fact, has suffered three body blows over the past couple of years - the recession means there is less money to spend on holiday, while the recent fears of a swine flu epidemic (which saw an outbreak in the country) meant that some people wanted to stay away. And in Europe and Asia, there have been regular media reports about lawlessness in some areas of the country - while tourists are rarely exposed to the real dark side of the country, the reports have been enough to put some people off.
But while Mexico may have been battered by the last couple of years, it is by no means fallen. The country has major oil reserves, which make up a significant part of its economy, so has seen benefits from the huge price rises in oil over recent years. There is also an increasingly high profile wealthy elite who invest both internally and internationally - indeed, telecoms magnate Carlos Slim has at times been anointed the world鈥檚 richest man with a fortune of around $50 billion. He鈥檚 the first person from a so-called 鈥榙eveloping nation鈥� to top the list. But while there was some pride within Mexico at his achievement, there was also anger from some in what is still in some places a desperately poor country.
In an attempt to increase the prosperity of the country and its citizens, the Mexican Government鈥檚 strategy has been to cautiously encourage foreign firms to build up huge stakes in the nation. The North American Free Trade Agreement, signed in 1994, saw a huge inflow of investment in the country from the US and Canada, which was swiftly followed by European and Asian firms.
Whether this has improved the lives of ordinary Mexicans may still be up for debate, but what is undeniable is that the financial infrastructure of the country is now on a par with most Western counterparts. And there are aggressive moves to keep Mexico at the top of the Latin American pile, and remaining a serious rival to its Southern counterparts in Brazil, Argentina and the like.
The players
As with the rest of the Latin American region, Spanish banks make up a major part of the Mexican banking system. Citi has long been a major player in the country, but it wasn鈥檛 until 1994, when the market opened up to international players that BBVA and Santander of Spain quickly gained a foothold, and they were soon joined by the UK鈥檚 HSBC and Scotiabank of Canada, who snapped up domestic providers.
Since then, more multinationals have entered - Fuji, Societe Generale, Tokyo Bank, Deutsche Bank and ABN Amro are now major players with significant market shares in securities lending. There are few remaining Mexican-owned banks, and these are not active in the market.
鈥淢exico has an efficient and ambitious banking sector, and securities lending is well supported by the country鈥檚 regulators for the most part,鈥� says fund consultant Enrique Sanchez. 鈥淏ut the growth is coming from the international players who are leveraging their experience and capabilities from other markets here.
鈥溚怨� lending - along with other complex financial instruments - is comparatively new to Mexico, and what remains of the local banking sector has not jumped on the bandwagon. In part this is down to an innate conservatism amongst the [domestic] banks, but it鈥檚 also down to a lack of systems and knowledge about this type of market.鈥�
The market
Although there are some players with a more pessimistic view, the general feeling is that securities lending has done remarkably well during the downturn. 鈥淲ithin Mexico, we have seen the volumes of securities lending increasing about 25 per cent in the last two years,鈥� says Patrick Avitabile, managing director and global securities finance head of equity trading at Citi鈥檚 Global Transaction Services in New York. 鈥淭he short sells are increasing, and therefore, the market need for securities lending has grown. Offshore, we have witnessed an increase of roughly the same magnitude.
鈥淭he increase is mainly an offshoot of additional borrowers participating in the Mexican market. We now trade with in excess of a dozen counterparties, where that number was two-to-three two years prior.鈥�
It鈥檚 international players that are driving the market, agrees Sanchez. 鈥淲e鈥檙e seeing an increased confidence in the underlying strength of the Mexican market,鈥� he says. 鈥淧retty much everything that could go wrong [in the economy] did go wrong in the last three years, yet the country remains on a firm footing. And that鈥檚 a good advert for encouraging inward investment.
鈥淲e鈥檙e also seeing more domestic funds involving themselves in lending securities. They have learned from their North American neighbours about the best ways to earn income while protecting themselves, and have an increased confidence in allowing their securities to be used. They still prefer the reassurance of a major international player to act on their behalf, however - at the moment, size really does matter when it comes to outsourcing these sorts of services.鈥�
The securities most lent and borrowed are the major companies of Mexico, especially those that are offshoots of multinational firms - the Mexican offshoot of Wal-Mart, for example, is very popular, as are telecoms, oil and mineral stocks.
When it comes to collateral, the eligible resources are set out by the regulators. Federal bonds are the most popular form, although corporate bonds remain an option. Cash is not allowed, which creates significant differences from the US market, while if shares are to be offered, they have to be in the most liquid and high-profile companies.
VALPRE
At the start of 1997, a securities lending programme was launched by S.D. Indeval. The aims were to make the process of settling trades between brokers more efficient, enhancing liquidity, facilitating short sales and allowing for a greater degree of compliance in international trades.
The firm built an electronic system for arranging securities loans, called VALPRE. Through the system, brokerage firms, banks and investors are able to: enter bids to lend or borrow securities; establish and administer margins; look up corresponding movements; and determine the premium, amount of securities and term requested for each bid. It was the first electronic system of its kind in Mexico.
Several types of security can be used on the exchange: shares, Federal treasury certificates, bonds, inflation-adjusted bonds, banker鈥檚 acceptances, bank certificates of deposit, bank promissory notes with yield payable on maturity, bank-backed commercial paper and bank bonds. The securities must be listed in the National Registry of 网爆吃瓜 and Intermediaries and deposited at S.D. Indeval.
There are two types of securities lending transactions on the platform: standard and automatic:
Standard Loans
They are transacted directly by participants through VALPRE.
They are subject to maximum terms.
The borrower may redeem the loan in advance at any time after the first day of the term, In the bid record, both the lender and borrower must indicate the add-on rate applicable for early redemption.
Automatic Loans
They are extended to any depositor that does not have sufficient securities to settle a transaction on the settlement date.
S.D. Indeval arranges the loan on behalf of the depositor in order to avoid default.
The borrower must pay an additional cost above the premium established by the lender in the corresponding bid.
Regulation
Perhaps uniquely amongst emerging economies, it鈥檚 difficult to find someone prepared to criticise Mexico鈥檚 regulatory structure or the regulators themselves. 鈥淲e have never had a serious problem with the regulators here,鈥� says a representative of one of the major Spanish banks, who adds that this is not the case in other markets on the continent, particularly Brazil and Argentina.
鈥淎s securities lending has developed within Mexico, the authorities have taken the attitude that this instrument is good for the market and they have applied a light touch that others really should learn from. That鈥檚 not to say that the market is unregulated - far from it - but that they do not make knee-jerk decisions that damage the market. They make sure they understand what is going on and what the impact of any new rules will be before they act. It鈥檚 a breath of fresh air.鈥�
So as the US entered a slowdown, so too did Mexico. Fewer consumers were buying the goods that were produced in the country, and fewer holidaymakers were visiting the resorts. Tourism, in fact, has suffered three body blows over the past couple of years - the recession means there is less money to spend on holiday, while the recent fears of a swine flu epidemic (which saw an outbreak in the country) meant that some people wanted to stay away. And in Europe and Asia, there have been regular media reports about lawlessness in some areas of the country - while tourists are rarely exposed to the real dark side of the country, the reports have been enough to put some people off.
But while Mexico may have been battered by the last couple of years, it is by no means fallen. The country has major oil reserves, which make up a significant part of its economy, so has seen benefits from the huge price rises in oil over recent years. There is also an increasingly high profile wealthy elite who invest both internally and internationally - indeed, telecoms magnate Carlos Slim has at times been anointed the world鈥檚 richest man with a fortune of around $50 billion. He鈥檚 the first person from a so-called 鈥榙eveloping nation鈥� to top the list. But while there was some pride within Mexico at his achievement, there was also anger from some in what is still in some places a desperately poor country.
In an attempt to increase the prosperity of the country and its citizens, the Mexican Government鈥檚 strategy has been to cautiously encourage foreign firms to build up huge stakes in the nation. The North American Free Trade Agreement, signed in 1994, saw a huge inflow of investment in the country from the US and Canada, which was swiftly followed by European and Asian firms.
Whether this has improved the lives of ordinary Mexicans may still be up for debate, but what is undeniable is that the financial infrastructure of the country is now on a par with most Western counterparts. And there are aggressive moves to keep Mexico at the top of the Latin American pile, and remaining a serious rival to its Southern counterparts in Brazil, Argentina and the like.
The players
As with the rest of the Latin American region, Spanish banks make up a major part of the Mexican banking system. Citi has long been a major player in the country, but it wasn鈥檛 until 1994, when the market opened up to international players that BBVA and Santander of Spain quickly gained a foothold, and they were soon joined by the UK鈥檚 HSBC and Scotiabank of Canada, who snapped up domestic providers.
Since then, more multinationals have entered - Fuji, Societe Generale, Tokyo Bank, Deutsche Bank and ABN Amro are now major players with significant market shares in securities lending. There are few remaining Mexican-owned banks, and these are not active in the market.
鈥淢exico has an efficient and ambitious banking sector, and securities lending is well supported by the country鈥檚 regulators for the most part,鈥� says fund consultant Enrique Sanchez. 鈥淏ut the growth is coming from the international players who are leveraging their experience and capabilities from other markets here.
鈥溚怨� lending - along with other complex financial instruments - is comparatively new to Mexico, and what remains of the local banking sector has not jumped on the bandwagon. In part this is down to an innate conservatism amongst the [domestic] banks, but it鈥檚 also down to a lack of systems and knowledge about this type of market.鈥�
The market
Although there are some players with a more pessimistic view, the general feeling is that securities lending has done remarkably well during the downturn. 鈥淲ithin Mexico, we have seen the volumes of securities lending increasing about 25 per cent in the last two years,鈥� says Patrick Avitabile, managing director and global securities finance head of equity trading at Citi鈥檚 Global Transaction Services in New York. 鈥淭he short sells are increasing, and therefore, the market need for securities lending has grown. Offshore, we have witnessed an increase of roughly the same magnitude.
鈥淭he increase is mainly an offshoot of additional borrowers participating in the Mexican market. We now trade with in excess of a dozen counterparties, where that number was two-to-three two years prior.鈥�
It鈥檚 international players that are driving the market, agrees Sanchez. 鈥淲e鈥檙e seeing an increased confidence in the underlying strength of the Mexican market,鈥� he says. 鈥淧retty much everything that could go wrong [in the economy] did go wrong in the last three years, yet the country remains on a firm footing. And that鈥檚 a good advert for encouraging inward investment.
鈥淲e鈥檙e also seeing more domestic funds involving themselves in lending securities. They have learned from their North American neighbours about the best ways to earn income while protecting themselves, and have an increased confidence in allowing their securities to be used. They still prefer the reassurance of a major international player to act on their behalf, however - at the moment, size really does matter when it comes to outsourcing these sorts of services.鈥�
The securities most lent and borrowed are the major companies of Mexico, especially those that are offshoots of multinational firms - the Mexican offshoot of Wal-Mart, for example, is very popular, as are telecoms, oil and mineral stocks.
When it comes to collateral, the eligible resources are set out by the regulators. Federal bonds are the most popular form, although corporate bonds remain an option. Cash is not allowed, which creates significant differences from the US market, while if shares are to be offered, they have to be in the most liquid and high-profile companies.
VALPRE
At the start of 1997, a securities lending programme was launched by S.D. Indeval. The aims were to make the process of settling trades between brokers more efficient, enhancing liquidity, facilitating short sales and allowing for a greater degree of compliance in international trades.
The firm built an electronic system for arranging securities loans, called VALPRE. Through the system, brokerage firms, banks and investors are able to: enter bids to lend or borrow securities; establish and administer margins; look up corresponding movements; and determine the premium, amount of securities and term requested for each bid. It was the first electronic system of its kind in Mexico.
Several types of security can be used on the exchange: shares, Federal treasury certificates, bonds, inflation-adjusted bonds, banker鈥檚 acceptances, bank certificates of deposit, bank promissory notes with yield payable on maturity, bank-backed commercial paper and bank bonds. The securities must be listed in the National Registry of 网爆吃瓜 and Intermediaries and deposited at S.D. Indeval.
There are two types of securities lending transactions on the platform: standard and automatic:
Standard Loans
They are transacted directly by participants through VALPRE.
They are subject to maximum terms.
The borrower may redeem the loan in advance at any time after the first day of the term, In the bid record, both the lender and borrower must indicate the add-on rate applicable for early redemption.
Automatic Loans
They are extended to any depositor that does not have sufficient securities to settle a transaction on the settlement date.
S.D. Indeval arranges the loan on behalf of the depositor in order to avoid default.
The borrower must pay an additional cost above the premium established by the lender in the corresponding bid.
Regulation
Perhaps uniquely amongst emerging economies, it鈥檚 difficult to find someone prepared to criticise Mexico鈥檚 regulatory structure or the regulators themselves. 鈥淲e have never had a serious problem with the regulators here,鈥� says a representative of one of the major Spanish banks, who adds that this is not the case in other markets on the continent, particularly Brazil and Argentina.
鈥淎s securities lending has developed within Mexico, the authorities have taken the attitude that this instrument is good for the market and they have applied a light touch that others really should learn from. That鈥檚 not to say that the market is unregulated - far from it - but that they do not make knee-jerk decisions that damage the market. They make sure they understand what is going on and what the impact of any new rules will be before they act. It鈥檚 a breath of fresh air.鈥�
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