We can go our own way
24 July 2018
In the 1990’s, Mexico’s securities lending market was in its infancy, now it’s one of the largest in Latin America. Amidst the election of Andrés Manuel Lopez Obrador and Trump’s renegotiation of NAFTA, what does the future entail?
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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’s choice to rewrite the North American Free Trade Agreement (NAFTA), have made Mexico’s market uncertain and volatile.
As Rich Marquis, regional head of equity finance for the Americas at BNY Mellon Markets, explains: “Mexican shares are being weighed down by concerns around NAFTA, as well as Mexico’s presidential election this year, which could usher in a less business friendly government, offsetting the positive earnings momentum.”
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 ‘wait and see’ attitude in terms of confidence in the markets, and this may not change for a while, until Andrés 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—local bilateral agreements and electronic platforms with authorisation from the Comisión Nacional Bancaria y de Valores—an independent agency. In addition, there are two authorised platforms for securities lending—VALPRE 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’t 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’s Nacional Financiera, states: “We are actively looking for global participants that want to take advantage of new opportunities and we are keen to improve the Mexican market’s liquidity by adding more securities to the pool.”
Nacional Financiera is the country’s main government-owned bank and supports the financial market through re-stimulating securities lending.
Ortega adds: “It’s in everyone’s 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’t yet fully realised its potential. The Mexican market still has a lot to offer in this regard.”
“In 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.”
Don’t stop thinking about tomorrow
LCH’s recognition as a foreign central counterparty (CCP) by Banco de México 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: “In LCH’s 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.”
However, he warns: “For an agent lender the current disconnect between the onshore and offshore markets is palpable.”
“The nuances regarding collateral requirements, restrictions for certain fund types regarding lendable assets, counterparty and country risk can all impact an agent’s ability to deal onshore.”
Martin Pluves, CEO of LCH, says: “Mexico and the Americas are important markets for us, and we are pleased to obtain recognition from the Banco de México.”
In addition, LCH’s recognition as a foreign CCP by Banco de México, 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’s 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’s 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: “Mexico 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.”
As of 2017, Chile’s 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—Chile’s 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 Securities Market Self Regulator.
Argentina’s 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’s financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
However, Argentina’s National Securities Commission still remains cautious on short selling and it intends to limit this negative impact.
With the aforementioned models in mind, Gilly Ortega, says: “Our efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.”
He adds: “Independently, other South American countries are starting to dig in to securities lending markets, they want to settle—the cards are in place to make things good in Mexico.”
Mexico round-up: crunching the numbers
According to DataLend, Mexico’s 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: “Mexican shares are being weighed down by concerns around NAFTA, as well as Mexico’s presidential election this year, which could usher in a less business friendly government, offsetting the positive earnings momentum.”
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 ‘wait and see’ attitude in terms of confidence in the markets, and this may not change for a while, until Andrés 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—local bilateral agreements and electronic platforms with authorisation from the Comisión Nacional Bancaria y de Valores—an independent agency. In addition, there are two authorised platforms for securities lending—VALPRE 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’t 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’s Nacional Financiera, states: “We are actively looking for global participants that want to take advantage of new opportunities and we are keen to improve the Mexican market’s liquidity by adding more securities to the pool.”
Nacional Financiera is the country’s main government-owned bank and supports the financial market through re-stimulating securities lending.
Ortega adds: “It’s in everyone’s 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’t yet fully realised its potential. The Mexican market still has a lot to offer in this regard.”
“In 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.”
Don’t stop thinking about tomorrow
LCH’s recognition as a foreign central counterparty (CCP) by Banco de México 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: “In LCH’s 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.”
However, he warns: “For an agent lender the current disconnect between the onshore and offshore markets is palpable.”
“The nuances regarding collateral requirements, restrictions for certain fund types regarding lendable assets, counterparty and country risk can all impact an agent’s ability to deal onshore.”
Martin Pluves, CEO of LCH, says: “Mexico and the Americas are important markets for us, and we are pleased to obtain recognition from the Banco de México.”
In addition, LCH’s recognition as a foreign CCP by Banco de México, 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’s 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’s 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: “Mexico 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.”
As of 2017, Chile’s 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—Chile’s 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 Securities Market Self Regulator.
Argentina’s 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’s financial market is gradually getting freed and its regulator is on the verge of granting permission for short selling.
However, Argentina’s National Securities Commission still remains cautious on short selling and it intends to limit this negative impact.
With the aforementioned models in mind, Gilly Ortega, says: “Our efforts as a region should be towards creating a Latin American association for securities lending, similar to the Pan Asian Securities Lending Association.”
He adds: “Independently, other South American countries are starting to dig in to securities lending markets, they want to settle—the cards are in place to make things good in Mexico.”
Mexico round-up: crunching the numbers
According to DataLend, Mexico’s 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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