Federico Ortega Gilly of Mexico’s Nacional Financiera explains why his country’s securities lending market is ripe for foreign investment

How has Mexico’s securities lending market developed in the past year and what role does Nafin play?

The Mexican securities lending market first started in the mid-1990s. It has evolved since then and regulation adapted to be better aligned with international standards. Therefore, it has opened up to foreign investors.

Nacional Financiera (Nafin) is a development bank and is wholly-owned by the Mexican government. Nafin’s principle goal is to provide access to affordable financing to micro, small- and medium-sized enterprises operating throughout Mexico, a historically under-banked sector of the economy, as well as to contribute to the development of the financial markets.

In accordance to this, Nafin has the support of the Mexican government to promote and develop the securities lending market.

Nafin’s primary role in securities lending is to provide liquidity and access to this market to broker-dealers and banks through our programme, because many do not have the infrastructure in place to do these types of activities.

Most of the broker-dealers and banks do not have a dedicated securities lending desk and most of the transactions are done by the back office. Most participants don’t see it as an actual business, just from an administrative point of view to avoid defaults on settlement dates.

Can you outline Mexico’s regulatory framework?

We had a significant breakthrough in 2004 when a lot of our rules were given a major overhaul and made a lot more competitive. Before then the regulation was very strict in terms of collateral requirements. It was very expensive and didn’t incentivise the buy side to engage in this market.

You were also unable to trade bilaterally and had to conduct transactions through a system called Valpre, which is part of the local depository trust company (INDEVAL) that mainly tended to focus on equities.

Now, with the new regulation, you’re still able to use this system but the market has also been opened up to anyone that has a trading platform that facilitates securities lending, and at this stage we only have two local platforms in Mexico.

It was also during this overhaul that international transactions were allowed and the standard agreements such as the master securities lending agreement and the global master securities lending agreement were recognised for bilateral trading.

As part of that initiative, the collateral requirements were also loosened to be more in-line with international standards.

Are the government and regulators fully on-board?

At Nafin, as a government-owned bank, we have the mandate to help develop the Mexican financial market. Therefore, Nafin supports the financial market through re-stimulating securities lending for all the same liquidity and efficiency benefits that you see in existing markets. It’s in everyone’s interest to see the securities lending market grow in an efficient way that draws in more market participants.

This is to achieve greater liquidity and more transactions not only in the securities lending market but in the equities and fixed income markets as well, resulting in a more efficient and mature Mexican financial market overall.

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.

When the new regulation was issued in 2004, there was initially a greater interest in Mexico from international investors.

The Risk Management Association held a conference in 2008 focused on the Latin American region and brokers and banks started to do some trades. However, this activity slowed down after a while.

Are there any initiatives going on in Mexico to boost the market?

Our aim is to get global investors to start to look at Mexico as a viable opportunity for new growth in their securities lending business.
We already have some global custodians operating in our market but there is a lot of scope for further growth.

The Mexican market is very different from others, such as Europe, because we have a situation where there is a significant demand to borrow securities that isn’t currently being met, but could be by foreign investors. It’s worth mentioning the particular case of the M bonds issued by the Mexican government. More than 60 percent of the outstanding amount is held by foreigners, which could provide liquidity to the Mexican market. As a development bank, 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. At the same time, locally, we have a big initiative to educate beneficial owners of the market’s benefits.

Are state pension funds able to participate?

Pension funds are able to participate. For example, Nafin’s own pension fund is an active participant of the securities lending market. Of course, we have guidelines of what our fund can do, but we are nearly utilising 100 percent of the assets that we’re able to make available to lend.

We’re trying to be an example and lead from the front by having skin in the game while we promote the market.

In terms of private pension funds and the mandatory pension funds known as ‘Afores’, some are already active in the fixed income market, but for the equity market there are some regulatory hurdles that are currently being worked through, but we will get it done in the near future.

Once those rules are amended, those pension funds will be able to be more active in the equity side of securities lending and I fully expect more to join in the near future.

Do you see a role for CCPs in the Mexican market?

We are still in a development stage but it’s definitely something that may happen in the future.

Nafin, in accordance with its mandate of helping to develop the financial market, is open to the idea of acting as a unique counterpart to foreign counterparts, which may find that more attractive than doing separate due diligence and paperwork for all the local counterparties.

By offering this partnership, we hope it will allow for foreign participants to look at the Mexican market more quickly than they might otherwise.

How does Mexico compare to the rest of Latin America?

As it stands Mexico is the second largest market in Latin America, with Brazil being the largest.

The various regulators do talk but in terms of securities lending, we still have a long way to go before we achieve a regional understanding. Each country that is active in securities lending, such as Brazil and Chile, have gone their own way with creating a regulatory framework for securities lending and now they are very different.

There was an effort a few years ago to create an association for securities lending in Brazil, but our efforts as a region should be towards creating a Latin American association for securities lending similar to the Pan Asian Securities Lending Association. If we as a region came together and formed a more unified model, it would help a lot in our efforts to attract outside investors.

A united front to promote our securities lending markets abroad would be a big step forward.

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