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Conditions for the Development of Repos and Securities Lending Markets . 4 th Annual Meeting AC Debt Group May 14-16, 2008 Puerto España, Trinidad & Tobago. Alfonso Mendoza Velázquez Research and Economic Intelligence Centre Mexico. Agenda. Introduction

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conditions for the development of repos and securities lending markets

Conditions for the Development of Repos and Securities Lending Markets

4th Annual Meeting AC Debt Group

May 14-16, 2008

Puerto España, Trinidad & Tobago

Alfonso Mendoza Velázquez

Research and Economic Intelligence Centre

Mexico

agenda
Agenda
  • Introduction
  • Repurchase Agreements (Repo) and Securities Lending (SL) transactions
  • Recommendations & Suggestions
    • International Experience
    • UK, Spain, USA, Latinoamerica
    • Mexico
  • Conclusions

4th LAC Debt Group Meeting, Trinidad & Tobago

introduction
Introduction
  • Aims of the Study
  • Extensive Financial Reforms in LA with no evident outcomes
    • Low liquidity & high concentration, few investors and few secutiries available.
    • ‘Short-termism’
  • Developed repo and SL markets promote successful capital markets and economic growth.
  • Implement sound Fiscal, Legal and Regulatory measures & remove restrictions

4th LAC Debt Group Meeting, Trinidad & Tobago

securities lending repos
Securities Lending & Repos
  • Securities Lending:
    • The purchaser buys specific securities in exchange of a commision (premium)
    • The seller can make a profit on highly liquid and overdemanded securities.
    • The property is transferred.
  • Repurchase Agreements:
    • Exchange of high credit quality securities for funds.
    • Securities serve as collateral for raising funds
    • Funds act as collateral for borrowing securities.

4th LAC Debt Group Meeting, Trinidad & Tobago

repo agreement
Repo Agreement

4th LAC Debt Group Meeting, Trinidad & Tobago

securities lending
Securities Lending

4th LAC Debt Group Meeting, Trinidad & Tobago

what are the benefits
What are the benefits?
  • Increases the general liquidity of the market
    • Serves as a liquidity channel to other markets (i.e., derivatives and forex)
  • Contributes to the efficiency of the market and price formation
  • Provides the market with longer maturities
  • Decreases the % of default
  • Can be used in short sales, arbitrage, speculation, etc.
  • Can generate profits on securities
  • Increases the availability of instruments

4th LAC Debt Group Meeting, Trinidad & Tobago

risks
Risks
  • Default is reduced significantly
  • Market Risk
  • Mismatch Risk
  • Issuer Risk
  • Liquidity Risk

4th LAC Debt Group Meeting, Trinidad & Tobago

sl repos in emerging markets
SL & Repos in Emerging Markets
  • Low liquidity and Concentration.
    • Few transactions on corporate debt and long term maturities
    • Specialization on government securities
      • In some countries the securities market is repo based
  • Info on SL and repo market dynamics, size, virtually unknown or unavailable.

4th LAC Debt Group Meeting, Trinidad & Tobago

sl repos in emerging markets an eye bird view
SL & Repos in Emerging Markets: An eye bird view
  • Lack of monitoring
  • Half the authorities believe a regulatory and fiscal framework exist
  • 40% considers they have the financial platform needed for the development of these markets
  • There is not reliable information on size of the market, composition, maturity or participants.

4th LAC Debt Group Meeting, Trinidad & Tobago

general suggestions
General Suggestions
  • A Latin American Repo & Securities Market Survey that identifies:
    • Participants (actual and potential), volumes & dynamics, maturities, instruments, fiscal & regulatory aspects, etc.
    • Important for better monitoring and policy analysis
  • Authorities should promote third party agreements to minimize risks
  • Comitee and Code of Conduct on Repo and SL with main actors
  • Monitor unusual activities by institutional investors and hedge funds
  • Identify causes of low liquidity (market practices, regulatory framework, etc.)
  • International transactions (beware of liquidity effects)

4th LAC Debt Group Meeting, Trinidad & Tobago

mexican experience
Mexican Experience
  • Macroeconomic stability has prompted a capital market with greater maturities
  • Repo market is regarded as a source of short term liquidity
  • Repo transactions:
    • Maturity <1-month
    • Mostly on government instruments.
  • SL transactions:
    • Mostly on Stocks and few on government debt or capital market instruments.

4th LAC Debt Group Meeting, Trinidad & Tobago

mexican experience1
Mexican Experience
  • Third Parties
    • Custody and administration of securities
    • Electronic platform to engage in SL transactions
    • Risks Comitee
    • Standard Repo Agreement
  • Identify more clearly market participants
    • Incentives
    • Resistance

4th LAC Debt Group Meeting, Trinidad & Tobago

conclusions
Conclusions
  • Low liquidity & high concentration, short term view.
  • Benefits and some risks
  • More studies needed:
    • Survey
    • Incentives
    • Resistence
    • Assymetric information
    • Comitee

4th LAC Debt Group Meeting, Trinidad & Tobago

uk repo market
UK Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago

uk repo market1
UK Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago

slide17

Spain Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago

spain and europe repo mkt
Spain and Europe Repo Mkt

4th LAC Debt Group Meeting, Trinidad & Tobago

us repo market
US Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago

us securities lending
US: Securities Lending

4th LAC Debt Group Meeting, Trinidad & Tobago

us sl composition
US: SL Composition

4th LAC Debt Group Meeting, Trinidad & Tobago

mexico sl evolution

Esquema 6. Evolución del Préstamo de Valores en México

Sistema

VALPRE

de Indeval

Proyecto de Modernización de Préstamo de Valores

Circular 1/2004

Mecanismos de Negociación

Misceláneas 2.1.6, 3.1.10, 3.3.6 y

Circular S-11.3

Temas Fiscales y Seguros

Circular 10-195

Ventanilla Banxico

1996

1997

2000

2005

2002-2003-2004

2006-2007

  • Se formaliza el mercado de préstamo de valores mediante la emisión de la circular y el inicio de operaciones en VALPRE
  • C 10-195:
  • Aforos fijos y muy altos
  • Plazo máximo 1 año

Los Formadores de Mercado pueden realizar operaciones de préstamo de valores sobre Valores Gubernamentales con Banco de México

Se inicia proyecto de nueva regulación por parte de Banco de México y CNBV con el apoyo de grupos de trabajo de las distintas asociaciones (AMIB, ABM, AMAFORE, AIFI)

  • Con la entrada en vigor de la nueva circular y la operación de Mecanismos de Negociación se abren las puertas para tener un mercado más eficiente, dinámico y accesible para todos
  • C 1/2004:
  • Aforos dinámicos
  • Plazo abierto
  • Fecha Valor
  • Operación de Mecanismos de Negociación

Las misceláneas fiscales publicadas en marzo del 2007 proporcionan un tratamiento fiscal más claro, se hace referencia a la Circular de Reporto de Valores de Banxico y se establece la participación de los seguros en operaciones de préstamo de valores.

Mexico: SL evolution

4th LAC Debt Group Meeting, Trinidad & Tobago

mexico sl stocks
Mexico: SL stocks

4th LAC Debt Group Meeting, Trinidad & Tobago

mexico sl
Mexico: SL

4th LAC Debt Group Meeting, Trinidad & Tobago

mexico repo transactions
Mexico: Repo transactions

4th LAC Debt Group Meeting, Trinidad & Tobago

mexico repo by maturity
Mexico: Repo by maturity

4th LAC Debt Group Meeting, Trinidad & Tobago

europe repo by maturity
Europe: Repo by Maturity

4th LAC Debt Group Meeting, Trinidad & Tobago