PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN MEXICO

Transcription

1 WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT INITIATIVE CENTRE FOR LATIN AMERICAN MONETARY STUDIES THE WORLD BANK PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN MEXICO MARCH 2003

2 PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN MEXICO

3 PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS IN MEXICO WESTERN HEMISPHERE PAYMENTS AND SECURITIES CLEARANCE AND SETTLEMENT INITIATIVE CENTRE FOR LATIN AMERICAN MONETARY STUDIES WORLD BANK

4 First English edition, 2004 Centro de Estudios Monetarios Latinoamericanos y Banco Mundial, 2003 Publicado también en español Centro de Estudios Monetarios Latinoamericanos, 2003 Durango 54, México, D.F All rights reserved Derechos reservados conforme a la ley ISBN Printed and made in Mexico Impreso y hecho en México

5 Foreword Following a request from the Western Hemisphere Finance Ministers, the World Bank (WB) launched in January 1999 the Western Hemisphere Payments and Securities Clearance and Settlement Initiative. The World Bank in partnership with the Centre for Latin American Monetary Studies (CEMLA) leads this initiative. Its objective is to describe and assess the payments systems of the Western Hemisphere with a view to identifying possible improvement measures in their safety, efficiency and integrity. To carry out this mandate an International Advisory Council (IAC) was established in March 1999 comprised of experts in the field from several institutions. In addition to representatives from the WB and CEMLA this Council includes members from the: Bank for International Settlements, Bank of Italy, Bank of Portugal, Bank of Spain, Council of Securities Regulators of the Americas (COSRA), De Nederlandsche Bank, European Central Bank, Federal Reserve Board, Federal Reserve Bank of New York, Inter-American Development Bank, International Monetary Fund, International Organization of Securities Regulators (IOSCO), Securities Commission of Spain, Swiss National Bank and U.S. Securities Commission (SEC). To assure quality and effectiveness, the Initiative includes two important components. First, all studies are conducted with the active participation of country officials and the project builds on the existing work being undertaken in the respective countries. Second, the Initiative draws on international and national expertise on the subject, through the IAC, to provide guidance, advice and alternatives to current practices. The Initiative has undertaken a number of activities in order to respond to the Western Hemisphere Finance Ministers request. These include: the preparation of public reports containing a systematic in-depth description of each country s payments clearance and settlement systems; the delivery of recommendations reports to country authorities on a confidential basis; the organization of IAC meetings to review country studies and provide input for future work; the organization of workshops focusing on issues of particular interest; the creation of a web-page ( to present the outputs of the Initiative and other information of interest in the payments systems area; and the promotion of working groups to ensure a continuation of the project activity. CEMLA has been acting as Technical Secretariat of the Initiative and is playing a major role in making the process sustainable and capable of extension to all the countries in the Hemisphere. To this end, the Initiative has helped strengthen CEMLA s in-house expertise. Additionally, practitioners in payments and securities clearance and settlement in some countries in the Region have participated in the studies under the Initiative, through CEMLA coordination, and this has contributed to the broadening of knowledge and the transfer of know-how within the Region. The endeavors of the working groups in coordination with CEMLA will maintain the infrastructure created under the Initiative and provide a permanent forum for the countries in the Region to discuss, coordinate, and add a collective impetus to the work in the area of payments and securities clearance and settlement systems. This Report Payments and Securities Clearance and Settlement Systems in Mexico is one of the public reports in the series and was prepared under the coordination of CEMLA and the World Bank. The Banco de México and the Comisión Nacional Bancaria y de Valores of México also participated actively in its preparation. Kenneth Coates Director General CEMLA David de Ferranti Vicepresident, LAC World Bank Cesare Calari Vicepresident, Financial Sector World Bank

6 Acknowledgments This Report is based on the findings of a mission that visited Mexico during March 4-22, 2001, under the auspices of the Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI). This document was prepared under the coordination of CEMLA and the World Bank. Jose Antonio Garcia (CEMLA) was the task manager, with cooperation from Massimo Cirasino and Mario Guadamillas, both from the World Bank. The WHI mission was performed in coordination with the Financial Sector Assessment Program (FSAP) mission, the joint IMF-World Bank effort to assess vulnerabilities and development opportunities in each country s financial system. The team wants to express its appreciation to the local team comprised of officers of Banco de México, coordinated by Francisco Solís (Payment Systems Manager), and the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) of Mexico. Carlos Orta (CNBV) made valuable comments to the Report and contributed in collecting the information for the Statistical Appendix.

7 TABLE OF CONTENTS 1 ECONOMIC AND FINANCIAL MARKET OVERVIEW OVERVIEW OF RECENT REFORMS MACROECONOMIC BACKGROUND Real Sector External Sector Public Sector Monetary Sector FINANCIAL SECTOR CAPITAL MARKETS MAJOR TRENDS IN PAYMENT SYSTEMS MAJOR TRENDS IN SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS INSTITUTIONAL ASPECTS GENERAL LEGAL FRAMEWORK Payments Securities Derivatives Specific Legal Issues Related to Clearance and Settlement Netting Zero Hour Rule Electronic Documents and Signatures Novation THE ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS The Banking Sector Other Institutions that Provide Payment Services CECOBAN Payment Cards ATMs and EFTPOS Telecomm Telégrafos Remittances THE ROLE OF FINANCIAL INSTITUTIONS: SECURITIES Securities Markets Participants Exchanges Securities Clearance and Settlement Institutions MARKET STRUCTURE AND REGULATION...24 iii

8 2.5 THE ROLE OF THE CENTRAL BANK Monetary Policy and Other Functions Involvement in the Payments System THE ROLE OF THE SUPERVISORY AGENCIES OF THE FINANCIAL SYSTEM The National Banking and Securities Commission Supervision of Financial Entities Supervision Model Payment System Oversight Anti-Money Laundering Measures Deposit Insurance Agency Pensions System Regulator Financial Services Consumer Protection Agency THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES Ministry of Finance and Public Credit Bankers Association Brokerage Houses Association Credit Information Registries PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES CASH PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH Cheques Direct Debits/Credits Direct Credits Direct Debits Payment Cards Credit and Debit Cards ATMs Prepaid Cards Electronic Purse Electronic Funds Transfer in the SPEUA NON-CASH GOVERNMENT PAYMENTS PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS CLASSIFICATION OF THE MAIN PAYMENT SYSTEMS THE REGULATORY FRAMEWORK FOR CLEARINGHOUSES RETAIL PAYMENT TRANSFER SYSTEMS Clearinghouses Cheques...41 iv

9 Direct Credits and Direct Debits Clearing and Settlement Risk Management Mechanisms LARGE VALUE PAYMENT TRANSFER SYSTEMS Extended Electronic Payments System (SPEUA) Settlement Pending Obligations in the SPEUA Risk Management Mechanisms Account Holders Service System (SIAC) Other Payment Systems that Settle in the SIAC Risk Management Mechanisms FOREIGN EXCHANGE SETTLEMENT SYSTEMS CROSS BORDER SETTLEMENT SYSTEMS MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED SECURITIES: MARKET STRUCTURE AND TRADING FORMS OF SECURITIES TYPES OF SECURITIES Shares and Other Securities Representing Equities Debt Securities Short Term Debt Instruments Medium Term Debt Instruments Long Term Debt Instruments SECURITIES IDENTIFICATION CODE TRANSFER OF OWNERSHIP PLEDGE OF SECURITIES AS COLLATERAL Repos Securities Lending TREATMENT OF LOST, STOLEN OR DESTROYED SECURITIES LEGAL MATTERS CONCERNING CUSTODY Protection of the Securities in Custody in case of Bankruptcy or Insolvency of the Custodian Elimination of Physical Delivery PUBLIC OFFERING OF SECURITIES PRIMARY MARKET SECONDARY MARKET STOCK EXCHANGE TRADING Trading Hours...64 v

10 5.12 DERIVATIVES TRADING OVER THE COUNTER MARKET MARKET SIZE RECENT TRENDS GOVERNMENT AND PRIVATE SECURITIES CLEARANCE AND SETTLEMENT CIRCUITS ORGANIZATIONS AND INSTITUTIONS Mexican Stock Exchange INDEVAL SECURITIES R EGISTRATION AND CUSTODY PROCEDURES Registration in the RNV Securities Registry and Custody with INDEVAL Deposit Accounts Operations Execution Deposit Account Information Administration of the Deposited Securities Securities Transfers Registry of Seizures over Deposited Securities Securities Withdrawal GUARANTEE SCHEMES SECURITIES CLEARANCE AND SETTLEMENT PROCESS Legal Issues Concerning Securities Clearance and Settlement Settlement Alternatives Settlement Procedures SIDV, Securities Accounts and Control Accounts Operations Executed in the BMV Operations Executed in the OTC market Closing of the Settlement Cycle Flow Charts of Settlement Processes Securities Lending Procedures to Handle Failures Conventional Penalties Pending Obligations Due to Lack of Securities (at the BMV) Pending Obligations due to Exhaustion of the Operational Capacity (BMV Transactions) Operations Executed outside the BMV DERIVATIVES CLEARANCE AND SETTLEMENT Ordinary Clearance and Settlement Procedures...86 vi

11 6.5.2 Extraordinary Settlement Settlement of Contracts at Expiration Date Risk Management Mechanisms INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS SAFEGUARD AND SECURITY SYSTEMS THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS RESPONSIBILITIES SETTLEMENT RISK CONTROL POLICY MONETARY POLICY AND PAYMENT SYSTEMS Open Market Operations THE ROLE OF THE CENTRAL BANK IN CROSS-BORDER PAYMENTS PRICING POLICIES SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS SECURITIES REGULATORY SUPERVISORY AND STATUTORY RESPONSIBILITIES Responsibility over Stock Exchanges Responsibility over Central Securities Depositories Responsibility over Central Counterparties Obligations of Information Issuers Intermediaries Sanction Capacity of the Securities Regulator SELF-REGULATORY ORGANIZATIONS SUPERVISORY AND STATUTORY RESPONSIBILITY Stock Exchanges Central Securities Depositories APPENDIX: STATISTICAL TABLES LIST OF ABBREVIATIONS GLOSSARY TABLES IN THE TEXT TABLE 1: MACROECONOMIC INDICATORS...3 TABLE 2: ECONOMIC INDICATORS OF THE MEXICAN EXTERNAL SECTOR...4 TABLE 3: FINANCIAL RESULT OF THE MEXICAN PUBLIC SECTOR...5 TABLE 4: MEXICAN MONETARY AGGREGATES...6 vii

12 TABLE 5: COMMERCIAL BANKS FUNDING BY MAIN INSTRUMENTS...8 TABLE 6: LEGAL FRAMEWORK OF THE MEXICAN FINANCIAL SYSTEM...15 TABLE 7: CLASSIFICATION OF THE MAIN PAYMENT SYSTEMS IN MEXICO...40 TABLE 8: OPERATIONS SUMMARY OF THE CHEQUE CLEARINGHOUSE...42 TABLE 9: PRIVATE SECTOR AND LOCAL GOVERNMENT DEBT ISSUANCES IN TABLE 10: TYPES OF FUTURE CONTRACTS TRADED IN THE MEXDER...65 TABLE 11: TRADED AMOUNTS AT THE BMV...67 TABLE 12: TOTAL TRANSACTIONS PROCESSED BY INDEVAL...68 TABLE 13: BALANCE OF SECURITIES DEPOSITED IN INDEVAL...71 CHARTS IN THE TEXT CHART 1: TRANSACTIONS IN THE INTERBANK PAYMENTS SYSTEM...36 FIGURES IN THE TEXT FIGURE 1: MEXICAN FINANCIAL SYSTEM REGULATORY STRUCTURE...25 FIGURE 2: ORGANIZATION CHART OF THE NATIONAL BANKING AND SECURITIES COMMISSION...27 FIGURE 3: STRUCTURE OF ISIN CODES...55 FIGURE 4: SETTLEMENT OF TRANSACTIONS EXECUTED AT THE BMV...81 FIGURE 5: SETTLEMENT OF THE TRANSACTIONS MADE IN THE OTC MARKET...82 FIGURE 6: FLOW CHART OF A SECURITIES SALE BY A DIRECT FOREIGN D EPOSITOR OF INDEVAL...89 viii

13 1 ECONOMIC AND FINANCIAL MARKET OVERVIEW 1.1 OVERVIEW OF RECENT REFORMS The comprehensive set of reforms that Mexico has implemented since the middle of the 1980s has changed the evolution of the country s economy. The period of economic reforms from 1987 to 1993 was one of the most intense in the country s experience. Among other reforms, the external debt was renegotiated, many government enterprises were privatized, a profound fiscal and financial reform was carried out, and greater attention was paid to foreign trade as a source of economic growth. A particularly important event was the reprivatization in 1991 of the banking sector, which had been nationalized in Another significant reform was the adoption of a restrictive fiscal policy, which substantially reduced the public sector deficit from levels above 10 percent of the gross domestic product (GDP) in 1982 to close to budgetary equilibrium in the first years of the 1990s. Together with adoption of the exchange rate as the nominal anchor of the economy, the restrictive fiscal policy lowered inflation to 7 percent in 1994, down from a high of nearly 160 percent in International investors accepted the reforms, as evidenced by net inflows of foreign private capital starting in These inflows helped to finance a growing deficit in the current account, which passed from a surplus of USD 4.2 billion in 1987 to a deficit of USD 29.7 billion in The substantial increase in imports during this period was due mainly to revaluation of the real exchange rate and trade liberalization. In the first part of the 1990s and until December 1994, the exchange rate regime consisted of a lower and an upper limit within which the exchange rate could fluctuate freely. For the upper limit, there were pre-announced daily mini-devaluations (i.e., a crawling peg). One of the most relevant events of this period was the creation of the North America Free Trade Agreement (NAFTA) among Canada, Mexico, and the United States of America (USA). In 1994 a sequence of political events reversed the flow of foreign capital, leading to a substantial decline in the country s international reserves. For the purpose of containing capital outflows, the federal government began to issue Tesobonos, bonds indexed to the exchange rate. Toward the end of 1994, the amount of tesobonos outstanding was nearly USD 30 billion. Despite this effort, capital outflows continued, and by December 1994 it became impossible to sustain the existing exchange rate regime. This led to the free flotation of the exchange rate, the regime in force today. Owing to this situation, the economy entered into a financial crisis. In 1995 the Mexican economy registered a 6.2 percent drop in GDP, while inflation rose to 52 percent. Interest rates passed 1 Throughout this report, the symbol USD is used for U.S. dollars and $ for the Mexican peso. A billion is 1,000 million. 1

14 from less than 10 percent to more than 100 percent by March The banks, which, after the reprivatization, had substantially expanded the amount of credit issued to the private sector, often without adequate assessment of risk, began to experience a reduction in the payment capacity of debtors. Past-due loans rocketed, exerting severe pressure on payments in the economy. To contain the effects of the banking crisis, the government created financial aid plans for the sector through the Banking Fund for the Protection of Savings (Fondo Bancario de Protección al Ahorro, FOBAPROA). All the major banks in the country continued to operate normally, and depositors did not suffer a loss of their savings. This, of course, was possible only at enormous fiscal cost to the nation. Starting in 1996, when the main economic and financial variables were stabilized, economic growth resumed. In the period, GDP grew at an average rate above 5 percent, and starting in 2000 inflation subsided to less than 10 percent. After the crisis, the following main reforms allowed the economy to grow with more stability: The free-floating exchange rate regime was maintained, 2 which allowed shocks in the economy to be distributed among different economic variables and facilitated the necessary adjustments. In addition, this policy lessened the appeal of domestic financial markets to volatile (often speculative) foreign capital. Fiscal discipline was maintained. The central bank adopted a new monetary policy stance, which made its inflation forecasts more reliable and increased public confidence in them. The pension system was reformed, which led to the creation of individual accounts managed by specialized private sector companies. Regulation and supervision of the financial system were strengthened, and banking laws were reformed to enable foreign capital to participate more extensively in the system, resulting in an increase in its solvency. Another significant change in the domestic context was the presidential election in For the first time in more than 70 years, a candidate of a political party different from the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) was elected president. The elections took place without incident. After nearly 15 years of economic and financial reforms, in the eyes of investors Mexico has apparently succeeded in differentiating its economy from that of the rest of Latin America. For example, in 2 Until 2000, Banco de México the central bank still intervened in the foreign exchange market through previously announced mechanisms to limit the volatility of the exchange rate. Since then, any kind of intervention has been eliminated. 2

15 contrast to the severe economic crisis recently occurring in Argentina, Mexico has experienced extreme stability MACROECONOMIC BACKGROUND Real Sector Since the end of the 1980s, economic growth has been driven by the external sector, which is highly dependent on the economic growth of the USA, Mexico s main trading partner. Between 1996 and 2000 GDP grew at a real average annual rate of 5.4 percent. In 1997 GDP grew 6.8 percent, 4.9 percent in 1998, and 3.7 percent in The instability of the world financial markets a product of crises in Southeast Asian countries, Russia, and Brazil, among others was largely responsible for this slowdown in economic growth. In 2000 the economy grew almost 7 percent, having received a big impulse from exports, which grew more than 22 percent. By the end of that year, however, the economy started slowing down in response to the first signs of slower growth in the USA. In 2001 the economic slowdown in the USA was a major cause of the 0.3 percent decrease in Mexican GDP and the 4.8 percent drop in exports. Gross capital formation declined from 21.2 percent of GDP in 1999 to 19.6 percent in 2001, as a result of revaluation of the Mexican peso and its effect on the imported component of investment. Table 1: Macroeconomic Indicators* (a) 2001 (a) GDP at current prices (thousands of millions of pesos) 3, , , ,771.9 Real GDP annual growth rate (in %) Consumption (as % of GDP) Capital gross creation (as % of GDP) F.o.b. imports (as % of GDP) F.o.b. exports (as % of GDP) Current account of the balance of payments (as % of GDP) Inflation (annual growth rate of the Consumer Price Index) Unemployment rate Memo: Nominal exchange rate (as of December) (b) Sources: Banco de México and Instituto Nacional de Estadística, Geografia e Informática (INEGI). (a) Preliminary figures. (b) Fix exchange rate (Exchange rate for the payment of obligations denominated in foreign currency payable in Mexico, determined by the Banco de México). 3 During previous crisis episodes, investors apparently did not differentiate among the countries of the region. Thus, a crisis episode in one country would generally produce extreme volatility in the financial variables of others. * The following conventions for notation are used throughout the Report: n.a. indicates data that are not available; stands for data that are not applicable; neg (this is, negligible) indicates where data are very small relative to other relevant data in the table concerned. 3

16 Job creation was boosted by the dynamic behavior of the export sector. Industries in the north of the country, particularly assembly plants known as maquiladoras, had contributed to a gradual reduction in the unemployment rate, which by 2000 stood at 2.1 percent. This trend reversed in 2001, when the decline in exports raised unemployment to 2.8 percent External Sector 4 Between 1988 and 1994, the deficit in Mexico s balance of payments current account averaged 4.4 percent of GDP, reaching 7 percent in 1994, its highest level. The portion of this deficit that was being covered by volatile sources of capital (such as foreign portfolio investment) averaged 58 percent in this period. With the 1995 crisis, the current account experienced a major adjustment, passing to a deficit of 0.6 percent of GDP. Since then, annual deficits have remained within manageable parameters, with a maximum deficit of 3.8 percent of GDP in In 2001 the current account deficit was 3.1 percent of GDP, and a similar level was estimated for Since 1995 approximately 80 percent of this deficit has been financed with foreign direct investment. In recent years foreign direct investment reached US$13 billion. In 2001, partly influenced by Citigroup s acquisition of Banamex- Accival Mexico s largest financial group it reached nearly US$25 billion. 5 International reserves, which fell abruptly in 1994, have been recovering since then, reaching the historic level of more than US$40 billion by the end of During the 1990s, the traditional vulnerability of the current account to fluctuations in international oil prices was greatly reduced, and the share of non-oil exports in total exports rose to an average of 91 percent during the period. However, foreign trade remains heavily concentrated in the USA, which receives more than 80 percent of Mexican exports. Hence, the recent slowdown of the economy of the former has had a severe impact on Mexico s export sector. Table 2: Economic Indicators of the Mexican External Sector (in USD million) (a) 2001 (a) I. Current Account -16,090-14,168-17,737-17,681 II. Capital and Financial Account 17,360 15,575 16,930 22,707 III. Errors, omissions and undetermined capital flows ,629 2,075 IV. Reserve Assets (decrease +, increase -) -2, ,822-7,325 Memo: Nominal exchange rate (as of December) (b) Sources: Banco de México and INEGI. (a) Preliminary figures. (a) Fix exchange rate. 4 The data of this section were extracted under the methodology of the Fifth Manual of the Balance of Payments of the IMF applied since The acquisition of Banamex-Accival totaled US$12.5 billion. 4

17 Mexico has executed the necessary reforms to liberalize the capital and financial account of the balance of payments within a framework of free exchange rate flotation Public Sector Even before the 1995 crisis, the public sector has been applying a balanced budget policy to avoid putting pressure on interest rates and inflation. About one-third of Mexican fiscal revenues stem from the oil sector, which in turn is highly dependent on international oil prices. This sector is controlled by the state through Petróleos Mexicanos (PEMEX), the fifth biggest oil exporter in the world. In view of this situation, and due to severe fluctuations in international oil prices, the Mexican Congress has established that, whenever the actual price of exported oil is higher than the price used for budgetary purposes, the corresponding surplus will be kept in a special fund to be used whenever the country faces the opposite situation. The efforts to reduce the fiscal deficit have borne fruit: between 1998 and 2001, the fiscal deficit did not exceed 1.5 percent of GDP in any year. The central government s deficit, which was reduced by transfers from other government sectors, was smaller than 1.8 percent of GDP and declining (see table 3). Table 3: Financial Result of the Mexican Public Sector (as % of GDP) (a) Non financial Public Sector Central Government Public Institutions Public Enterprises Source: Secretaría de Hacienda y Crédito Público (SHCP). (a) Preliminary figures. The disciplined budgetary policy also permitted a decline in the ratio of total public sector debt to GDP. From almost 37 percent in 1995, the ratio declined to a little more than 20 percent in The structure of total debt also changed as the share of internal debt grew. The costs undertaken by the government as a consequence of the 1995 banking bailout are not recognized as official public debt, and by the end of 2001 these costs represented almost 12 percent of GDP Monetary Sector Inflation has been falling since reaching a high of 52 percent in Starting in 1999, observed inflation rates have been below the official targets established by Banco de México, Mexico s central bank. For the years 1999, 2000, and 2001, observed inflation was 12.3, 9.0, and 4.4 percent, with inflation targets for these years of 13.0, 9.0, and 6.5 percent, respectively. For 2003 Mexico is seeking to match the inflation rate of its main commercial partners, which is approximately 3 percent. 5

18 From 1997 to 1999, characterized by episodes of high volatility in interest rates and in the exchange rate, the monetary policy of the central bank was highly restrictive in order to avoid money issuance, which could trigger a speculative attack. Since then, monetary policy has been characterized by the gradual abandonment of a two-step regime and the move to a regime of inflation targeting, which was formally approved in the Monetary Program for In the current paradigm, Banco de México evaluates whether the observed growth in prices is consistent with its multi-annual inflation target and signals the market of its intention to pursue a more accommodating or a more restrictive monetary policy through a mechanism known as accrued daily balances (saldos diarios acumulados) of the accounts that commercial banks hold at the central bank. This mechanism is discussed in more detail in section 7.4 of this Report. The monetary policy strategy has been supported by the free flotation of the exchange rate, which distributes the effects of external imbalances among various variables. The monetary aggregate M1 remained relatively stable at around 10 percent of GDP during the period (see table 4). For 2001, the fact that observed inflation was below the planned target of 6.5 percent together with the general slowing of the economy motivated the government to inject more liquidity into the system. The consequent change in the direction of monetary policy beginning in the second quarter of that year resulted in an increase in liquidity as measured by the various monetary aggregates. Table 4: Mexican Monetary Aggregates (in millions of pesos, at the end of each year) (a) M1 387, , , ,646 As % of GDP M2 = M1 + Internal Financial Assets owned by residents 1,656,617 2,016,394 2,337,375 2,736,549 As % of GDP M3 = M2 + Internal Financial Assets owned by foreign residents 1,683,152 2,033,275 2,365,752 2,763,792 As % of GDP M4 = M3 + Deposits in foreign agencies of Mexican Banks 1,769,041 2,106,970 2,422,133 2,812,620 As % of GDP Workers funds in the Savings for Retirement System 192, , , ,735 As % of GDP Source: Banco de México. (a) Preliminary figures. 6 The two-step regime consists of reaching final objectives through instruments and intermediate objectives. In the first step, the instruments affect the intermediate objectives, and in the second step, the intermediate objectives affect the final objectives. The inflation targeting regime establishes inflation objectives for the short and medium term. These objectives are communicated to the public in order to facilitate the alignment of private forecasts with the authority s targets. 6

19 The analysis of the velocity of the various aggregates is similar. All the aggregates showed an increase in their velocity beginning in 1998, with the exception of 2001, when monetary policy was modified. 1.3 FINANCIAL SECTOR When banks were nationalized in 1982, the monetary authorities determined the activities of this sector, and banking supervision was limited to verifying compliance with those rules. An increasing percentage of each peso in banking deposits was destined to finance the fiscal deficit. For this reason, the private sector was crowded-out and had difficulty acquiring bank loans. Restrictions were imposed on interest rates, and other quantitative and qualitative limits were imposed on credit. To address the financing needs of the private sector, a parallel banking system emerged. Brokerage houses were the main institutions to compete with the nationalized banking system. In 1990, with the creation of FOBAPROA, the ground was set for reprivatizing the banking system, a process that began in This coincided with strong net capital inflows and the abolition, by Banco de México, of the reserve requirements on new banking liabilities. These events greatly increased the liquidity of the banking system and, thus, its potential to grant loans. The nationalization had erased many market practices of banks, mainly by eliminating the responsibility for risk management, capping interest rates, and imposing qualitative and quantitative limitations on credit. Supervision was distracted from its main goal of ensuring the ongoing soundness and solvency of the system. As a result, the significant growth in banking credit from 1991 to 1994 was accompanied by extremely lax or null requirements on loans, together with very optimistic scenarios for their reimbursement. Banking was among the sectors heavily affected by the financial crisis triggered by devaluation of the Mexican peso in December In the following weeks and months, the drop in economic activity and the sharp rise in interest rates deepened the deterioration in the quality of the credit portfolio. Facing the latent insolvency of most of the country s banks, the government decided to apply several bailout programs in an attempt to avoid major repercussions in the payments system, the wider financial sector, and the real economy. In 1995 the Temporary Capitalization Program (Programa de Capitalización Temporal, PROCAPTE) was created. Its objective was to support the banking institutions so that they would comply with the minimum capital and reserve requirements. Through PROCAPTE, banks could sell part of their past-due loans, net of credit risk provisions, to FOBAPROA in exchange for FOBAPROA s high-quality securities. Moreover, bank owners committed themselves to inject new capital into their institutions through the issuance of subordinated debt, in a proportion of two pesos for every peso of securities granted by FOBAPROA. The authorities also implemented the Agreement for Immediate Support to Bank Debtors (Acuerdo de Apoyo Inmediato a los Deudores de la Banca, ADE) with the objective of containing the 7

20 deterioration of the loan portfolio. ADE had two basic features: (a) the establishment of caps on interest rates for individuals and firms, with the federal government paying the difference between these rates and prevailing market rates, and (b) the restructuring of debts in so-called investment units (unidades de inversión, UDIs). 7 Later on, some interventions became necessary for the system to remain operational. Moreover, in order to keep the banking system in the hands of the private sector, bank equity was opened to foreign capital. In this way, domestic private banking assets switched into the hands of foreign capital in a very short period of time. In 1998, 76 percent of the banking system belonged to domestic capital. In 2000, approximately half of the system was in the hands of foreign capital. By 2001, with Citigroup s acquisition of Banamex, almost 90 percent of banking system assets was owned by foreign institutions. Table 5: Commercial Banks Funding by Main Instruments (in millions of pesos) Traditional Funding 510,962 1,153,187 1,141,359 Traditional Funding in domestic currency 491,059 1,093,440 1,015,317 Checking Accounts 87, , ,940 (a) Savings Accounts 1,517 1,163 1,344 Long-Term Deposits redeemable in fixed days 7,616 5,269 5,032 Fixed Term Deposits 36, , ,012 Promissory Notes with interest payable at maturity 296, , ,130 Current Account Deposits at sight with interests 10,982 n.a. n.a. Other instruments 50,548 68,347 32,859 Funding in foreign currency (b) 19,903 59, ,042 Investment banking and repos in domestic currency 210, , ,381 (c) Source: Banco de México. (a) Includes traditional current accounts, sight current account deposits with interest and certified cheques. (b) Converted at the exchange rate of the accounting closing date. (c) Includes the balances of operations documented as trusts. Some other laws were also reformed in order to facilitate the access of national and foreign investors to other kinds of financial institutions. The most relevant changes were made to the General Law of Credit Auxiliary Organizations and Activities (Ley General de Organizaciones y Actividades Auxiliares del Crédito), the General Law of Insurance Institutions and Mutual Companies (Ley General de Instituciones Mutualistas y de Seguros), and the General Law of Guarantee Institutions (Ley General de Instituciones de Fianzas). 7 UDIs are constant-value units. In high-inflation conditions, a loan denominated in UDIs avoids the accelerated amortization of the debt principal. Hence, in the context of straight-line amortization, the periodic payments of UDI-denominated loans remain relatively constant in real terms. 8

21 Pension fund management firms (administradoras de fondos para el retiro, AFOREs) began to operate in 1997, right after the reform of the Mexican Social Security Institute (Instituto Mexicano del Seguro Social, IMSS). AFOREs are private financial institutions handling the pension system based on the accumulation of resources in individual accounts. At present, this system is applicable only to workers in the private sector. Public sector workers remain in the original system, which does not have individual accounts. Until 2001, the Mexican financial system comprised 28 financial groups, 56 commercial banks, 381 institutions belonging to the securities market, and 460 institutions classified as other financial intermediaries and credit information companies. 1.4 CAPITAL MARKETS The Mexican securities market is divided into the following categories: Capital markets, which include equities, optional securities related to equities, and mediumand long-term debt instruments Money market, comprising short-term debt instruments Metals market. Equities and debt instruments issued by non-banking private entities are traded mainly on the stock exchange, while government and banking instruments are traded mainly in over-the-counter (OTC) markets. The stock market is small compared with the economy. Capitalization of the equities market represented 45 percent of GDP in 1994, but only 22 percent in Traded volumes also decreased, from 20 percent of GDP in 1994 to 8 percent in The market for corporate debt as well as for debt issued by state-owned firms and local governments is also relatively small. Therefore, the Mexican securities market is concentrated in securities issued by banks and the federal government. In , the number of transactions in the debt securities market grew at an annual average real rate of 12 percent, mainly as a result of the demand of Mexican investors. In this period, the federal government was able to expand significantly the maturities of the various types of securities it regularly issues. Mexico has only one stock exchange: the Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV). Since 1999, all trades have been executed electronically through the SENTRA-Capitales, SENTRA-Deuda, and REMATE Lince systems. The clearance and settlement of operations with securities traded either at BMV or in the OTC markets are executed through the central securities depository, INDEVAL. Since 1998, there has been an organized market for derivatives, called the Mexican Derivatives Market (Mercado Mexicano de Derivados, MEXDER). The main instruments traded in this market 9

22 are currency, interest rates, and individual stock futures. Since it began operations, MEXDER has been experiencing significant growth in traded volume. In recent years, several reforms had been carried out to develop the securities market further. In general, reforms have focused on increasing transparency, protecting small investors, and facilitating market access to the general public of investors. For the most part, reforms are concentrated in two laws, the Securities Market Law and the Mutual Funds Law. Changes to the Securities Market Law focus on protecting the rights of minority shareholders, avoiding operations that are contrary to the market s normal and safe operations, changing the privacy rules to enable the sharing of information with foreign regulators, changing the registration and public offering regime from a framework based on merit to one based on disclosure, 8 creating new instruments to develop the medium- and long-term debt market, creating central counterparties, and demutualizing the stock exchange. The new Mutual Funds Law focuses on strengthening the securities market, improving the access of small and medium investors to the equity market, protecting the interests of investors, diversifying capital, and contributing to the financing of productive activities in the country. Another new aspect of this law is the requirement that mutual fund management firms be independent. Credit institutions and brokerage houses can no longer operate directly as mutual fund managers, and they have to create independent subsidiaries with independent staff. This measure aims to eliminate potential conflicts of interest with other entities in the same financial group. Mutual fund management firms are compelled to operate as independent business units with the sole purpose of managing and distributing mutual funds. 1.5 MAJOR TRENDS IN PAYMENT SYSTEMS Up until the mid-1990s the Mexican payments system was relatively simple. Only two clearance and settlement mechanisms were relevant to the operation of financial markets: the cheque clearinghouse and an electronic procedure for interbank transfers. The electronic procedure did not allow, and still does not allow, banks to include in the payment instructions information related to clients, either to indicate that a client has ordered a transaction or to instruct the receiving bank to credit a payment to one of its own clients (so-called third-party information). This limitation on the electronic system and on settlement facilities at the cheque clearinghouse was the major reason why most payments among financial sector entities were made through cheques. The central bank guaranteed the settlement of all transactions, both in the electronic system as well as in the cheque clearinghouse, with no limits on transaction amounts or on bank balances at the central bank. This allowed banks to make uncollateralized overdrafts on their current accounts at the central bank. Hence, the central bank undertook excessive credit risks, introducing moral hazard into the system and creating disincentives to the proper behavior of financial market participants. 8 In the new framework, authorizations are given on the basis of the amount and quality of the information that is disclosed by the interested party. 10

23 In 1994 Banco de México initiated a comprehensive reform of its payment systems in an effort to reduce moral hazard and achieve a high degree of operational security and reliability in payment clearance and settlement. A major component of this reform was the design and development of new payment systems with more stringent risk controls and real-time settlement procedures that could replace the use of cheques for large-value financial transactions. Thus Banco de México first developed the Extended Electronic Payments System (Sistema de Pagos Electrónicos de Uso Ampliado, SPEUA) to facilitate the settlement of payment transactions made by bank clients and also the Interactive System for Securities Deposits (Sistema Interactivo para el Depósito de Valores, SIDV) to support securities transactions through a delivery-versus-payment mechanism. In both systems, transactions are settled as soon as sufficient funds (or credit), and eventually securities, are available at the corresponding accounts. Banco de México has established limits to the credit it grants to participants and has required participants to provide collateral or other guarantees. The SPEUA is still in the process of implementing this last requirement. These changes aim to reduce the reliance of payment systems on the settlement guarantee provided by Banco de México and to give participants the right incentives to contribute, through proper market decisions, to the financial stability of the system overall. For this purpose, clear mechanisms and procedures have been established to cover the liquidity shortfalls of individual participants or the inability of one participant or more to settle a transaction. Authorities also have tried to balance the operational needs of financial markets while maintaining reasonable standards of security in the systems. Banco de México owns and operates two electronic systems for large-value payments. The first is the Account Holders Service System (Sistema de Atención a Cuentahabientes, SIAC), which handles the current accounts that banks and other financial institutions, such as brokerage houses, mutual fund management firms, AFOREs, and some insurance companies, hold at the central bank. Payment transactions made by third parties or on their behalf may not be processed through SIAC. Banco de México also owns and operates the SPEUA, which, as mentioned before, was launched in 1995 with the objective of substituting large-value cheques and reducing credit risks for Banco de México, financial institutions, and the public in general. Only banks have access to the SPEUA, and through it they may execute large-value payments with same-day value for account holders at different banks. The SPEUA does not operate directly with the banks current accounts in the SIAC, although it is linked with the SIAC, and every day, at closing time, balances in SPEUA are transferred to SIAC for settlement. As for deferred net settlement systems, the Banking Clearing Center (Centro de Compensación Bancaria, CECOBAN) offers countrywide clearance of cheques, in Mexican pesos and in USD, and other methods of paying for retail purchases, including both credit and debit instruments. CECOBAN belongs to the commercial banks, and it replaced the former trust managed by Banco de México. The Clearinghouse System (Sistema de Cámaras, SICAM) operated by Banco de México clears the payments that CECOBAN has processed up to the morning following the day in which the documents or files are presented for collection. The resulting balances are settled at the SIAC before 9:00 a.m. 11

24 The new structure of interbank clearance and settlement favors efficiency in the payment services that financial institutions provide to their clients. The rules and procedures of payment systems have enabled participants to understand the financial risks they incur by participating in the payment system and thus allow them to better manage their credit and liquidity risks. The central bank no longer provides special credit facilities to deferred net settlement systems. Instead, it manages a process for executing the credit lines that banks grant to each other. If a bank is unable to fulfill its obligations by the time these are due, it is excluded from the settlement process before all other banks credit the payments to the corresponding beneficiaries. Notwithstanding the reforms already made, the current systems still depend on Banco de México to assure final settlement. To eliminate the remaining moral hazard, Banco de México is entering a new phase of reforms. To guide this effort, at the beginning of 2001 the Board of Governors of Banco de México adopted the Core Principles for Systemically Important Payment Systems issued by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS). The reforms are expected to be completed by Eventually, Banco de México will withdraw the guarantee it provides for the settlement of largevalue transactions and will only provide liquidity facilities in the system through which it manages the current accounts of financial institutions. These changes will be implemented gradually to allow participants to adjust to the new operational practices and to allow the financial system to operate smoothly. The design of SPEUA s current information system is not adequate to support some of the changes described here. Therefore, Banco de México will have to replace it with a new platform consisting of two modules: one using cash deposits generated in SIAC and one using credit lines among banks. The new system will provide banks with further opportunities to automate their own processes, which is expected to improve efficiency and security, as well as open new possibilities for cost reductions. For further details on the reforms being planned, see section 4.7. As regards other payment instruments, credit and debit cards are widely used, with approximately 8 million and 33 million cards outstanding, respectively. Credit cards are issued under Visa, MasterCard, and, less frequently, American Express. 9 Debit cards are issued by banks, mainly under Visa (Electron) and MasterCard (Maestro). Major retailers also offer payment cards, which can be either credit or debit cards. Prepaid cards for gasoline and telephone services also are used extensively. Regarding automated teller machines (ATMs), in Mexico there are three interconnected networks with national coverage. Two are the property of the two largest banks of the country, Banamex- Citibank and BBVA Bancomer. The third one, named RED, integrates the networks of all other banks and is controlled by Promoción y Operación, S.A. de C.V. (PROSA), a company owned by the participating banks. The settlement of credit and debit card transactions is similar to that of ATM transactions. The three big networks process the operations. PROSA clears the payments, which are then settled by a commercial bank through electronic funds transfers at SPEUA. 9 In Mexico the American Express Company has a banking subsidiary through which it issues credit cards. 12

25 Regarding other methods of payment, postal money orders through the state-owned Telecomm Telégrafos are widely used. Remittances from Mexicans residing in the USA are important as well. Remittances are processed by companies such as Money Gram and Western Union in collaboration with local partners, usually a bank or a retailer with wide national coverage. 1.6 MAJOR TRENDS IN SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS All securities in the National Securities Registry (Registro Nacional de Valores, RNV) are represented physically, generally by global notes, and are immobilized in INDEVAL, the central securities depository. Securities are standardized and carry identification numbers that follow the criteria of International Securities Industry Numbering (ISIN). INDEVAL is the only entity authorized to operate as a central securities depository. Among other services, it is the custodian and administrator of all the securities registered in RNV, and it clears and settles all transactions made with such securities. INDEVAL is a private sector firm whose shareholders include 29 brokerage houses, 13 commercial banks, six insurance and guarantee firms, as well as Banco de México, the BMV, and Nacional Financiera, a state-owned development bank. Until 1994, INDEVAL was responsible only for the transfer of securities, while payments were arranged bilaterally among counterparties. At the end of 1995, together with the Banco de México, it implemented the SIDV, which allows the settlement of all operations under a delivery-versus-payment framework. For settlement of the cash leg, SIDV has a real-time link with the payment systems of Banco de México. 10 Stock exchange trades, mainly equities and debt securities issued by private sector entities, are settled in T+2 under a multilateral netting scheme for both the securities leg and the cash leg (DVP model 3 of the BIS). 11 Securities traded in the OTC market are settled according to conditions established by the parties, generally in T or T+1, on a gross basis for both the securities leg and the cash leg (DVP model 1 of the BIS). Although INDEVAL does not act as central counterparty, it guarantees the settlement of all transactions executed through BMV by means of a settlement fund. To qualify for this guarantee, operations need to be declared unfulfilled, because of the lack of either securities or cash, which would happen at the closing of T+5. Prior to this day, if the operations are not settled normally by T+2, they are declared in arrears, and the participants may access the securities lending facility created by INDEVAL in order to accomplish settlement. Regarding the derivatives market, a clearinghouse, Asigna Compensación y Liquidación (ASIGNA), operates as a central counterparty for all derivative contracts traded in the MEXDER. ASIGNA shares the credit risks with four trusts. Each of these four trusts was established by a commercial bank. 10 However, the changes being planned for the SPEUA will eliminate its connection with the SIDV. 11 Delivery Versus Payment in Securities Settlement Systems, Committee on Payment and Settlement System of the Central Banks of the Group of Ten Countries of the Bank for International Settlements, September

26 With the reform of June 2001, the Securities Market Law enables the creation of central counterparties for securities market transactions, with the purpose of reducing or eliminating the risk of settlement defaults. Central counterparties have to determine and apply a strict system of financial safeguards to assure fulfillment of their obligations. Presently, INDEVAL is working to establish a subsidiary, together with partners that could act as settlement partners, that will seek to function as a central counterparty for the capital market. 14

27 2 INSTITUTIONAL ASPECTS 2.1 GENERAL LEGAL FRAMEWORK In Mexico, the principal laws regulating the system of payments and the system of securities clearance and settlement are the Central Bank Law, the Payment System Law, the Securities Market Law, the Banking Law (Ley de Instituciones de Crédito), and the General Law of Credit Certificates and Transactions (Ley General de Títulos y Operaciones de Crédito, LGTOC), which regulates paperbased payment instruments like cheques, money orders, and bills. All these laws are federal. According to the Mexican Constitution, states may not issue laws regulating any part of financial activity. Tabla 6: Legal Framework of the Mexican Financial System Law Ruling since Banking Law 18/06/90 Banking Savings Protection Law 19/01/99 Bankruptcy Law 12/05/00 Bonding Institutions Federal Law 20/12/50 Central Bank Law 20/12/93 General Law of Credit Auxiliary Organizations and Activities 14/01/85 General Law of Credit Certificates and Transactions 27/08/32 General Law of Insurance Institutions and Mutual Companies 31/08/35 Law for the Protection and Defense of Financial Services Users 18/01/99 Law Regulating Financial Groups 18/06/90 Mutual Funds Law 04/06/01 National Banking and Securities Commission Law 00/00/95 Organic Law of Nacional Financiera (National Development Bank) 26/12/86 Organic Law of the Banco del Ahorro Nacional y Servicios Financieros (Savings and Financial Services National Bank) 30/05/01 Organic Law of the Banco Nacional del Ejército, Fuerza Aérea y Armada (National Bank of the Army and Air Force) 13/01/86 Organic Law of the Banco Nacional de Comercio Exterior (Foreign Trade National Bank) 20/01/86 Organic Law of the Banco Nacional de Obras y Servicios Públicos (Public Works and Services National Bank) 20/01/86 Organic Law of the Banrural System 13/01/86 Organic Law of the Patronato del Ahorro Nacional (National Savings Foundation) 26/12/86 Organic Law of the Sociedad Hipotecaria Federal (Federal Mortgage Society) 25/09/01 Organic Regulations of Financiera Nacional Azucarera (Sugar National Financing Company) 02/04/91 Payment System Law 12/11/02 Savings for Retirement System Law 23/05/96 Securities Market Law 02/01/75 Sources: Banco de México and CNBV. 15

28 Other rules governing the operations of financial entities are the Circulars of Banco de México and those of the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) Payments The Central Bank Law of 1993 (Ley del Banco de México) establishes the responsibilities and powers of the central bank. According to this law, Banco de México is in charge of fostering the stability of the national currency s purchasing power, the sound development of the financial system, and the smooth functioning of the payment system. The following are some of the articles dealing with the specific powers of the Banco de México regarding payment systems: Article 2 establishes fostering a well functioning payments system as one the primary task of the central bank Article 3 defines the central bank s functions as being to regulate the issuance and circulation of currency and of the payments system and to operate with credit institutions as the reserve bank and as lender of last resort Article 15 details the requirements and exceptions for financing that Banco de México may grant to credit institutions in order to avoid problems in the payments system and the operations Banco de Mexico can make as the lender of last resort Article 24 establishes the central bank s ability to issue regulations for the payments system and to impose sanctions on entities that do not follow these dispositions Article 31 establishes the central bank s ability to regulate the transfer of funds through credit institutions. The present interpretation of these powers, consistent with the general practice in many countries, is that Banco de México is responsible for regulating, organizing, and controlling its own payment systems SIAC and SPEUA as well as for overseeing self-regulated private systems in order to guarantee the continuous, appropriate, efficient, and safe provision of financial services in a competitive environment of free access. However, until November 2002 it was not clear whether Banco de México was empowered to oversee all payment systems. Hence, Banco de México oversaw the systems operated by other entities only indirectly. In that month, the Mexican Congress enacted the Payment System Law granting Banco de México full powers to oversee all payment systems and to impose sanctions. The Banking Law regulates the operations of banks and establishes that banks are the only institutions authorized to operate current accounts. A June 2001 reform of this law authorized banking institutions to provide clients with direct debit or preauthorized charge services, in which the client authorizes 16

29 a third party, generally a provider of goods or services, to dispose of his or her funds through a direct charge on the client s account. To protect users of this service, the law obliges the credit institution to return the correspondent funds if a client opposes any of the charges made Securities The Securities Market Law of 1975 regulates securities dealers, securities market intermediaries, stock exchanges, and central securities depositories. It also regulates public offerings of securities, the intermediation of these securities, the National Securities Registry, and the authorities and services related to this market. According to this law, securities are considered to be equities, obligations, bonds, certificates, and other credit certificates that are issued in series or in bulk and are circulated in the market. This law also applies to other types of publicly offered credit securities and documents issued both domestically and abroad granting credit, property, or participation rights in the equity of firms. Intermediation in the securities market is defined as the regular execution of brokerage activities, commissions, and other operations that match offers of and demands for securities, the execution of operations on one s own behalf with securities issued or guaranteed by third parties subject to public offering, and the management and handling of securities portfolios owned by third parties. Intermediation in the securities market may be executed by brokerage houses, stock exchange specialists, other financial entities, and individuals. The Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP) 12 is empowered to interpret, for administrative purposes, the precepts of this law and to provide, through general rules, everything necessary to apply it. In turn, the CNBV is empowered to supervise the securities market Derivatives Mexico has no formal legal basis for derivatives trading. Banco de México s Circular 2019/95 is the only reference to formal regulations for the trading of financial operations known as derivatives. This circular regulates the operations of credit institutions. As a result of the June 2001 reform of the Securities Market Law, brokerage houses and stock exchange specialists also can trade derivatives, subject to regulations issued jointly by Banco de México and the CNBV. This circular contains rules focusing on authorization requirements for derivatives trading. The rules establish that authorized credit institutions may trade derivatives with any counterpart, subject to the existence of a written contract, as long as they inform Banco de México about the transaction. Trades may be executed either in OTC markets or on recognized exchanges. MEXDER, established in 1998, is one of the recognized markets for derivatives Article 8 of the Securities Market Law. 13 The Chicago Mercantile Exchange, the Chicago Board of Options Exchange, and the Mid-America Commodity Exchange are also regarded by Banco de México and the CNBV as recognized markets for derivatives. 17

30 In 2001 this circular was modified as follows: The different types of derivatives transactions that may be performed by commercial banks were grouped in a single rule, as were underlying assets. Swaps were incorporated as transactions on their own and not as underlying assets, as was the case in the previous regime Banco de México was empowered to carry out derivatives transactions with those underlying assets stated in the applicable regime Banking institutions that already had obtained permanent authorization to carry out derivatives transactions with particular underlying assets were allowed to request a similar authorization to carry out transactions with other underlying assets Banco de México was empowered to authorize some institutions, for a predetermined time span and value, to trade derivatives without having to comply with risk management requirements established in the applicable regime, as long as the transactions are exclusively for risk-hedging purposes Specific Legal Issues Related to Clearance and Settlement Netting The Federal Civil Code contains the legal underpinning for netting arrangements. 14 Netting occurs when two people are reciprocal creditors and debtors. The effect of netting is to extinguish, through use of the law, the two debts up to the smallest quantity. In order for netting to take place, debts must be equal in both liquidity and maturity. Operations different from these may be netted only if the parties explicitly agree. Netting, once legally executed, produces its full effects and extinguishes all related obligations. Netting only proceeds when debts are of a monetary nature or are fungible, meaning that the relevant things are of the same species and quality, as long as this has been established in a contract. Netting cannot be executed if doing so would harm the legally acquired rights of third parties Zero Hour Rule In the Mexican legislation no specific rules are related to the zero hour rule, which invalidates transactions already settled and considered final that were executed after the beginning of the day on which the bankruptcy of a given entity was declared. Even so, in an insolvency procedure, it is possible to establish retroactive effects if the insolvent debtor operated dishonestly. 14 Fifth Title, Book 4, Articles 2185 to 2205 of the Federal Civil Code. 18

31 Electronic Documents and Signatures The Commercial Code contains a section on electronic commerce. Article 89 establishes that, for purposes of the code, electronic and optic media and any other technology may be used in commercial activities. The information created, sent, received, filed, or communicated through these media is called a data message. It is presumed that a data message comes from the issuer if a means of identification such as a user name and password has been used or if the message is received through an automated information system programmed either by the issuer or on his behalf. 15 For this purpose, an information system is considered as any technological means used to generate, send, and receive data messages. In certain cases the law requires written contracts and signatures on the related documents. In the case of data messages, the latter requirement is considered to be executed if data messages can be attributed to the relevant persons and can be accessed for further consultation. Also, Article 1298-A establishes that data messages are accepted as proof in a court of law. When weighting the proof of these messages, the reliability of the method with which the information was generated, filed, communicated, or maintained has to be determined. On July 5, 2002, Banco de México issued Circular 19/2002, known as the Circular on Extended Infrastructure (Infraestructura Extendida, IES). This circular allows Banco de México to authorize commercial banks to issue digital certificates to their clients for operational purposes and to register and process such certificates through the extended infrastructure. Starting on September 9, 2002, Banco de México, as the IES Central Registrar (Agencia Registradora Central, ARC), may issue digital certificates to commercial banks, which allow them to act as registration or certification agencies of the IES; all participants in the Mexican financial system can receive the digital certificates issued by commercial banks. The IES allows the on-line validation of certificates. These certificates facilitate the use of electronic signatures, which in turn improve the safety of and confidence in the operations of the financial system Novation The legal dispositions regarding novation are also contained in the Federal Civil Code. 16 A contract is novated when the interested parties significantly modify it by substituting a new obligation for an old one. Novation is a contract, and as such it is subject to the corresponding rules, except for the following: Novation is never assumed; it must be explicitly stated 15 Article 90 of the Commercial Code. 16 Fifth Title, Book 4, Articles 2213 to 2223 of the Federal Civil Code. 19

32 Even when the former obligation is subordinated to a condition of suspension, novation depends on the fulfillment of that obligation only if this has been stated If the first obligation is extinguished when the second obligation is undertaken, the effects of novation cease Novation is void if the original obligation is also void, except when only the debtor may invoke the cause for voidance or when ratification validates void acts in the original obligation. If novation is void, the former obligation subsists. Novation extinguishes the principal obligation and the accessory obligations. The creditor can, for a specific reason, prevent the extinction of the accessory obligations, which in this case are added to the new one. 2.2 THE ROLE OF FINANCIAL INSTITUTIONS: PAYMENTS The Banking Sector The Banking Law of 1990 defines banking and credit services as the acceptance of deposits made by the public in the domestic market for the purpose of placing these funds as loans to the public. In Mexico, commercial banks are corporations whose equity may be sold on the stock exchange and that are authorized to provide a wide range of banking activities as well as activities related to the securities market. All banks can open up offices and do business anywhere in the country. The Banking Law allows foreign banks to establish subsidiaries and representative offices in the national territory. Commercial banking is highly concentrated. The two biggest banks Banamex-Citibank and BBVA Bancomer constitute more than 50 percent of the market, measured in terms of either assets or deposits. One-quarter of all banks control almost all retail operations and services. Development banks are entities controlled by the federal government that perform second-tier activities, which are activities for a specific sector of the economy. Generally speaking, development banks grant credit to commercial banks so that they may, in turn, grant loans to firms or individuals following the guidelines of development banks. Regarding payment services, commercial banks are the only institutions authorized by law to operate with cheques and to provide interbank payment services through the SPEUA and the Internet. Commercial banks issue debit cards related to transferable deposits as well as credit cards with the Visa and MasterCard brands Other Institutions that Provide Payment Services CECOBAN In 1996 Mexico s principal banks decided to transform into a private entity the government trust, managed by Banco de México, that was operating the cheque clearinghouse. In October of that year, CECOBAN was created. By December 2001, 44 banks were CECOBAN shareholders. 20

33 As of December 2001, CECOBAN had 24 regional branches and a presence in 111 cities through its representation services for banks. CECOBAN provides cheque clearing services at a national level in Mexican pesos and in USD, with different levels of automation. By the end of 2001, electronic clearance represented 99.6 percent of total operations in pesos and 92.9 percent of total operations in USD. The other two methods automated and traditional (manual) clearance are being eliminated gradually. CECOBAN also offers clearance services for interbank electronic payments, which are used to settle payments of goods and services, in the form of either credits or debits, by individuals and corporations. Interbank credit-type payment transactions grew in volume from 1.6 million transactions in 1999 to 5.7 million in Finally, CECOBAN offers a system for the exchange of cash among banks (Sistema de Intercambio del Efectivo Bancario, SIEBAN). This is a cash management service for banks. In December 2001, five banks were using this service, and CECOBAN is working to provide the same service to the correspondents of Banco de México Payment Cards Visa and MasterCard are the principal operators of debit and credit cards. The majority of Mexican banks issue cards under one of these two logos. American Express and, on a smaller scale, Diners, offer charge cards, which are payment cards that do not carry a credit line, since the total amount being charged needs to be settled by the established cutoff date. 17 Major retailers also offer payment cards, either as credit or as charge cards. These cards can only be used on their own premises. Prepaid cards frequently are used to purchase gasoline, Internet access, and telephone services. Some financial groups have been trying for years to introduce the electronic purse. As of today, its use is still very limited ATMs and EFTPOS Mexico has three interconnected ATM networks. The two largest banks Banamex-Citibank and BBVA Bancomer have their own networks, while the remaining one, the RED network, is controlled by PROSA and processes ATM operations for 24 other banks. All these networks have national coverage. Besides ATM operations, PROSA also handles the majority of transactions made at EFTPOS terminals in the country, which are directed and processed electronically through the Carnet system. PROSA s 17 In Mexico, the American Express Company owns a banking subsidiary, American Express Bank, through which it also issues credit cards. 21

34 main functions and services include the transaction switch, clearing and settlement, voice authorizations and stand-in, ATMs and EFTPOS Front-End Management, issuance of ATM regulations, management of the Merchants Single Database, e-commerce on the Internet, and the presentation and payment of services on the Internet Telecomm Telégrafos Telecomm Telégrafos is a state-owned company that, among its services, offers cash transfer through an extensive communication network that allows clients to send telegraphic money drafts, which are purchased and paid in cash. The postal service also offers cash transfer services through postal drafts Remittances Some companies, like Money Gram and Western Union, provide money transfer services for Mexicans residing in the USA. These individuals deliver USD in the USA and order a transfer to their beneficiaries in Mexico, who for the most part receive the transferred amount in Mexican pesos. These companies work with a local partner, usually a bank or retailer with extensive coverage. In addition, some retail stores like Elektra have extended their service to cover fully domestic payments as well. In the latter case, the client pays for a cash transfer in one of the stores; the beneficiary is notified by phone and goes to the closest branch to withdraw the transfer. In 2001, Mexico received more than US$8.8 billion in cross-border remittances through more than 27 million transactions. 2.3 THE ROLE OF FINANCIAL INSTITUTIONS: SECURITIES Securities Markets Participants The main regulatory agencies of the Mexican securities markets are the SHCP, the CNBV, and Banco de México. Major participants in the market are issuers, securities intermediaries, institutional investors, rating agencies, market makers, investment advisers, and price vendors. According to the Securities Market Law, issuers are the organizations or corporations that, having complied with the established rules and being represented by a brokerage house, offer equities and debt securities to the general public. Securities intermediaries are the brokerage houses, stock exchange specialists, and other authorized financial entities and individuals. The Securities Market Law rules the operations of brokerage houses and stock exchange specialists. Securities transactions performed by credit institutions, auxiliary credit organizations, insurance and guarantee companies, and mutual fund management firms are governed by other applicable rules and laws. Brokerage houses are chartered by the SHCP. Among other activities, they are authorized to execute the sale and purchase of securities, provide custody and administrative services for securities, offer 22

35 consulting services to firms regarding placements of securities and to investors regarding creation and management of their portfolios, receive loans or credits to carry out their activities, grant loans to purchase securities as long as the loan is collateralized with the same securities, execute repo transactions, securities lending, and derivative transactions, and act as stock exchange specialists and as fiduciaries in transactions directly linked to their own activities. In addition, the CNBV may charter individuals or firms to act as stock exchange specialists, whose primary function is to carry out transactions on their own behalf in order to create a deeper market for certain securities. They can perform almost all the functions authorized for brokerage houses, although they can only execute operations directly with investors when authorized by the CNBV. At present, no stock exchange specialists are operating in the marketplace. The CNBV also can register and authorize individuals to act as stock exchange agents. Securities market intermediaries may hire these individuals to buy and sell securities with the public and also to handle consulting and promotion. Institutional investors are those institutions with high investment capabilities and a deep knowledge of the market and its implications, such as mutual fund management firms, pension fund management firms, insurance companies, and others. Securities rating agencies are institutions whose sole social object is to provide regular studies, analysis, opinions, assessments, and rulings about the credit quality of securities. 18 Rating agencies require authorization from the CNBV. Some of the most important rating agencies in Mexico are Standard and Poor s, Fitch México, and Moody s México. In Mexico, market makers are intended to increase the liquidity of the market for government securities. Hence, banks and brokerage houses may be considered market markers by the SHCP if they quote buy and sell prices for government securities on a permanent basis and trade these securities regularly on their own behalf. Investment advisers and price vendors appeared only recently in the marketplace. So far, authorities have not established regulations for investment advisers Exchanges According to the Securities Market Law, stock exchanges exist to facilitate securities transactions and to promote development of the market. To operate, a stock exchange must obtain the corresponding concession from the SHCP, which in turn is required to hear the opinions of Banco de México and the CNBV. In order to grant a concession, authorities must give priority to development of the market and cannot authorize more than one stock exchange for each location. With the 2001 reform of the Securities Market Law (which, among other things, allowed the 18 In Mexico, every debt issuance, except that of the federal government, must be rated by an authorized rating agency. 23

36 demutualization of stock exchanges), brokerage houses, stock exchange specialists, commercial banks, insurance and guarantee companies, mutual fund management firms, pension fund management firms, issuers, and any others determined by the SHCP can now become stock exchange shareholders. At no time may any individual or firm control, either directly or indirectly, more than 10 percent of the paid-in equity of a stock exchange. This reform to the Securities Market Law also granted stock exchanges the status of self-regulatory organizations. However, their constitutional acts, bylaws, and internal regulations, as well as any subsequent modifications, have to be approved by the SHCP. Stock exchanges must be constituted as corporations (sociedades anónimas de capital variable) and are subject to the Mercantile Societies General Law and to the special rules established in Article 31 of the Securities Market Law. In order to be traded on a stock exchange, securities must be registered at the RNV, the issuers must request their registration on the stock exchange, and they must comply with the stock exchange s internal regulations. At present, the BMV is the only stock exchange operating in the country Securities Clearance and Settlement Institutions Central securities depositories (CSDs) provide depository services for securities deposited by brokerage houses, stock exchange specialists, stock exchanges, central counterparties, banks, guarantee and insurance companies, and mutual fund management firms. They are entitled to administer these securities, according to the terms indicated in Article 75 of the Securities Market Law, to make transfers, and to execute clearance and settlement of the securities they hold in deposit. At present, INDEVAL is the only institution acting as a CSD in Mexico. INDEVAL is a private company owned by various private financial institutions, including brokerage houses, banks, insurance companies, Nafinsa, BMV, and Banco de México. INDEVAL keeps on deposit all the securities traded in the Mexican market 19 and executes clearance and settlement under a delivery-versus-payment (DVP) scheme through the SIDV. 2.4 MARKET STRUCTURE AND REGULATION One classification of the Mexican financial system considers the transfer of savings into investments as either intermediated or non-intermediated. Based on this, the banking system and the credit auxiliary organizations (for example, credit unions) constitute the intermediated segment, while brokerage houses, guarantee and insurance companies, mutual and pension fund management firms, and other entities participating in the securities market constitute the non-intermediated segment. 19 Government securities are kept in custody in Banco de México, although INDEVAL administers them and settles the transactions carried out with them. 24

37 The SHCP, the regulatory agencies under its umbrella, and Banco de México are the main regulators of the financial system (see Figure 1). The CNBV and other regulatory agencies such as the National Insurance and Guarantee Commission (Comisión Nacional de Seguros y Fianzas, CNSF), the National Commission of the Savings for Retirement System (Comisión Nacional del Sistema de Ahorro para el Retiro, CONSAR), and the National Commission for the Defense of Financial Services Users (Comisión Nacional para la Defensa de los Usuarios de Servicios, CONDUSEF) work under the umbrella of the SHCP and have regulatory and supervisory powers over the types of institutions in which they specialize. The Institute for the Protection of Bank Savings (Instituto para Protección al Ahorro Bancario, IPAB) administers Mexico s deposit insurance scheme. Figure 1: Mexican Financial System Regulatory Structure Banco de México SHCP Regulates operations CONDUSEF CNBV CNSF CONSAR Financial Intermediaries Source: Own elaboration. The SHCP determines the major regulations to which the financial system is subject. Banco de México establishes the operational rules with which intermediaries are obliged to comply in order to participate in the market for government securities, the broader money market, the foreign exchange and derivatives markets, and payment systems. 2.5 THE ROLE OF THE CENTRAL BANK Monetary Policy and Other Functions According to Article 2 of the Central Bank Law, Banco de México provides the country s national currency and preserves the stability of the purchasing power of this currency. The amendment to Article 28 of the Mexican Constitution in June 1993 guaranteed the autonomy of the Banco de México and gave it total control over the credit it grants. Banco de México is empowered to regulate the issuance and circulation of currency, foreign exchange transactions, financial services, and payment systems, and it operates as a reserve bank and lender of last resort for commercial banks. 25

38 In foreign exchange matters, Banco de México acts according to the guidelines issued by the Foreign Exchange Commission, 20 which includes the minister and deputy minister of finance and public credit, another deputy of this institution designated by the minister, the governor of Banco de México, and two other Banco de México board members designated by the governor Involvement in the Payments System As mentioned, the participation of Banco de México in the payment system is based on its own law. Banco de México places high priority on developing a healthy financial system and fostering a well-functioning payment system; to these ends, it has powers to regulate financial intermediation, financial services, as well as payment systems. Banco de México owns and operates two systems for the transfer of interbank funds: SIAC and SPEUA. These systems are described in detail in Chapter 4. The current accounts managed by Banco de México for the Federal Treasury, commercial and development banks, brokerage houses, insurance companies, mutual and pension fund management firms, and some public sector entities are key elements in the functioning of large-value payment systems and in the implementation of monetary policy. 2.6 THE ROLE OF THE SUPERVISORY AGENCIES OF THE FINANCIAL SYSTEM The National Banking and Securities Commission The CNBV is a decentralized organ of SHCP, with technical autonomy and executive powers. It exists to supervise and regulate financial entities within its field, to foster their stability and proper functioning, and to maintain and foster the healthy and balanced development of the financial system as a whole. It must provide for the adequate protection of the public s interests. To this end, it supervises and regulates individuals and firms performing activities listed in the laws related to the financial system. In April 1995, the CNBV Law was issued, placing under CNBV the operations and powers of the former National Banking Commission and the National Securities Commission and expanding them to include all the financial system institutions with the exception of AFOREs, insurance companies, and guarantee firms. The CNBV kept the powers that previously belonged to the merged regulatory agencies and also assumed the power to sponsor preventive or corrective programs and agreements with which financial entities are obliged to comply in order to eliminate financial imbalances that could jeopardize their liquidity, solvency, or stability. The CNBV also was granted the power to dictate prudential rules to preserve the liquidity, solvency, and stability of intermediaries, such as rules for the diversification of risk, the creation of preventive provisions, and the establishment of minimum capital requirements. 20 Article 21 of the Central Bank Law. 26

39 The law lists the following specific CNBV functions: 21 Issuing prudential regulations to which the entities will be subject and dictating the rules by which their operations are to be recorded Establishing the criteria mentioned in Article 2 of the Securities Market Law as well as those of general application in the financial sector, which deal with actions and operations contrary to the best practices of the commercial, banking, and securities market, and dictating the necessary measures so that the entities may adjust their activities and operations to the applicable laws and best practices of the market Operating the RNV and certifying the postings made in the same Supervising the securities issuers registered in the RNV regarding the obligations imposed by the Securities Market Law Ordering the suspension of trading whenever the market shows disorderly conditions or the operations are not compliant with market best practices Intervening in institutions for the purpose of suspending, normalizing, or solving operations that could endanger their solvency, stability, or liquidity or operations that are unlawful or against the regulations stemming from these laws Investigating the actions of individuals and corporations that, although not financial entities on their own, could be performing operations considered in violation of the laws applicable to those entities, ordering inspections of individuals or firms and the suspension of operations, and intervening in the businesses of individuals or firms who, without the proper authorization, perform those activities for which such an authorization is required Acting as a consultative body in financial matters for the federal government. Figure 2: Organization Chart of the National Banking and Securities Commission Presidency Comptroller General Director for International Affairs VP Supervision of Financial Institutions 1 VP Supervision of Financial Institutions 2 VP Supervision of Financial Institutions 3 VP Supervision of Financial Institutions 4 VP Securities Supervision VP Legal VP Regulatory VP Administration Source: CNBV. 21 The sanctions associated with its supervisory functions are described in chapter 8. 27

40 Supervision of Financial Entities The CNBV supervises financial group holding firms, commercial and development banks, brokerage houses, stock exchange specialists or dealers, stock exchanges, mutual fund management firms, mutual funds, general deposit warehouses, credit unions, financial leasing companies, factoring companies, savings and loan companies, foreign exchange firms, limited-purpose financial companies, CSDs, credit information firms, and public institutions and trusts executing financial activities Supervision Model According to Article 5 of the CNBV Law, supervision includes the powers of inspection, surveillance, prevention, and correction. All of these powers are to be carried out in accordance with regulations issued by the federal government. Supervision is undertaken to assess the risks to which financial entities are exposed, their controls, and the quality of their management. The purpose of this activity is to ensure that institutions maintain adequate liquidity, are solvent and stable, and, in general, comply with the relevant rules and best practices of the market. Through supervision, risks are assessed also from a consolidated perspective Inspection is performed through visits, verification of operations, auditing of registries and systems on the premises, or inspection of automated equipment of the financial entities to verify their current status Surveillance is performed by analyzing economic and financial information in order to measure possible effects on financial entities and the financial system as a whole Prevention and correction are carried out by establishing programs of mandatory compliance for financial entities in order to eliminate irregularities. These programs are established when the entities show financial imbalances that may affect their liquidity, solvency, or stability. In all cases such programs may be implemented in agreement with the relevant entities Payment System Oversight The CNBV, according to article 4 of its Law, can authorize and oversee clearance systems, centralized information systems, securities ratings and other mechanisms intended to facilitate the operations or to improve the quality of the securities market Anti-Money Laundering Measures Several regulatory dispositions regarding anti money laundering were published on March 10, 1997, related to the changes in Article 115 of the Banking Law and Article 95 of the General Law for Credit Auxiliary Organizations and Activities. Banks, limited-purpose financial companies, and foreign exchange firms are subject to these rules. 28

41 These institutions must establish specific and rigorous measures for the identification and knowledge of their depositors, account holders, investors, debtors, grantors, and trustees that operate with foreign exchange firms and any other users, before entering into transactions with them. Institutions must elaborate operations manuals, which need to be registered and authorized by the Federal Fiscal Prosecutors Office of the SHCP. Such manuals must contain the criteria that serve as the basis for considering an operation suspicious. A relevant operation is one executed in any monetary instrument for an amount equal or superior to USD 10,000, the equivalent in national currency, or in any other legal currency. A suspicious operation is one that, being executed by individuals or corporations, can be considered suspicious because of its amount, frequency, and nature, its place, region, or area of execution, its previous records, the activity of the individual or corporation, as well as the criteria listed in the operations manual that the foreign exchange firms have prepared and registered with the SHCP. 22 In order to determine if an operation fits in these categories, all activities are considered, including those on the assets and liabilities side of the balance sheet, those related to services, and other similar and analogous activities. Regarding sanctions, the Federal Penal Code added Article 400-Bis establishing that whoever in person or through third parties executes one of the following activities, will be penalized with five to 15 years of prison and a fine of 1,000 to 5,000 salary days: 23 acquires, alienates, manages, keeps in custody, exchanges, deposits, gives as a guarantee, invests, transports, or transfers, inside the national territory, from the national territory to abroad, or vice versa, resources, rights, or goods of any nature, knowing that they could be the result of an illegal activity with one of the following purposes: to hide or try to hide, conceal, or prevent from knowing the origin, location, destination, or property of such resources, rights, or goods or to encourage illicit activities. In order for a criminal case to proceed on the basis of the activities listed in this article for which the services of financial institutions have been used, such activities must have been previously denunciated at the SHCP Deposit Insurance Agency In Mexico, the first formal deposit insurance scheme was created in This was a trust denominated FOBAPROA, whose trustee was Banco de México, whose grantor was the SHCP, and whose beneficiaries were banking institutions. Its function was to execute the necessary operations in order to avoid financial problems that could hamper the liquidity of commercial banks and, thus, their ability to fulfill their obligations with depositors. FOBAPROA was an explicit and public deposit insurance system, and all banks were obliged to be a part of it. The system s coverage included all banking liabilities. 22 The details regarding suspicious operations are described in the third paragraph of Article 95 of the Credit Auxiliary Organizations and Activities General Law and in the second paragraph of Article 115 of the Banking Law. 23 In Mexico fines and penalties related to salary days refer to the minimum daily wage. During 2002, the minimum daily wage was approximately US$

42 After the 1995 banking crisis and several attempts to establish a mechanism capable of reducing the fiscal cost of the bailout carried out through FOBAPROA, in December 1998 the Mexican Congress enacted the Law for the Protection of Bank Savings. IPAB was created as a consequence of this law. The IPAB is a decentralized organ of the federal government and has two main purposes: (a) establishing a system for the protection of savings in banks and (b) managing the financial recovery programs it may create to protect bank depositors and clients and to safeguard the national payments system. The IPAB guarantees the payment of the general public s funds deposited in banks that have been declared bankrupt or are in liquidation. It also has the power to perform preventive interventions when a bank is considered to be improperly managed and when its financial capacity to fulfill its obligations is jeopardized. IPAB also manages and sells the assets of banks that have been intervened by the authorities and must recover the maximum amount possible from their sale. The insurance provided by IPAB is limited starting in 2003, and by 2006 it will have a maximum coverage per person, either individuals or corporations, of UDI 400,000, 24 despite the number or type of obligations the same bank may have with them. The types of bank liabilities guaranteed by IPAB are also limited. Liabilities with other financial institutions, those with other entities making up the same financial group, negotiable debt, or other securities, and liabilities with or deposits of shareholders, board members, and officers up to the first two hierarchic levels are not covered by the insurance. Additionally, the insurance does not cover operations that are not compliant with legal, regulatory, and administrative dispositions or with market best practices or in which the holder has dishonest intentions or is linked to illegal activities. 25 The IPAB determines the ordinary and extraordinary fees that banks are obliged to pay to build the fund. At present, this system is based on uniform percentages related to banks liabilities, although the law provides for the creation of a system in which fees are determined by the individual risk posed by each bank. Finally, the IPAB is a regular issuer of debt securities in the market. The issuance of bonds for the protection of bank savings (bonos de protección al ahorro bancario, BPAs) has the purpose of refinancing and reducing the financial cost of the obligations undertaken by the IPAB and those inherited from FOBAPROA Pensions System Regulator CONSAR is the entity in charge of the coordination, regulation, supervision, and surveillance of the savings for retirement system. It is an administrative organ functioning under the umbrella of the SHCP, with technical autonomy and executive powers. 24 Approximately US$120,000 as of the end of December At present there is a calendar for the gradual reduction of guaranteed liabilities. The final set of liabilities not covered by the insurance will go into effect in January 2004 and is the one described in this paragraph. 30

43 Its powers stem from the Savings for Retirement System Law. Some of the most relevant are the following: 26 Regulate, through the issuance of general rules, the operation of the system, the collection, deposit, transfer, and administration of the fees and contributions associated with this system, as well as the transmission, handling, and interchange of information among the entities of the federal public administration, the social security institutions, and the system s participants, determining the procedures for its proper functioning Issue the general rules with which the system s participants have to comply, according to their incorporation, organization, functioning, operation, and participation in the system Issue the prudential regulations with which the system s participants have to comply Supervise the system s participants (in the case of banks, this supervision will be performed exclusively with reference to their participation in the savings for retirement system; the CNBV, CNSF, and CONSAR must determine the basis on which they will collaborate to discharge their supervisory responsibilities) Impose fines and sanctions as well as advise the relevant authority about the activities considered as felonies according to this law Prepare quarterly reports on fees and other charges, number of affiliates, balance sheets, income statements, integration of the portfolio, and profitability of the pension funds and publish information related to the complaints presented against the banks or AFOREs Financial Services Consumer Protection Agency The CONDUSEF is an organ under the umbrella of SHCP, with autonomy in decision-making. Its object is to defend the interests of the users of financial system services, for which it acts as an impartial referee on the relations between clients and financial institutions. 2.7 THE ROLE OF OTHER PRIVATE AND PUBLIC SECTOR ENTITIES Ministry of Finance and Public Credit Regarding the financial system, the functions of the SHCP are the following: Propose, direct and control the Federal Government s policy in the following matters: financial, fiscal, public spending, credit, banking, monetary, foreign currencies, prices and tariffs of public sector goods and services, statistics, geography and IT 26 Article 5 of the Savings for Retirement System Law. 31

44 Plan, coordinate and evaluate development banks and those commercial banks in which the Federal Government is the controlling shareholder Exercise the powers granted to it by the law with reference to Banco de México as a central bank Exercise the powers indicated by the laws dealing with banking, insurance and guarantees, credit auxiliary organizations, insurance mutual companies and foreign exchange firms Bankers Association The Mexico s Bankers Association (Asociación de Banqueros de México, ABM) is a private organization representing commercial banks. Among its main objectives are the following: Collaborate with associates in pursuing its general objectives and in all those activities related to banking and credit services and promote the development of banking activities in the country and the participation of Mexican banks in international financial markets Participate in the operations of state banking centers as well as coordinate and supervise their functioning Act as a consultative body for the state in banking and financial matters, creating the technical groups deemed necessary for this purpose Exercise the right of petition, through the necessary procedures with authorities, to request the issuance, modification, or abolition of the laws and administrative rules related to the development, security, and improvement of the banking system Organize, sponsor, lead, and in general execute directly or indirectly courses, conventions, seminars, conferences, study meetings, forums, round tables, or any other event with the purpose of disseminating information on the banking system Perform studies and research oriented to the development and smooth functioning of the banking and financial system as well as to the improvement of its methods and operational practices Promote and establish relationships with similar organizations in other countries and with international financial entities and collaborate with the studies and efforts aimed at unifying procedures, exchanging experiences, and sharing knowledge of legal or administrative rules regulating credit and banking activity. The ABM has a Working Committee on Payment Media (Comité de Trabajo sobre Medios de Pago, COMEPA), whose principal purpose is to enhance coordination among banks on issues such as the development of new products, communications and networks, ATMs, EFTPOS, and the settlement of credit card, debit card, and electronic purse transactions. 32

45 2.7.3 Brokerage Houses Association The Asociación Mexicana de Intermediarios Bursátiles (AMIB) encompasses all stock exchange brokerage houses authorized by the SHCP and the CNBV. Additionally, 38 mutual fund management firms, 22 shareholders of the MEXDER, and the Securities Market Training Center participate in it. AMIB defends the interests of all stock market intermediaries with respect to all public and private entities. Its main functions are the following: Coordinate the definition of the needs of intermediaries concerning instruments, operational procedures, services, and market infrastructure Act as a self-regulatory organization in coordination with the other regulatory and selfregulatory bodies for the securities and derivatives markets Promote and spread the financial and capital markets culture Promote the launch and implementation of new technologies. AMIB acts as the voice of the stock exchange community toward the financial community, the government, and the general public. It holds a regular dialog with government agencies related to stock market activities Credit Information Registries Credit information providers in Mexico operate on the basis of the Credit Information Societies Law (Ley de Sociedades de Información Crediticia), enacted in January This law provides procedures and requirements for the establishment and operation of a credit registry, including mechanisms for protecting data subject rights, such as consent requirements, access to own records, ability to correct erroneous data, and limits for the time period that derogatory information can be stored. Credit information providers must be authorized to operate by the SHCP, and must follow regulations issued by the Banco de México and enforced by the CNBV. The law encourages competition in credit information market by restricting exclusive arrangements between creditors and credit registries, and requiring credit bureaus to share information with other credit information providers upon request. Further, regulations require all financial institutions to obtain a credit report before making lending decision, which, given the reciprocity-based principle in the operation of credit registries, implies that participation in a credit bureau is mandatory. The main source of credit information in Mexico is the private credit registry Buró de Crédito. This organization was established in 1995 jointly by the ABM, TransUnion (consumer reporting) and Dun&Bradstreet (business reporting). In 2000, the registry contained information on more than 12 million individuals and issued about 0.5 million reports per month. All banks participate in the Buró de Crédito, as well as a number of non-bank financial institutions, retailers and other creditors. According to a recent survey of banks conducted by the Banco de 33

46 México, 27 the quality of information is considered to be satisfactory. The registry has a comprehensive coverage with 60 percent of banks reporting a hit ratio of 80 percent, i.e., in 80 percent of cases the information on the requested borrower is located in the Buró de Crédito s database. On the other hand, Banco de México operates a credit registry called National Service of Bank and Credit Information (Servicio Nacional de Información Crediticia y Bancaria, SENICREB). The registry was established in 1964 with the main purpose of monitoring compliance of banks with the directives on directed credit. The registry collects positive and negative information on loans above USD 20,000. SENICREB also distributes information to the financial system. The registry played an important role as a provider of information till about 1998, when its functions were replaced largely by the Buró de Crédito. At present, SENICREB is mainly used to support the banking regulation and research functions at the Banco de México. 27 Results of the survey conducted by Banco de México as cited in Marques, Negrin, O Dogherty, Werner Credit Information, Credit Risk Management and the Regulation of Bank Capital and Provision Requirements in Mexico, Banco de México, Working Paper,

47 3 PAYMENT MEDIA USED BY NON-FINANCIAL ENTITIES 3.1 CASH Article 28 of Mexico s Constitution, Articles 4 and 5 of the Central Bank Law, and Articles 11 and 12 of Mexico s Monetary Law establish that Banco de México, in its role as central bank, is the only issuer of legal tender in the country. 28 The official currency is the Mexican peso. Bank notes and coins are an important means of payment for consumers, representing about 30 percent of M1. In most rural areas, cash is the only means of payment. Although the USD, together with the peso, circulates in some tourist and border areas, in the rest of the country the peso is the currency used for retail transactions. Some large-value goods (for example, real estate) usually are quoted in USD, although such transactions often are settled in pesos. Banco de México designs and prints bank notes, distributes them, replaces damaged ones, and identifies and removes from circulation counterfeit ones. Banco de México has six branches and almost 100 correspondents intervening in the collection and distribution of bank notes. Although Banco de México is the official issuer, coins are produced by the Coins House of Mexico. 29 Bank notes are issued in the following denominations: 20, 50, 100, 200, and 500 pesos. Denominations of coins are 10, 20, and 50 cents and 1, 2, 5, 10, and 20 pesos. By the end of 2001, $199.2 billion were in circulation, including bank notes and coins, an amount equal to approximately 3.5 percent of that year s GDP. 3.2 PAYMENT MEANS AND INSTRUMENTS OTHER THAN CASH At present, cashless payment instruments include cheques, postal and telegraphic drafts, payment cards including credit, debit, retailer and prepaid cards, and electronic payments, including largevalue interbank credit transfers with same-day value and electronic credit and debit transfers with deferred net settlement Cheques Cheques are an important instrument for paying suppliers, payrolls, taxes, credit card balances, and services such as electricity, cable television, education, and telephone. Nonetheless, the possibility of fraud due to counterfeiting or lack of funds risks inherent in the instrument means that many operators refuse to accept cheques. Moreover, the measures adopted by Banco de México to promote the use of electronic payments have caused a significant decline in the use of cheques, especially for large-value transactions. 28 That is, the only entity entitled to issue bank notes and order coinage. 29 The Coins House of Mexico functions under the umbrella of the SHCP. 35

48 In 1998 banks reached an agreement on standardization of cheques, with the purpose of reducing the incidence of fraud and allowing the automated processing of cheques. The standards include specifications regarding the format and content of magnetized characters and physical characteristics such as size, chemical solvents reactive paper, synthetic fibers, and protective windows. Cheques are still widely used in the industrial and service sectors. Until January 4, 1996, interbank cheques were credited to the beneficiary s account on the same day of presentation for collection. At present, cheques deposited on day T until 1:00 p.m. are credited to the account of the beneficiary on T+1, and those deposited after this hour are credited on T+2. Banks receive deposits in the form of cheques from other banks. Cheques are taken for clearance to the regional clearinghouses managed by CECOBAN Direct Debits/Credits For several years, CECOBAN has been providing a credit transfer service. Until March 2, 2002 the system was known as interbank payment (pago interbancario). Since then the system for credit transfers has been known as electronic funds transfers (transferencias electrónicas de fondos, TEF). CECOBAN also provides direct debit services under the name domiciliación. 31 Chart 1: Transactions in the Interbank Payments System (volume of transactions, in thousands) 7,000 6,000 5,722 5,000 4,457 Source: CECOBAN. 4,000 3,000 2,000 1, , In order to improve the reliability of its services, CECOBAN is promoting the use of a standardized banking code, known as clave bancaria estandarizada (CLABE), which uses 18 digits with a standard structure to identify the bank, agency, and account number. The CLABE is gradually replacing account numbers for interbank payments. 30 See chapter 4 for a description of the cheque clearing process. 31 See the glossary at the end of this report. 36

49 Direct Credits For many years, bank customers have been able to make credit transfers to checking or to credit card accounts as long as all these accounts are in the same bank. In 1995 the service for interbank credit transfers became available, first as interbank payment and recently as TEF. Clients, called originators (ordenantes), send payment instructions from a bank branch or alternative channel (for example, telephone, Internet) so that the corresponding funds can be credited to a client or clients, called receivers (receptores), with an account at another banking institution. Funds are credited at the beginning of T+1 or T+2, according to the instructions of the originator, and there is no limit on the value of such transactions. This service has national coverage, and every institution pertaining to the banking system, which covers 1,050 cities and towns, participates in it Direct Debits A few years ago, banks offered direct debit services to large companies at the intrabank level, charging the transaction against the checking or credit card accounts of their clients. For this service, both the payer and the beneficiary had to have an account at the same bank. This limitation was eliminated with the June 2001 reform of the Banking Law. Starting in 2002, CECOBAN, through the electronic clearinghouse, began to offer direct debit services to banks. In this service, bank customers authorize a corporation, known as the issuer (emisor), to request charges to a customer s account for the payment of goods and services. The issuer orders its bank, known as the presenter, to collect charge orders endorsed with the customer s authorization. The presenter sends these instructions through the direct debit service to the banks, known as the receivers, holding the accounts to which the corresponding charges are to be made. A direct debit may be a one-time payment or a revolving one. The June 2001 reform of the Banking Law also obliged banks to reimburse any funds associated with a charge to which the client objects Payment Cards Credit and Debit Cards Credit cards started to be used in the 1960s, and this service was available almost exclusively to the bank s most solvent customers. At present, the service is offered to a much wider segment of the population, and it is intensively used. Commercial banks issue cards affiliated with Visa and MasterCard, although American Express Bank issues its own credit cards. In 1994 about 14 million credit cards were present in the country. The 1995 crisis and the much stricter conditions under which banks grant credit since then have reduced the number of cards in circulation to about 8 million. Neither the volume nor the total value of transactions has regained the levels of

50 Department stores and supermarkets issue cards offering a credit line to their clients. Many of these cards are issued jointly with a commercial bank, which takes responsibility for their administration and the collection of funds. Debit cards became widely accepted in Mexico when electronic payroll services became available. Presently, banks offer debit cards linked to every kind of savings or checking account, and they can be used for ATM cash withdrawals and as payment instruments in more than 100,000 commercial establishments throughout the country using EFTPOS terminals. Commercial banks issue debit cards under the Visa (Electron) and MasterCard (Maestro) brands, and by December 2000 there were about 33 million of these cards in circulation. In the period from January 1997 to December 2001, the volume of transactions increased more than fivefold, while the value of transactions doubled. Credit and debit cards are processed through three interconnected national networks. The two biggest banks Banamex-Citibank and BBVA Bancomer have their own networks, while PROSA, owned by other smaller banks, manages the third one. The three networks settle transactions at the end of the day in a commercial bank, Serfín, through transfers made at the SPEUA. International transactions are settled directly by Visa and MasterCard ATMs In almost every urban neighborhood, ATMs are available to cardholders (of debit, credit, or access cards). 32 The ATM network has expanded rapidly: from January 1994 to December 2000, the number of ATMs grew from 4,853 to 17,979 that is, a 23 percent annual growth on average. ATM networks operate similarly to payment cards. There are three national interconnected networks. Banamex-Citigroup and BBVA Bancomer have their own networks, while the smaller banks use the RED system managed by PROSA Prepaid Cards The biggest telephone company, Teléfonos de México (Telmex), has been promoting the use of prepaid chip cards for public telephone services throughout the country. These cards are sold in more than 81,000 locations and can be used in more than 215,000 installed public phones providing service to nearly 20,000 towns and cities. At present, these cards are not rechargeable. Mobile phone operators also have sponsored the use of prepaid cards. To activate the service, individuals with a mobile phone and a prepaid card dial a number and provide a numeric code. Recent developments in this market segment are the joint ventures between mobile phone companies and banks, by which banks, among other things, allow mobile phone customers to buy calling time in ATMs, charging their credit or debit card. Gasoline station chains also have developed a system of prepaid cards for their products. In general, these cards can be recharged automatically for a specific amount and for any given time period (for 32 Just like debit cards, access cards or cash cards are linked to a current account, although cash cards may not be used as a means of payment at EFTPOS terminals. 38

51 example, a month). This service is widely used by companies with vehicle fleets in order to control fuel expenses and facilitate payments Electronic Purse In recent years, Banamex, Banco Inbursa, Banorte, and Santander-Serfin have been trying to implement the electronic purse in Mexico. To recharge these cards with new money, some have installed specific terminals, while others (such as Banco Inbursa in partnership with Telmex) have been using existing infrastructure like ATMs and public phones. Nowadays use of the electronic purse is limited to some commercial franchises and restaurants. Banco de México has been overseeing electronic purse projects and has requested reports analyzing their evolution and implications for monetary policy. In order not to inhibit their development, no regulations have been issued so far in this regard Electronic Funds Transfer in the SPEUA Banco de México operates the SPEUA. All banks have access to this system. Through the SPEUA, banks, on their own behalf or on behalf of clients, can send payment orders rapidly to one another; these payments are settled almost in real time. An individual or corporation holding a bank account may request a bank to send a payment order through the SPEUA to another bank for a determined amount in national currency. The designated beneficiary is credited the amount within 30 minutes of the order being received. The SPEUA alters bank balances at the moment in which the receiving bank credits the designated beneficiary. At the end of the day, outstanding balances are transferred to the corresponding accounts at the SIAC for settlement. In order to participate in the SPEUA, banks have to sign a contract with Banco de México. Through this contract, banks accept the current rules issued by Banco de México as well as those it might issue in the future. Every bank receiving a payment order through SPEUA must accept it and process it, as long as it is clear and compliant with the applicable rules. 3.3 NON-CASH GOVERNMENT PAYMENTS Starting on April 1, 1997, federal cheques, treasury cheques, and other payment documents linked with the current account held by the Federal Treasury in Banco de México were no longer issued. Recently, the federal government has been making more intensive use of the electronic funds transfer service provided by CECOBAN. Cheques are still common in local governments, through the current accounts they hold with commercial banks. 39

52 4 PAYMENTS: INTERBANK EXCHANGE AND SETTLEMENT CIRCUITS 4.1 CLASSIFICATION OF THE MAIN PAYMENT SYSTEMS Table 7 below shows the classification of the main payment systems in Mexico. Table 7: Classification of the Main Payment Systems in Mexico System Type Operator Clearing Agent Settlement Agent SIAC Credit Transfers Banco de México Not applicable Banco de México SPEUA Credit Transfers Banco de México Not applicable Banco de México SIAC SIDV Securities Transactions INDEVAL Not applicable Banco de México SIAC SICAM Banco de México TEF Credit Transfers CECOBAN CECOBAN SIAC SICAM Banco de México Cheques Credit Transfers CECOBAN CECOBAN SIAC SICAM Banco de México Domiciliación Direct Debits CECOBAN CECOBAN SIAC BBVA-Bancomer BBVA-Bancomer A participating Payment Cards Banamex-Citibank Banamex-Citibank commerical bank PROSA PROSA Source: Banco de México. 4.2 THE REGULATORY FRAMEWORK FOR CLEARINGHOUSES Banco de México Circular 2019/95 establishes regulations regarding the clearance and transfer of funds. In this document, SICAM, the clearinghouses system, is defined as a subsystem of the SIAC. Documents and transactions executed through the TEF and the domiciliación services are cleared through the SICAM, which determines the amount of credit needed to settle the resulting balances of the clearing process. According to this circular, clearance may be executed through any operational mode and through the mechanisms freely agreed by the participating banks. Notwithstanding these agreements, the clearing process must comply at all times with the guidelines of the circular and with market best practices. It also must give all banks access to clearinghouses under equitable conditions, as long as the applicants fulfill the requirements previously established for the corresponding clearinghouse. 40

53 4.3 RETAIL PAYMENT TRANSFER SYSTEMS With the exception of payment cards and ATMs, the clearance of retail interbank payments is done by CECOBAN. CECOBAN is the only clearinghouse authorized by Banco de México to clear through the SICAM and to settle the corresponding balances in SIAC. In this way, CECOBAN s clearance services include cheques and electronic interbank retail payments. This clearinghouse operates in Mexico City and has nationwide coverage. The three ATM and payment card networks settle at the end of the day in Banco Serfín through credit transfers made in the SPEUA Clearinghouses Cheques Since it began operations in 1997, CECOBAN has been upgrading its cheque clearing services. In 1998, 238 local clearinghouses were closed down and replaced by 51 regional branches, in addition to the ones already existing in Mexico City, Guadalajara, and Monterrey. In 2001 the banks together with CECOBAN implemented the National Electronic Clearinghouse (Cámara de Compensación Electrónica Nacional, CCEN). This project entailed a centralization process by which many branches were closed down and the remaining 24 were transformed into sole cheque exchange points. Hence, as part of CCEN, a cheque and mailbox subsystem allows cheques denominated in pesos and in USD to be cleared electronically in a single clearinghouse operating in Mexico City and which services all the country. Even so, the banks still have traditional mechanisms for clearing cheques that do not fulfill the requirements for electronic processing. Thus although it handles a very small number of transactions, the National Traditional Clearinghouse still functions at the CECOBAN branch in Mexico City. 33 During 2001, CECOBAN cleared 169,293,389 cheques in national currency, of which 167,900,133, (99.2 percent) went through electronic clearance and only 723,787 went through traditional clearance. Regarding cheques in USD, of a total of 1,894,377 cleared cheques, 93 percent were cleared electronically. 34 All institutions have to present to the clearinghouse the documents on the same day they are received from their clients, and they must accept without restrictions the documents that are presented for clearing. If they refuse to pay a document for some legal cause, they have to write on the documents the reason for this refusal. 33 Until July 2001, another mechanism automated clearance was operating only in Mexico City. 34 Figures do not add to 100 percent since, as mentioned in the previous footnote, the automated clearance mechanism was still in operation in

54 Table 8: Operations Summary of the Cheque Clearinghouse (volume of cheques and percentages) Circular 2019/95 of Banco de México establishes that banks have to make the corresponding credits or charges to the customer accounts no later than noon of T+1, with T being the day in which the documents are presented at the clearinghouse session. Cheques that are deposited in day T before 1:00 p.m. belong to the clearinghouse session of day T and must be credited in the beneficiary customer accounts in T+1. Those that are deposited after 1:00 p.m. belong to the T+1 session and are to be credited in T+2. For this reason, the clearinghouse session mentioned in Circular 2019/ 95 is said to use a T+1½ settlement cycle. On September 6, 2002, the banks together with CECOBAN began operating a cheque truncation service. In the first stage, only cheques with an amount of $2,000 or less (or its equivalent in USD) were truncated. In the second stage, which started on February 7, 2003, cheques of $10,000 or less (or its equivalent in USD) are being truncated. Finally, in the third stage, which will start on April 4, 2003, all cheques will be truncated, and the Images Exchange Clearinghouse (Cámara de Intercambio de Imágenes, CII) will begin operating. The exchange of images is expected to improve the efficiency and safety of the cheque validation process Direct Credits and Direct Debits Since 1996, CECOBAN has been providing electronic funds transfer for banks, with information that facilitates the crediting of funds in customer accounts. In 2002, as part of implementation of the CCEN system, the former interbank payment system was upgraded and changed its name to TEF. Also, a direct debit service, domiciliación, was implemented. The standardized banking code (CLABE) was developed, replacing the system of 11-digit account numbers in which the bank and the branch were identified separately. CLABE has 18 digits and the following structure: First three digits from left to right: bank identification Cheques in Mexican pesos (a) 87,131, % 191,429, % 169,293, % Electronic Clearing 59,262, % 185,475, % 167,900, % Traditional Clearing 22,769, % 4,102, % 723, % Cheques in USD (a) 182, % 1,851, % 1,894, % Electronic Clearing % 345, % 1,758, % Traditional Clearing 182, % 597, % 136, % Source: CECOBAN. (a) Figures do not add to 100 percent as cheques cleared through the automated clearance mechanism, in operation until July 2001, are not included here. 42

55 Next three digits from left to right: branch identification. Next 11 digits from left to right: account identification. Last digit to the right: verifying digit. The issuing banks send to CECOBAN the electronic files corresponding to the TEF and domiciliación services between 5:30 and 8:30 p.m. CECOBAN validates the format and dates and informs each participating bank of the outcome between 5:30 and 8:30 p.m. Then it begins processing the electronic files and generates the outgoing files for every participating bank. 35 The outgoing files may be accessed by the receiving banks between 8:31 and 9:00 p.m. If any of the transactions contained in the outgoing file cannot be executed, the receiving banks generate a returned items file, which is transmitted to CECOBAN from 9:30 p.m. until 6:30 a.m. of the following day. Finally, CECOBAN executes a new process validating this information between 6:30 and 7:30 a.m. and sends the results to Banco de México for clearing at the SICAM and settlement at the SIAC. Credit transfer orders executed through the TEF are credited to the beneficiary account in T+1 or T+2, according to the originator s instructions, and funds are available after 9:00 a.m. The direct debit service operates with a T+1 cycle. Transactions must be sent to CECOBAN for processing one working day before the charge is to be made Clearing and Settlement Cheques as well as the TEF and the domiciliación services follow a parallel procedure for clearing and settlement. Clearinghouse members sign a multilateral contract through which, among other matters, they authorize CECOBAN to provide Banco de México with the information needed to determine the net credit or debit position resulting from the transactions. The institutions also authorize Banco de México to debit or credit, as appropriate, their accounts up to the amount resulting from the clearing process, on the basis of the information CECOBAN has provided on their behalf. Hence, CECOBAN reports to Banco de México the following: Information regarding the cheques each institution presented to all the other institutions, including the date on which cheques were presented and the date on which they are to be settled Information regarding the returned cheques and the adjustments that were made on the cheques presented the previous working day 35 The outgoing files contain the operations belonging to each of the participating banks that are to be applied to their customer accounts. 43

56 Information on the transactions each institution has made through electronic funds transfer and direct debit, including the dates on which transactions are to be settled Information on returned items for these two services. On the basis of this information, Banco de México determines, through the SICAM, the preliminary or final balances of the cheque clearing session and of the TEF and domiciliación services. In order to assure timely settlement of these instruments, banks may grant credit lines to each other. For this purpose, they must inform Banco de México of the amount and beneficiary. Banco de México will keep these credit lines in the SICAM until the banks inform otherwise. The banks authorize Banco de México to debit or credit their accounts up to the amount of the credit lines they have granted to other banks. Banco de México, once it knows the resulting net credit or debit balances, determines the portion of the credit lines that will be used. Finally, Banco de México executes final settlement. For this, it debits or credits the corresponding amounts, including those of the credit lines, in the current accounts in the SIAC before 9:00 a.m. Mexico City time. Banks may review both the preliminary and final results of the clearing session every working day within the hours established in SICAM s operations manual Risk Management Mechanisms Banco de México sets limits on the individual credit lines that an institution may grant to another on the basis of the net capital of the former. 36 It also sets a limit on the aggregate amount of the credit lines an institution may grant to all others. If one institution (or more) is unable to settle the final balances, and as long as there are banks in this situation, Banco de México will carry out the clearing session excluding from one or more clearinghouses the cheques or other types of transactions to be paid by that bank (commonly known as unwinding) according to the following procedure: 1. It determines the bank i* that requires the biggest amount to settle its obligations. 2. It cancels the obligations of bank i* derived from the domiciliación service. 3. If bank i* continues in a deficit position and this deficit exceeds the sum of its payment obligations deriving from cheques that were received in all clearinghouses, 37 then Banco de México cancels its payment obligations derived from the TEF service. 36 For more information, refer to Item M of Circular 2019/ In the case of the cheque clearinghouse operated by CECOBAN, each of the locations in which the banks exchange cheques physically is considered a clearinghouse. 44

57 4. If the deficit persists, Banco de México identifies a pool of clearinghouses in which the sum of the payment obligations of bank i* is equal to or greater than its overall deficit, and it cancels those payment obligations. In the case of the cheque clearinghouse operated by CECOBAN, each location in which the banks physically exchange cheques is considered a clearinghouse. 5. Banco de México then clears the remaining transactions and recalculates the credit lines that must be executed. 4.4 LARGE VALUE PAYMENT TRANSFER SYSTEMS Extended Electronic Payments System (SPEUA) Only banks may use the SPEUA to send payment orders on their behalf or on behalf of their clients. The SPEUA is linked to the current accounts managed by SIAC. Banks must send the payment orders they receive from their clients within 30 minutes of receipt, as long as there are enough funds in their accounts to complete the transfer. 38 The SPEUA processes the payment orders and makes the funds available to the receiving bank once it has validated that the issuing bank has enough money or credit available to cover them. Banks may not charge each other any fees for sending, receiving, returning, or executing the payment orders processed through SPEUA. The SPEUA cancels those payment orders that, by closing time, have not passed its controls. The receiving bank must accept these payment orders as long as the beneficiary is the receiving bank itself or one of its account holders, and it must credit the corresponding amount to the respective account within 30 minutes following receipt. The SPEUA does not operate directly with the current accounts; rather it uses a system of virtual cash balances based on bilateral credit lines. This system works as follows: Every morning, every bank informs Banco de México of the maximum credit amount it wishes to grant to each of the other participants. 39 These amounts may be raised throughout the day, but they cannot be lowered. Banco de México considers these amounts as outstanding until the participants inform otherwise Each day, Banco de México determines the maximum debt limit for each participant, that is, the maximum amount of credit that the participant may use. This limit is equal to the lesser of (a) the sum of the risk exposures all other participants have established for this participant or (b) an amount established by Banco de México considering the particular liquidity situation and overall financial health of this participant 38 Issuing banks may not send payment orders requested by persons different from their clients. 39 The credit amounts for each institution and the totals are limited by Banco de México. See section

58 Participants may also transfer funds from their accounts in SIAC and in SIDV. 40 Hence, as the SPEUA receives and accepts payment orders, it produces a settlement balance for each participant. The SPEUA will not process a payment order if doing so would cause the balance of the issuing bank to fall below its maximum debt limit. In this case, the payment instructions are put on hold, and the system tries to settle them through an automated process once the balance makes it possible. The issuing bank may cancel these payment orders as long as they have not been settled by the system Settlement At the end of the day, participants with a debit position must pay this amount, which results from a multilateral netting process. For this purpose, Banco de México executes settlement through SIAC in the hours established in SPEUA s operations manual. Thus final and irrevocable charges are applied in the current accounts of participants with a debit position, and final and irrevocable credits are applied in the accounts of participants with a credit position Pending Obligations in the SPEUA It is understood that a participant registers a pending obligation in the SPEUA when its multilateral net position in SPEUA exceeds the sum of its current account balance and overdraft limit in SIAC (see section 4.4.2). When a bank faces a pending obligation in SPEUA, all other banks that granted credit to it face an additional settlement obligation (obligación adicional de liquidación, OAL). Banco de México is authorized to charge these banks their corresponding additional settlement obligation. Nevertheless, the sum of additional obligations may never exceed an amount equal to 1.25 times the largest exposure that any of these banks has established in relation to other participants Risk Management Mechanisms Banco de México sets limits on the individual credit lines that banks may grant to one another. 41 These credit lines may not exceed the greater of (a) 30 percent of the net capital of the creditor or (b) 2.4 percent of the value of a pool of liabilities of the creditor. 42 On the one hand, the central bank limits the sum of all the credit lines a bank may grant to others. This limit is a positive function of net capital. On the other hand, Banco de México may limit the credit a bank may receive from others considering its overall liquidity position and financial health. 40 Banco de México sets a limit for the net transfers each bank may make from the SPEUA. 41 Or to other entities within the same financial group to which the bank belongs. 42 For more information, refer to Item M of Circular 2019/95. 46

59 The additional settlement obligations protect Banco de México from the risk it undertakes by assuring settlement at the SPEUA. The amount of a pending obligation of one bank may not exceed the sum of the credit lines this bank has received from other banks. Hence, this guarantee would cover the inability to settle of the participant with the largest settlement obligation, although it may not be sufficient if two or more big participants are unable to settle. Regarding operational risk, Banco de México has established the following measures: The participants equipment, accessories, and software related to SPEUA must comply with Banco de México s technical specifications To operate in SPEUA, every participant must keep at least two sets of equipment with the same functions and capabilities, including security procedures to authenticate payment orders The security procedures that participants must follow in order to access the SPEUA and operate in it are established in SPEUA s operations manual Each participant must designate two people an owner and a substitute with enough powers to act as representatives with Banco de México in connection with the activities that their institution performs in SPEUA Also, every participant must designate the operators of the equipment that is used to operate in connection with the SPEUA. Those operators designated to use access codes are compelled to change these codes the first time they use them and every 15 days or more frequently from then on If there are failures in the communications between Banco de México s equipment and those of one or more of the participating institutions, if SPEUA is closed before the established hours, or if any other event has an extraordinary impact on SPEUA, Banco de México may take some of the following actions: extend the operating hours of SPEUA, extend the cutoff time to determine the pending obligations in SPEUA and the corresponding additional settlement obligations, mandate participants to stop sending payment orders through SPEUA, or order them to keep sending instructions through backup equipment and so forth Account Holders Service System (SIAC) Banco de México owns and operates SIAC, an electronic system for large-value payments, through which it manages the current accounts that banks, brokerage houses, AFOREs, mutual fund management firms, some insurance companies, as well as the Federal Treasury and other government entities hold at the central bank. Instructions to credit customer accounts of the receiving banks may not be sent through the SIAC; neither does information identifying the client of the originating bank that has ordered a payment. 47

60 Although the majority of large-value transactions are executed through the SPEUA and the SIDV, SIAC is particularly important because SPEUA, SIDV, and the deferred net settlement systems managed by CECOBAN settle their balances in this system. Orders to transfer funds among institutions holding a current account must be sent through SIAC between 9:00 a.m. to 5:30 p.m., Mexico City time, and the day of value may be the same day or the following working day. Only banks may overdraw their accounts at the SIAC. Banco de México sets a limit on overdrafts on the basis of net capital; to use the overdraft facility, banks may post collateral in favor of Banco de México at INDEVAL. SIAC does not settle those payments that would cause the overdraft to exceed this limit or the amount of the collateral that has been posted. An exception to this would be when Banco de México charges banks for additional settlement obligations or other debts the banks may have with it. Participants who also have an account in SIDV may transfer positive balances from SIAC to SIDV or vice versa. Those who have an account in SPEUA may transfer payment capacity (positive balances or credit capacity) to SIAC and vice versa Other Payment Systems that Settle in the SIAC Besides SIAC s own operations, other payment systems settle in the current accounts of the central bank through this system. CECOBAN calculates the net bilateral balances of the cheque clearinghouse, TEF, and domiciliación services and sends them to the SICAM, which then clears and settles these positions in SIAC before 9:00 a.m. SIDV balances are transferred at 4:30 p.m., and those of SPEUA are transferred at 5:30 p.m. Therefore, on day T, SIAC settles the following: SIAC s own transactions that were made in T with same-day value and those that were made in T 1 with value day on T CECOBAN net balances with value day on T SIDV balances, which include transactions made in T 2, T 1, and T (for more details, see chapter 6) SPEUA balances, including the additional settlement obligations, of operations made in T. The closing of the different payment systems does not necessarily mean that overdrafts have to disappear. 43 There is a limit of $9 billion for net transfers to and from SPEUA. 48

61 Risk Management Mechanisms Intraday overdrafts in SIAC bear no cost as long as they do not exceed the limit established by Banco de México and are collateralized. Collateral is assessed according to a price vector of Banco de México. Uncollateralized overdrafts or those that exceed the established limit are subject to penalties. The excess is measured on a minute-by-minute basis, and the daily average is charged an interest rate equal to one-third that of 28-day CETES (federal treasury notes). 4.5 FOREIGN EXCHANGE SETTLEMENT SYSTEMS Most bank accounts in the Mexican banking system are denominated in Mexican pesos. However, the inhabitants of a 20-kilometer trench beginning at the border between Mexico and the USA, the inhabitants of the states of Baja California and Baja California Sur, corporations residing in any part of the country, official representatives of foreign governments, international organizations, and foreign citizens working in this type of institution may open current accounts in USD. In Circular 2019/95, Banco de México has established that banks are free to determine the procedures and mechanisms for clearing cheques and other payment orders denominated in USD, as long as such mechanisms comply with safe banking practices. Funds transfers may be executed through a foreign settlement agent or through accounts the banks may open in a foreign bank willing to provide this service. Currently, Bank of America serves as a settlement agent for USD-denominated transactions of Mexican banks, and CECOBAN clears USDdenominated cheques drawn on Mexican banks. 4.6 CROSS BORDER SETTLEMENT SYSTEMS Payment instructions are normally sent and received through SWIFT and are settled through foreign correspondents. One of the most important cross-border payments is represented by remittances or money transfers from Mexicans residing in the USA to their families back home. Usually, these transfers are collected through agents (for example, convenience stores, gas stations, supermarkets) with terminals connected to major operators like Money Gram and Western Union. These companies receive U.S. dollars in the USA. Then a local partner usually a bank or a retailer with wide national coverage pays these transfers in pesos to beneficiaries in Mexico (see section ). 4.7 MAJOR PROJECTS AND POLICIES BEING IMPLEMENTED Banco de México is in the process of reforming its payment systems. The main changes aim to reduce moral hazard and the distortions resulting from the credit that is granted to payment system participants, on the one hand, and to upgrade and modernize the system s technological infrastructure, on the other hand. 49

62 Banco de México will concentrate all its credit facilities in SIAC in order to facilitate settlement. Moreover, it will change the rules through which participants obtain liquidity throughout the day. The principal tasks center on (a) establishing a new way of granting credit during the day in SIAC using intraday repos and (b) eliminating intraday overdrafts, except when these are backed with net deposits in Banco de México. The planned changes for SPEUA include a new technological platform and a change in name. The main goals are the following: 44 Banks will be required to post collateral for an amount equal to 1.25 times the largest credit line they have extended to other participants The system will have clear rules in order for collateral to be executed rapidly The new system will allow banks to reduce at any moment the credit lines extended to other banks, without withdrawing the obligation that was acquired before this reduction The ability to execute net transfers outside SPEUA will be eliminated Limits to bilateral net balances among the participants will be established. At first, the intention is to limit the net debit balance of a participant with another in an amount equal to five times the credit line the latter has granted to the first The new system, the Interbank Electronic Payment System (Sistema de Pagos Electrónicos Interbancarios, SPEI) will be more robust and efficient, and it will use message standards that will allow participants to offer better services to their clients. SPEI will be able to handle a much larger volume of payments. It will be capable of processing pending payments in a way that optimizes the money balances of participants. SPEI will have two modules: one will use money balances generated in SIAC, so that participants may make payments to be settled in real time; the other one will make payments backed by credit lines that participants will extend to each other and will be settled at the end of the day. Banco de México also will change the way it grants credit in SIDV. In order to keep the system running efficiently, Banco de México will maintain the connection between SIAC and SIDV, but it will eliminate the credit lines (that is, overdrafts in the cash control accounts) it grants to participants in the SIDV system. 45 In turn, Banco de México will offer intraday repos. Procedures are being implemented to ensure the efficient use of securities balances as well as of cash balances to settle pending transactions. These changes to the different payment systems will have major effects in the treasury operations of intermediaries; for this reason they will be applied gradually so that banks and brokerage houses have sufficient time to adapt their operational practices to the new scheme. In this regard, Banco de México has suggested that these institutions adopt the Sound Practices for Managing Liquidity in Banking Organizations issued by the Basel Committee on Banking Supervision. 44 Once these changes are made, it will not be necessary for Banco de México to assure settlement of the SPEUA. 45 This as well as other concepts related to the SIDV are explained in detail in chapter 6. 50

63 5 SECURITIES: MARKET STRUCTURE AND TRADING INSTRUMENTS 5.1 FORMS OF SECURITIES Through general dispositions, the CNBV establishes the regulations to which the issuance and operation of securities and other documents covered by the Securities Market Law are subject. In contrast, the General Law for Credit Certificates and Transactions (LGTOC) includes several rules regarding the form in which credit securities a broad concept that includes securities and other instruments such as bills of exchange and cheques should be represented. The LGTOC only considers the representation of credit securities through physical certificates. Regarding this matter, Article 17 determines that the owner of a security must show it in order to exercise the rights that come with it. Nonetheless, Article 22 of LGTOC states that the provisions applied to public debt bonds, bank bills, corporate shares, and all other securities regulated by special laws are determined in the corresponding legal dispositions. Regarding this matter, Article 74 of the Securities Market Law establishes that, when securities are deposited in a central depository or when securities stemming from the exercise of patrimonial rights are deposited directly in a central depository, the issuer may deliver multiple securities or a single security covering a portion or all of the securities deposited. The depository must then make the necessary entries to determine the rights of the depositors. The certificates representing nominative shares are issued with a legend stating that they are in a central securities depository, and this produces the same effects as an endorsement. If the issuer and depository agree, securities may be issued without coupons. In this case, the certifications provided by the depository have the same legal validity as these accessory documents. All of the securities traded in the Mexican market are immobilized at INDEVAL. The BMV has established that all types of securities (debt, variable rate, public, or private) traded in it must be deposited at INDEVAL. 5.2 TYPES OF SECURITIES According to the legal definition, securities are the shares, obligations, bonds, certificates, and other credit titles and documents issued in series or en mass, in the terms of the applicable laws, that are set to circulate in the securities market, including bills of exchange, promissory notes, and optional securities. The regime established by the Securities Market Law for securities and the activities executed with them are also applicable to credit securities and other documents granting to their holders either credit or property rights or the right to participate in the equity of corporations whose shares are publicly offered or intermediated in the securities market. The Securities Market Law also is applicable to the securities, certificates, and documents with these characteristics issued abroad Article 3 of the Securities Market Law. 51

64 5.2.1 Shares and Other Securities Representing Equities The shares in which a firm s equity is divided are represented by nominative shares serving as proof of ownership. These nominative securities are transferable and are subject to the general rules governing securities. 47 Shares have an identical value among them and carry the same rights, although capital may be divided into various types of shares with special rights for each one, according to the issuing firm s social contract. 48 In Mexico there are different kinds of shares. The main differences are related to voting rights and to who can own them. The A share series is reserved for Mexican investors and must be at least 51 percent of the common shares. The B share series has no restrictions and can reach up to 49 percent of the common or controlling shares. Both carry the same voting rights. The O share series consists of common shares of financial groups and can be freely acquired by any financial institution. Shares with limited voting rights may belong to the L series, when common, or to the C series, when preferred. 49 Ordinary participation certificates represent ownership rights regarding a group of shares. Article 228-A of LGTOC defines ordinary participation certificates (certificados de participación ordinaria, CPOs) as credit securities representing the following: The right to a percentage of the profits of the securities, rights, or goods of any class that the issuing fiduciary has in an irrevocable trust created for this purpose The right to a percentage of the property or ownership rights of such goods, rights, or securities The right to a percentage of the net income resulting from the sale of these goods, rights, or securities. In practice, CPOs represent a package of shares of different series and in different proportions, issued by the same company. They generally do not grant voting rights and are registered in the BMV as a single issuance. Warrants are option-like securities issued by stock exchange intermediaries or companies. By paying a premium, the holder acquires an optional right to buy from or sell to the issuer a determined amount of shares at the strike price and within the expiration period established in the document. 47 Article 111 of the Commercial Enterprises General Law. 48 Article 112 of the Commercial Enterprises General Law. 49 Article 132 of the Commercial Enterprises General Law indicates that current shareholders have a preferential right, in proportion to the number of shares they own, to purchase newly issued shares whenever the firm intends to increase its equity. 52

65 5.2.2 Debt Securities The debt market is divided into a short-term money market and a long-term debt market. The debt market and the stock market together form the so-called capital market. Public securities mainly those issued by the SHCP, Banco de México, and IPAB represented about 93 percent of total outstanding debt securities registered in the BMV at the end of The OTC market is especially relevant, and public securities and banking instruments are mainly traded in it Short Term Debt Instruments CETES, federal treasury notes, are bearer credit securities by which the issuer the federal government obliges itself to pay a fixed amount of money on a predetermined date. CETES are issued with maturities of 28, 91, 182, and 364 days. Their nominal value is paid at maturity. These are the most liquid securities on the market. By the end of July 2002, the amount of CETES outstanding was $207.8 billion. Bankers acceptances are bills of exchange issued by banks to back a loan granted to a firm. In 2001 Banco de México canceled the issuance of these instruments since they were rarely used in practice. Nominal value was $100, and maturity was between 7 and 182 days. The yield was related to a reference rate, such as CETES or the interbank equilibrium interest rate (tasa de interés interbancaria de equilibrio, TIIE). Commercial papers are negotiable promissory notes issued by companies participating in the securities market. Their nominal value is $100, and maturity may be between 7 and 360 days. These instruments are issued at par and generally pay a reference rate, such as CETES or TIIE. Commercial papers offer higher rates and less liquidity than government instruments. Promissory notes, known as PRLVs (pagarés con rendimiento liquidable al vencimiento), are short-term securities issued by banks. 50 An alternative instrument for funding banks, they aim to tap the internal savings of individuals. Their nominal value is $100, and maturity may extend from 7 to 360 days. Interest is fixed at issuance and paid at maturity Medium Term Debt Instruments Medium-term promissory notes are debt securities issued by firms. Their nominal value is variable, and maturity is between one and three years. They usually carry a floating interest rate, and interest may be paid monthly, quarterly, semi-annually, or annually. These promissory notes may have a fiduciary guarantee. 50 They are similar to a bank certificate of deposit. 53

66 Long Term Debt Instruments Udibonos are issued by the federal government and are indexed to the national consumer price index (índice nacional de precios al consumidor, INPC). Their nominal value is UDI 100, and maturity can be three, five, or 10 years, with semi-annual payments. This instrument is sold at a discount and pays a real rate (that is, a rate above the inflation rate of the corresponding period). At the end of June 2002, the total amount of udibonos outstanding was $29.5 billion. 51 Development bonds, known as bondes, are issued by the federal government with a nominal value of $100 and a minimum maturity of one to two years. They are sold at a discount, and interest is paid every six months based on the 182-day CETES or inflation during the corresponding period, whichever is higher. Another version of this instrument, called bondes T, pays interest quarterly, based on the 91-day CETES, and has a maturity of three years. At the end of June 2002, the total amount outstanding was $253.3 billion in development bonds and $118.9 billion in bondes T, respectively. Bonds are issued by the federal government with maturities of three, five, and 10 years at a fixed rate payable every six months. By the end of June 2002, the amounts outstanding for the three-, five-, and 10-year maturities were $80.4 billion, $69.9 billion, and $14.7 billion, respectively. Monetary regulation bonds (bonos de regulación monetaria, BREMs) are issued by Banco de México for monetary regulation purposes with a three-year maturity. BREMs pay interest every 28 days. The corresponding rate is revised daily, based on the rate at which financial intermediaries execute one-day repos with securities issued by banks. At the end of June 2002, the total amount of BREMs outstanding was $201.3 billion. Debentures are instruments issued by private firms that participate in the securities market. Their nominal value is variable, and maturity is between three and eight years. Principal may be paid at maturity or periodically during the life of the security. These instruments grant an interest rate based on CETES or TIIE. They may be guaranteed by endorsement or fiduciary guarantee or may be backed by a mortgage or pledged securities. Highway indemnification promissory notes, know as PICs (pagarés de indemnización carretera), were issued as a part of the Support Program for the Rescue of the Highways under Concession. A PIC is a promissory note endorsed by the federal government. Its nominal value is UDI 100, and maturity is between five and 15 years. These instruments were issued at a discount, with a fixed interest rate paid every 182 days. Bonds for the protection of bank savings are issued by IPAB for the purpose of refinancing its contractual obligations and gradually reducing the financial cost associated with the support programs for banking institutions. They are issued with a three-year maturity and a 51 At the time of preparation of this report, no three-year udibonos were in circulation. 54

67 face value of $100, which is amortized at maturity in a balloon payment. They are issued at par, and interest is paid every 28 days. The interest rate is the higher of the 28-day CETES and the most representative interest rate of one-month PRLVs, published by Banco de México. These instruments have a federal government guarantee, and the amount in circulation at the end of June 2002 was $185.9 billion. Stock exchange certificates were created with the June 2001 reform of the Securities Market Law. Different from medium-term promissory notes, these certificates allow covenants, obligations of giving, and anticipated expiries, among others. Different from debentures that also allow the above, the issuance of a stock exchange certificate does not need to be agreed by a shareholders meeting but only by the administrative bodies of the corporation. These certificates can be issued in pesos or UDIs, with a maturity of one year or more. Interest and coupons are not standard and may be guaranteed in several ways. 5.3 SECURITIES IDENTIFICATION CODE Since October 1993, INDEVAL has been a member of the Association of National Numbering Agencies, the world organization in charge of defining the rules for identification codes. In January 1994, BMV designated INDEVAL as the National Numbering Agency of ISIN (international securities identification numbers) codes. Figure 3: Structure of ISIN codes positions positions position M X P Country s prefix (Mexico) Region identifier (South America) Source: INDEVAL. Issuer identifier Issue identifier Verifying digit As the National Numbering Agency, INDEVAL does the following: Assigns ISIN codes to actual and future issues with maturities of 28 days or more Assists participants Supervises and controls the correct application of ISIN codes 55

68 Distributes and disseminates information related to codes and issues Provides the market with ISIN codes through SIDV. In order to facilitate the use of codes, ISIN INDEVAL, together with BMV, created the ISIN Codes Electronic Directory, with which the intermediaries as well as other national and foreign institutions may access electronically and in real time the database of ISIN codes. This database is updated weekly. In March 1997, INDEVAL signed an ISIN codes assignment contract with Banco de México in order to facilitate the trading of federal government securities in foreign markets. 5.4 TRANSFER OF OWNERSHIP Article 18 of LGTOC establishes that the ownership of securities is transferred by transmitting the credit certificate through which ownership was originally established. However, all securities traded on the Mexican securities market are deposited and immobilized in INDEVAL. Hence, once the securities have been deposited, the transfer of ownership legally occurs by transferring ownership from one account to another at the central securities depository; this does not involve either physically delivering the asset or writing a legend on the securities themselves or, when applicable, on the issuer s registry. 52 The certificates representing nominative securities must be endorsed to INDEVAL for administration. The endorsement enables INDEVAL to justify its securities holdings and to execute the functions granted by law to central securities depositories. When the securities are no longer deposited at INDEVAL, the endorsement no longer affects administration, and these securities become subject to the regime established in the general commercial and other applicable laws. INDEVAL must issue to depositors non-negotiable letters of proof of ownership of the deposited securities. These letters are sufficient to demonstrate ownership of the related securities, exercise the right to attend shareholder meetings, and, in the case of equities, permit the issuing company to be included in the registry of shareholders. These documents also serve to legitimate the execution of those actions mentioned in Articles 185 and 201 of the Commercial Enterprises General Law 53 as well as any other action in which it might be necessary to exhibit the securities held in custody by INDEVAL. 5.5 PLEDGE OF SECURITIES AS COLLATERAL In Mexico there are two basic legal frameworks for collateralization: the pledge and securities safekeeping (caución bursátil). 52 Article 67 of the Securities Market Law. This same paragraph appears in Article 8 of INDEVAL s internal regulations. 53 The right to call a shareholders general meeting and the right to oppose judicially the resolutions of the shareholders general meetings, respectively. 56

69 In LGTOC, the pledge refers to credit transactions; regarding negotiable securities it is created by: 54 Delivering to the creditor goods or credit certificates if they are in bearer form Endorsing credit certificates in favor of the creditor if they are for nominative shares Depositing goods or certificates, if they are in bearer form, with a third party designated by mutual agreement and at the creditor s disposal Delivering or endorsing certificates representing the goods or issuing or endorsing the related pledge bond. When fungible goods or securities are pledged, the pledge prevails if the securities or goods are substituted with others of the same kind. The secured creditor must deliver to the debtor a receipt expressing the fact that the goods or securities were given in pledge and must keep them and preserve them as well as exercise all rights related to them, charging the debtor for any expense incurred. The creditor can ask a judge to authorize the sale of the pledged goods or securities once the guaranteed obligation has expired or their price has declined to a level in which they no longer cover the full amount of the debt itself plus an additional 20 percent. The debtor can oppose the sale by paying the required funds, enhancing the collateral, or reducing the debt. The creditor cannot become the legal owner of the pledged goods or securities without approval of the debtor. If applicable, the proceeds of the sale are held in custody by the creditor in lieu of the goods or securities sold. The LGTOC also contains a concept called pledge without ownership transfer. This constitutes a real right over goods, and its purpose is to guarantee the fulfillment of an obligation and its seniority for payment, while the debtor retains ownership. This type of pledge can guarantee any obligation. In case of bankruptcy of the debtor, the secured creditor may execute through judicial proceedings the goods with this kind of pledge. Securities safekeeping is described in Article 99 of the Securities Market Law. A securities pledge may be created by signing a contract and requesting the central depository to open an account or expand the number of existing accounts in which to deposit the corresponding securities. It is not necessary to endorse the securities, to deliver them physically, or to register them with the issuer. A relevant feature of securities safekeeping is that the extrajudicial sale of pledged securities may be agreed, as long as the execution procedure described below is followed: a. The parties must decide together who will execute and who will administer the pledged securities. Brokerage houses or banks may be designated for either of these tasks as long as 54 Articles 334 to 380 of the LGTOC. 57

70 they are not related to the transaction itself or they do not belong to the same financial group whose brokerage house (or bank) is involved in the transaction. The same institution may be designated both as administrator and as executor. b. The contract must include the procedure for replacing the executor if it is unable to act in this capacity or whenever a conflict of interest arises between the executor and the creditor or debtor. c. If at the expiration date of the pledge or when the pledge must be reconstituted the creditor does not receive payment or the amount of the pledge increases, then the creditor may request, by itself or through the administrator, that the executor sell the pledged securities. The creditor, or the administrator, notifies the debtor, and the debtor can oppose the sale only by paying the amount due or by increasing the pledge as required. d. If the debtor does not pay and does not increase the pledge as required, the executor proceeds with the sale of the pledged securities at market prices up until the amount needed to cover the principal and the agreed accessories. The proceeds are given to the creditor. The sale takes place on the stock exchange if the pledged securities are listed either on it or in the OTC market. Brokerage houses have to send their clients account statements reporting the correspondent elements of the securities safekeeping constituted by them, with the necessary data for identifying the pledged securities. The statement constitutes receipt of the securities until the end of the contract Repos The LGTOC considers the repurchase agreement (repo) as a special contract falling in the category of credit operation. 55 Through a repo transaction, the creditor acquires for a certain amount of money the property of credit certificates, and it agrees to transfer back to the debtor the ownership of the same amount of credit certificates of the same species at the agreed term, against the reimbursement of the original purchase price plus a premium. The repo is legally binding once the securities have been transferred or endorsed, if securities are nominative. Accessory rights and obligations related to the underlying securities belong to the debtor. If, by the first day after the expiration date of the repo, the debtor has not settled the operation, and this has not been rolled over, the repo transaction is considered abandoned. The debtor is then entitled to request any differences in value from the creditor. Hence, the initial repo agreement is transformed into an outright transaction, and in case of default the creditor remains secured, at least for the amount of principal, without having to initiate judicial proceedings. 56 According to the LGTOC, maturity of a repo may never exceed 45 days, and the transaction can be rolled over one or more times without the need for a new contract. However, this last restriction is 55 Articles 259 to 266 of LGTOC. 56 In Mexico, repo transactions do not incorporate margin calls. 58

71 not applicable to repos in which banks, brokerage houses, and mutual funds participate, being subject to the general rules established by Banco de México. For this last set of repos, maturity cannot exceed 360 days or the time to maturity of the underlying securities. Under the regulations of Banco de México, only those securities issued by the federal government and by the banks may be used as underlying assets for repo transactions Securities Lending The Securities Market Law establishes in Article 98 that securities loans executed with brokerage houses transfer property to the debtor, who then is compelled to return other securities of the same issuer, nominal value, species, and class. These operations can be executed outside the stock exchange and only with securities authorized by the general rules of the CNBV. For more details on the securities lending mechanism, see section TREATMENT OF LOST, STOLEN OR DESTROYED SECURITIES Article 80 of the Securities Market Law states that depositors are responsible for the authenticity of the deposited securities and the validity of their transactions. Thus INDEVAL is not responsible for the defects, legitimacy, or nullity of the securities or transactions it holds. Moreover, Article 26 establishes that brokerage houses are responsible for the authenticity and integrity of the securities they trade as well as for the continuity of the endorsements and their authenticity. Regarding this, INDEVAL s responsibilities are the following: Guarantee the safekeeping and proper conservation of the securities Inform depositors about the loss, counterfeiting, destruction, mutilation, or theft of the deposited securities as well as any other situation that, according to its judgment, could temporarily weaken the provision of services Return to depositors securities of the same nominal value, species, and class as those deposited by them. 5.7 LEGAL MATTERS CONCERNING CUSTODY In Mexico the securities custody service is considered to be of public interest and can be provided by private sector firms only by concession of the federal government. Banco de México, brokerage houses, stock exchange specialists, stock exchanges, banks, and insurance companies can be the sole providers of this service. At the same time, these companies can provide custody services to brokerage houses, stock exchange specialists, stock exchanges, central counterparties, banks, insurance firms, mutual funds and their management firms, and foreign financial entities, as well as to other central securities depositories whose nationality is Mexican or foreign. Central depositories are subject to the inspection and control of the CNBV. 59

72 In practice, INDEVAL is the only company in Mexico authorized to operate as a central securities depository. INDEVAL provides the deposit and custody service under the category of physical custody of the securities, and it is the centralized custodian of all securities registered in the RNV that are traded in the Mexican financial markets, either at the BMV or anywhere else. INDEVAL is empowered to keep the securities on its own premises, in any commercial bank, or at Banco de México. When authorized by the CNBV, the deposited securities may also be kept at foreign banking institutions or other central securities depositories, either Mexican or foreign. Banks and brokerage houses also can provide custody and administrative services, depositing the securities on their own premises, in a central securities depository, or in another institution indicated by the CNBV. Basically, banks and brokerage houses operate as subcustodians for INDEVAL and for investors who do not have their own account with INDEVAL. As of April 15, 2002, INDEVAL registered almost $2 trillion in direct custody and over $1.0 trillion in indirect custody through subcustodians (see table 13) Protection of the Securities in Custody in case of Bankruptcy or Insolvency of the Custodian In INDEVAL, depositors must deposit the securities in their name, distinguishing between those they own and those belonging to third parties, because INDEVAL is compelled to segregate all securities by ownership. The Securities Market Law does not mention explicitly the protection of securities held in custody in case of bankruptcy or insolvency of the custodian. In case of dissolution and liquidation of a central securities depository, the Securities Market Law states that the occurrence will be handled according to rules established in the Commercial Firms General Law or, if applicable, to rules established in the Bankruptcy Law. 57 Article 70 of the Bankruptcy Law states that the goods that can be identified as in possession of a firm but whose ownership has not been transferred to it in a legally final and irrevocable way may be separated by the legal owners. At the same time, Article 71 states that it is possible to separate from the total those goods that, among other circumstances, are in possession of a firm as a deposit or a trust or that were received in administration or consignation. The Bankruptcy Law contains a paragraph dealing with entities providing public goods under concession, as is the case for INDEVAL. The article states that bankruptcy procedures for these kinds of entities are subject to the laws, regulations, concession titles, and other dispositions regulating that specific concession and public service Elimination of Physical Delivery As mentioned in section 5.1, Mexican laws do not cover the dematerialization of securities, as every security that is traded in the local markets is backed by physical certificates deposited at 57 Moreover, in these cases the CNBV has special powers that it can apply by law in case of suspension of payments or bankruptcy of banks. These powers are described in Chapters 245 through 261 of the Bankruptcy Law. 60

73 INDEVAL. However, the law allows the trading of securities, with ownership transfers accomplished through book entries at INDEVAL accounts. In this regard, the Securities Market Law states in Article 67 that, once a deposit is created with INDEVAL, the transfer of the deposited securities is executed through a transfer from one account to another, through entries in the registry of the central securities depository, without the need either to physically deliver the documents or to write a legend on the certificates or, if applicable, in the issuer s registry. As mentioned, the deposited securities can be withdrawn through the physical delivery of the securities 58 (traditional or direct withdrawal at the vaults of INDEVAL), electronic transfer (withdrawals from the premises of the depositor), or by transfers from the account of the withdrawing depositor to another. Regarding withdrawals through electronic transfer, depositors enter the necessary information for withdrawal in the equipment provided by INDEVAL, and the following day INDEVAL personnel deliver the related securities to the depositors offices. INDEVAL has no obligation to make physical deliveries to depositors in the case of government securities. It is sufficient to provide receipts proving that the securities were transferred by crediting the account of the beneficiary and debiting that of the previous legal owner. 59 MARKET STRUCTURE AND TRADING SYSTEMS 5.8 PUBLIC OFFERING OF SECURITIES According to Article 2 of the Securities Market Law, a public offering is an offering executed through mass media to undetermined persons to subscribe, sell, or buy securities, credit certificates, and other documents representing securities. The CNBV establishes the criteria in order to determine if an offering is public. If it is public, it needs to be authorized by the CNBV. Only those securities registered in the Securities Section of the RNV can be publicly offered. 60 The public offering of any document not included in the definition of securities provided in Article 3 of the Securities Market Law is prohibited. Any issuer complying with the requirements established in Article 14 of the Securities Market Law can register its securities in the Securities Section of the RNV and can request the CNBV for authorization to offer such securities publicly. Securities issued or guaranteed by the federal government or Banco de México, securities representing liabilities of commercial banks with 58 INDEVAL must return to the depositors securities of the same nominal value, species, and class as those deposited. If the securities to be physically withdrawn are represented by jumbo certificates or global notes, INDEVAL will return them once it receives from the issuer the securities representing that individual holding as well as the new security or securities representing the remaining amount still under deposit. 59 Government securities are deposited at Banco de México. 60 The offer to subscribe or sell abroad securities issued in Mexico or by Mexican firms must be registered in the Special Section of the RNV. 61

74 maturities of one year or less, and shares representing the equity of mutual funds are exempt from these requirements PRIMARY MARKET Government securities issuances in the primary market are executed by Banco de México through auctions. 62 Auctions in the primary market are held every week on Tuesdays at 1.30 p.m. and are settled through SIAC on the following Thursday, which is considered as the issuance date. Banks, brokerage houses, mutual funds, insurance companies, and pension funds are authorized to participate in these auctions. Banco de México also places securities issued by other public sector institutions, such as IPAB, whose securities it auctions on Wednesdays. Other kinds of securities must be placed in the primary market through brokerage houses. Initial public offerings of equities have been practically nonexistent in recent years. In 2001 four new issuances were registered, although these were made by firms that had been spun off or by firms that had acquired others and decided to place their own shares in place of shares of the firm that was bought out or merged. Regarding the placement of debt instruments different from those issued by the federal government, the figures by type of major instrument are shown in table 9. Table 9: Private Sector and Local Government Debt Issuances in 2001 (in millions of pesos and USD) 61 Risk capital mutual funds as well as limited-purpose mutual funds intending to make a public offer have to comply with Article 14 of the Securities Market Law. 62 The government also sells securities directly to Banco de México, which then places them in the market through auctions. Issued Amount Conversion Number ($) to USD of Issuances Private Certificates 14, , Local Government Certificate PICs 12, , Medium Term Promissory Notes 9, , CPOs debt 3, Bank Bonds 2, Debentures 1, TOTAL 44, Source: BMV. 62

75 Additionally, 58 commercial paper lines were approved in 2001 for a total of $63.6 billion. A total of 898 issuances were made for a total amount of $517.5 billion, including rollovers SECONDARY MARKET According to the Securities Market Law, brokerage houses, stock exchange specialists, and other financial entities authorized by other laws to handle securities are considered intermediaries in the securities market. Hence, banks, insurance companies, and mutual and pension fund management firms, among others, can also make transactions in the securities market. In 2000 in order to increase the liquidity of the secondary market of government securities and to foster investment in these securities, the SHCP approved the operation of Market Makers for Government Securities. The relevant rules were published in Official Note 102-B-308. Market makers are the banks and brokerage houses that quote bid and ask prices for CETES and development bonds permanently and that trade these securities regularly on their own behalf. Their main obligation with the SHCP consists of quoting CETES and development bond bid and ask prices at all moments, for a minimum amount of $20 million S TOCK EXCHANGE TRADING With the June 2001 reform of the Securities Market Law, banks, insurance companies, and mutual and pension fund management firms may become BMV shareholders. However, this law also established that only brokerage houses or market specialists may operate in the BMV. 63 Moreover, the Securities Market Law establishes that these institutions cannot operate outside the stock exchange those securities registered in it. In 1992 the BMV implemented the first electronic system for securities trading, the Integrated Automated System for Securities (Sistema Integral de Valores Automatizado, SIVA RE). SIVA RE was used to trade debt securities and also equities registered in the intermediate market (now known as the Market for Mid-Size Mexican Enterprises). Later on, the BMV acquired the trading system used by the Vancouver Stock Exchange to trade capital market instruments and implemented it in Mexico under the name of Automated System for Transactions and Operations (Sistema Automatizado de Transacciones y Operaciones, SATO). In August 1996, it implemented the Electronic System for Trading, Transaction, Registration, and Allotment (Sistema Electrónico para la Negociación, Transacción, Registro y Asignación, SENTRA). SENTRA allows trading of capital market securities (equities, long-term debt instruments), public offerings, registry operations (including registry of mutual fund prices), and auctions. At the beginning, the system was a complement to outcry transactions. Equities registered at the BMV were traded under the outcry system on the auction floor or through SENTRA-Equities, but never simultaneously. 64 However, later on the traditional outcry system was gradually replaced by the electronic system. 63 Notwithstanding these provisions, Mexico has a large over-the-counter market. See section At that time, only equities traded through SENTRA-Equities were suitable for being traded electronically, according to the BMV, the CNBV, and the brokerage houses. 63

76 SENTRA-Equities provides the user with the means to trade securities through workstations located at the trading desks of intermediaries. Intermediaries can obtain real-time information, they have a full view of bid and ask positions, and they may identify the best investment options for their clients and participate directly in the market. The capital market in BMV is divided into two sections: Section A, or Main Market, which includes large firms, and Section B, or Market for Mid-Size Mexican Enterprise. Moreover, in Section A there is a subsection called International Quotations System (Sistema Internacional de Cotizaciones, SIC) in which foreign equities are listed and traded. The instruments issued by the government and the debt securities issued by private sector firms and banks are traded in another system called SENTRA-Debt. This system was created by BMV in In 1998 the firm Financial Integration Services (Servicios de Integración Financiera, SIF) was created to operate this system. 65 Besides providing this trading system, SIF also provides electronic brokerage services, which are explained in section Trading Hours Securities making up the capital market may be traded according to any of the following operational schemes: Continuous: Bids can be entered and operations completed at any time during the auction session Auction: Bids can be entered only during the auction period Mixed: The continuous and auction schemes are alternated. To determine the securities to be traded in the different operational schemes, the BMV considers, among other criteria, liquidity, price formation, and volatility. The volume of the bids and transactions are standard according to the batches determined by the BMV. The BMV may establish batches by type of security, issuer, or series. The prices of positions and transactions are also subject to the biddings determined by the BMV D ERIVATIVES TRADING In Mexico there is a derivatives exchange called MEXDER. 66 The MEXDER project was conceived in 1995 by the BMV and some commercial banks. MEXDER began operations in December 1998, 65 Financial Integration Services is legally separated from the BMV, although the BMV owns more than 99 percent of it. 66 Banco de México and the CNBV have authorized financial intermediaries chartered in Mexico to make derivatives transactions in the following recognized derivatives exchanges: Chicago Mercantile Exchange, Chicago Board Options Exchange, and the Mid-America Commodity Exchange. 64

77 and it has its own clearinghouse, which operates as a central counterparty for all derivatives contracts traded in the organized market. At the beginning, futures contracts were traded under the traditional outcry method on the auction floor. MEXDER started its electronic operations on May 8, 2000, using the SENTRA-Derivatives system, which was developed specifically for futures transactions. Table 10 shows the types of futures contracts that were available in MEXDER as of June Table 10: Types of Future Contracts Traded in the MEXDER Type Underlying Contract Size Contract Period Currencies USD USD 10,000 Monthly Cycle, up to 36 months Indexes Prices and Quotations Index of the BMV 28-day TIIE $10 x IPC (a) $100,000 Quarterly Cycle (March, June, September, December) up to one year Monthly Cycle, up to 36 months Debt Instruments 91-day CETES 3-year, fixed-rate BONDES 10,000 CETES (b) 1,000 BONDES (c) Monthly Cycle, up to 36 months Quarterly Cycle (March, June, September, December) up to three years Cementos Mexicanos (CEMEX CPO) Individual Equities Fomento Económico Mexicano (FEMSA UBD) Grupo Carso (GCARSO A1) 1,000 shares Quarterly Cycle (March, June, September, December) Grupo Financiero BBVA Bancomer (GFBB O) Teléfonos de México (Telmex L) Source: MEXDER. (a) The IPC is the Prices and Quotations Index of the BMV. As of June 2002, contract size was equal to $64,601 (approximately USD 6,500). (b) Equal to $100,000. (c) Equal to $100, MEXDER intends to introduce option contracts shortly. 65

78 5.13 OVER THE COUNTER MARKET In Mexico there is a large and deep over-the-counter (OTC) market. Several legal underpinnings support transactions in this market. For example, the Banking Law establishes that transactions made by banks on their own behalf with securities registered in the RNV must be made through brokerage houses, except for securities issued, accepted, or guaranteed by banks themselves, those securities determined by Banco de México, and those excluded by the SHCP. 68 Regarding this particular matter, Circular 2019/95 of Banco de México establishes that transactions with banking and government securities can be executed without the intermediation of brokerage houses and that such transactions may be executed through verbal, telephone, written, or any other electronic means of information or communication accepted by the parties. Nonetheless, these operations need to be registered in the accounting books without exceptions and need to be confirmed the same day in writing or by fax, telex, or other means providing written evidence that the transaction has taken place. In practice, Mexico s OTC market can be divided into direct trades among financial intermediaries and intermediated trades. Intermediated trades comprise three segments: Automated screen trading: Interactive terminals are provided to the participants (banks and brokerage houses), which enter their final bid and ask prices as well as the amounts being offered for outright and repo transactions with government and banking securities. The screens show the best available prices, and participants may match a partial amount of the offer or its total amount. 69 Voice brokerage: In this segment, a group of brokers 70 intermediate outright and repo transactions with government and banking securities by telephone, with some screen support. These companies provide participants (banks and brokerage houses) with two resources: (a) non-interactive terminals in which the quantities and best bid and ask prices are shown and (b) a speaker, through which brokers may call the attention of participants to any relevant change on the screens. Participants transmit their final orders by telephone to the brokers, who immediately enter the information on their screens without identifying the participant. Transactions are also closed by telephone, and the result is announced on the screens. Only at this moment do participants know who their counterparty is. 68 Article 53 of the Banking Law. 69 Two companies provide this service: SIF and Infosel, through their systems SENTRA-Debt and Lince, respectively. The SENTRA-Debt system is described in section 5.11 as part of stock market transactions, since the BMV considers the value traded in it as part of total stock exchange transactions. However, for all practical purposes the system can be classified as an over-the-counter mechanism because it does not perform the functions of a centralized mechanism for transactions. 70 Enlaces Prebon, Eurobrokers, Cantor Fitzgerald, and Red Financiera, among others, are special agents whose activities resemble those of brokerage houses. However, they are not considered as such for legal and regulatory purposes. 66

79 Secondary market rounds: In this system some of the brokers intermediate special auctions of government securities requested by any of the participants. The auction is held in the terminal of the broker. In practice, equities and non-bank private debt issuances are traded in the BMV, while banking, government, and Banco de México securities, even if listed in the BMV, are mainly traded OTC MARKET SIZE At the end of 2001 the Mexican equities market reached a market capitalization value of $1.1 trillion or US$126.6 billion, which represented nearly 25 percent of GDP that year. In 2001 the average daily volume was 4,073 transactions, with a daily traded amount of US$151 million. All these figures were slightly lower in 2001 than in Total traded value (primary and secondary market) in BMV for 2001 reached $40.4 trillion, slightly above that for 2000 and about double that for The amount traded in the equities market during 2001 was US$38 billion, which is 0.9 percent of the total amount traded in BMV. Table 11 shows the recent evolution of the Mexican stock exchange. During the 1990s many Mexican companies listed their equity shares on the New York Stock Exchange through American Depositary Receipts (ADRs). Nowadays most trades with major Mexican equities occur outside the country. 71 Table 11: Traded Amounts at the BMV (in millions of pesos) Capital Market Total (a) 366, , ,444 Equities 331, , ,221 Long-Term Debt 3,638 5,038 7,182 Money Market-Short Term Debt 20,952,343 39,077,980 40,029,192 TOTAL 21,319,211 39,478,639 40,395,636 Source: BMV. (a) The sum of equities and long term debt, which constitutes the Capital Market, differs from the total shown in this line due to the fact that the figures of the equities market numbers do not include mutual funds, warrants or indexed banking bonds. These items are included in the Capital Market Total. Regarding the OTC market, as all securities that are traded in the Mexican markets are deposited with INDEVAL, it is possible to obtain information about the importance of this market. Table 12 shows the volume of transactions processed by INDEVAL, for both the stock exchange and the overthe-counter market. 71 In 1998 approximately 62 percent of the trading of these equities occurred on the New York Stock Exchange. 67

80 Table 12: Total Transactions Processed by INDEVAL (volume of transactions) Operations executed in the BMV 1,396,574 1,383,428 1,295,027 Operations executed in the OTC market 1,295,758 1,417, ,467 TOTAL 2,692,332 2,800,619 1,917,494 Source: INDEVAL. Regarding the value of transactions, the amounts traded in the OTC market represented nearly four times those traded on the stock exchange in Finally, the derivatives market has been growing steadily since 1998, when it began operations. According to MEXDER and ASIGNA the derivatives clearinghouse trading volume for the January June 2002 period increased to 35,255,218 contracts for a value of $3.5 billion. Both numbers doubled in By June 2002 there were 4,406,974 open contracts with a notional value of $437.1 billion R ECENT TRENDS In June 2001, the Mexican authorities and Congress launched a major reform of the Securities Market Law. The main changes were directed toward protecting minority shareholders, establishing new rules for independent board members, auditing committees, insider information, and information disclosure, and creating a new instrument for the securities market: the stock exchange certificate. Regarding securities clearance and settlement, some other changes were made: Central counterparties: The concept of central counterparties was incorporated in the securities market for the purpose of reducing or eliminating settlement risks. 73 Central counterparties constitute themselves as reciprocal creditors or debtors of the rights and obligations stemming from securities transactions. Central counterparties undertake this obligation with intermediaries, which are linked legally with the central counterparty and not among themselves. Central counterparties have to rigorously control the risks they assume and have enough resources to ensure the fulfillment of their obligations. 72 The total traded value in the over-the-counter market cannot be obtained directly because INDEVAL classifies the information in the categories of banking market, government securities, and capital market, without specifying whether the operations were executed in the BMV or not (even if, as mentioned in section 5.13, the banking and government instruments are traded mainly in the over-the-counter market). This approximation is obtained using the daily average of the total value of the operations settled in INDEVAL in 2001 ($746.8 billion) multiplying it by 250 working days and comparing it to the total traded value in the BMV, which appears in table In the derivatives market, ASIGNA performs the role of central counterparty. 68

81 This service can only be provided by firms receiving a concession from the federal government. Central counterparties can only act as such with securities market intermediaries that have become their partners, who in turn may participate in the market on their own behalf or on behalf of third parties. At present INDEVAL is working to establish a firm that will apply to obtain the concession to act as a central counterparty in the capital market. National securities registry: The Intermediaries Section of the former National Registry of Securities and Intermediaries (presently the RNV) was eliminated. Prior to this measure, in order to operate in the market intermediaries first had to become incorporated and then had to register in the Intermediaries Section. The new measure includes some new obligations. Issuers that intend to register their securities in the RNV have to provide the CNBV with more information that may improve the decision making of investors. Also risk ratings are now mandatory for all new debt securities. Stock exchanges: Besides brokerage houses and specialists, banks, insurance companies, guarantee firms, mutual funds, mutual fund management firms, pension fund management firms, stock issuers, and others, as determined by the SHCP, may now become shareholders of a stock exchange. Finally, in August 2001 INDEVAL initiated the multilateral net settlement service for transactions executed at the BMV. With the Multilateral Operations Clearance System (SCO-Multilateral), INDEVAL has reduced the amount of funds needed for settlement by more than 50 percent (for details of the functioning of the SCO-Multilateral System, see section 6.4). 69

82 6 GOVERNMENT AND PRIVATE SECURITIES CLEARANCE AND SETTLEMENT CIRCUITS 6.1 ORGANIZATIONS AND INSTITUTIONS Mexican Stock Exchange The BMV provides the physical and technological infrastructure to facilitate operations in the securities market. It was created in 1933 with enactment of the Law to Regulate Stock Exchanges, followed by creation of the Stock Exchange of Mexico (Bolsa de Valores de México). This stock exchange was supervised by the former National Securities Commission. In 1975 the Stock Exchange of Mexico changed its name to the Mexican Stock Exchange, incorporating Mexico s two other exchanges, which were operating in the cities of Guadalajara and Monterrey INDEVAL The first central securities depository in Mexico was created on April 28, 1978, under the name of Institute for Securities Deposit (Instituto para el Depósito de Valores). This public sector entity was created to offer custody services, administration, clearance, settlement, and transfer of securities through book entries. In 1987 this organization went private and was legally constituted under the name of S.D. INDEVAL, starting operations on October 1 of the same year. INDEVAL is the only company in Mexico authorized to operate as a central securities depository according to the terms established in the Securities Market Law. Besides the services of deposit, custody, administration, clearance, settlement, and transfer of securities, which are described in more detail in the following sections of this chapter, INDEVAL provides the following services: Securities lending: In January 1997, INDEVAL created the Securities Lending Program, denominated VALPRE, making available to market participants an electronic system for securities lending. ISIN codes: The BMV designated INDEVAL as the National Numbering Agency for ISIN codes. Specialized services: INDEVAL offers the following services directly to issuing companies: (a) registration of shareholders who are entitled to the rights of ownership but who have not registered their shares in a brokerage house and thus have not deposited them with INDEVAL, (b) the exercise of ownership rights, such as dividend payments, capitalizations, subscriptions, exchanges, and splits, and (c) rights updates. At the end of 2001, deposits in INDEVAL totaled $3.8 billion (approximately US$415 billion). INDEVAL has vaults in Mexico City, at the BMV building, and in the city of Monterrey. 70

83 Table 13: Balance of Securities Deposited in INDEVAL (in millions of pesos) Capital Market 1,296,481 1,319,802 1,827,652 1,724,434 2,020,774 Money Market 743, ,355 1,095,188 1,364,455 1,797,789 Government Securities 535, , ,982 1,063,383 1,340,414 Banking Securities 207, , , , ,375 Others (Metals) Total 2,039,958 2,198,169 2,922,847 3,088,898 3,818,570 Securities in Custody (Units) 66,559 44,478 38,872 34,971 33,676 Source: INDEVAL. 6.2 SECURITIES REGISTRATION AND CUSTODY PROCEDURES Registration in the RNV The RNV is public and operated by the CNBV. It comprises two sections: a Securities Section and a Special Section. 74 Securities issued in Mexico or by Mexican individuals or corporations overseas are registered in the Special Section. Only securities registered in one of these sections can be offered publicly. To register securities in the Securities Section and to obtain the authorization for a public offer, an issuer must satisfy the following requirements: 75 The application must be accompanied by a prospectus on the financial, administrative, economic, accounting, and legal situation of the issuer as well as of the securities in the public offer. 76 The annual financial statements of the issuer must be accompanied by the report of an independent external auditor. There must be an independent legal opinion about the legal existence of the issuer, the validity of the agreements reached by the shareholders general meeting or by the board of directors regarding the particular issue, the powers of the persons underwriting the securities, and the authenticity and integrity of these securities. In the case of debt instruments, there must be a report by an authorized risk rating agency about the credit quality of the securities. 74 Article 10 of the Securities Market Law. 75 Article 14 of the Securities Market Law. 76 Whoever issues securities representing a liability with a maturity of one year or less is exempt from the prospectus requirement. 71

84 A stock exchange must have agreed to register the security in its listings. The issuer must provide any additional information requested by the CNBV. In case of equities, the social bylaws of the issuing company must comply with the rules given in Article 14 Bis 3, parts I, III, and IV of the Securities Market Law. To maintain this registration, the issuing companies must fulfill the following requirements: Provide to the CNBV, the stock exchange, and investors continuous, quarterly, and annual reports. Such reports must comply with the rules issued by the CNBV for this purpose. When determined by the CNBV through general rules, the financial statements must be accompanied by the report of an independent external auditor Comply with the requirements for disclosure given in Article 16 Bis of the Securities Market Law and provide timely information on the outcome of shareholder meetings Comply with the requirements for maintaining registration of equities in the stock exchange s securities listings, including those related to the participation of independent directors on the firm s board of directors Ensure that the issuers policies regarding their presence, activity, and participation in the securities market are consistent with the interests of investors, for which purpose the CNBV will issue general rules Provide all other information and documents required by the CNBV through general rules. All secondary regulations mentioned in this section have already been issued by the CNBV and are currently in force Securities Registry and Custody with INDEVAL According to Article 67 of the Securities Market Law, the deposit occurs with delivery of the securities to the central securities depository, which opens an account for the depositor. Once the deposit is made, INDEVAL is responsible for the custody and proper conservation of the securities, being able to decide if it will keep the securities on its own premises, at any other commercial bank, or at Banco de México. INDEVAL receives securities as various types of deposits (custody, administration, and guarantee) as well as metal coins in gold or silver. Its internal regulations state that the securities deposit occurs through physical delivery, with the transfer from one depositor s account to another account, with the allotment of securities to the account of a depositor, and, in the case of government securities, with virtual delivery INDEVAL holds government securities in centralized custody at Banco de México. In primary auctions, it deposits government securities in the depositors accounts once Banco de México has transferred them to the account INDEVAL holds for this purpose. 72

85 In order to hire INDEVAL for deposit and administrative services, it is necessary to sign a contract. Through this contract, depositors agree with rules established in the internal regulations of INDEVAL. For the provision of services by computer, electronic, or telecommunications means, depositors need to provide a written request signed by officials empowered to undertake administrative actions, who also must show a certified copy of the public papers granting them such powers. INDEVAL provides custody and deposit services under the following categories: Physical deposit and withdrawal of documents from the vaults of the institution, using the legal concept of endorsement in administration Immobilization of documents. INDEVAL promotes a permanent program to reduce the amount of documents through the issuance of single securities (global notes) for new issuances and the conversion to global notes of the documents representing existing deposits Centralized custody of all the securities registered in the RNV that are traded in financial markets, either at the BMV or elsewhere. Nominative securities must be endorsed to INDEVAL, in the terms and for the purposes described in Articles 67 and 74 of the Securities Market Law. Depositors must deposit securities in their name, distinguishing between securities that belong to them and those that belong to third parties. INDEVAL is obliged to segregate securities by ownership. The securities are considered in custody with INDEVAL once authorized personnel physically receive them on the premises of the institution Deposit Accounts There are three types of securities deposits: in custody, in administration, or in guarantee. Deposits in custody: INDEVAL is only responsible for the safekeeping of the securities. Deposits in administration: INDEVAL is responsible for executing the necessary actions for preserving the rights that the deposited securities confer on their owners. INDEVAL is empowered to make effective the ownership rights deriving from these securities, to collect principal payments, dividends in cash or shares, interest, and other ownership-related items for the time the securities are in deposit. The administration of securities is always subject to the condition that the issuers provide INDEVAL with the necessary funds to exercise these ownership rights in a timely manner. Deposits in guarantee: INDEVAL is compelled to keep the securities in guarantee to ensure the fulfillment of obligations, in the terms of the applicable laws and rules. 73

86 Operations Execution In order to execute operations in the assigned accounts (whether deposits, transfers or withdrawals) and obtain the related information, depositors must authorize INDEVAL officers to execute such operations and messengers to pick up documents and information through a procedure of signatures registration Deposit Account Information The Securities Market Law states in Article 73 that central securities depositories must send to their depositors, at least once a month, an authorized account statement with operations registered during the period since the last cutoff date. The depositors can make objections to the statement within 15 days from its receipt. INDEVAL sends to its depositors daily and monthly reports of the credits or debits to their own accounts and to those of third parties. These reports work as authorized account statements and include all the transactions since the last cutoff date. The reports and the account statements are generated through SIDV. In the system s corresponding menu (Capital Market and Money Market), the depositor can access the Single Account module in which a global daily report is produced for purchases, sales, transfers, deposits, and withdrawals for each of these markets. Article 72 of the Securities Market Law states that central securities depositories cannot give information about the deposits and any other transactions to anyone other than the depositors themselves, their legal representatives, or whoever was granted the power to manage the account. The only exception is when this information is required by judicial authorities or by fiscal authorities through the CNBV. When requested by depositors in writing, INDEVAL can provide information to persons or entities different from the depositors themselves Administration of the Deposited Securities INDEVAL provides the following administrative services for securities deposited by either residents or foreigners: Exercise rights in cash: cash dividends, interest payments, and principal payments. Exercise rights in species: capitalizations, exchanges, conversions, and splits. Exercise mixed rights: subscriptions. The issuers must provide INDEVAL with all the information and documents necessary to execute the agreed acts. They also must provide the funds to pay the corresponding ownership rights as well as the calculation of the rate. By request of the issuer, INDEVAL provides the service of exchanging final or provisional securities for new securities. The issuer has to agree with INDEVAL on the issuance of securities without coupons, so that the records issued by INDEVAL represent such coupons for all legal effects The issuers must issue and exchange the necessary securities, with their respective coupons, when required by INDEVAL to service the withdrawal of securities. 74

87 6.2.3 Securities Transfers Once the securities deposit has been created, transfers of securities occur through book entries in INDEVAL registries. All securities transactions must be settled through this method of securities transfer, under a deliveryversus-payment (DVP) framework. The depositors, under their responsibility, can request INDEVAL to transfer securities free-of-payment in those cases conforming to the applicable rules Registry of Seizures over Deposited Securities It is understood that all guarantees created with securities deposited with INDEVAL are granted under the securities safekeeping system as stated in Article 99 of the Securities Market Law (see section 5.5). There could be exceptions when specifically stated in the laws and applicable rules or because of the nature of the transactions themselves. In order to open accounts for securities pledges, depositors must provide the original of the securities safekeeping contract and an application to open such an account. INDEVAL then identifies the accounts according to rules established in its operations manual. INDEVAL exercises the ownership rights deriving from pledged securities according to instructions provided by the depositors who pledged the securities. Pledged securities can be substituted and released according to the terms agreed by the depositors in the securities safekeeping contracts Securities Withdrawal Securities deposited with INDEVAL can be withdrawn either through their physical delivery or by their transfer from one account to another. To withdraw securities through physical delivery, the depositors must make a request to INDEVAL, as indicated in the operations manual. INDEVAL must return securities of the same nominal value, species, and class as the deposited ones. If the withdrawal proceeds, INDEVAL endorses the securities, without any further responsibility, to the depositor requesting the withdrawal, and the securities become subject to the general regime established in commercial and other applicable laws. INDEVAL has no obligation to make physical deliveries of government securities that were deposited. It only has to provide a receipt confirming the transfer of such securities through debits and credits to the accounts of the transmitters and the beneficiaries, respectively. For securities in the custody of institutions contracted by INDEVAL to provide centralized deposit services, it is understood that the withdrawal is finalized when a charge is made on the accounts these institutions have opened with INDEVAL. 75

88 When securities are to be physically withdrawn and are represented by single or multiple securities, INDEVAL proceeds with the delivery once the issuer has provided new securities representing the individual ownership and replaced the original security or securities with new one(s) representing the remaining balance. If issuers have granted INDEVAL the power to underwrite securities on their behalf, INDEVAL proceeds to issue and exchange the necessary securities to service the requested withdrawal. 6.3 GUARANTEE SCHEMES In 1997 an irrevocable guarantee trust for the settlement of securities transactions executed in the BMV was created within INDEVAL, based on the methodology of defaulted or expired transactions. For a better determination of contributions to the fund, in 1999 the value-at-risk (VAR) methodology was introduced, based on the volume of transactions of a brokerage house. At the beginning, this methodology was used only partially to determine the size of the fund. By 2001, the size of the fund was based completely on the VAR methodology, with the fund being constituted 30 percent in cash and 70 percent in government securities and credit lines. The specific methodology is the following: Every brokerage house must contribute to the fund on the basis of its open positions, which are pending obligations to be settled in T, T+1, or T+2 and the expired obligations. Different risk measures are calculated to determine the size of the contributions: Individual VAR (exposure of each brokerage house): The maximum expected loss if a brokerage house is unable to fulfill its pending obligations. Overall VAR (exposure of the system): The maximum expected loss if two or more brokerage houses with adverse movements in their positions to be settled are unable to fulfill their obligations; a weighted global measurement is also calculated combining the system s exposure and the individual exposure of each brokerage house. VAR of expired positions: The maximum expected loss over the expired positions. Price differentials are calculated on the basis of the open positions of each brokerage house, under 250 historic scenarios with a 99 percent confidence level. Brokerage houses make contributions based on these measurements as follows: Required minimum contribution: The monthly average of each brokerage house s exposure to the system as measured by VAR. Variable contribution: Updated daily to capture a brokerage house s increase in its risk exposure as a result of higher volume of transactions or higher volatility. 76

89 Extraordinary contribution: Updated daily based on the maximum expected loss, as measured by VAR, over expired positions. Therefore, the fund is constituted by the sum of the contributions of all brokerage houses. 79 In recent months, the size of the fund has been about $50 million, representing around 2.5 percent of the volume of transactions of brokerage houses. The maximum price differential in a single day represented about 12 percent of the size of the fund. 6.4 SECURITIES CLEARANCE AND SETTLEMENT PROCESS INDEVAL provides securities clearance, settlement, and transfer services for all transactions made through the BMV or elsewhere. For buys and sells, repos, and the exercise of rights involving cash payments, INDEVAL makes electronic payments through a real-time link among the SIDV, SIAC, and SPEUA. For all kinds of transactions, INDEVAL uses a delivery-versus-payment framework. The depositors, under their responsibility, can request INDEVAL for free-of-payment transfers Legal Issues Concerning Securities Clearance and Settlement According to Article 57 of the Securities Market Law, functions of the central securities depositories are, among others, the transfer, clearance, and settlement of transactions made with deposited securities. Moreover, the securities leg and the cash leg can be settled according to rules established in the internal regulations. Regarding transactions made at the stock exchange, the internal regulations of BMV specify that these operations must be settled through deliveries against the corresponding payment. Operations must be executed through INDEVAL, in terms of the applicable rules given in INDEVAL s internal regulations and operations manual. For this purpose, the BMV daily informs INDEVAL and all members of the transactions that members have executed through SENTRA, identifying the type of security, the issuer, series, and price, as well as the counterparty, volume, amount, trade date, and settlement date Settlement Alternatives Trades on the stock exchange must be settled according to the following: In the case of capital market securities, within two working days following the trade When dealing with securities quoted in the International Quotations System, within three working days following the trade Due to correlation effects, the overall VAR is equal to or less than the sum of the individual exposures. 80 However, the CNBV may determine that a transaction must be adjusted to the rules of the other market. 77

90 Hence, equities and corporate bonds traded in SENTRA are settled in T Banking instruments are traded mainly OTC, where the settlement cycle is generally T or T+1, although the parties can agree on longer settlement cycles. Government securities are also traded mainly in the over-thecounter market and generally are settled in T or T Settlement Procedures SIDV, Securities Accounts and Control Accounts The SIDV is used to settle transactions in the primary and secondary markets among direct depositors. SIDV has two kinds of accounts in which to settle securities transactions under a delivery-versuspayment environment: Securities accounts: Ordinary securities deposits. Control accounts: Irrevocable cash credits and debits related to the securities transactions made in SIDV. Control accounts have a real-time link with the SIAC and the SPEUA, and every day these accounts open and close with a zero balance. The irrevocable credits and debits represent virtual cash balances, which at the end of the day (4:30 p.m.) are transferred to the SIAC. Real cash balances also can be kept in the control accounts since transfers between SIAC or SPEUA and SIDV may be made freely. In order to understand the functioning of control accounts, it is important to understand the concepts of operational limits and operational capacity. For banks, operational limits are equal to the credit lines authorized by Banco de México on the basis of their net capital. 83 These credit lines are available at the SIDV at the beginning of every day and can be modified at the end of the day. Banks own securities holdings are used as collateral for the portion of the credit lines they actually use. The SIDV blocks these securities as banks use the credit line. 84 Banco de México defines eligible securities on the basis of priority rules, which imply that the most liquid securities are selected first. Banco de México applies various methodologies (for example, haircuts, mark-to-market) to determine the value of securities for collateral purposes Equities may be settled until T+4, although with a penalty. 82 Circular 2019 of Banco de México states that the settlement of banking instruments may not exceed T+2, while settlement for government securities cannot exceed T+4. Banco de México has established that the limit for a transaction to be considered as a spot transaction is T The amount is calculated as indicated in Circular 2019/ The owner of the blocked securities can still sell them as long as he replaces them with other securities or he receives sufficient funds in the transaction. 85 Eligibility rules for collateral and risk management techniques to be used are defined in Circular 2019/95 of Banco de México. 78

91 Brokerage houses do not have access to these credit lines and must negotiate them directly with commercial banks. However, Banco de México grants additional credit to commercial banks solely for this purpose. 86 The credit lines granted by banks are collateralized with securities deposited with INDEVAL. The amounts are revised every day, and any changes are applied on the following day. A brokerage house may receive credit lines from various banks. All other SIDV participants must deposit real cash balances in their control accounts in order to trade securities. Those institutions that also are SIAC participants, such as insurance companies, can transfer real cash balances from this system to the SIDV. Institutions having no access to SIAC (for example, foreign financial institutions) must request the bank holding their cash deposits to transfer cash balances to their accounts with INDEVAL. Operational capacity is the sum of the real cash balances in the control accounts plus the abovementioned operational limit and represents the total amount available to a participant to settle its securities transactions. Participants are not allowed to exceed the operational capacity Operations Executed in the BMV Day T 1. Brokerage houses enter their transactions in SENTRA. Once the transaction is executed, it is considered as locked in, and the counterparty becomes known 2. The BMV sends the executed transactions to each brokerage house, which electronically downloads the file in its own system 3. Brokerage houses send to their clients a confirmation via fax or . The clients then send settlement instructions to INDEVAL. Depositors are linked to INDEVAL through a computer network operating from 8:30 a.m. to 4:00 p.m. for debt instruments and until 3:00 p.m. for equities. The SENTRA system is linked directly to the SIDV. If the clients are foreign residents, they send the settlement instructions to their custodian, which transmits them to INDEVAL. If transactions are denominated in foreign currency, the settlement instructions are free-of-payment, and the cash leg is settled outside INDEVAL. Day T+1 At noon, INDEVAL starts the process of pre-matching transactions with the buying and selling brokerage houses. This is done mainly on the phone, although electronic mail is often used as well. Since August 2001, all transactions with equities and option-like securities of the same issuer, class, series, and, if applicable, coupon executed in the BMV are subject to a multilateral netting process of both securities and funds (model 3 of the BIS classification) 87 through the SCO-Multilateral of 86 It is worth remembering that major brokerage houses are part of financial groups that, for the most part, also include a bank. 87 Delivery Versus Payment in Securities Settlement Systems, Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries, International Payment Bank, September

92 INDEVAL. This system carries out the netting of the balances for each issuance and for each brokerage house and guarantees all settlement obligations. For the latter, SCO-Multilateral has a risk management module that measures the participants daily exposures on the basis of their positions pending settlement and a guarantee management module that allows it to cover directly the required contributions or to withdraw the required debit (see section 6.3). For this purpose, the participants can verify their positions in the settlement fund in real time. Day T+2 The SCO-Multilateral system verifies compliance with delivery-versus-payment conditions in multiple cycles throughout the day. If there is compliance with the DVP conditions, the net amount of securities is charged to the seller s securities account and credited to the buyer s securities account. The net amount of cash is charged to the buyer s control account and credited to the seller s one. If at first DVP conditions are not met, operations are resubmitted during the day. Equities transactions that cannot be settled are kept in a queue subject to a penalty to be covered by the unfulfilling party through the Settlement Fund. If transactions have not been settled by T+5, the Settlement Fund undertakes the obligations of the unfulfilling party. This last possibility is described in detail in section Operations Executed in the OTC market The settlement process begins with a communication of the selling party to INDEVAL. INDEVAL verifies that the information is complete and automatically sends it to the buying counterparty. Once the counterparties confirm the details, the securities delivery orders and payments become irrevocable. 88 The orders of delivery and payment are executed on a gross (transaction-by-transaction) basis on the date agreed by the parties. If there is compliance with delivery versus payment, the amount of securities is charged to the seller s securities account and credited to the buyer s one; the amount of cash is charged to the buyer s control account and credited to the seller s one. If at first there is no compliance with DVP conditions, the transactions are resubmitted during the day. Transactions that are to be settled at the beginning of the day and cannot be settled by 1:00 p.m. are erased. Other transactions with debt securities that are not settled by 3:45 p.m. are also erased Closing of the Settlement Cycle Final crediting of the securities occurs at the moment in which SIDV verifies compliance with the delivery-versus-payment conditions. Regarding the crediting of real funds, the control accounts must end the day with a zero balance. Any negative balance (credit lines used) must be eliminated, and any positive balance must be sent out of the SIDV. When financial institutions other than brokerage houses and banks purchase securities, they must operate with real cash balances in their control accounts. Therefore, the crediting of real funds to the selling counterparty occurs simultaneously with the crediting of securities. If an institution 88 In the case of repos, irrevocability also applies to the second leg of the transaction. 80

93 maintains a positive balance at the end of the day, the balance must be transferred to a bank s cash account in INDEVAL (that is, its control account). In contrast, when brokerage houses have negative balances in their control accounts at the end of the day, they must cover these balances inside the SIDV. This is done automatically through overnight repos between the brokerage house and the bank(s) that granted the collateralized credit line. Thus negative balances in the control accounts are transferred to the control accounts of corresponding banks. If a brokerage house maintains a real positive balance at the end of the day, this balance must be transferred to a bank s cash account in INDEVAL. Finally, the balances of banks in their control accounts are transferred to the SIAC (after the adjustments described in the two previous paragraphs). If funds available at SIAC are not sufficient to cover the negative balances originated in the SIDV, the banks use the credit of Banco de México. As part of the agreement of collateralized credit lines in the SIDV, the banks post securities at INDEVAL, which keeps them blocked. If necessary, Banco de México instructs INDEVAL to block additional securities Flow Charts of Settlement Processes Figure 4: Settlement of Transactions Executed at the BMV Selling Broker 1. Sell Offers BMV 1. Buy Offers SENTRA 2. Sends file with locked-in transactions 2. Sends file with locked-in transactions Buying Broker 3. Sends settlement instructions (delivery) under DVP 4. Pre-matching and confirmation INDEVAL SIDV 3. Sends settlement instructions (payment) under DVP 4. Pre-matching and confirmation 6. If compliant with DVP: Debit to Securities Account and Credit to Control Account (cash) 5. Multilat. Netting of Securities and Cash 6. If compliant with DVP: Debit to Control Account (cash) and Credit to Securities Account SCO Multilateral Source: Own elaboration based on INDEVAL information. 81

94 Figure 5: Settlement of the Transactions Made in the OTC Market Selling Depositor 1. Inputs the Information of the Transaction, including the agreed settlement date INDEVAL SIDV 2. Verifies and resubmitts for Confirmation 3. Sends Confirmation Buying Depositor 4. SIDV processes on a gross basis if compliant with DVP: Debit to Securities Account and Debit to Control Account (cash) 4. SIDV processes on a gross basis if compliant with DVP: Debit to Control Account (cash) and Credit to Securities Account Source: Own elaboration based on INDEVAL information Securities Lending Since 1997, INDEVAL has had a securities lending program with the objective of, among others, guaranteeing delivery-versus-payment and reducing defaults due to lack of securities. Through VALPRE an electronic system for securities loans the participants can enter their bids for securities loans, post and manage the necessary collateral, cheque transactions, and determine the premium, the amount of securities, and the requested maturity of each bid. Securities loans can be of two types: automatic loans and standard loans. Automatic loans are applied to any INDEVAL depositor who, by the settlement day, does not come up with enough securities to fulfill its obligations. INDEVAL, on behalf of the depositor, executes a loan transaction in order to avoid a possible failure. 89 This depositor becomes the debtor and has to post the necessary collateral on the basis of eligible securities. In order to fully collateralize the amount of the loan transactions, it must create margins with cash, securities, or letters of credit. Standard loans are agreed directly among participants through VALPRE and have a maximum maturity. The grantor may call the transaction in advance at any moment after the first day of the term. In the bids registry, the applicable extra rate for anticipated calls must be established Procedures to Handle Failures INDEVAL s internal regulations establish that, for transactions made at the BMV, obligations pending settlement are declared in default if, at the close of the day corresponding to the value date, it is not possible to execute a securities loan transaction (at this moment the transaction is declared in arrears) and this situation remains for the following three working days, which constitute an 89 For this, participants must have signed a mandate allowing INDEVAL to execute securities loans transactions on their behalf and a contract called an adhesion contract, which specifies the terms of a trust in which the cash derived from the securities loan is deposited. 82

95 extraordinary period in which to fulfill obligations. To resolve transactions in arrears, INDEVAL uses one of the following procedures: (a) securities loan, (b) cash arrangement, and (c) mandatory buyin and sell-out procedures for securities. Operations executed outside the stock exchange are not subject to this extraordinary period for the fulfillment of obligations (see section ) Conventional Penalties In all cases, the unfulfilling depositor must pay its counterparty a conventional penalty for each day the obligation remains in arrears. The amount of the conventional penalty for the first day is equal to the amount resulting from applying the 28-day TIIE to the cash amount of the failed obligation. For the second and third day, a similar formula is used, although the TIIE is now multiplied by two and by three, respectively Pending Obligations Due to Lack of Securities (at the BMV) Securities Loan If an obligation cannot be settled because of lack of securities, at the end of each of the two first days of the extraordinary period for fulfilling obligations, INDEVAL tries to make a securities loan transaction on behalf of the unfulfilling party. Securities obtained from this transaction are used to fulfill the obligation with the counterparty. INDEVAL then creates a guarantee with the cash obtained from the original transaction. For this purpose, INDEVAL credits a fiduciary institution, specifying that the funds must be kept as a guarantee. The guarantee is independent of the posting of additional securities, letters of credit, or cash to ensure the sufficiency of the guarantee. Cash Arrangement At any moment during the extraordinary period, the unfulfilling party can come to a cash arrangement with its counterparty. In this case, participants must inform INDEVAL of this agreement. If one party does not inform INDEVAL of the agreement, the agreement is considered void, and INDEVAL informs the BMV, which proceeds according to its regulations. Mandatory Securities Buy-in and Sell-out Procedures If, by the end of the second day of the extraordinary period, the default remains, and if participants are not able to reach a cash arrangement, the following day the fulfilling party must try to make a purchase in the BMV at market prices with the purpose of acquiring securities of the same issuer, class, series, and, if applicable, coupon. The fulfilling party must inform INDEVAL of the outcome, providing information about this transaction and the failed transaction. If the fulfilling party does not provide this information, it is assumed that it failed to try to make the purchase, in which case INDEVAL informs the BMV, which proceeds according to its regulations. 83

96 If the buy-in is made, the obligation in arrears is canceled from the systems. 90 Nevertheless, the conventional penalty and any price differentials remain. Regarding price differentials, every day at closing hour INDEVAL determines the price differential for each failed transaction, which is the result of the closing price corresponding to this day minus the original price and a price differential estimated on the basis of the following day s VAR. From the moment in which an obligation is declared in arrears and during the two following days, INDEVAL instructs the fiduciary managing the Settlement Fund (see section 6.3) to separate each day s price differential and VAR. If the buy-in is made, INDEVAL orders this fiduciary to deliver to the fulfilling party any negative price differential. Any contribution to the Settlement Fund that was used for this purpose must be reconstituted by the depositor no later than the following working day. INDEVAL also alerts the BMV of failures to reconstitute the Settlement Fund, in which case the participant is subject to the sanctions described in BMV s regulations. If the fulfilling party is not able to carry out the buy-in and the transaction in arrears remains at the end of that day, INDEVAL proceeds according to Article 39 of its internal regulations, as follows: 1. If the failed obligation has not yet been fulfilled by the end of the last day of the extraordinary period, it is declared in default. 2. INDEVAL notifies the parties, the CNBV, and the BMV of the default. 3. INDEVAL undertakes the obligation, charging the Settlement Fund. 4. INDEVAL erases from its system information corresponding to the defaulted obligations, keeping as a backup an archive containing this information. The legal obligation of settlement remains, and the parties must solve the problem by themselves. 5. Depositors in failure or in default must pay INDEVAL the administrative costs resulting from the reprocessing of the corresponding obligations. Once all the extraordinary procedures have been exhausted, if a member of the BMV continues with the default and does not establish the necessary collateral with the Settlement Fund, it is suspended from the BMV. The suspension lasts until INDEVAL sends a written notice to the BMV confirming fulfillment of the transaction Pending Obligations due to Exhaustion of the Operational Capacity (BMV Transactions) If an obligation is pending due to exhaustion of the operational capacity of the control accounts or if the operational limit cannot be exercised due to insufficient collateral, the obligation is declared in arrears for an extraordinary period of three working days. 90 INDEVAL keeps a backup copy of the file containing information related to the erased obligation. 84

97 At any moment during the extraordinary period, the unfulfilling party may come to a cash arrangement with its counterparty. The procedure is the same as the one previously described. If transactions in arrears maintain their status by the closing of the second day of the extraordinary period, the fulfilling party must try to execute, the following working day, a sale in the BMV, at market price, of the securities it still keeps as a result of the failed transaction. This party must inform INDEVAL of the result of the selling offer, providing data on the transaction and on the failed obligation. If the fulfilling party does not provide this information, it is assumed that it failed to try to make the sale, in which case INDEVAL informs the BMV, which proceeds according to its regulations. If the sell-out is made, the failed obligation is erased from the systems. 91 Nevertheless, the conventional penalty and any price differentials remain. INDEVAL instructs the trustee to deliver to the fulfilling party any positive price differential. If the fulfilling party is not able to carry out the sell-out and the failed transaction remains by the end of that day, INDEVAL proceeds according to Article 39 of its internal regulations Operations Executed outside the BMV Transactions executed outside BMV are not subject to the extraordinary period for fulfillment of the obligation. If the transaction cannot be settled at the close of the working day, Article 39 of INDEVAL s internal regulations is applied as follows: If the obligation is pending because of a lack of securities, INDEVAL tries to execute, on behalf of the unfulfilling participant, a securities loan according to the previously described rules. If the securities loan cannot be obtained, the pending obligation is declared in default, and Article 39 is followed If the obligation is pending because the operational capacity is exhausted or the operational limit cannot be exercised because of insufficient collateral, the operation is declared in default, and Article 39 applies. 6.5 DERIVATIVES CLEARANCE AND SETTLEMENT ASIGNA is the clearing and settlement house for derivatives transactions made at MEXDER. Through its system, INTRACS/400, ASIGNA provides registration, clearing, and settlement functions. ASIGNA acts as a central counterparty for all the contracts in order to reduce the credit risk due to volatile market conditions and extreme volatility in the prices of the underlying products. ASIGNA is an administration and payment trust established in BBVA Bancomer. The grantors are also administration and payment trusts created by some of the main financial groups in the country: Banamex-Citibank, BBVA Bancomer, Scotiabank Inverlat, and Serfin. The grantors are settlement 91 INDEVAL keeps a backup copy of the file containing the information related to the erased obligation. 85

98 partners of ASIGNA, bringing resources for creation of the Equity Fund of the Clearinghouse, the Clearing Fund, and the Contributions Fund. INDEVAL is also a partner in ASIGNA. The settlement partners share with ASIGNA the credit risks of the contracts. The settlement partners can operate on their own behalf, if their purpose is to execute and settle their own futures contracts, or they can operate on behalf of third parties if the contracts are executed and settled in favor of their clients. ASIGNA installs terminals on their premises, assigning passwords that enable authorized personnel to access the clearance and settlement system at different levels, varying from restricted consultation to direct updating Ordinary Clearance and Settlement Procedures 1. The settlement partners must deliver to ASIGNA, on a daily basis, a report presenting the minimum level of initial contributions (aportaciones iniciales mínimas, AIMs) or margins to execute operations, indicating the segmentation of the assets backing such margins. In order to be considered in the daily settlement calculation, or eventually in the extraordinary one, settlement partners must cover their margin positions or those of their clients with securities during the trading day, from 9:00 a.m. to 3:45 p.m. This settlement takes place in the Securities General Account through the System for the Administration of Securities Contributions for Derivatives (SAVAP) operated by INDEVAL. 2. The settlement partners confirm each transaction, indicating the position (opening or closing) and the account (own, group, or third party). Once the operation is confirmed, MEXDER informs the intermediaries through its trading system, SENTRA-Futures. The registration of transactions in ASIGNA s clearing and settlement system is automatic, as SENTRA-Futures transmits the necessary information. ASIGNA verifies daily, at 4:35 p.m., whether it received all the necessary information regarding the executed transactions. If ASIGNA rejects a transaction, the rejection is automatically registered in SENTRA-Futures, and staff verify the reasons for it, proceed to correct them, and, if necessary, send the transaction again. 3. At the moment in which a transaction is registered in ASIGNA s clearing and settlement system, the position in the destination account in which the transaction was executed is automatically updated according to the following principles: Own accounts: If the existing position is short, new short positions are added, and long positions compensate them. If the existing position is long, new long positions are added, and short positions compensate them. Group and clients accounts: These accounts carry both long and short positions. Long positions add to the existing long ones when the member indicates an opening at confirmation. Short positions add to the existing short ones when the member indicates an opening at confirmation. The long (short) positions compensate the existing short (long) positions when the member indicates closing (opening) at confirmation. 86

99 4. ASIGNA executes settlement by marking to market and updating daily the obligations and rights of settlement partners. Thus daily settlement consists of the following: 92 The profits and losses resulting from variations in the daily settlement price of contracts during their validity and until the expiration date The minimum initial contributions (margins) corresponding to open contracts, including the returns generated with that day s calculation The contributions for the constitution of the Clearing Fund as well as the returns generated with that day s calculation. The total amount integrates a daily net balance that can only be covered with cash. When calculating settlement obligations, the value of the contributions in securities in SAVAP and in cash in ASIGNA at the moment of settlement is considered. 5. According to this, the debit and credit balances produced by the parties are settled between 9.00 a.m. and a.m. on the following day. The daily cash settlement is executed through the Fiduciary Integrated System, property of BBVA Bancomer. The settlement parties can order payments through the SPEUA 93 or make deposits in the current accounts they have to open in BBVA Bancomer Extraordinary Settlement If trading of the underlying asset is unstable or if one or more of the parties increase significantly their open contracts during trading hours, ASIGNA can demand a reduction in the quantity of open contracts they keep in their accounts or a modification of their AIMs through an extraordinary settlement that can only be covered with cash. Before exercising this extraordinary power, ASIGNA considers the level of AIMs in securities to cover the potential losses Settlement of Contracts at Expiration Date At the expiration date, currency futures are settled in species through an agent bank with offices both in Mexico and in the country of origin of the relevant currency. Equities futures are settled in species through an agent brokerage house Risk Management Mechanisms As a central counterparty, ASIGNA has several procedures in place to control its risk exposures. First, there are procedures to avoid the concentration of open positions that may result in a high-risk situation for the market as a whole. The main activities in this regard are the permanent surveillance of market behavior, open positions, and limit positions, daily settlements and settlements at expiration, and compliance with manuals, internal regulations, and operational parameters. 92 The fees and commissions corresponding to the clearing and settlement services provided by ASIGNA are calculated on a daily basis and settled monthly on the first working day of the subsequent month. 93 The Fiduciary Integrated System has an interface with the SPEUA. 87

100 To prevent losses from intermediaries and clients, ASIGNA monitors in real time the positions of its operators and clients and the adequacy of their resources, performs simulations with extreme price scenarios for each open account, and has a warning system regarding insufficient resources in order to demand timely reconstitution, which it may do by triggering an extraordinary settlement if the AIMs are insufficient. ASIGNA also performs a variety of activities leading to the implementation and development of methodologies to better measure risks, including, among others, determining the AIMs applicable to each of the futures contracts traded in MEXDER, assessing and determining the haircuts to be applied to the securities constituted as AIMs, and conducting real-time monitoring of the adequacy of AIMs. 6.6 INTERNATIONAL LINKS AMONG CLEARANCE AND SETTLEMENT INSTITUTIONS INDEVAL, through SIDV International Division, provides direct accounts to foreign entities holding securities issued in Mexico, for example, the ADRs of Mexican firms that are traded in New York. These are free-of-payment custody accounts, since payment occurs outside SIDV. SIDV International receives free-of-payment transfer instructions from and sends them to its foreign depositors via fax or SWIFT. When receiving instructions via fax, INDEVAL executes a pre-matching process by phone with the Mexican counterparty and enters a free-of-payment securities delivery instruction in the SIDV. Securities are then transferred, and confirmations are sent via fax to the foreign depositor and the Mexican counterparty. If the instructions are received through SWIFT, INDEVAL electronically downloads them from the SWIFT terminal to the SIDV. Once the pre-matching process has been executed, the instruction entered in the SIDV is considered confirmed and the securities are transferred. Then INDEVAL sends confirmations via SWIFT to the counterparties. At the end of the day, INDEVAL also sends through SWIFT information on positions, activity, and pending transactions. Settlement of the cash leg occurs bilaterally between the counterparties. Figure 6 shows the flow chart of a sale by a foreign depositor of securities deposited in INDEVAL. Some Mexican eurobonds denominated in USD are held in securities accounts in Clearstream. For this reason, INDEVAL opened an omnibus account with Clearstream. Some of these securities are listed in the BMV and are traded mainly by mutual and pension funds. If a Mexican investor wants to acquire one of these securities, the original owner makes a transfer in Clearstream from its own account to that of INDEVAL, which then credits the account of the Mexican investor. Any further transaction with these same securities inside the Mexican market will be settled through INDEVAL just like any other operation, as long as it is denominated and settled in Mexican pesos. 6.7 SAFEGUARD AND SECURITY SYSTEMS SIDV runs on a Hewlett Packard HP9000 mainframe with a Unix operating system and Sybase database. The software was developed in Uniface, under a server-client scheme. Regarding 88

101 Figure 6: Flow Chart of a Securities Sale by a Direct Foreign Depositor of INDEVAL Foreing Depositor Sends free-of-payment transfer Instructions via SWIFT or fax SIDV International Foreing Depositor INDEVAL does the pre-matching Via Telephone Mexican Counterparty Receives confirmation and end-of-day reports via SWIFT or fax Free-of-payment Securities Transfer Confirmation Debit F. Dep. Credit Mex. C. Foreing Depositor Settlement of Cash Leg outside the SIDV Mexican Counterparty Source: INDEVAL. communication systems, INDEVAL has routers, hubs, and network concentrating equipment for the internal links and all the necessary hardware to create remote links using a high-speed private phone network. The chapter Communications Infrastructure of INDEVAL s operations manual describes the technical and safety requirements for connecting to INDEVAL s systems through a terminal and through the depositors electronic, computer, or other telecommunication network. It also provides information about the reciprocal and identification access keys and about verification of the elements and goods related to maintaining and operating the systems. Bursatec, a firm owned by the BMV, INDEVAL, MEXDER, and ASIGNA, provides a contingency network, backup equipment, and a backup alternative site that assure continuous processing and communication during unanticipated contingencies. A fiber-optic network is used on a regular basis, while contingency is guaranteed through KBTel microwaves. 94 The alternative site is located in the city of Pachuca, Hidalgo. This site has alternate links for participants; it replicates the database every half hour and is capable of substituting the main processing site within an hour of failure. 94 As an additional contingency mechanism, INDEVAL enters participants instructions on personal computers. 89

102 7 THE ROLE OF THE CENTRAL BANK IN CLEARANCE AND SETTLEMENT SYSTEMS 7.1 RESPONSIBILITIES Banco de México has been intimately involved in the development of payment systems. It developed and operates the major settlement systems SIAC and SPEUA and has been active in the development of the SIDV, the securities settlement system. It has also been a major promoter of cheque processing centers and has worked closely with commercial banks to standardize cheques and retail electronic payments. Banco de México has reduced its involvement in the clearance and settlement of cheques, and its current policy is to create a proper environment and the infrastructure necessary for banks and other institutions to develop better payment systems and media for their clients. In 1994 the Board of Governors of Banco de México established guidelines for the reform and development of payment systems. At the beginning of 2001, the board replaced these guidelines with the Core Principles for Systemically Important Payment Systems of the Bank for International Settlements Committee on Payment and Settlement Systems. 7.2 SETTLEMENT All the banks and brokerage houses, mutual and pension fund management firms, and some insurance companies hold current accounts in the SIAC system. This system does not transmit information indicating that transactions are being made on behalf of third parties or that funds received must be credited to some other account. The Treasury and a few other public sector entities also have cash accounts in this system, although the operational rules applicable to them are more restrictive. In contrast, only banks have accounts in SPEUA, which does allow the transmission of information indicating which transactions were made on behalf of third parties and instructing the receiving bank to credit the funds to the account of one its clients. Every day the closing balances of the SPEUA, as well as those of CECOBAN, which include cheque clearing and retail electronic payments, and the cash leg of the SIDV are sent to the SIAC for settlement. Other payment instruments, such as debit and credit cards or the interbank balances of ATM transactions, are settled without the direct participation of Banco de México. 7.3 RISK CONTROL POLICY The main objective of the 1994 reform was to improve the safety of the payments system, while maintaining its flexibility and efficiency. Before the reform came into place, banks could overdraw their current accounts with the central bank without limits, and they were not compelled to collateralize their overdrafts. The central bank was providing intraday credit at no cost, while overnight overdrafts 90

103 were subject to a punitive rate. At present, except for some charges that Banco de México can make, a bank can only overdraw its account in SIAC within a predetermined limit established by the central bank itself. This limit varies according to the net capital of the bank, and overdrafts can occur only after the institution has posted collateral for the amount of the credit facility. Collateral is not necessary when the overdraft is caused by a charge made by Banco de México as a consequence of, for example, settlements in the SPEUA in which the balances are backed by credit lines granted by other banks. Hence, currently Banco de México allows banks to have intraday overdrafts in SIAC. These overdrafts have no cost as long as they do not exceed the bank s net capital, and they must be fully collateralized with government securities transferred to the special accounts that Banco de México holds at INDEVAL. Overdrafts exceeding the participant s net capital are penalized with a rate equal to one-third of that of 28-day CETES, and the calculation is done on a minute-by-minute basis. SPEUA and SIDV transfer their balances to the SIAC at the close of each day. They do not operate directly with the current accounts in SIAC; 95 instead they operate on the basis of overdrafts guaranteed by the bilateral interbank credit lines, whose size and concentration are determined by Banco de México. As mentioned, banks may use the credit facilities provided by the SIAC system. The SPEUA has a loss-sharing mechanism in case a participant is unable to settle by the end of the day. If there is a negative position in SPEUA that may not be covered with the bank s own resources, Banco de México is entitled to charge the corresponding amount to the banks that granted the associated credit lines. The amount that would correspond to each participant is known as an additional settlement obligation. Through the operational changes to the SPEUA being planned by Banco de México, every bank will be required to post collateral in the system for at least 1.25 times the largest credit line being granted to another bank. This measure aims to comply with the minimum standard established in the Core Principles of the Committee on Payment and Settlement Systems, to assure prompt settlement if a participant is unable to settle the largest obligation. Also, net transfers from the SPEUA to other systems will be eliminated. With this measure, Banco de México will provide liquidity to payment systems only through the SIAC. Liquidity will be injected through intraday repos. 7.4 MONETARY POLICY AND PAYMENT SYSTEMS The main objective of Banco de México is to maintain the stability of the purchasing power of the national currency. The most important instrument for the implementation of monetary policy is the so-called daily balances regime. In this regime, at the end of the day the balances of the current accounts of banks add up to an amount previously determined by the Board of Governors of Banco de México. Any overdraft is subject to a punitive rate equal to two times the market rate. Positive balances are not remunerated. 95 Transfers between SIAC and SPEUA and between SIAC and SIDV are allowed at any time of the day, being subject only to the limits of SIAC overdrafts. 91

104 One of the advantages of this mechanism is that it signals financial markets without having to establish specific levels for interest rates or the exchange rate. The daily balances regime implies that Banco de México must neutralize the resulting monetary impact of, among other factors, changes in international net assets, operations of the Federal Treasury, and money demand. The Board of Governors of Banco de México periodically determines the target amount for the aggregate daily balances of the banks current accounts. This target is based on the estimated consistency between the evolution of the monetary base and the inflation target. Every day Banco de México intervenes in the market to inject or withdraw money, according to the target amount that has been established for the aggregate daily balances. Hence, Banco de México sends a restrictive monetary policy signal when it announces that it will satisfy a portion of the primary money demand at the prevailing market rate, while the other portion will have to be satisfied through current account overdrafts subject to the punitive rate. In other words, the system is left short, pushing interest rates upward. Alternatively, it may signal an accommodating monetary policy by announcing that it stands ready to satisfy more than what is being required by the system. The system is left long, putting downward pressure on interest rates. Banco de México carries out its interventions through open market operations that are implemented through the SIAC system. In contrast, Banco de México has no specific objectives regarding foreign exchange policy. The market freely determines the prices of foreign currencies Open Market Operations Banco de México s open market operations traditionally were executed using treasury certificates (CETES). In 2000, based on its own law, the Board of Governors of Banco de México decided to issue monetary regulation bonds (BREMs) for the purpose of regulating liquidity in the money market and facilitating the conduct of monetary policy. The same rules are applied to BREMs as are applied to government securities, in particular those of the federal government development bonds. The operations of banks and Banco de México regarding BREMs follow the terms indicated in Annex 7 of Circular 2019/95. Brokerage houses cannot execute operations in BREMs with Banco de México, whereas pension funds may execute repo transactions with this kind of security. At the end of June 2002, the outstanding amount of BREMs was $201.4 billion. 7.5 THE ROLE OF THE CENTRAL BANK IN CROSS-BORDER PAYMENTS Banco de México does not provide cross-border payment services, nor does it intervene directly in the corresponding processes. It only makes some payments on behalf of the federal government as its financial agent. Circular 2190/95 of Banco de México establishes that banks may execute the clearing of cheques and payment orders denominated in USD dollars through the procedures and mechanisms the banks freely agree on, subject only to market best practices. 92

105 7.6 PRICING POLICIES Banco de México s pricing policies for the payment services it provides are based on the premise of recovering all costs incurred. Every participant in the SPEUA has to pay a monthly fee. This fee is calculated on the basis of the volume of electronic messages sent or received by the participant in the previous month. 96 Banco de México specifies the types of messages, including the payment orders, to be included in the fee, as well as the amount that will be charged for every message. The cost of each payment message is established on the basis of the time of the day in which the instruction is executed. Moreover, every participant has to pay Banco de México an annual fee for the services provided through the SPEUA. All expenses related to the acquisition and maintenance of equipment are the responsibility of each participant. 96 Circular 2019/95 of Banco de México. 93

106 8 SUPERVISION OF SECURITIES CLEARANCE AND SETTLEMENT SYSTEMS 8.1 SECURITIES REGULATORY SUPERVISORY AND STATUTORY RESPONSIBILITIES According to Article 8 of the Securities Market Law, the SHCP is responsible for the interpretation, in administrative terms, of this law. The SHCP must provide, through general dispositions, everything that is needed for its full application. The SHCP executes its functions in this area once it hears the opinion of the CNBV. The CNBV issues the prudential regulations and general dispositions that entities have to follow and is in charge of their supervision. More specifically, the CNBV supervises and regulates financial entities to ensure their overall stability and proper functioning as well as to maintain and foster a healthy and balanced development of the financial system as a whole, protecting the public interests. Financial group holding companies, banks, brokerage houses, market specialists, stock exchanges, central securities depositories, and risk rating firms, among others, are all considered financial entities for these purposes. 97 Regarding securities trading, clearance, and settlement, some of the most relevant powers of CNBV are the following: 98 Supervise financial entities as well as all other individuals and firms that perform the activities indicated in laws related to the financial system Issue the prudential regulations that financial entities have to follow 99 Authorize the creation and operation of entities indicated by the laws Authorize and oversee clearance systems, centralized information systems, securities ratings, and other mechanisms whose purpose is to facilitate transactions or improve the securities market Authorize the individuals who may execute operations with the public, acting as representatives of securities market intermediaries, including consultancy, promotion, and securities buys and sells Issue rules for the registration of operations Establish rules for the appraisal of assets and, if applicable, of liabilities and other responsibilities of the entities 97 Article 3 of the CNBV Law. 98 Article 4 of the CNBV Law. 99 Article 6 of the CNBV Law indicates that the rules of prudential character issued by the CNBV must preserve the liquidity, solvency, and stability of the financial entities. 94

107 Issue rules regarding the information that entities have to provide periodically Establish the criteria referred to in Article 20 of the Securities Market Law (definition and authorization of securities public offers) as well as those of general application in the financial sector regarding actions and operations considered against commercial, banking, and market best practices. Also issue the necessary measures so that the entities can adjust their activities and operations to the applicable laws, the general dispositions deriving from the laws, and market best practices Order suspension of the operations of financial entities and intervene in their operations and management; order the suspension of operations and intervene in the businesses of firms or individuals that, without the corresponding authorization, perform activities requiring this authorization Investigate actions or events that could be against those allowed in the Securities Market Law Impose sanctions for the infringement of laws regulating the activities, entities, and persons subject to supervision Intervene in the issuance, draw, and cancellation of securities, making sure that their circulation does not exceed the legal limits Lead the RNV and certify the registrations made in it; authorize, suspend, or cancel registrations Supervise the securities issuers registered in the RNV regarding the obligations imposed by the Securities Market Law; issue general dispositions related to the way and terms in which issuers have to disclose insider information to the market Order the suspension of securities quotations when disorderly conditions are present or when operations do not conform to healthy usage and practices Establish agreements with national and international organizations that have supervisory and regulatory functions similar to those of the CNBV. In order to comply with its functions, the supervision executed by the CNBV includes inspection, surveillance, prevention, and correction Responsibility over Stock Exchanges A concession is required to create an exchange. This is granted discretionally by the SHCP once it hears the opinions of Banco de México and the CNBV. The incorporation act as well as the stock exchange bylaws and their modifications need to be approved by the SHCP. Once this approval has been obtained, the stock exchange can be registered in the Public Registry of Trade. 95

108 Article 37 of the Securities Market Law states that stock exchanges must elaborate a set of internal regulations that include the self-regulatory rules applicable to the stock exchange itself, brokerage houses, and stock market specialists, the process for their adoption and supervision, the disciplinary and corrective measures that will be applied in case of failure to comply, as well as the procedures to apply these measures. These regulations and any modifications must be authorized by the CNBV. 100 In more general terms, the CNBV is responsible for verifying compliance with the rules regulating stock exchange activity as well as with self-regulatory rules, financial statements, assessment of trading system management, and confirmation of the dissemination of information to the market Responsibility over Central Securities Depositories The Securities Market Law states that the services of custody, administration, clearance, settlement, and transfer of securities are of public interest. These services can only be provided by entities obtaining a concession from the SHCP, once it hears the opinion of the CNBV. 101 Among other functions, central securities depositories are empowered to carry out depository functions, administer the deposited securities, and transfer, clear, and settle transactions made with the deposited securities. Article 58 of the Securities Market Law states that central securities depositories are subject to inspection and surveillance by the CNBV, to which they must provide all the necessary information and documents. More specifically, the CNBV has the following powers regarding central securities depositories: Authorize the accounting records as well as issue the rules for grouping accounts and for registering operations Issue general rules to which central securities depositories are subject according to the application of their equity Order inspection visits to central securities depositories. If applicable, the CNBV is empowered to intervene in these institutions for the purpose of suspending, normalizing, or settling those operations that may endanger their solvency, stability, or liquidity or those that violate the law or the general rules deriving from it. Article 60 of the Securities Market Law states that central securities depositories must elaborate a set of internal regulations that include, among others, rules applicable to the delivery and withdrawal of deposited securities, physical custody and administration of deposited securities, procedures for the transfer, clearance, and settlement of deposited securities, procedures for the execution of ownership rights, and procedures for the handling of settlement defaults and sanctions. The internal regulations and subsequent modifications must be approved jointly by the CNBV and Banco de México. 100 Except for self-regulatory rules, over which the CNBV has veto power. 101 Articles 54 and 55 of the Securities Market Law. 96

109 8.1.3 Responsibility over Central Counterparties The provision of central counterparty services is of public interest and can only be performed by companies that obtain a concession from the SHCP, once it hears the opinions of Banco de México and the CNBV. Central counterparties are subject to the inspection and surveillance of the CNBV. The powers of the CNBV over central counterparties are the same ones detailed in Article 58 of the Securities Market Law (that is, those applicable to central securities depositories), to which the following are added: 102 Supervise the functioning of their system of financial safeguards, the compliance of their operational, prudential, and self-regulatory rules, and the application of disciplinary measures in case of failure to comply Order modifications to the system of financial safeguards Issue the necessary regulations for their proper functioning Require all the information and documents through general rules. Article 89 Bis 7 of the Securities Market Law establishes the minimum requirements for the internal regulations that central counterparties must elaborate, which include the requirements the intermediaries must meet at all times so that the central counterparties may act as reciprocal debtor and creditor, the procedures and systems through which the operations will be cleared and settled, and the systems of financial safeguards and operational, prudential, and self-regulatory rules applicable to the central counterparty and its reciprocal debtors and creditors. The internal regulations and any modifications to them are subject to authorization of Banco de México and the CNBV, except for self-regulatory rules over which these authorities may exercise veto power Obligations of Information Issuers The Securities Market Law in Article 14 Bis 2 states the following information disclosure requirements that issuing companies must follow in order to register their securities in the Securities Section of the RNV: Provide the CNBV, the stock exchange, and investors with continuous, quarterly, and annual reports containing information about the issuer on financial, administrative, economic, accounting, and legal matters as well as about the issued securities. These reports must be prepared according to the general rules issued by the CNBV. Any relevant information that 102 These last ones are faculties of both the CNBV and Banco de México. 97

110 may contribute to proper decision-making by investors must be included in them. When determined by the CNBV, the financial statements of the issuer have to be accompanied by the report of an independent external auditor Comply with the requirements of disclosing the relevant events to which Article 16 Bis of the Securities Market Law refers as well as present in a timely fashion the information regarding shareholder meetings Present all other information and documents determined by the CNBV through general rules Intermediaries Brokerage houses are obliged to provide the CNBV with the following: 103 Periodic statistical information about their activities and operations Financial statements. Brokerage houses must compile their financial statements as of the last day of every month and publish them in a journal with national circulation. The CNBV can establish the rules for grouping financial statements, can order changes and corrections to published financial statements, and can order them to be republished Sanction Capacity of the Securities Regulator The CNBV can impose administrative and penal sanctions, along with warning procedures, suspensions, dismissals, and disqualifications, administrative or managerial intervention, and suspension, revocation, and cancellation of authorizations and registry. Violations of the Securities Market Law or the general rules deriving from it are sanctioned with an administrative penalty based on salary days or even jail. 104 Articles 51 and 51 Bis of the Securities Market Law describe in detail the cases in which sanctions will be imposed on the operators, officials, and intermediaries, on the basis of salary days or according to the amount of the relevant transaction. In addition to these penalties, the CNBV can suspend or cancel the registry of issuers, revoke the authorization granted to stock exchange specialists, or propose that the SHCP revoke the authorization or concession granted to brokerage houses and stock exchanges. The CNBV can also disqualify offenders from participating in Mexico s financial system for a period of up to five years as well as, in order to protect the public interest, disclose the imposed sanctions once these resolutions are considered final. 103 Article 27 of the Securities Market Law. 104 At the time of preparation of this report, a salary day was equal to $42.15, approximately USD The sanction can reach the 100,000 salary days (approximately USD 450,000). 98

111 Articles 52 to 52 Bis 8 of the Securities Market Law describe the cases in which offenders can be sanctioned with prison. 105 Depending on the severity of the violation, sanctions can be up to 15 years in prison. 8.2 SELF-REGULATORY ORGANIZATIONS SUPERVISORY AND STATUTORY RESPONSIBILITY Article 125 of the Securities Market Law considers as self-regulatory organizations stock exchanges, central counterparties, associations of securities market intermediaries, and associations of providers of services linked to the securities market. Article 126 establishes that self-regulatory organizations are subject to the supervision and surveillance of the CNBV for what concerns compliance with the self-regulatory rules they have issued Stock Exchanges The functions of stock exchanges include establishing the necessary measures so that the transactions that brokerage houses or stock market specialists execute on their premises conform with the applicable rules. 106 As mentioned, Article 37 of the Securities Market Law states that stock exchanges must include in their internal regulations the self-regulatory rules applicable to the stock exchange itself, brokerage houses, and stock market specialists, the process for their adoption and supervision, the disciplinary and corrective measurements that will be applied in case of failure to comply, as well as the procedure for applying these measures effectively. The self-regulatory rules do not require the previous authorization of the CNBV. Nevertheless, the CNBV has veto power over them. The current internal regulations of the BMV were authorized by the CNBV on September 27, 1999, and became effective on October 25, Regarding supervision of its internal activities, the regulation includes detailed rules on aspects such as admission criteria, obligations of members, operators, and issuers, transaction fulfillment, surveillance, preventive measures, and sanctions. Some of the most relevant contents of the regulation are described below. Admission The BMV can visit the premises of brokerage houses applying for membership, with the purpose of verifying their compliance with the minimum standards of organization, functioning, and safety to perform transactions with listed securities. 105 Offenders can include members of the board of directors, directors, officials, employees, agents, commissioners, external auditors, and the like. 106 The authorization to create a brokerage house belongs to the SHCP, subject to the opinion of the CNBV, while the authorization for stock exchange specialists is granted by the CNBV. 99

112 Obligations of BMV Members and Operators Act in accordance with healthy usage and practices Fulfill in a timely manner all transactions executed at the BMV, according to procedures indicated in the internal regulations of INDEVAL and its operations manual Establish institutional mechanisms to avoid conflicts of interest among various departments or business areas Abstain from doing anything that could affect the reputation of the stock exchange Provide the stock exchange with a daily report of the operations that were not executed through SENTRA, according to procedures established in the applicable rules and the operations manual Provide all the documentation and information required by the stock exchange as long as the privacy indicated by the law is preserved Allow the stock exchange to pay visits to verify compliance with their obligations stemming from the use of SENTRA terminals, as well to verify the compatibility and fulfillment of the technical requirements for the SENTRA alternate mechanisms Comply with the contingency plan determined by the stock exchange Comply with the sanctions imposed by the disciplinary organs of the stock exchange, according to what is indicated in the regulation In the case of operators, use in a responsible manner the access keys to SENTRA. Another important requirement of the BMV is that its members, through a legal representative and after reaching consensus among their board of directors, sign a letter expressing their intention to adhere to and have all staff comply with the ethics code of the BMV community. Members must disclose the code among their directors, managers, representatives, and employees and ensure that these people comply with the key principles contained in it. Obligations of the Issuers Accept that a representative of the stock exchange participate, without voting rights, in the ordinary and extraordinary assemblies of shareholders and other securities holders Reveal, at least once a year, the persons who the law assumes may have access to insider information when performing their duties, including those indicated in the ethics code If applicable, report to the stock exchange any action or transaction that, in their judgment, may be against healthy market practices and usage 100

113 Provide the stock exchange with information regarding the total number of shares distributed among investors, identifying those belonging to directors and to controlling shareholders, in accordance with the applicable rules Keep available for the stock exchange and investors, for no less than three years, the original documents of the information to which the regulation refers, duly signed by the persons in charge Provide the stock exchange, through the media it may determine, with the economic, accounting, legal, and administrative information the issuer has to provide in order to comply with the applicable rules Prepare and present quarterly financial information through the automated system determined by the stock exchange and disseminate it through the EMISNET system Disclose to the stock exchange and through it to the CNBV and the public in general the relevant events included in the regulations Provide the stock exchange with information on the exercise of corporate and ownership rights Comply with the contingency plan determined by the stock exchange Comply with the sanctions imposed by the disciplinary organs of the stock exchange Provide the stock exchange with any other information it may require. Preventive Measures The BMV can apply any of the following preventive measures: Suspend the quotation of a security Suspend the ongoing auction session Start contingency plans Perform visits and audits. Surveillance The BMV can use any systems, devices, mechanisms, and measures to oversee the proper operation of the market, of issuers, and of its members for the purpose of ensuring a transparent and organized development of the market. 101

114 Sanctions The BMV can apply the following sanctions: Warning Suspension of the activities of the operator of any member Partial or total suspension of the activities of any member Suspension of the registration of an issue Revocation of the approval granted by the exchange to the operator of a member Revocation of the admission granted by the exchange to a member and, hence, its final suspension Public disclosure of the sanctions. The CNBV must be informed by the stock exchange about the resolutions containing any of these sanctions. The sanctioning powers of the BMV neither exclude nor limit in any way those of the CNBV to start investigation procedures and impose its own sanctions on brokerage houses Central Securities Depositories The INDEVAL regulation was authorized by the CNBV on December 22, 1995, and since then it has experienced some changes. Moreover, INDEVAL has developed an operations manual for the services it offers, which details the requirements to participate and execute operations in its system. Failure to comply with the dispositions in the operations manual is considered a violation of the regulation; for this reason, offenders are subject to the penalties described in the regulation. Regarding the supervision of activities, some of the most important points of the regulation are the following: Depositors Obligations As general requirements to contract INDEVAL services, depositors must, at all times, comply with the following obligations: 107 Maintain up-to-date information about persons, legal representatives, and agents determined in the manual 107 Article 4 of the internal regulation of INDEVAL. 102

115 Maintain up-to-date reconciliation of their own accounts and those of third parties they manage Pay in a timely fashion the fees indicated in Article 86. Conventional Penalties Depositors and issuers must promptly provide INDEVAL with the information it may require, as established in its regulation and the manual. By subscribing to the adhesion contract, they authorize INDEVAL to pass to the CNBV and Banco de México the information they may require regarding executed transactions. If depositors and issuers do not deliver the required information or if the information contains errors or omissions, INDEVAL will charge, as a conventional penalty, an amount equivalent to up to180 times the general daily minimum salary in force in the Federal District for each day of delay. 108 The depositors and issuers in arrears regarding the payment of fees indicated in the regulation and in the manual will have to pay INDEVAL, as a conventional penalty, an amount calculated on the basis of the total balance of unfulfilled obligations, 109 to which is applied a conventional penalty rate (28-day TIIE) multiplied by two. When the failure to comply with any obligation impedes the ability of INDEVAL to intervene and correct the situation, and as a result the central securities depository incurs financial costs, damages, losses, penalties, fees, or any other cost, the depositor who did not comply with the obligations has to cover, as a conventional penalty, an amount equal to what INDEVAL paid for the occurrences. INDEVAL, without incurring any responsibility, can suspend or terminate the provision of all or some of its services to the depositor or issuer that infringe on either the regulation or the manual. 108 Articles 88 to 92 of the internal regulation of INDEVAL. 109 The balance of the unfulfilled obligations in the period is determined every month. The accrued balance for the previous month is added to the one for this month to generate the total balance of unfulfilled obligations. 103

116 APPENDIX: STATISTICAL TABLES The first series (A) are payment and securities clearance and settlement statistics in Mexico. The second series (B) are more general statistics of the financial system. Starting 2002, the Working Group on Payment System Issues of Latin America and the Caribbean (WGPS-LAC), has been working on a document on Comparative Statistical Tables on Payments and Securities Clearance and Settlement Systems for the Region s countries. For the latter, the statistical tables of individual countries are being updated periodically and may be reviewed at the WHI s web site: SERIES A Payments and securities clearance and settlement statistics A1 Basic Statistical Data A2 Settlement Media Used by Non-banks A3 Settlement Media Used by Credit/Deposit Taking Institutions A4 Institutional Framework A5 Bank Notes and Coins A6 Cash Dispensers, ATMs and EFTPOS Terminals A7 Number of Payment Cards in Circulation A8 A9 A10 A11 Indicators of Use of Various Cashless Payment Instruments (volume of transactions) Indicators of Use of Various Cashless Payment Instruments (value of transactions) Payment Instructions Handled by Selected Interbank Transfer Systems (volume of transactions) Payment Instructions Handled by Selected Interbank Transfer Systems (value of transactions) A12 Securities and Accounts Registered at INDEVAL A13 Securities Holdings in INDEVAL A14 Transfer Instructions Handled by the SIDV (volume of transactions) A15 Transfer Instructions Handled by the SIDV (value of transactions) A16 Participation in SWIFT by Domestic Institutions A17 SWIFT Message Flows To / From Domestic Users

117 SERIES B Financial system general statistics B1 Number of Financial Entities B2 Number of Chequing, Savings and Time Deposits Accounts B3 Assets B4 Deposits B5 Equity B6 Outstanding Loan Portfolio B7 Equity Market B8 Entities Supervised by the CNBV

118 Tabla A1: Basic Statistical Data* Population (in thousands) GDP (in USD million) 183, , , , ,240 GDP per capita (in USD) 2, , , , ,579.6 Interbank Exchange Rate vs. USD Year end Year average Source: Banco de México. Notes and Coins issued Tabla A2: Settlement Media Used by Non-banks (in billions of pesos, year-end) held by the public Transferable deposits in local currency Households Business sector Others Narrow money supply M Transferable deposits in foreign currency M , , ,352.6 M , , , ,383.5 Source: Banco de México. Tabla A3: Settlement Media Used by Credit/Deposit Taking Institutions (in billions of pesos, year-end) Required reserves at the Central Bank (a) of which, usable for settlement: Excess reserves at the Central Bank Loans granted to financial institutions by the Central Bank transferable deposits at other entities. n.a. n.a. n.a. n.a. n.a. Source: Banco de México. (a) Banco de México does not require banks to maintain reserves at the Central Bank. * The following conventions for notation are used throughout the Appendix: n.a. indicates data that are not available; stands for data that are not applicable; neg (this is, negligible) indicates where data are very small relative to other relevant data in the table concerned. 107

119 Tabla A4: Institutional Framework (end of 2000) Number Value of of current current accounts Number Number (checking) (billions of institutions of branches accounts of pesos) Central Bank (a) Commercial banks 55 7,311 n.a of which: State-owned banks n.a Private banks 48 6,905 17,767, Subsidiaries of foreign banks n.a. n.a. n.a. n.a. Non-banking financial institutions n.a. n.a. n.a. n.a. Postal Office n.a. n.a. n.a. n.a. Sources: Banco de México and CNBV. (a) The number of accounts in Banco de México includes the current accounts of commercial banks and other special accounts. Tabla A5: Bank Notes and Coins (in millions of pesos, year-end) Banknotes and coins in circulation 83, , , , ,880 Total banknotes issued n.a. n.a. n.a. n.a. n.a. Total coins issued n.a. n.a. n.a. n.a. n.a. Banknotes and coins held by the public 9,900 14,539 15,173 24,520 26,007 Banknotes and coins held outside commercial banks 74,091 94, , , ,873 Source: Banco de México. Tabla A6: Cash Dispensers, ATMs and EFTPOS Terminals (year-end) Cash dispensers and ATMs Number of networks Number of terminals 14,308 n.a. n.a. 16,687 17,011 Volume of transactions (in millions) 227 n.a. n.a ,104 Value of transactions (billions of pesos) 62 n.a. n.a EFTPOS: Number of networks Number of terminals n.a. n.a. n.a. 109, ,799 Sources: Asociación de Banqueros de México, PROSA and Banco de México. 108

120 Tabla A7: Number of Payment Cards in Circulation (year-end) Cards with a cash function (in thousands) n.a. n.a. n.a. 8,898 9,505 Cards with a debit/credit function (in thousands) 22,688 n.a. n.a. 35,839 40,794 of which: Debit cards (in thousands) 19,409 n.a. n.a. 29,759 32,972 Credit cards (in thousands) 3,279 n.a. n.a. 6,080 7,822 Retailer and fidelity cards n.a. n.a. n.a. n.a. n.a. Stored-value cards n.a. n.a. n.a. n.a. n.a. Sources: Asociación de Banqueros de México, PROSA and Banco de México. Cheques issued (a) Tabla A8: Indicators of Use of Various Cashless Payment Instruments (volume of transactions, in thousands) in local currency 166, , , , ,175 in foreign currency n.a. n.a. 1,852 6,243 5,714 Payment cards n.a. n.a. n.a. 1,067,520 1,274,123 Paper-based credit transfers n.a. n.a. n.a. n.a. n.a. Paperless credit transfers (b) 4,291 5,576 9,104 9,728 10,282 initiated by clients 745 1,624 4,457 5,721 6,466 interbank / large value 3,546 3,952 4,647 4,007 3,816 Direct Debits 5,292 9,060 E-money n.a. n.a. n.a. n.a. n.a. Source: Banco de México. (a) Includes only the cheques processed at the clearinghouse. (b) Includes information of the SIAC, SPEUA and Pago Interbancario systems (beginning March 4, 2002, the latter changed its name to TEF). 109

121 Cheques issued (a) Tabla A9: Indicators of Use of Various Cashless Payment Instruments (value of transactions, in billions of pesos) in local currency 1,792 2,375 2,607 11,312 8,972 in foreign currency (b) n.a. n.a Payment cards n.a. n.a. n.a Paper-based credit transfers n.a. n.a. n.a. n.a. n.a. Paperless credit transfers (c) 69,888 71,859 74,568 93, ,038 initiated by clients interbank / large value 69,820 71,769 74,404 93, ,799 Direct Debits E-money n.a. n.a. n.a. n.a. n.a. Source: Banco de México. (a) Includes only the cheques processed at the clearinghouse. (b) In USD billion. (c) Includes information of the SIAC, SPEUA and Pago Interbancario systems (beginning March 4, 2002, the latter changed its name to TEF). Tabla A10: Payment Instructions Handled by Selected Interbank Transfer Systems (volume of transactions, in thousands) Retail systems SICAM 166, , , , ,379 Pago Interbancario (a) n.a. n.a. n.a. 5,721 6,466 Large value systems (b) SIAC SPEUA 2,869 3,201 3,599 3,690 3,501 Source: Banco de México. These systems only accept transactions in local currency. (a) Starting March 4, 2002, the Pago Interbancario system changed its name to TEF. (b) Does not include transfers among systems. 110

122 Tabla A11: Payment Instructions Handled by Selected Interbank Transfer Systems (value of transactions, in billions of pesos) Retail systems SICAM 1,792 2,375 2,607 2,361 2,648 Pago Interbancario (a) n.a. n.a. n.a Large value systems (b) SIAC 24,239 26,935 24,324 29,680 34,895 SPEUA 45,581 44,834 50,079 63,399 68,904 Source: Banco de México. These systems only accept transactions in local currency. (a) Starting March 4, 2002, the Pago Interbancario system changed its name to TEF. (b) Does not include transfers among systems. Tabla A12: Securities and Accounts Registered at INDEVAL Number of registered securities 66,559 44,478 38,872 34,971 33,676 Number of participants n.a. n.a. n.a. n.a. n.a. Number of accounts n.a. n.a. n.a. n.a. n.a. Number of foreign investors n.a. n.a. n.a. n.a. n.a. Source: INDEVAL. Tabla A13: Securities Holdings in INDEVAL (in millions of pesos) Capital markets instruments 1,296,481 1,319,802 1,827,652 1,724,434 2,020,774 Money market instruments 743, ,355 1,095,188 1,364,455 1,797,789 Government securities 535, , ,982 1,063,383 1,340,414 Bank securities 207, , , , ,375 Others (Metals) Total 2,039,958 2,198,169 2,922,847 3,088,898 3,818,570 Source: INDEVAL. Tabla A14: Transfer Instructions Handled by the SIDV (volume of transactions) SIDV 2,449,650 2,420,834 2,529,332 2,800,619 1,917,494 Stock exchange transactions 1,316,543 1,202,040 1,396,574 1,383,428 1,295,027 OTC transactions 1,133,107 1,218,794 1,295,758 1,417, ,467 Memo: Securities lending transactions 5,990 6,923 6,080 6,564 6,975 Source: INDEVAL. 111

123 Tabla A15: Transfer Instructions Handled by the SIDV (value of transactions, in billions of pesos) SIDV Securities Transactions 94,268 94, , , ,281 Government securities 30,955 30,835 34,699 38,203 59,256 Corporate and banking debt securities 62,666 62,477 73,673 92,213 92,937 Equities ,088 Funds transfer among SIAC-SPEUA-SIDV 22,853 32,597 37,642 50, ,786 SIDV total settlement throughput 117, , , , ,067 Source: INDEVAL. Tabla A16: Participation in SWIFT by Domestic Institutions Domestic SWIFT users Of which: Memo: Members Sub members Participants SWIFT users worldwide 5,918 6,372 6,771 6,991 7,293 Of which: Source: SWIFT. Members 3,014 3,070 3,052 2,230 2,307 Sub members 2,500 2,621 2,781 2,825 3,037 Participants ,936 1,949 Tabla A17: SWIFT Message Flows To/From Domestic Users (in thousands) Total messages sent 1,070 1,350 1,426 1,361 1,462 Of which: Category I 802 1,042 1,097 1,058 1,174 Category II Total messages received 701 1,397 1,813 1,733 1,388 Of which: Category I 625 1,100 1,379 1,403 1,124 Category II Domestic traffic 1,771 2,747 3,239 3,094 2,850 Memo: Global SWIFT traffic 687, , ,235 1,015,105 1,476,840 Source: SWIFT. 112

124 Tabla B1: Number of Financial Entities Multiple commercial banks Development banks Brokerage houses Insurance companies (a) Bonding companies Investment funds management firms (b) Siefores AUXILIARY CREDIT ORGANIZATIONS Credit unions General deposit warehouses Leasing firms Factoring firms Exchange houses Financial groups Sources: CNBV and CNSF. (a) Includes reinsurance firms and mutual societies. (b) Debt Instruments Investment funds (for individuals and firms) and Equities Investment Funds. Tabla B2: Number of Current, Savings and Time Deposits Accounts Commercial banks 14,774,958 21,608,663 23,667,662 25,018,246 22,782,798 22,242,896 Sight deposits: Cheques 7,513,335 12,728,506 14,150,109 14,631,747 14,169,308 17,779,652 Savings 2,928,706 3,496,158 3,761,142 3,524,537 3,823,259 n.a. Time deposits 4,332,917 5,383,999 5,756,411 6,861,962 4,790,231 4,463,244 Brokerage houses (a) n.a. 114, , , , ,456 Source: CNBV. (a) Figures stand for the number of investment contracts. 113

125 Tabla B3: Assets (in USD million) Multiple commercial banks 148, , , , , ,020 Development banks 60,924 51,782 49,182 52,090 51,773 57,883 Brokerage houses n.a. 3,261 1,526 1,781 1,387 1,746 Insurance firms 7,461 8,889 8,480 11,204 12,023 14,229 Bonding firms * Investment funds management firms n.a. n.a. n.a. 19,993 19,163 32,406 Equities 1,789 2,891 1,682 2,450 2,514 3,571 Debt instruments 8,180 10,576 10,469 16,973 15,961 28,197 Risk capital n.a. n.a. n.a AUXILIARY CREDIT ORGANIZATIONS Credit unions 1,452 1,182 1,213 1,273 1,212 1,431 General deposit warehouses Leasing firms 1,431 1,208 1,234 1,146 1,313 1,448 Factoring firms Exchange houses Sources: CNBV and CNSF. Tabla B4: Deposits (a) (in USD million) Multiple commercial banks 82,155 92, ,582 97, , ,925 Development banks 20,685 19,917 22,378 20,221 20,616 26,432 Sources: CNBV and CNSF. (a) Sight deposits, plus time deposits, plus outstanding bank bonds. 114

126 Tabla B5: Equity (a) (in USD million) Multiple commercial banks 8,880* 10,440 10,496 11,551 14,651 16,294 Development banks n.a. 51,782 49,182 52,090 51,773 57,883 Brokerage houses n.a. 1, n.a. 1,023 1,036 Insurance companies 1,696 1,898 1,526 2,203 2,150 2,358 Bonding companies Equity investment funds 1,765 2,867 1,645 2,436 2,506 3,560 Debt instruments investment funds 8,041 10,042 10,098 16,931 15,886 28,096 Risk capital investment funds n.a. n.a. n.a. n.a AUXILIARY CREDIT ORGANIZATIONS Credit unions General deposit warehouses n.a Leasing firms n.a ,234 1, Factoring firms n.a Exchange houses n.a Figures are consolidated with UDIs trusts. Sources: CNBV and CNSF. (a) Tier 1 capital. Tabla B6: Outstanding Loan Portfolio (in USD millions) Multiple commercial banks 82,554 81,955 78,830 86,922 91,862 94,965 Development banks 41,510 40,049 40,088 41,223 38,597 39,701 Source: CNBV. Tabla B 7: Equities Market Total value traded (in USD million) (a) 43, , , , ,362.4 As % of GDP Number of listed firms Of which: Industrial, Commercial and Services Financial institutions International Quotation System (SIC) n.a Investment funds Option-like securities Previous listing n.a n.a Source: CNBV. (a) Does not include investment funds or warrants. 115

127 Tabla B8: Entities Supervised by the CNBV MULTIPLE COMMERCIAL BANKING INSTITUTIONS ABN AMRO Bank American Express Bank Banca Afirme Banca Mifel Banca Serfin Banco del Atlántico Banco del Bajío Banco del Centro Banco del Sureste Banco Inbursa Banco Interacciones Banco Internacional Banco Invex Banco JP Morgan Banco Mercantil del Norte Banco Nacional de México Banco Obrero Banco Regional de Monterrey Banco Santander Mexicano Bancrecer Bank of America México Bank of Tokyo Mitsubishi México Bank One Bankboston Bansi BBVA Bancomer Comerica Bank Deutsche Bank Dresdner Bank GE Capital Bank HSBC Bank México ING Bank IXE Banco Scotiabank Inverlat DEVELOPMENT BANKS Banco del Ahorro Nacional y Servicios Financieros Banco Nacional de Comercio Exterior Banco Nacional de Crédito Rural Banco Nacional de Obras y Servicios Públicos Banjercito Nacional Financiera FINANCIAL GROUPS HOLDING FIRMS Abaco GF Afirme GF Arka GF CBI Grupo Financiero GE Capital GF GF Asemex Banpais GF Associates GF Banamex GF Banorte GF BBVA Bancomer GF Bital GF Capital GF Caterpillar México GF Cremi GF del Sureste GF Finamex GF Ford Credit de México GF GBM Atlántico GF Inbursa GF Interacciones GF Margen GF Mifel GF Pronorte GF Santander Serfin GF Scotiabank Inverlat Grupo Financiero Anahuac Grupo Financiero Asecam ING Grupo Financiero Invex Grupo Financiero IXE GF JP Morgan GF Multivalores GF Value GF 116

128 Tabla B8: Entities Supervised by the CNBV (cont...) LIMITED PURPOSE FINANCIAL FIRMS Cemex Capital Corporación Financiera de América del Norte Crédito Inmobiliario Ficen Ficen Financiera Compartamos Financiera Independencia Fincasa Fomento Hipotecario General Hipotecaria GMAC Financiera GMAC Hipotecaria Hipotecaria Associates Hipotecaria Comercial América Hipotecaria Crédito Operando y Casa Hipotecaria Mexicana Hipotecaria Nacional Hipotecaria Vanguardia Hipotecaria Su Casita Metrofinanciera Operaciones Hipotecarias de México Patrimonio Prime Capital Servicios Financieros Navistar Sociedad de Fomento a la Educación Superior Terras Hipotecaria BROKERAGE HOUSES ABN AMRO Securities Accival Arka Banorte BBVA Bancomer Bital Citibank Deutsche Securities Finamex Goldman Sachs México Grupo Bursátil Mexicano ING Baring Interacciones Inversora Bursátil Invex Ixe JP Morgan Merrill Lynch Monex (CBI) Multivalores Santander Serfin Scotia Inverlat Valores Mexicanos Value Vector Source: CNBV. 117

129 LIST OF ABBREVIATIONS ABM AC ADE ADRs AFORE AIMs AMIB: AR ARC ASIGNA ATM BIS BMV BONDES BPAs BREMs CCEN CCP CECOBAN CETES Asociación de Banqueros de México (Mexico s Bankers Association) Agencia Central (Central Agency) Acuerdo para el Apoyo Inmediato a Deudores (Agreement for Immediate Support to Debtors) American Depositary Receipts Administradora de Fondos para el Retiro (Pension Funds Management Firms) Aportaciones Iniciales Mínimas (Minimum Initial Contributions) Asociación Mexicana de Intermediarios Bursátiles (Mexican Association of Stock Exchange Intermediaries) Agencia Registradora (Registration Agency) Agencia Registradora Central (Central Registrar) Asigna Compensación y Liquidación (ASIGNA Clearing and Settlement) Automated Teller Machine Bank for International Settlements Bolsa Mexicana de Valores (Mexican Stock Exchange) Bonos de Desarrollo del Gobierno Federal (Federal Government Development Bonds) Bonos de Protección al Ahorro Bancario (Bonds for the Protection of Banking Savings) Bonos de Regulación Monetaria (Monetary Regulation Bonds) Cámara de Compensación Electrónica Nacional (National Electronic Clearinghouse) Central Counterparty Centro de Compensación Bancaria CECOBAN S.A. de C.V. (CECOBAN Banking Clearing Center) Certificados de la Tesorería de la Federación (Federal Treasury Certificates) 118

130 CII CLABE CNBV CNSF COMEPA CONDUSEF CONSAR CCPs CPOs CPSS CSD DVP EFTPOS FOBAPROA IES IMF IMSS INDEVAL INEGI INPC IPAB IPC Cámara de Intercambio de Imágenes (Images Exchange Clearinghouse) Clave Bancaria Estandarizada (Standardized Banking Code) Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission) Comisión Nacional de Seguros y Fianzas (National Insurance and Bonds Commission) Comité de Trabajo sobre Medios de Pago (Working Committee on Payment Media) Comisión Nacional para la Defensa de los Usuarios de Servicios Financieros (National Commission for the Defense of Financial Services Users) Comisión Nacional del Sistema de Ahorro para el Retiro (National Commission of the Savings for Retirement System) Central Counterparties Certificados de Participación Ordinaria (Ordinary Participation Certificates) Committee on Payment and Settlement Systems Central Securities Depository Delivery versus Payment Electronic Funds Transfer at the Point of Sale Fondo Bancario de Protección al Ahorro (Banking Fund for the Protection of Savings) Infraestructura Extendida (Extended Infrastructure) International Monetary Fund Instituto Mexicano del Seguro Social (Mexican Social Security Institute) S.D. INDEVAL, S.A. de C.V. Instituto Nacional de Estadística, Geografía e Informática (National Statistics, Geography and Information Institute) Índice Nacional de Precios al Consumidor (National Consumer Price Index) Instituto de Protección al Ahorro Bancario (Institute for the Protection of Bank Savings) Índice de Precios y Cotizaciones de la Bolsa Mexicana de Valores (Prices and Quotations Index of the Mexican Stock Exchange) 119

131 ISIN LGTOC NAFTA OAL OTC PEMEX PICs POS PROCAPTE PROSA PRLV PVP RNV SATO: SAVAP SAR SCO SENICREB SENTRA SHCP SIAC SIC International Securities Industry Numbering Ley General de Títulos y Operaciones de Crédito (General Law for Credit Certificates and Operations) North America Free Trade Agreement Obligación Adicional de Liquidación (Additional Settlement Obligation) Over-the-Counter Petróleos Mexicanos (Mexican Oil Company) Pagarés de Indemnización Carretera (Highway Indemnization Promissory Notes) Point of Sale Programa de Capitalización Temporal (Temporary Capitalization Program) Promoción y Operación S.A. de C.V. Pagaré con Rendimiento Liquidable al Vencimiento (Promissory Notes) Payment versus Payment Registro Nacional de Valores (National Securities Registry) Sistema Automatizado de Transacciones y Operaciones (Automated System for Operations and Transactions) Sistema de Administración de Aportaciones en Valores para Derivados (System for the Administration of Securities Contributions for Derivatives) Sistema de Ahorro para el Retiro (Savings for Retirement System) Sistema de Compensación de Operaciones (Transactions Clearing System) Servicio Nacional de Información Crediticia y Bancaria (National Service of Bank and Credit Information) Sistema Electrónico de Negociación, Transacción, Registro y Asignación (Electronic System for Trading, Transactions, Registration and Allotment) Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) Sistema de Atención a Cuentahabientes (Account Holders Service System) Sistema Internacional de Cotizaciones de la Bolsa Mexicana de Valores (International Quotations System of the Mexican Stock Exchange) 120

132 SICAM SIDV SIEBAN SIF SIVA RE SPEI SPEUA SWIFT TEF TIIE UDI USA VAR Sistema de Cámaras del Banco de México (Clearinghouses System of Banco de México) Sistema Interactivo para el Depósito de Valores (Interactive System for Securities Deposits) Sistema de Intercambio de Efectivo Bancario (System for the Exchange of Banking Cash) Servicios de Integración Financiera (Financial Integration Services) Sistema Integral de Valores Automatizado (Integrated Automated System for Securities) Sistema de Pagos Electrónicos Interbancarios (Interbank Electronic Payments System) Sistema de Pagos Electrónicos de Uso Ampliado (Extended Electronic Payments System) Society for Worldwide Interbank Financial Telecommunication Transferencia Electrónica de Fondos (Electronic Funds Transfer) Tasa de Interés Interbancaria de Equilibrio (Interbank Equilibrium Interest Rate) Unidad de Inversión (Investment Unit) United States of America Value at Risk 121

133 GLOSSARY In January 2001, the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) published a combined glossary for payments and securities clearance and settlement terms. The Glossary can be found on the BIS web page: The Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI), on the basis of the glossary produced by the CPSS, also produced a uniform glossary of terms in Spanish in order to avoid unnecessary proliferation of terminology and definitions. The latter can be found on the WHI s web page: Below are some terms that are peculiar to the Mexican context: Control accounts: Credit institution: Domiciliación: Originating Institution: Originator: Receiving Institution: Receiver: Single account: (cuentas de control) accounts that are used to register irrevocable cash debits or credits, associated with securities transactions executed at the SIDV. the name by which commercial banks are referred to in Mexican laws. the pre-authorized charges or direct debits service provided by CECOBAN. user institution that sends payment files to CECOBAN, either on its own behalf or on behalf of the originator. customer or user of an originating institution who uses the payment services producing instructions to be executed by the receiving institution. user institution that receives from CECOBAN the payment files containing information on debits or credit to be applied to its customers accounts. is the final person or firm who receives a debit or credit in his account, according to the instructions sent by the originating institution. (cuenta única) this is the name given to the current accounts held by financial institutions and others public sector institutions at Banco de México. 122

134 ISBN