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

4th LAC Debt Group Meeting, Trinidad & Tobago2 Agenda Introduction Introduction Repurchase Agreements (Repo) and Securities Lending (SL) transactions Repurchase Agreements (Repo) and Securities Lending (SL) transactions Recommendations & Suggestions Recommendations & Suggestions International Experience International Experience UK, Spain, USA, Latinoamerica UK, Spain, USA, Latinoamerica Mexico Mexico Conclusions Conclusions

4th LAC Debt Group Meeting, Trinidad & Tobago3 Introduction Aims of the Study Aims of the Study Extensive Financial Reforms in LA with no evident outcomes Extensive Financial Reforms in LA with no evident outcomes Low liquidity & high concentration, few investors and few secutiries available. Low liquidity & high concentration, few investors and few secutiries available. ‘Short-termism’ ‘Short-termism’ Developed repo and SL markets promote successful capital markets and economic growth. Developed repo and SL markets promote successful capital markets and economic growth. Implement sound Fiscal, Legal and Regulatory measures & remove restrictions Implement sound Fiscal, Legal and Regulatory measures & remove restrictions

4th LAC Debt Group Meeting, Trinidad & Tobago4 Securities Lending & Repos Securities Lending: Securities Lending: The purchaser buys specific securities in exchange of a commision (premium) The purchaser buys specific securities in exchange of a commision (premium) The seller can make a profit on highly liquid and overdemanded securities. The seller can make a profit on highly liquid and overdemanded securities. The property is transferred. The property is transferred. Repurchase Agreements: Repurchase Agreements: Exchange of high credit quality securities for funds. Exchange of high credit quality securities for funds. Securities serve as collateral for raising funds Securities serve as collateral for raising funds Funds act as collateral for borrowing securities. Funds act as collateral for borrowing securities.

4th LAC Debt Group Meeting, Trinidad & Tobago5 Repo Agreement

4th LAC Debt Group Meeting, Trinidad & Tobago6 Securities Lending

4th LAC Debt Group Meeting, Trinidad & Tobago7 What are the benefits? Increases the general liquidity of the market Increases the general liquidity of the market Serves as a liquidity channel to other markets (i.e., derivatives and forex) Serves as a liquidity channel to other markets (i.e., derivatives and forex) Contributes to the efficiency of the market and price formation Contributes to the efficiency of the market and price formation Provides the market with longer maturities Provides the market with longer maturities Decreases the % of default Decreases the % of default Can be used in short sales, arbitrage, speculation, etc. Can be used in short sales, arbitrage, speculation, etc. Can generate profits on securities Can generate profits on securities Increases the availability of instruments Increases the availability of instruments

4th LAC Debt Group Meeting, Trinidad & Tobago8 Risks Default is reduced significantly Default is reduced significantly Market Risk Market Risk Mismatch Risk Mismatch Risk Issuer Risk Issuer Risk Liquidity Risk Liquidity Risk

4th LAC Debt Group Meeting, Trinidad & Tobago9 SL & Repos in Emerging Markets Low liquidity and Concentration. Low liquidity and Concentration. Few transactions on corporate debt and long term maturities Few transactions on corporate debt and long term maturities Specialization on government securities Specialization on government securities In some countries the securities market is repo based In some countries the securities market is repo based Info on SL and repo market dynamics, size, virtually unknown or unavailable. Info on SL and repo market dynamics, size, virtually unknown or unavailable.

4th LAC Debt Group Meeting, Trinidad & Tobago10 SL & Repos in Emerging Markets: An eye bird view Lack of monitoring Lack of monitoring Half the authorities believe a regulatory and fiscal framework exist Half the authorities believe a regulatory and fiscal framework exist 40% considers they have the financial platform needed for the development of these markets 40% considers they have the financial platform needed for the development of these markets There is not reliable information on size of the market, composition, maturity or participants. There is not reliable information on size of the market, composition, maturity or participants.

4th LAC Debt Group Meeting, Trinidad & Tobago11 General Suggestions A Latin American Repo & Securities Market Survey that identifies: A Latin American Repo & Securities Market Survey that identifies: Participants (actual and potential), volumes & dynamics, maturities, instruments, fiscal & regulatory aspects, etc. Participants (actual and potential), volumes & dynamics, maturities, instruments, fiscal & regulatory aspects, etc. Important for better monitoring and policy analysis Important for better monitoring and policy analysis Authorities should promote third party agreements to minimize risks Authorities should promote third party agreements to minimize risks Comitee and Code of Conduct on Repo and SL with main actors Comitee and Code of Conduct on Repo and SL with main actors Monitor unusual activities by institutional investors and hedge funds Monitor unusual activities by institutional investors and hedge funds Identify causes of low liquidity (market practices, regulatory framework, etc.) Identify causes of low liquidity (market practices, regulatory framework, etc.) International transactions (beware of liquidity effects) International transactions (beware of liquidity effects)

4th LAC Debt Group Meeting, Trinidad & Tobago12 Mexican Experience Macroeconomic stability has prompted a capital market with greater maturities Macroeconomic stability has prompted a capital market with greater maturities Repo market is regarded as a source of short term liquidity Repo market is regarded as a source of short term liquidity Repo transactions: Repo transactions: Maturity <1-month Maturity <1-month Mostly on government instruments. Mostly on government instruments. SL transactions: SL transactions: Mostly on Stocks and few on government debt or capital market instruments. Mostly on Stocks and few on government debt or capital market instruments.

4th LAC Debt Group Meeting, Trinidad & Tobago13 Mexican Experience Third Parties Third Parties Custody and administration of securities Custody and administration of securities Electronic platform to engage in SL transactions Electronic platform to engage in SL transactions Risks Comitee Risks Comitee Standard Repo Agreement Standard Repo Agreement Identify more clearly market participants Identify more clearly market participants Incentives Incentives Resistance Resistance

4th LAC Debt Group Meeting, Trinidad & Tobago14 Conclusions Low liquidity & high concentration, short term view. Low liquidity & high concentration, short term view. Benefits and some risks Benefits and some risks More studies needed: More studies needed: Survey Survey Incentives Incentives Resistence Resistence Assymetric information Assymetric information Comitee Comitee

4th LAC Debt Group Meeting, Trinidad & Tobago15 UK Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago16 UK Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago17 Spain Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago18 Spain and Europe Repo Mkt

4th LAC Debt Group Meeting, Trinidad & Tobago19 US Repo Market

4th LAC Debt Group Meeting, Trinidad & Tobago20 US: Securities Lending

4th LAC Debt Group Meeting, Trinidad & Tobago21 US: SL Composition

4th LAC Debt Group Meeting, Trinidad & Tobago22 Mexico: SL evolution 1996 Circular Sistema VALPRE de Indeval Se formaliza el mercado de préstamo de valores mediante la emisión de la circular y el inicio de operaciones en VALPRE C : Aforos fijos y muy altos Plazo máximo 1 año Proyecto de Modernización de Préstamo de Valores Se inicia proyecto de nueva regulación por parte de Banco de México y CNBV con el apoyo de grupos de trabajo de las distintas asociaciones (AMIB, ABM, AMAFORE, AIFI) 2005 Circular 1/2004 Mecanismos de Negociación Con la entrada en vigor de la nueva circular y la operación de Mecanismos de Negociación se abren las puertas para tener un mercado más eficiente, dinámico y accesible para todos C 1/2004: Aforos dinámicos Plazo abierto Fecha Valor Operación de Mecanismos de Negociación 2000 Ventanilla Banxico Los Formadores de Mercado pueden realizar operaciones de préstamo de valores sobre Valores Gubernamentales con Banco de México Esquema 6. Evolución del Préstamo de Valores en México Misceláneas 2.1.6, , y Circular S-11.3 Temas Fiscales y Seguros Las misceláneas fiscales publicadas en marzo del 2007 proporcionan un tratamiento fiscal más claro, se hace referencia a la Circular de Reporto de Valores de Banxico y se establece la participación de los seguros en operaciones de préstamo de valores.

4th LAC Debt Group Meeting, Trinidad & Tobago23 Mexico: SL stocks

4th LAC Debt Group Meeting, Trinidad & Tobago24 Mexico: SL

4th LAC Debt Group Meeting, Trinidad & Tobago25 Mexico: Repo transactions

4th LAC Debt Group Meeting, Trinidad & Tobago26 Mexico: Repo by maturity

4th LAC Debt Group Meeting, Trinidad & Tobago27 Europe: Repo by Maturity