ISDA - NAFINSA CONFERENCE MAY 7, 2001 MEXICO CITY MA. TERESA VARGAS, BBVA CAROLINA MACHADO, JP MORGAN HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN MEXICO

2 AGENDA 1.INTRODUCTION 2. FIRST STEPS 3.HOW TO DEVELOP A MASTER AGREEMENT  NATURE OF AGREEMENT  OBJECTIVE OF AGREEMENT  PROPOSED STRUCTURE OF AGREEMENT 4.CONCLUSIONS HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN MEXICO

3 INTRODUCTION

4 1.1 INTERNATIONAL STANDARD AGREEMENTS (i)ISDA Master Agreement (ii)IFEMA (iii)ISMA (repos and buy sellbacks)

5 INTRODUCTION 1.2 MASTER AGREEMENTS EXISTING IN MEXICO Currently i n Mexico, the local master derivative agreements are specific by product (i) Fx Forwards (ii) Fras (iii) Ois (iv)INPC

6 FIRST STEPS

7 2.1 IMPORTANCE OF DEVELOPING A LOCAL MASTER The need arises to develop a standard local agreement that governs all over the counter markets, but that is in accordance with local market practices A contractual structure compatible with Mexican legislation and courts Use of the native language for clarity But to the extent possible, with the minimum discrepancies of the internationally used agreements such as ISDA

8 FIRST STEPS 2.2 KEY PLAYERS (i) Financial Intermediaries (including banks and broker dealers) (ii)Mexican Regulators (iii)With the participation and intervention of ABM, AMIB and ISDA (iv)Other potential players are financial intermediaries such as insurance companies, pension funds and mutual funds

9 FIRST STEPS 2.3 EXPECTED USERS The local Master Agreement to be developed s hould be used between : Mexican Financial Intermediaries Financial Intermediaries and Corporates Financial Intermediaries and Governmental entities Mainly Mexican players

10 HOW TO DEVELOP A MASTER AGREEMENT

11 HOW TO DEVELOP A MASTER AGREEMENT Nature of Agreement Objective of Agreement Proposed Structure of Agreement

12 HOW TO DEVELOP A MASTER AGREEMENT 3.1 NATURE OF AGREEMENT Only one contractual relationship to negotiate The local master agreement will act as a frame for the execution of derivative trades, without imposing an obligation to execute trades. If a trade is executed, the terms of the master agreement come into play.

13 Should be mainly influenced by ISDA Master Agreement, since it is recognized by international community. The Master, the schedule, plus the corresponding confirmation make one same agreement. HOW TO DEVELOP A MASTER AGREEMENT 3.1 NATURE OF AGREEMENT

14 HOW TO DEVELOP A MASTER AGREEMENT 3.2 OBJECTIVE OF AGREEMENT To regulate different types of transactions of the same nature, under one same umbrella. Contractual framework for the same type of trades Netting of trades Reduction of credit exposure Better use of credit line Avoiding credit risk during a bankruptcy situation Legislation has been put in place to apply this in Mexico

15 HOW TO DEVELOP A MASTER AGREEMENT 3.3 PROPOSED STRUCTURE OF AGREEMENT Sections of document  Main form  Schedule  Confirmation

16 HOW TO DEVELOP A MASTER AGREEMENT Transactions that should be covered Swaps Forwards Options Foreign Exchange

17 HOW TO DEVELOP A MASTER AGREEMENT Swaps –Interest Rate Swaps (IRS) –Cross Currency Swaps –Cross Currency Rate Swaps –Equity Swaps / Equity Index Swaps –Any other type of derivatives that may be negotiated in the Financial Markets

18 HOW TO DEVELOP A MASTER AGREEMENT Forwards and Options * –Interest Rate –Caps, collars and floors –Currency –Fixed Rate Securities –Variable Rate Securities –Any other type * Subject to changes in the corresponding regulations

19 HOW TO DEVELOP A MASTER AGREEMENT Foreign Exchange –FX spot –FX Forward

20 CONCLUSIONS

21 CONCLUSIONS Contractual Uniformity in local markets Better legal and credit protection Facilitates the negotiation of agreements Can assist in amending and issuing new regulations