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Conditions for the Development of Repos and Securities Lending Markets

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

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Conditions for the Development of Repos and Securities Lending Markets

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

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

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

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

  5. Repo Agreement 4th LAC Debt Group Meeting, Trinidad & Tobago

  6. Securities Lending 4th LAC Debt Group Meeting, Trinidad & Tobago

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

  8. Risks • Default is reduced significantly • Market Risk • Mismatch Risk • Issuer Risk • Liquidity Risk 4th LAC Debt Group Meeting, Trinidad & Tobago

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

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

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

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

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

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

  15. UK Repo Market 4th LAC Debt Group Meeting, Trinidad & Tobago

  16. UK Repo Market 4th LAC Debt Group Meeting, Trinidad & Tobago

  17. Spain Repo Market 4th LAC Debt Group Meeting, Trinidad & Tobago

  18. Spain and Europe Repo Mkt 4th LAC Debt Group Meeting, Trinidad & Tobago

  19. US Repo Market 4th LAC Debt Group Meeting, Trinidad & Tobago

  20. US: Securities Lending 4th LAC Debt Group Meeting, Trinidad & Tobago

  21. US: SL Composition 4th LAC Debt Group Meeting, Trinidad & Tobago

  22. Esquema 6. Evolución del Préstamo de Valores en México Sistema VALPRE de Indeval Proyecto de Modernización de Préstamo de Valores Circular 1/2004 Mecanismos de Negociación Misceláneas 2.1.6, 3.1.10, 3.3.6 y Circular S-11.3 Temas Fiscales y Seguros Circular 10-195 Ventanilla Banxico 1996 1997 2000 2005 2002-2003-2004 2006-2007 • Se formaliza el mercado de préstamo de valores mediante la emisión de la circular y el inicio de operaciones en VALPRE • C 10-195: • Aforos fijos y muy altos • Plazo máximo 1 año Los Formadores de Mercado pueden realizar operaciones de préstamo de valores sobre Valores Gubernamentales con Banco de México Se inicia proyecto de nueva regulación por parte de Banco de México y CNBV con el apoyo de grupos de trabajo de las distintas asociaciones (AMIB, ABM, AMAFORE, AIFI) • Con la entrada en vigor de la nueva circular y la operación de Mecanismos de Negociación se abren las puertas para tener un mercado más eficiente, dinámico y accesible para todos • C 1/2004: • Aforos dinámicos • Plazo abierto • Fecha Valor • Operación de Mecanismos de Negociación Las misceláneas fiscales publicadas en marzo del 2007 proporcionan un tratamiento fiscal más claro, se hace referencia a la Circular de Reporto de Valores de Banxico y se establece la participación de los seguros en operaciones de préstamo de valores. Mexico: SL evolution 4th LAC Debt Group Meeting, Trinidad & Tobago

  23. Mexico: SL stocks 4th LAC Debt Group Meeting, Trinidad & Tobago

  24. Mexico: SL 4th LAC Debt Group Meeting, Trinidad & Tobago

  25. Mexico: Repo transactions 4th LAC Debt Group Meeting, Trinidad & Tobago

  26. Mexico: Repo by maturity 4th LAC Debt Group Meeting, Trinidad & Tobago

  27. Europe: Repo by Maturity 4th LAC Debt Group Meeting, Trinidad & Tobago

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