IV. Secondary market

4.1 Background

At the end of the nineties, domestic government debt was composed basically of 28-day or 91-day floating rate bondes,[2] of cetes[3] of terms greater than one year, and of udibonos[4] that had a maximum 10-year term. In those years, cetes interest rates were between 15% and 20%, the concept of market makers had still not been introduced, and resources managed by Siefores[5] were limited.

The primary goal at the time was to develop a fixed-rate, long-term government securities market. Following that purpose, since the mid-nineties, financial authorities promoted various initiatives to establish the bases for the development of the debt market in México. These efforts, fostered by conditions of low inflation, fiscal discipline and Banco de México’s credibility, allowed for developing a government debt market. The yield curve of nominal fixed-rate government securities thus moved from a maximum term of one year in 1999, to 30 years by the end of 2006. This extension in the yield curve has been the most evident achievement in terms of government debt market development.

1/ The chapter “Market makers” includes the chart “Development of the fixed-rate yield curve”, which also includes the years since the concept of market makers was created and complements the chart shown above.

4.2 Development of the secondary market

The primary market is where negotiable securities are issued for the first time in the market. In the primary market, the securities placed by debt issuers (governments, companies, etc.) are purchased by investors seeking a yield. There is also a secondary market where issued securities are sold and purchased, although these transactions take place among investors themselves instead of directly with the issuer. In the secondary market, securities can be exchanged through direct, pre-sale and repo operations.

A well-developed government bond market must rely on an efficient and liquid secondary market. In this regard, the Federal Government has promoted major reforms to adjust the debt market microstructure and foster the secondary market.

Pension system reform is one of the most important structural reforms promoted in 1997, that allowed the construction of a considerably strong local institutional investor base. The creation of the market maker[6] concept set the bases for the development of a liquid inter-bank market for government securities. The concept of price vendor,[7] first introduced in the Mexican market in 1998, responsible for setting daily a fair price for all outstanding issues, including government securities, brought along considerable transparency into the market.

The greater debt management discipline applied by the Federal Government was also fundamental. In this regard, worth highlighting is the publication of quarterly issuance calendars, the adoption of the reopened issues that may be rapidly converted into market benchmarks, the incorporation of syndicated placements[8] and securities swaps.

Other change introduced in 2004 was a regulation allowing the stripping of bonos and udibonos which allows to trade separatecoupons and principal. Finally, the development of a repo and securities lending market, has been fundamental to the market depth and liquidity. All these initiatives have led to a more liquid and efficient government-debt secondary market.

4.3 Current developments in Mexico’s secondary market

The trading volume of the secondary market of Mexican government securities has reached liquidity levels similar to those observed in other international markets. A survey conducted by the Emerging Markets Traders Associations (EMTA) during 2013 revealed that Mexico reached the second highest trading volume in debt instruments for a total of 748 billion dollars accumulated during the period. This amount represents a 7% drop as compared to the 806 billion dollars recorded in 2012. Eighty percent of the trading volume comprised instruments in pesos. Brazil was the first market with the highest trading volume for a total of 902 billion dollars. Mexico ranked above countries such as South Africa, Russia, and Poland, which have also developed local government securities markets.

The data obtained by Banco de México shows that the average daily trading volume of government securities[9] in 2013 reached an estimated 98.414 billion pesos, equivalent to a daily average of approximately 7.570 billion dollars.[10] Bonos[11] account on average for nearly 50% of this volume. Cetes are the second highest trading volume security with a total of 26.800 billion pesos (2.061 billion dollars), while udibonos account only for 10% of the total operation.

A stronger and more active investor base and, consequently, a higher trading volume, has contributed to see spreads between purchase (bid) and sale (offer) prices for government bonds in the Mexican market come close to those of other developed economies. The spreads for bonos M are, on average, 3 basis points and for udibonos, 4 basis points. The average trading volume has also increased substantially to 50 million pesos. Nevertheless, on highly active days, this amount reaches up to 150 million pesos per transaction.[12]

Agreed upon operations are settled on the second working day after the transaction, i.e., the Mexican market uses a t + 2 agreement. It was not until lately that all operations were settled based on this convention. However, since Mexico became a member of various global market indexes, such as Citibank’s WGBI,[13] Banco de México authorized operations with bonos with a t + 8 date settlement without having them considered as derivative operations. This decision is in line with the developments in several Asian countries, which close their financial markets for long periods (under the former regulation, this type of transactions would have been considered similarly as derivatives operations).

Table 4.1
Secondary market trading volume
Daily average in million pesos; April 2014
Instrument	Interbank		Customers		Total
	Broker	Phone-service	Broker	Phone-service
Udibonos	2,344	781	755	4,906	8,786
Dec-14	222	61	52	566	902
Jun-16	832	174	154	1,828	2,987
Dec-17	132	26	36	175	370
Jun-19	92	148	21	76	338
Dec-20	40	7	16	141	204
Jun-22	56	28	15	173	272
Dec-25	76	19	18	330	442
Nov-35	120	55	45	106	325
Nov-40	775	262	398	1,511	2,947
Bonos	15,192	7,244	1,914	24,556	48,906
Jun-14	108	2	0	332	442
Dec-14	222	33	29	647	931
Jun-15	474	1,049	68	913	2,504
Dec-15	124	39	59	234	456
Jun-16	257	195	55	1,624	2,132
Dec-16	564	451	232	864	2,111
Jun-17	336	56	46	3,341	3,778
Dec-17	1,144	359	67	1,034	2,604
Jun-18	1,330	119	117	1,809	3,375
Dec-18	506	1,412	36	497	2,451
Jun-20	383	99	38	277	798
Jun-21	302	64	24	464	853
Jun-22	688	821	11	1,095	2,614
Dec-23	723	172	41	841	1,777
Dec-24	3,444	876	315	4,068	8,702
Jun-27	221	123	2	487	833
May-29	399	293	18	852	1,563
May-31	1,839	553	266	1,292	3,951
Nov-34	0	0	161	1,271	1,431
Nov-36	186	27	16	228	458
Nov-38	816	324	108	1,150	2,398
Nov-42	1,126	176	207	1,236	2,745
Source: Banco de México.

4.4 Repurchase agreements (repos)[14]

According to Mexican regulations, repos are defined as transactions through which the lender buys, for a certain amount, the legal ownership of debt securities ensuring to transfer to the borrower the ownership of the same type and amount of securities on the agreed upon date and upon payment, at the same price plus a premium. Such premium is for the benefit of the lender, unless otherwise stated.[15] Maturity dates for repo transactions are determined freely and depend on the parties involved. However, they must expire not later than one working day before the due date of the securities used in the transaction. Both the price and premium received by the lender may be denominated in local or foreign currencies or in udis,[16] regardless of the securities’ denomination.

One of the benefits of the repo market is that the lender receives a “customized” investment instrument that allows him to invest at the maturities and for the amounts preferred, always through a collateral. For the borrower, this transaction represents a quite efficient financing mechanism.

In 2000, the regulations for securities lending and securities repo operations was modified in order to be in line with the best international practices. Transactions were therefore documented using international master agreements. The new regulation even allowed foreign customers to sign ISMA PSA[17] agreements for these transactions. Another goal of the reform was collateralizing repo operations in order to reduce the credit risk on these transactions.

Currently, the daily trading volume of government securities repos is of 720 billion pesos. However, this volume is concentrated in short terms: 97% is for 1- to 3-day terms, while the remaining 3% is for terms shorter than one month. As for government securities that are mostly used in repo operations, bondes D account for 44.6% and BPAs for 26.5%. Banco de México publishes daily information on the repo market trading volume.[18]

Credit institutions and brokerage firms are the main participants of the Mexican repos market. These institutions may act either as lenders or borrowers.[19] Generally, banks and brokerage firms use repos as an instrument to finance through their customers their open positions with securities. In addition, many of them also take advantage of repos flexibility to invest their liquidity. Sometimes they use this tool for short positions buying government securities through repo agreements and simultaneously selling them directly.[20] Other major participants of this market are the corporate treasuries of the main national companies and treasuries of many of the public agencies which generally invest their cash surpluses in these instruments. Mutual funds and, to a lesser extent, Siefores and insurance companies, are also key players in this market.

Finally, Banco de México also plays an important role in this market, since a significant part of the liquidity that is being regulated in the financial system is performed through short-term credits collateralized with government securities, and which are quite similar to repos.

Box 4.1
Monetary policy implementation through the secondary market

Introduction

The main goal of Banco de México is to guarantee the peso’s purchasing power stability, i.e., to guarantee price stability.

Conceptual framework

Central banks have no direct control over inflation or its determining variables. Based on this premise, central banks have the necessary tools to directly affect a group of nominal variables which, in turn, have an impact on inflation determinants. In economic theory, these nominal variables are known as operational targets and include, among others, the exchange rate, the short-term interest rates, and the banks’ accounts in the central bank. When implementing monetary policy, the central bank must select one of these operational targets. For Banco de México, the operational target is the overnight (1-day) interbank interest rate.[21]

This interest rate operational target offers several advantages:

1. It facilitates the understanding of monetary policy actions and their effectiveness.
2. It provides greater stability to short-term interest rates and greater relevance to monetary policy all along the yield curve.
3. It adjusts monetary policy implementation to that of other central banks worldwide.

Monetary policy tools

In order to meet its monetary policy operational target, Banco de México has several instruments available to manage the liquidity in the Mexico’s financial system and prevent it from affecting negatively money market interest rates and, eventually, inflation. At present, the bank uses the following tools to achieve its target:

1. Monetary Regulation Deposits (Depósitos de Regulación Monetaria, DRMs)
2. Open Market Operations (Operaciones de Mercado Abierto, OMAs)
   1. Auctions of short- and long-term government securities for monetary-regulation purposes.
   2. Liquidity-providing and funding auctions.

A. Monetary Regulation Deposits (DRMs, for their acronym in Spanish)

DRM is one of the instruments available by Banco de México to “sterilize” the excess of liquidity in Mexico’s financial system. These are mandatory long-term deposits from national credit institutions in the central bank. These deposits have an indefinite maturity date and generate yields equivalent to the interbank funding rate. They differ from the reserve requirement used by other central banks.[22] DRM may be used as collateral in Banco de México’s transactions with banking institutions such as in liquidity–providing auctions, for instance, or when a credit operation is performed using the quote of the interbank equilibrium interest rate (Tasa de Interés Interbancaria de Equilibrio, TIIE), in the payment systems, to prevent overdrafts.

B. Open Market Operations (OMAs, for their acronym in Spanish)

1. Short-, medium- and long-term government securities for monetary-regulation purposes auctions.

The purpose of the auctions for short- and long-term government securities for monetary regulation is to withdraw liquidity from the money market. At present, Banco de México sells in auction instruments issued by the Federal Government.[23] Cetes auctions are used to withdraw excess liquidity in terms of up to 1 year. On the other hand, 3-, 5-, and 7-year bondes D auctions are used for withdrawing liquidity in the medium- and long-term. The amount of these transactions is fixed according to liquidity management forecasts and policies set by Banco de México’s Governing Board. The sale of securities for monetary regulation purposes is completely independent from the operations the central bank carries out in its role as financial agent of the Federal Government and IPAB.

2. Liquidity-providing and deposit auctions

Banco de México balances the excess or lack of liquidity in the interbank market through its liquidity-providing and deposit auctions. The conditions under which Banco de México supplies or withdraws liquidity ensure the fulfillment of the overnight interbank funding rate target. These auctions balance liquidity in the system so that the accrued balance of the bank’s current accounts in Banco de México totals zero at the end of every day. Credit auctions must be collateralized through government securities, monetary regulation deposits or dollar deposits in the central bank.

4.5 Securities lending

Securities lending is a financial transaction through which the legal property of securities is transferred by the holder, or lender, to the borrower. The later must restore, at the maturity of the agreed upon term, the corresponding value in securities (from the same issuer and, if applicable, for the same nominal value, type, class, series, and maturity date), as well as a premium on behalf of the lender, unless otherwise agreed.[24]

Figure 4.1 Securities lending diagram

Source: Prepared by the author.

Securities lending operations in Mexico must be performed using the master agreement jointly approved by the Mexican Banking Association (Asociación de Bancos de México, ABM), the Mexican Brokers’ Association (Asociación Mexicana de Intermediarios Bursátiles, AMIB), and the Mexican Pension Funds Administrators’ Association (Asociación Mexicana de Administradoras de Fondos para el Retiro, Amafore. This contract must be structured according to the best international practices and therefore include the guidelines established in the contracts for such transactions approved by the Public Securities Association (PSA), the Bond Market Association, and the Securities Industry Association (SIA). Also, the lender’s obligation to collateralize the loan transaction must be agreed upon, as well as the procedure to follow in the event the securities loaned or used as collateral are no longer listed at the stock exchange.

A deep and liquid securities lending market is crucial for the development of the secondary market. Particularly, securities lending is the most important tool used by institutional investors to lend their securities and obtain and additional yield. For financial intermediaries, it represents the most adequate instrument to request borrowed instruments and take short positions in some securities.

Nowadays, there are two private agencies in Mexico that provide securities lending services to banks, brokerage firms, and investors in general: Indeval,[25] through its Valpre system, and Accival, through its Accipresval system, which is focused mainly on institutional investors, Siefores, insurance companies, and mutual funds operators. Besides, there is also the securities lending facility of Banco de México which, in contrast with other facilities, is only available for market makers.

4.5.1 Private institutions offering securities lending services

The institutions offering the securities lending service do not borrow or lend securities on their own behalf; their role is to provide and manage the system through which the various intermediaries can carry out lending transactions. By means of these institutions, brokerage firms, banks or any investor may enter positions offering or requesting securities in loan, establish or manage the necessary collaterals to carry out the securities lending, verify the number of operations generated and, finally, determine the premium, the amount and term of the securities requested for each position.

All instruments participating in securities lending must be listed in the National Register of Securities and Brokers (Registro Nacional de Valores e Intermediarios, RNVI) and deposited at Indeval. In order to carry out securities lending operations involving low or nule trade volume securities or securities that are not classified according to the Mexican Stock Exchange criteria, (Bolsa Mexicana de Valores BMV), the borrower must obtain and submit before Indeval the previous authorization from the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV).

As in any loan, collaterals backing up the loan granted must be created for each and every type of securities. For each registered transaction, the collateral may be constituted using securities (through the institution providing the service) or cash (through a trust). Government securities, high and low traded securities (according to the trading volume indexes of the Mexican Stock Exchange), mutual funds’ equity and securities, and bank securities may be used as collateral.

The amount the borrower must leave as collateral depends on the security granted in loan, since each instrument has a coverage factor. Indeval values collaterals daily at the close of transactions and may carry out “margin calls” for the collaterals to be covered or may instruct the release of excess collateral to use them, as needed, on the next working day.

At the time the securities lending transaction takes place, the institutions offering this service are in charge of delivering and safekeeping the securities in loan as well as of managing the collateral submitted. In the event the securities are not delivered 48 hours after the loan matures (typically over the collateral), the institution providing the securities lending service is responsible for selling the collateral and delivering the cash to the lender. The transaction requirements of each institution include the signing of a trust adherence contract and of a contract setting forth the rights and duties of both borrowers and lenders in the securities lending transaction. It is worth pointing out that in order to participate in securities lending transactions, the interested party must necessarily have access to the Indeval system and have a securities custody account. Lenders must also specify the authorized counterparties, the credit lines with each and the collateral they are willing to accept in each case. These specifications are entered into the system and the institutions monitor the compliance to each and every parameter.

In a securities lending transaction, institutions (Valpre and Accipresval) charge a fee additional to the premium agreed upon in the transaction. This fee is equivalent to 15% of the premium value in the case of lenders (usually Siefores), and to 5% in the case of borrowers (usually brokerage firms and banks).

4.5.2 Banco de México’s securities lending facility[26]

The securities lending facility of Banco de México is only accessible to market makers. The market makers interested in this facility sign a contract that establishes the details of the transactions, the duties and obligations of the parties and the procedure to create and cancel the corresponding collateral. The term for securities lending transactions is of one working day and they may be renewed daily. Each market maker may request a loan for any effective issue of cetes, bonos or udibonos. The maximum amount of each instrument that may be requested is 4% of the amount outstanding of the corresponding issue, as long as the requested total lending amount does not exceed 2% of the amount outstanding. The maturity of the requested government securities must be at least two working days after the loan’s maturity date.

The premium to be paid to Banco de México for each cete or bono lending transaction is calculated by multiplying the weighted government funding rate by a factor determined on the basis of each market maker’s operation in repos and securities lending transactions. The calculation of this factor is carried out monthly, starting on the 16th day of each month and concluding on the 15th day of the following month, in order to apply it as of the first working day of the following month. In the case of banks that become part of the market maker list, the factor applicable during the first two months after being incorporated to the list is of 5%.

In the case of udibonos, the premium to be paid for each securities lending transaction is 7% of the weighted government funding rate.

4.6 Stripped securities

In Mexico, long-term fixed rate instruments, both in pesos and udis, may be stripped. This means that the payment of interest (coupons) and of principal can be documented independently as a zero-coupon instrument. For example, a 5-year bono that pays interest on 10 different dates and the principal at maturity can be documented and stripped into 11 different zero coupons (one per each interest payment and one for the principal).

When an instrument is stripped, its market risk profile changes, although its credit risk remains unchanged. The main advantage of stripping interest and principal of fixed rate bonds is offering investors the possibility of choosing from a wide range of short, medium and long term zero-coupon government securities. This segregation may be particularly useful for institutional investors, such as insurance companies, who are looking for investments that adapt to the market risk of their liabilities. Nevertheless, this market has developed slower than expected in Mexico.

4.7 Market makers[27]

One of the most important actors in the development of the Mexican market has been the market maker figure, which was created for the first time in 2000. Market makers have helped to increase secondary market liquidity substantially since they are forced to provide bid and ask prices of government securities.

4.8 Price vendors[28]

In order to ensure a fair valuation of financial instruments, a valuation committee was established in the mid-nineties, which comprised both authorities and members of the financial sector. The main role of such committee was to establish the estimation guidelines and criteria for price valuation. Estimations were carried out by the Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV). By the end of the nineties, however, and in order to standardize and provide higher accuracy in the valuation of financial intermediaries’ holding of securities, the concept of price vendor was introduced.

Price vendors are in charge of calculating the updated valuation prices for outstanding securities in the market. They must therefore display two main characteristics: they must be widely recognized experts in financial instruments’ valuation and have no conflicts of interest. There are two price vendors in Mexico: Proveedor Integral de Precios (PIP) and Valuación Operativa y Referencias de Mercado (Valmer).

Price vendors in markets may facilitate the development of local market reference indexes. For example, PIP has two government bond indexes, while Valmer has six indexes referenced to bonos. Regarding cetes, PIP has seven indexes and Valmer six. These indexes are extremely useful tools in the construction and maintenance of investment portfolio, which may be used by investors as benchmarks.

In Mexico, price vendors are regulated by the CNBV. Among their obligations are:

• To inform the CNBV daily the prices calculated for the instruments, as well as any unforeseen changes in the valuation procedures.
• To keep for as long as five years the standard valuation prices and the inputs used in the calculations.
• To have a valuation committee that reviews methodologies, settles disputes and proposes improvements.
• To offer information to customers through different media.

4.9 Firms that operate over-the-counter trading systems (brokerage firms or “brokers”)[29]

The Mexican bond market is operated either through telephone services or by brokers. The later offer interbank intermediation or brokerage services in financial markets. By means of electronic platforms, brokers facilitate the transactions among banks, stock markets, Siefores and insurance companies, by providing timely access and generating valuable information for these institutions.

Brokers take no positions themselves, they only facilitate the operations between intermediaries and customers when selling and buying securities. In certain cases, they substitute the most basic contact sources, such as phones. These companies foster competition by facilitating the communication between supply and demand in the market. Moreover, the services of brokers have increased the speed at which real-time information on market prices and transactions is spread, hence improving transparency in markets and creating new structures for the automatic realization of transactions.

According to the definition of the International Monetary Fund (IMF), the Mexican market may be classified as a periodic market, with working hours from 7:00 a.m. to 2:30 p.m. Most transactions take place during these hours, as compared to most developed country markets, which operate nearly for 24 hours. However, since the entrance of Mexico to several investment indexes, some trading offices implemented 24-hour trading services, although their activity after 2:30 p.m. is reduced.

Brokers have also contributed to increase the liquidity and depth of government securities’ markets. In electronic markets, quotes are centralized in a network that discloses on-screen information. Purchase and sales orders are also entered in this network and performed automatically.

Some of the advantages offered by this type of infrastructure include higher transparency in price formation and the use of the best price available in the market and real-time auditing, which means a better market surveillance.

Brokers maintain their customers’ information confidential, protecting them from the risk that could result if other banks or customers get to know the nature and size of the transactions performed or to be performed. Their income comes from the fees charged to customers. Some brokers use different collection systems, from fixed fees, for a limited number of transactions, to floating fees, depending on the number of transactions agreed upon for a certain period, usually a month.

There are five brokers in the Mexican market. Enlace was the first, starting operations in the foreign exchange market in October 1993; Remate Lince, which began operations in 1996 and Servicios de Integración Financiera (SIF) S.A. de C.V., which began operations in August 1998. There is also Eurobrokers, which started its brokerage services in Mexico in 1996 and stands out because it also operates securities known as CEDEVIS,[30] and Tradition, incorporated in May 2004.

4.10 References

• AMIS. Presentation “Préstamo de Valores” by Navarro, Eduardo. Market and Securities Lending Director of Accival, Banamex. May 2007.
• BANAMEX. Mexico’s local markets and bonos M: A primer. July 2010.
• BBVA BANCOMER. Handbook of Mexican financial instruments. 2010.
• BIS, Committee on the Global Financial System (CGFS). Financial stability and local currency bond markets. June 2007.
• BIS. The role of the central bank in developing debt markets in Mexico. Sidaoui, José Julián. June 2002.
• CONSAR. Glossary of the National Commission for the Pension System (Glosario de la Comisión Nacional del Sistema de Ahorro para el Retiro) (available only in Spanish). Last update: August 31, 2010.
• CREDIT SUISSE. Guide to Mexico local markets. September 2010.
• DEUTSCHE BANK. Guide to Mexico’s local markets. March 2008.
• HSBC. Latin America rates. Exploring LatAm instruments, regulations and market conventions. March 2010.
• JP MORGAN. Mexico 101. The 2010 country handbook. February 2010.
• SHCP. Press release on the syndicated placement of the peso-denominated fixed rate 10-year bono (Comunicado de prensa referente a la colocación sindicada del bono a tasa fija a plazo de 10 años en moneda local) (available only in Spanish). February 23, 2010.
• www.banxico.org.mx
• www.consar.gob.mx
• www.shcp.gob.mx
• www.infonavit.gob.mx
• www.bmv.com.mx
• www.indeval.com.mx
• www.mexder.com.mx

4.11 Notes

[1] Juan Rafael García-Padilla has a Bachelor degree in economics from Instituto Tecnológico y de Estudios Superiores de Monterrey, Campus Estado de México (ITESM-CEM), and a Master degree in business administration with a major in financial administration, from the University of North Carolina. He has worked in Banco de México since 2001, where he has held several positions. First, he was trader at the peso-dollar market desk, then he became head trader. Later, he became head of the Secondary Market Operations Office and deputy manager of the Market Operations Division. Currently, he is the Market Operations manager, responsible for implementing Banco de México’s monetary and exchange rate policy and Banco de México’s activities as financial agent for the Federal Government.

The author would like to thank Javier Duclaud, Jaime Cortina, Alfredo Sordo and Claudia Álvarez-Toca for their valuable comments, as well as Fernanda Ríos-Cruz, Luis Mata-Roch, Gilberto Montaño-Calvillo, and Gabriel Anaya-González for the excellent technical and research assistance.

[2] BONDES: One-month coupon government development bonds. They belong to the family of floating-rate government securities, i.e., they pay and adjust their interest rate every month. For more details, see chapter “Types of instruments and their placement”.

[3] CETES: Federal treasury certificates. They are the oldest stock market debt instrument issued by the Federal Government. They were first issued in January 1978 and since then have been a fundamental pillar in the development of the Mexican money market. These certificates belong to the family of zero-coupon bonds, which are sold at discount (below their nominal value), bear no interest and are settled at maturity. For more information, see chapter “Types of instruments and their placement”.

[4] UDIBONOS: Government development bonds denominated in investment units. They were created in 1996. Udibonos are investment instruments hedged against inflation. They are placed at long terms and pay interest every six months based on a real fixed rate determined at issuance. For more information, see the chapter “Types of instruments and their placement”.

[5] SIEFORE: Mutual fund specialized in pension funds. Siefores are mutual funds on which pension funds’ administrators (Administradoras de Fondos para el Retiro, Afores) invest workers’ resources in order to generate yields. There are four different Siefores depending on workers’ age. In the chapter “Investor base”, a table with this classification is included.

[6] Market makers are institutions that must continuously trade securities in such a way as to help investors to easily find counterparties to purchase or sale such securities at prices fixed by the market. In Mexico, market makers are credit institutions or brokerage firms that permanently use, on their own behalf, purchase and sale quotation prices of government securities and continuously carry on transactions to provide greater liquidity to the government securities market. See chapter “Market makers” for more details.

[7] Both in this chapter and in the chapter “Legal and regulatory framework. Fiscal considerations” a section referring to price vendors is included.

[8] Syndication is a placement practice regularly used for major issues, through which brokers are appointed for the distribution of securities for a fee. In this way, a broader investor base is covered, as compared to that achieved through a traditional primary auction. Some of its advantages include the following:

• New issues are ensured to have a higher initial outstanding amount.
• With a considerable placed amount, the new issues become eligible from the beginning to be included in the global fixed-rate indexes.
• A broad distribution is achieved among local and foreign investors.
• Better liquidity conditions are guaranteed in the market.

The chapter “Types of instruments and their placement” refers to this type of government securities placement.

[9] Including bonds known as BPAs. These bonds are issued by Banco de México and the Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, IPAB). The IPAB, as set in Article 2 of the Federal Revenues Law (Ley de Ingresos de la Federación, LIF) for the fiscal period of 2007, is authorized to issue bonds for savings protection purposes (Bonos de Protección al Ahorro, BPAs) through Banco de México as government broker, for the purpose of exchanging or refinancing its financial liabilities, of providing liquidity to securities and, in general, of improving the terms and conditions of its liabilities in order to meet its financial obligations. At the end of July 2011, these instruments were issued at 3-, 5- and 7-year terms and bear interest every 28, 91 and 182 days, respectively. For more details, see chapter “Types of instruments and their placement”.

[10] At a conversion exchange rate of 13.00 pesos per dollar.

[11] BONOS M or BONOS: Fixed-rate government development bonds. They are issued and placed at over-a-year maturities, bear interest every six months and, contrary to bondes, their interest rate is determined at issue and remains fixed over the life of the instrument. For more details, see chapter “Types of instruments and their placement”.

[12] Previously, the average differential between bid and offer operations was of approximately 5 or 6 basis points and the average trading volume was between 5 or 10 million pesos per transaction.

[13] The chapter “Investor base” includes a box describing the WGBI index.

[14] The chapter “Legal and regulatory framework. Fiscal considerations”, includes a box explaining the provisions set forth by Banco de México for repo and securities lending operations.

[15] Although the ownership is transferred legally, the risk of surplus or loss is entitled solely to the borrower.

[16] UDIs: “Investment units”. Their variation is in line with that of the National Consumer Price Index (Índice Nacional de Precios al Consumidor, INPC), in compliance with the procedure established and published by Banco de México in the Official Gazette of April 4, 1995.

[17] ISMA/PSAs are master repurchase agreements used as standards in the international repos market. The International Securities Market Association (ISMA) developed these contracts.

[18] http://www.banxico.org.mx/portal-mercado-valores/informacion-oportuna/operaciones-en-el-mercado-de-valores/index.html

[19] Repos are ruled in Mexico by Banco de México through circular note 33/2010, which sets forth the coverage and limitations of this type of transaction. The chapter “Legal and regulatory framework. Fiscal considerations” includes a box explaining Banco de México regulations related to this matter.

[20] Short positions are carried out when the counterparty purchases securities he is obliged to later return. If during the term agreed to return them the interest rates decrease, the counterparty will incur in a loss, as he will have to acquire the instruments to be returned at a higher price. On the contrary, if interest rates increase, he will obtain a yield.

[21] For an historical background, see Inflation Report (July-September 2007), Annex III, published by Banco de México.

[22] Reserve requirement occurs when a central bank requires commercial banks to deposit a mandatory and minimum amount of the deposits received from their saving customers (i.e., bank liabilities). The purpose is to keep these amounts as reserves to cover withdrawals by depositors. No reserve requirement is applicable in Mexico. Instead, Banco de México keeps a monetary regulation deposit over banking institutions.

As compared to the reserve requirement, such deposit does not adjust continually to the fluctuations in banks’ reference liabilities. The amount of the deposit is fixed on the basis of the target amount of liquidity that Banco de México needs to withdraw from the market and is prorated using certain bank’s reference liabilities at a predetermined date (e.g., total cash term deposits).

[23] Up until the third quarter of 2006, Banco de México issued and placed its own monetary-regulation instruments. These instruments, known as BREMs, had a floating interest rate referenced to the interbank funding rate. In 2006, both the Ministry of Finance and Banco de México agreed that the central bank would use floating-rate instruments placed by the Federal Government in its short-, medium- and long-term liquidity withdrawal operations.

[24] Although the property of securities is legally transferred, the appreciation or depreciation risk remains the same for the original security holder.

[25] INDEVAL: Private institution authorized by the law to perform as central securities depository (CSD) that offers protection, custody, management, clearing and settlement services within a setting of maximum trust and safety. For a more thorough description, see chapter “Instruments settlement”.

[26] The chapter “Legal and regulatory framework. Fiscal considerations” includes a box explaining the regulations set forth by Banco de México for repos and securities lending operations.

[27] For a broad description on the subject, see chapter “Market makers”.

[28] For information on the regulation governing price vendors, see chapter “Legal and regulatory framework. Fiscal considerations”.

[29] The section “Fiscal considerations” of the chapter “Legal and regulatory framework. Fiscal considerations” deals with the regulation imposed on brokers.

[30] CEDEVIS: Mortgage-backed securities issued by the Mexican Federal Institute for Workers’ Housing (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT). Cedevis (Certificados de vivienda) are an alternative source of financing for INFONAVIT, since the resources resulting from their placement are reinvested in new credit lines granted to workers.