III. Investor base

Claudia Tapia-Rangel[1]

This chapter analyzes thoroughly the investor base available in Mexico’s current government securities market. It describes the importance of financial intermediaries, foreign investors, and local institutional investors such as pension funds known as Siefores, mutual funds and insurance companies, among others, in this market.

  1. Introduction
  2. Impact and advantages of institutional investors
  3. Domestic financial investors
  4. Foreign investors
  5. Non-financial national investors
  6. References
  7. Notes

3.1 Introduction

The development of a government debt market necessarily involves strengthening both the supply and demand for these securities. After the 1995 financial crisis, Mexico implemented a clear strategy to strengthen the offer of government securities based on four pillars: (i) using domestic instead of external debt to finance the fiscal deficit; (ii) developing a local, long-term yield curve; (iii) promoting higher transparency and predictability in debt issues, and finally, (iv) implementing structural efforts aimed at strengthening the public debt market, such as including pension funds and insurance companies in government securities primary auctions, among others.[2]

The implementation of responsible monetary and fiscal policies led to a reduction in inflation, from 52 percent in 1995 to 3.97 percent in 2013,[3] and the ratio public deficit to GDP declined to levels below 3% during the same period (2.2% at the end of 2013).[4] The latter, together with some reforms including modifications to the pensions system, to regulations on repurchase and securities lending operations, and the creation of a Mexican Derivatives Market (MexDer), strengthened the demand for government securities and fostered a diversified investor base.

Nevertheless, the credibility on the government as debt issuer and macroeconomic and financial stability are not enough to develop a government securities market. The participation of both domestic and foreign investors is essential for achieving a consistent demand and, hence, for lowering the cost of public debt. A broader participants’ base also promotes financial innovation and the development of financial markets, as it contributes to the depth and liquidity of the secondary market.

3.2 Impact and advantages of institutional investors

The participation of institutional investors[5] has played a key role in the development, consolidation, and current operation of the Mexican debt market and, particularly, of the broader government securities market.[6] The amount outstanding of these securities went from 718 billion pesos at the end of 2000, to 5.865 trillion pesos at the end of 2013, a 717% increase. In terms of GDP, the ratio shifted from 11% to 35% during this same period.

The pension system reform, the availability of a wider variety of securities to satisfy the needs of institutional investors, and the flexibility of their investment regimes, contributed to the growth of these investors’ portfolios. Total bank assets, investment funds, insurance companies and pension funds accounted for 67% of GDP at the end of 2013, the same figure as in the end of 2000. In 2000, these same investors held 28% of the government debt versus 40% in 2013.

Demand for government securities from institutional investors varies according to their needs and investment regimes. For instance, insurance companies and pension funds generally require long-term securities due to their long-term liabilities, in terms of both nominal and real rates. Mutual funds, on the other hand, are more interested in liquid securities due to restrictions linked to the possibility of their customers demanding their funds at any time.

Table 3.1
Broader government securities holdings by sector*
Mutual funds   Foreigners
General public
Total 1/
* Unless otherwise specified, all figures and charts of this chapter are up to the end of December 2013. 
1/ Million pesos.
Source: Banco de México.

Such demand has enabled the creation of new securities. The development of a long-term reference yield curve (up to 30 years) has set the basis for the development of derivatives markets, which have interest rates as underlying, a corporate debt market, stripped bonds[7] market and an asset-backed securities market.[8]

This broader base of local institutional investors has contributed to stabilizing local debt markets in financial turmoil episodes during which foreign investors withdraw their capital from the country, particularly if this capital flight is not related to fundamental economy factors but to external factors that generate outflows chain. The aforementioned is the backbone for the local market during periods of risk aversion.

Finally, the constant search for better investment opportunities by institutional investors has increased the depth and liquidity of the broader government securities market. It has also fostered the implementation of new tools, such as securities lending, with an increasing active involvement of Siefores,[9] mutual funds,[10] and insurance companies. The presence of institutional investors promotes competition and greater transparency in the price formation process, hence facilitating the work of price vendors.[11]

3.3 Domestic financial investors

3.3.1 Commercial banks

At the end of 2013, there were 47 banking institutions operating in the country, 15 of which were mostly foreign-owned and 32, domestic-owned. Assets from this sector added up to 6.5 trillion pesos, accounting for 59.5% of total financial sector assets and 39.1% of GDP. The major seven banks[12] managed 78.4% of total bank assets, while the 24 medium and small banks[13] managed 11.7%. The four banks linked to commercial chains (Bancos Asociados a Cadenas Comerciales, BACC)[14] managed 2.2% and, finally, the twelve small foreign banking[15] subsidiaries, the remaining 7.7%.[16]

Commercial banks are one of the most important participants in the government securities market. They have evolved in this market along time hand in hand with financial innovation and have diversified both their functions and customer portfolio. In 1978, when the first government securities were issued, commercial banks held 3% of total outstanding. By the end of 2013, their total government securities holdings accounted for 5% of the total outstanding.

According to the IADB (2007), banks’ activity in the government debt market plays a double role: on the one hand, they keep securities in their portfolios as any other asset for the purpose of managing their balance sheets and, on the other, they are the main market operators and market makers[17] for these securities, i.e., banks actively participate on primary auctions, on the price formation process, and in providing liquidity to the secondary market.

Among the reasons for banks to keep government securities in their balances are:

  1. To guarantee financing. Government securities (mainly short-term Treasury bills) are ideal for this purpose since they generally have a liquid secondary market and can be used for repurchase operations with the central bank or other commercial banks.
  2. To obtain profits using the interest rate spread between passive rates and rates of instruments they invest. Generally, banks purchase longer term government securities and keep them until their maturity date. From an accounting point of view, these securities are seen as long-term investments that should be included in the “permanent-portfolio” based on their purchase price.
  3. To purchase and sell securities and to act as market makers in the secondary market for these securities. Their holdings are mostly small and mark to market.

1/ The figure is 10 times the indicated. 

The business sector on which different banks specialize also has an influence on the type of government securities they demand. For instance, at the end of 2013, medium- and small-size banks mainly devoted to commercial credit, kept most of their holdings in bondes D[18] and IPAB securities (BPAs) at floating rates. To date, BACC mainly involved in household lending for consumer goods acquisitions keep their holdings mostly in cetes and BPAs, while foreign bank subsidiaries, focused on securities and derivatives, invest their resources in cetes, bondes D and BPAs.

1/ The figure is 10 times the indicated. 

There is not an investment regime for banks. The Law of Credit Institutions (LIC), the General Regulations Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito), and the Regulations Applicable to Credit Institutions and Mexico’s Rural Credit Government Agency (Disposiciones Aplicables a las Operaciones de las Instituciones de Crédito y de la Financiera Rural), issued by Congress, the National Banking and Securities Commission (CNBV, for its acronym in Spanish), and Banco de México, respectively, include the guidelines banks must follow regarding the type of instruments on which they can invest. Each bank determines the structure of its portfolio based on of its own risk departments and/or on headquarters’ (foreign banks) criteria and recommendations.

3.3.2 Pension funds

Since the nineties, the Mexican pensions system has undergone significant reforms that have endow it with two relevant features: first, it is a sustainable system that protects and maximizes the value of pensions posing no risks for public finances; the second quality is related to this system’s structure, as this system is a long-term source of capital that can be used for financing both public and private infrastructure projects.

The transformation of the pension regime began in 1992 with the creation of the Retirement Savings System (SAR, for its acronym in Spanish), for the purpose of complementing the Disability, Old Age, Aging Unemployement and Death (seguro de Invalidez, Vejez, Cesantía en Edad Avanzada y Muerte, IVCM) insurance scheme, which was created by the Mexican Social Security Institute (IMSS) and operated since its founding in 1943. Unlike IVCM resources, which were linked to a sharing scheme, SAR resources had defined property rights allowing each employer to open an individual bank account for each worker, where it would deposit the employer’s contributions, which were to be paid to the worker completely at the time of retirement.

In 1997, a new reform divided the IVCM insurance scheme in two concepts: Disability and Life (Invalidez y Vida, IV) and Retirement, Aging Unemployement, and Old Age (Retiro, Cesantía en Edad Avanzada y Vejez, RCV). The basis for this new mandatory system for IMSS-insured workers is an individual savings and capitalization scheme under which each worker now pays for his/her own pension by opening an individual account in specialized financial institutions known as Pension Funds Administrators (Administradoras de Fondos para el Retiro, Afores). The worker’s contributions accumulated in this account together with those from his/her employer and from the Federal Government are then paid completely at the time of retirement.

At the closing of 2013, there were 12 authorized pension funds administrators. Their assets, at the closing of 2013, added-up to 2.1 trillion pesos, equivalent to 19.2% of the total assets of banks, mutual funds, insurance companies and pension funds and to 12.8% of GDP. The number of registered workers to that same date was 33.9 million.[19]

The characteristics of pension funds liabilities determine to a great extent the type of assets selected to invest. Due to the future obligations to be paid, these funds are traditionally considered as long-term investors. Bonos and udibonos[20] usually constitute the dominant asset in their portfolios.

Due to the long-term horizon of their investments, pension funds are natural candidates for investing in long-term assets. Nevertheless, their investment in other instruments has become more flexible along the years, hence benefiting from diversification.

Afores invest workers’ resources through Specialized Mutual Funds for Retirement (Sociedades de Inversión Especializadas en Fondos para el Retiro, Siefores). When the individual accounts system was created in 1997, Afores relied on two types of Siefores: the Basic Investment Fund and the Voluntary Contributions Investment Fund. The investment regime of both types was limited to inflation-indexed instruments (udibonos) or floating instruments (bondes), with yields sufficient to account for inflation (at least 51% of their total assets); at least 65% of securities with a maturity (or term when a variable rate is fixed) up to 183 days, no more than 10% in foreign currencies (either government debt securities or Banco de México securities), no more than 35% maximum of corporate issues and no more than 10% in AA-rated or higher rated securities.[21]

Currently, each Afore has at least a family of four Siefores on which resources are invested in different assets classes, based on the workers’ age. This approach allows offering various risk-return options: the higher the age of the worker, the more conservative the investment regime, thus reducing risks.

Table 3.2
Classification of Siefores by age of workers
Básica 1
Básica 2
Básica 3
Básica 4
60 years and over
46 to 59 years
37 to 45 years
36 years or less
Source: CONSAR.

Contrary to the above mentioned, the current regime is focused not only on safeguarding the workers’ resources, but on allowing workers to diversify their investments and to take calculated risks to maximize the yield of the resources managed by each Siefore.

The entire Siefores family may invest all its assets in AAA-rated securities and government securities, as well as 50% and 20% in AA-rated and A-rated securities, respectively. Siefores may also invest up to 30% in foreign currencies and 20% in foreign instruments. Likewise, and within the limits authorized for each type of Siefore, they may invest in equities, structured instruments, asset-backed securities, FIBRAs,[22] and derivatives.

Besides serving as a guide on the type of securities Siefores may invest in, the investment regime also sets limits to risk of market, credit, concentration, and counterparty they may assume. The following table summarizes the current investment regime:

Table 3.3
Siefores investment regime
Limits by type of Siefore Básica 1/
Market risk
Differential of the conditional value at risk 2/
≤ 0.3
≤ 0.45
≤ 0.7
≤ 1
Equity 3/ 4/
Foreign exchange instruments (USD, euros, yens and/or others 
for stock market indexes) 3/
Concentration risk by issuer or counterparty 3/
On the same issue (Max.) 5/
{35; 300 mp}
{35; 300 mp}
{35; 300 mp}
{35; 300 mp}
Domestic 6/
Common debt from mxBBB to mxAAA or in foreign currency from BB to AAA
Subordinated debt from mxBB+ to mxBBB- or in foreign currency from B+ to BB-
Foreign securities from BBB- to AAA single issuer or counterparty 7/
Other limits 3/
Foreign securities (debt rating at least A-)
Asset-backed securities 8/
Structured instruments 9/
Inflation linked 10/
Yes (51 min)
Conflicts of interest 3/
Inter-entity instruments 
Instruments from entities with a patrimonial link to Afore 11/
Vehicles and contracts
Mutual funds
1/ All limits are maximum percentages, except for inflation linked coverage, which is the minimum percentage of assets (see note 10/).
2/ As a percentage of the assets managed directly by the Siefore. The Risk Assessment Committee (Comité de Análisis de Riesgos,CAR) might fix tighter limits. Insofar as the criteria set out in the First Transitory Rule of the IR is fulfilled, Siefores must maintain the following VaR limits on the assets managed by the Siefore: SB1 = 0.7, SB2 = 1.1, SB3 = 1.4 and SB4 = 2.1. 
3/ As a percentage of total assets of the Siefore, incuding assets managed by asset managers. 
4/ Includes individual equities, IPOs, authorized stock market indexes (domestic and international) and mandatory convertible securities in domestic issuers' equity.  
5/ Applies to the holdings of all Siefores Básicas managed by the same Afore, for domestic and foreign debt and structured securities. This limit might be exceeded by CKDs if the criteria foreseen in IR are fulfilled. 
6/ Rating of mid-term and long-term issuances and of the issuer and guarantor, when necessary. Repos and derivative operations are included within these limits.
7/ For foreign securities with ratings under A- and no less than BBB-, the Afore shall comply with the IR. 
8/ Including asset-backed securities that comply with the Ninth Transitory Rule of IR, which are considered to be issued by an independent entity.  
9/ Includes CKDs and FIBRAs. Structured securities are divided in a) Infrastructure or real estate, and b) Others. 
10/ Minimum limit of investment in financial assets that ensures at least the same performance as Mexico's inflation. 
11/ Restriction included in the SAR Law (Ley del SAR), art. 48, section 10. Increased exceptionally to 10%. When the entities have patrimonial link to the Afore, the limit is 0%. 
Source: CONSAR.

3.3.3 Insurance companies

Insurance companies represent an important segment of institutional investors. They also have a significant role in financial markets as long-term financing providers for banks and other sectors.

At the closing of 2013, there were 103 insurance companies in Mexico, 58 of which were mostly foreign-owned and 45 domestic-owned.[23] At this same date, the resources managed by these companies were 727 billion pesos, equivalent to 6.5% of the total assets of banks, mutual funds, insurance companies and pension funds, and 4.4% of GDP.

In Mexico, the insurance sector concentrates its activity on life insurance, which accounted for 41% of the total portfolio at the closing of 2013, followed by automobile insurance, with 20% of the portfolio, damages (excluding automobiles) with 19%, accidents and medical insurance with 15%, and finally, pensions, with 6%.

Like pension funds, asset management in the insurance sector relies considerably on their liabilities and on the type of risks covered by its business model. In general terms, insurance companies may cover risks related to property and accidents, life risks and credit risks related to investment in financial instruments. Life insurances regularly cover the financial aftermath in the event of death or disability of the insured and also include other products that foster saving in order to have financial solvency at retirement. Property insurance coverage includes events or disasters affecting property, either personal or real estate; home insurance and insurance against damages are examples of insurances protecting family or business assets from disasters like earthquakes, floods, theft and fire, among others.

Medical insurances cover hospital expenses resulting from a disease or accident that affects the health of the insured, while accident insurances cover the resulting loss of body parts or death. Credit insurances protect both the portfolio and risk of a company in the event of default from its customers due to insolvency, encumbrances and delinquency, among others.

Since most liabilities of insurance companies are long term, they are natural candidates for investing in long-term assets. They are thus major participants in both government long-term securities and inflation-linked bonds (udibonos) markets.

The assets on which insurance companies invest are determined by the Technical Reserves Investment Rules[24] of Mutual Insurance Institutions and Insurance Companies (also known as the Rules) issued in 2000. The main purpose of the Rules is to set an investment framework ensuring liquidity and solvency of insurance companies through an adequate diversified portfolio, without letting aside the financial risks they face.

In an effort to adapt to the constant financial innovation and development of new markets, the Rules include more flexible investment criteria for products such as derivatives, instruments replicating stock indexes, debt instruments, asset-backed securities and structured instruments,[25] among others. Besides promoting new markets participation, the Rules also ensure that the provisions to face assumed obligations are backed-up by safe, profitable and liquid investments.

Regarding investment in government securities, the regime allows an investment of up to 100% of the technical reserves in securities issued or backed-up by the Federal Government. Likewise, it points out that repo transactions can only be done when the companies are acting as repo buyers[26] and exclusively for government securities.

The Rules also set limits per type of securities, instruments, goods, credits, repurchases or other assets to prevent excessive concentration on any, as well as limits per issuer or debtor to prevent risks by sector of economic activity and patrimonial nexus.

3.3.4 Mutual funds

Mutual funds play a key role in Mexico’s money market as they represent an access to stock market for the small and medium investor. Currently, there are four types of mutual funds:[27] Equity Investment Funds (Sociedades de Inversión en Renta Variable, SIRV), Debt Investment Funds (Sociedades de Inversión en Instrumentos de Deuda, SIID), Capital Investment Funds (Sociedades de Inversión en Capitales, SIC) and Special Purpose Investment Funds (Sociedades de Inversión de Objeto Limitado, SIOL). Those accounting for the highest shares in the Mexican financial markets are SIRV and SIID.

At the closing of 2013, there were 28 mutual funds operators[28] and 565 mutual funds in Mexico. The assets managed by these funds added up to 1.7 trillion pesos at the end of 2013, equivalent to 14.8% of banks, mutual funds, insurance companies and pension funds’ total assets and to 9.9% of GDP. At the end of 2013 there were 267 SIRV with assets amounting to 357 billion pesos, and 298 SIID, with assets worth 1.3 trillion pesos.[29]

Table 3.4
Limits of insurance companies' investment regimes 1/
I. Market risk
a) Government-backed or government-issued securities
a.1) Securities issued by descentralized agencies, state-owned companies and local/municipal govts.
b) Securities denominated in local currency or issued by credit institutions and international financial agencies 2/
c) Securities issued by entities other than those specified in  a), a.1) and b)
c.1) Securities issued by foreign issuers
c.2) Structured notes
c.3) Securities linked to the same economic activity
c.4) Securitized instruments placed by an independent issuer 
c.5) Structured instruments
d) Discount, rediscount, real estate, mortgage-backed credit or collateralized operations
d.1) Discount and rediscount operations
d.2) Collateralized credits
d.3)  Mortgage-backed securities
d.4) Real estate
e) Repos and securities lending
f) Securities issued by mutual equity funds and vehicles to capitalize domestic enterprises 3/
g) Premiums 4/
h) Reinsurance companies' share 5/
II. Concentration risk by issuer and counterparty  6/
a) Government-backed and government-issued securities
a.1) Securities issued by decentralized agencies, state-owned companies and local/municipal govts.
a.1.1) Securities with acceptable rating
a.1.2) Securities with good rating, including a.1.1)
a.1.3) Securities with high rating, including a.1.1) and a.1.2)
a.1.4) Securities with outstanding rating, including a.1.1), a.1.2) and a.1.3)
b) Securities denominated in local currency issued by international financial groups in local currency 2/
b.1) Securities with acceptable rating
b.2) Securities with good rating, including b.1)
b.3) Securities with high rating, including b.1) and b.2)
b.4) Securities with outstanding rating, including b.1), b.2) and b.3)
c) Securities issued by entities other than those listed in  a), a.1) and b)
c.1) Securities with acceptable rating
c.2) Securities with good rating, including c.1)
c.3) Securities with high rating, including c.1) and c.2)
c.4) Securities with outstanding rating, including c.1), c.2) and c.3) 
d) Equity issued  by private firms and vehicles replicating stock market indexes 7/ 
e) Principal unprotected structured notes 
f) Senior trust bonds
g) Equities from sectors with common institutional risks 8/ 
h) Equities and securities issued, endorsed or accepted by institutions belonging to the same financial group
i) Equities and securities issued, endorsed or accepted by interrelated funds
j) Securities issued by mutual equity funds and vehicles to capitalize country's companies 9/
1/ Estimated based on net investor base; i.e., on the sum of balances of technical reserves, deposit premiums, and resources from life insurance funds minus risk reserves for premiums ceded to reinsurers for damages and/or accidents and illness at the end of the month. 
2/ Covering all financial organizations to which Mexico belongs as long as the Ministry of Finance (SHCP) authorizes such investment. 
3/ Not exceeding in total the 40% as set in item I.c)
4/ Receivable for life insurance, and debtor for damage and/or accidents or illness premiums. 
5/ For ongoing risk of damages and/or accidents and illness, transferred to reinsurers registered in the General Registry of Foreign Reinsurers authorized to take Reinsurance and Rebonding for the country (Registro General de Reaseguradoras Extranjeras autorizadas para tomar Refinanciamiento y Reafianzamiento del país, RGRERRP). 
6/ The rating levels in this section are published by the CNSF through administrative regulations. 
7/ Different from those listed in a), a.1) and b).
8/ Except for the processing sector, which has a limit of 20%, not exceeding 10% for each of its components.
9/ Not exceeding in total the 7% set forth in item II.d).
* According to the risk reserve.
Source: Based on information from the National Insurance and Bonding Commission (CNSF, for its acronym in Spanish).

Securities on which mutual funds invest depend to a great extent on their diversification criteria and on the type of fund. Most times, in view of the fact that mutual fund stockholders may demand at any time the amount invested, mutual funds are very cautious regarding the liquidity of their investment instruments. Additionally, their high concentration in short-term securities is due, on the one hand, to the investment patterns of savers in Mexico, who are always seeking liquidity and, on the other, to mutual funds’ obligation to keep a minimum percentage in 3-month or less than 3-month securities and operations.

Mutual fund regimes vary according to the type of fund. However, there are certain general criteria established by the CNBV: maximum limits in the concentration of securities from the same issuer; minimum limits in securities and operations of 3-month or less-than-3-month maturity (SIRV and SIID), and minimum percentages of investment in shares and other equities (SIRV). The regime is also subject to the conditions set forth in the fund’s bylaws and public information brochures. SIRVs and SIIDs may invest the resources managed in values listed in the National Register of Securities and Brokers (Registro Nacional de Valores e Intermediarios, RNVI) and the Quotations International System (Sistema Internacional de Cotizaciones, SIC). Investment in foreign securities, derivatives, structured securities, capital trust certificates[30] and asset-backed securities are also allowed and 100% of their total asset may be invested in securities issued or guaranteed by the Federal Government.

Tabla 3.5
Mutual funds investment regime 1/
Mutual equity and debt funds 2/  
Financial securities and  instruments related to the same issuer or financial organization
Total issuers or financial entities that individually represent more than 15% of the total assets
Securities of the same issue or series
Must maintain a minimum percentage in liquid securities and securities with maturities under 3 months 3/
Mutual debt funds
Long term (duration of assets that qualify for investment above 3 years) 4/
Medium term (duration of assets that qualify for investment between 1 and 3 years)
Short term (duration of assets that qualify for less than 1 year)
Money market mutual funds 
a) Government- and Banco de México-backed securities
b) Bank deposits and debt instruments issued by credit institutions with either of the highest short-term ratings 
c) Overnight repos 
At least 40
d) Bank deposits and debt instruments issued by the same credit institution
e) Bank deposits and debt instruments issued by the same development bank
Assets duration under 1 month. Maturity of  a) and b) shall not exceed 1 year.
Mutual equity funds
Specialized in shares
At least 80 in shares 5/
Mostly shares
80 maximum, 50 minimum in shares 5/
Mostly debt securities
80 maximum, 50 minimum in debt securities
Specialized in debt securities
80 minimum in debt securities
Specialized mutual funds
Specialized in government, private, sectorial, regional and other types of securities 
At least 80 of the specialized assets
Specialized in replicating the performance of a certain index, interest rate, exchange rate or collective investment mechanism operating in stock markets
At least 80 of the specialized assets and beta 6/ between the specialized variable and the price of its share between 0.95 and 1.05 units 
Discretional mutual funds
Structure based on an exposure limit relative to a risk or yield target
The model or methodology used to select the asset for investment must be clearly and precisely specified in its prospectus
1/ Limits acoording to total assets of mutual funds. 
2/ Excluding the securities authorized by the securities commissions of the selected countries, those issued by central banks (including the European Central Bank), those issued by international organizations or institutions to which Mexico belongs, those issued or backed by the Federal Government and Banco de México, those acquired to replicate the performance of a public index, the capital stock of mutual equity funds or mutual debt funds, the notes with yield payable at maturity, and certificates of deposit for terms under 1 year, demand cash deposits in banks, and securities issued by banks for terms under a year. It does include unsettled repo and securities lending transactions and positions on derivatives settled with the same financial institution.  
3/ Those representing up to 50 percent of the daily average trading volume during the last 60 working days on the relevant market. 
4/ The duration of assets for investment is the sum of the average weighted maturity flows of each asset allocated in the funds' portfolio, determined by the price vendor selected by the mutual fund, weighted by its share on it.  
5/ Comprises shares and other securities or agreements representing securities or referred to them. 
6/ Refers to the measure of price volatility of a mutual fund share, due to changes in the referred variable and is estimated taking into account the last one hundred observations. 
Source: Based on information from the National Banking and Securities Commission (CNBV, for its acronym in Spanish). 

3.4 Foreign investors

After the sudden flight of foreign capital in the mid-nineties, the government’s efforts to reduce its dependency on foreign financing gave way to the strengthening of the local debt market. The implementation of structural reforms and of a clear and defined debt management strategy by the Federal Government contributed to increase foreign investors’ interest in participating in the local debt market.

Since 1999, foreign investors’ participation in the broader government securities market has included the purchase of cetes. In 1991, foreign investors held 6.9% of the total outstanding broader government securities. By 2006, their share decreased to only 1.7%, but by the end of 2013, it rose again to 62%.

Mexico has become one of the best alternatives for foreign investors due to its attractive investment regime that includes a friendly fiscal scheme and no restrictions for the entrance and exit of foreign capitals. The sound macroeconomic foundations recently observed, the responsible management of public finances, and the development of financial markets that allow for risk hedging of both derivatives and foreign exchange, have also contributed. As a result, the foreign holding of long-term fixed rate securities denominated in pesos (bonos) has also increased.

Foreigners’ holdings of bonos shifted from 95 billion pesos at the closing of 2005 to 1.1 trillion pesos at the closing of 2013, a 1,101% growth. To this last date, foreigners’ holdings in bonos accounted for 62% of their total holdings in government securities, 56% of the total bonos outstanding and 20% of the total domestic debt instruments.

Various factors account for the increased interest of foreign investors in the Mexican government debt market. One of them is related to the higher interest rates in Mexico as compared to those in other countries where investors try to find financing to later invest with better conditions in Mexican government securities (carry trade). But the most important factor is global investors’ constant search for benefits from diversification. As a result, international financial institutions publish investment indexes which global investors seek to replicate. In the beginning, emerging market global indexes only included their foreign debt (EMBI) and equities (MSCI-EM). Later, with the creation of global investment indexes referenced to fixed-rate government debt a new segment began to operate in the asset management sector, which triggered the participation of global funds and therefore raised the potential demand of foreign investors for these instruments.

The Mexican Federal Government debt is included in the following indexes:

  • Government Bond Index Broad-JP Morgan
  • Government Bond Index Emerging Markets-JP Morgan
  • Universal Government Inflation-Linked Bond Index-Barclays
  • Global Aggregate Index-Lehman/Barclays
  • Emerging Markets Government Inflation-Linked Bond Index-Barclays
  • Global Government Bond Index-Merrill Lynch
  • Global Government Inflation-Linked Index-Merrill Lynch
  • Global Emerging Markets-Markit Group
  • World Government Bond Index-Citigroup

Box 3.1.
World Government Bond Index (WGBI)

The World Government Bond Index (WGBI) is one of a series of investment benchmarks for the government debt market calculated and published by Citibank. Its main purpose is to provide investors with a global reference for this market while at the same time give them access to purchase any of the issues that make up the Index.

The WGBI consists of approximately 958 bonds issued by sovereign issuers which have highly developed and liquid markets. The index is currently made up of the debt instruments of 23 countries, which include the European Government Bond Index (EGBI) and debt instruments of 14 additional countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Malaysia, the Netherlands, Norway, Poland, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States, and Mexico.

According to Citibank figures, at the end of April 2014 the market value of funds referenced to the WGBI totaled approximately 20.9 trillion dollars.

Mexico was issuer number 24 in entering the WGBI (Portugal was later removed) and the first Latin American country to be included in this index. The initial weight of Mexican securities in the index was 0.64%, with a market value of around 100 billion dollars. The weight of each country is reviewed every month together with the rebalancing of the index.

The criteria issuers must maintain to be part of the WGBI include requirements in terms of issues size, issuers credit rating, and barriers to entry in each market.

As for the size of issues, they must total at least 20 billion dollars of yearly amount outstanding. In Mexico, due to the method of syndication for new benchmarks, new issues are rapidly gaining liquidity. As for credit ratings, they should be BBB-/Baa3 (at least) as granted by S&P or Moody’s for all issuers. S&P has rated the local long-term Mexican debt as A and Moody´s as A3. Finally, fixed-rate long-term Mexican securities may be settled through Euroclear, ensuring access to foreign investors and therefore complying with the requirement of lower access barriers.

The Ministry of Finance announced Mexico’s inclusion in the WGBI on February 11, 2010. From that date and up to its formal inclusion on October 2011, the holdings of long-term securities by foreign investors increased by 109 billion pesos.

The significant participation of foreign investors in the local debt market brings along several benefits, both for the Federal Government and the development of markets. The growing interest of foreigners in Mexican securities provides the government with enough resources to reduce its financing costs. At the same time, the inflow of foreign capital allows national investors to channel the resources used to finance the government to other productive activities through, among others, the purchase of corporate bonds.

The participation of foreign investors also increases the investor base for the broader government securities market and promotes depth and liquidity, fostering the development of the debt market. By promoting higher levels of competition in financial services, foreign investors also contribute to financial innovation, triggering technology transfer and the adoption of better practices.

Nevertheless, there are risks associated with their participation in the government securities market. One of the risks is the growing interdependency of the Mexican economy, which makes it more vulnerable to volatility in international financial markets.

In this regard, foreign investors are more susceptible to lose confidence in a country’s solvency when they perceive a deterioration of the economy or unhealthy fiscal policies, a weak banking system or political instability. In those scenarios, they can abruptly withdraw their investments and generate distortions in the market.

3.5 Non-financial national investors

Companies and individuals in Mexico may invest in the government securities market through brokers and mutual funds. Both of these often require a minimum amount for opening and keeping an account and most of them charge fees for account management and operation.

Nonetheless, by the end of 2010, and in order to offer more alternatives for small and medium investors, the Federal Government launched the Cetesdirecto[31] program. It is a mechanism in which retail investors may purchase and sell government securities[32] through electronic means (Internet), by phone (call centers) or through a customized customer service window (Bansefi,[33] for its acronym in Spanish).

Cetesdirecto offers several advantages, both for the Federal Government and small investors. For the government, the introduction of this mechanism promotes medium and long-term domestic saving, as well as the use of financial services among the population. At the same time, it provides higher competitiveness, efficiency and depth to the financial system. Also, by providing the general population with an opportunity to purchase securities, it fosters a better understanding of the management and characteristics of the government’s debt and contributes to broaden and diversify the Federal Government’s investor base.

For the small and medium investor, Cetesdirecto represents an investment alternative that before was available only through banks, brokers and mutual funds. These institutions required a minimum investment amount and securities were only available through a basket or portfolio comprising instruments and maturity dates that not always adapted to the customer’s needs. Not to mention that yield was also subject to discounts due to account management and operation fees.

This type of government securities selling scheme has already been implemented in other countries such as the U.S., Brazil and Sweden. In the U.S., for instance, the total holding of government securities by small investors accounted for 0.22% of the total outstanding government securities at the end of 2013;[34] in Brazil, 0.56%,[35] and in Sweden, 3.66%.[36]

In Mexico, the total outstanding amount of this program up to the closing of 2013 was 1.141 billion pesos, which accounts for 0.02% of the total outstanding. As for the distribution of securities acquired by the general population, 89.5% corresponds to cetes, 0.8% to bondes D, 4.8% to bonos, and 4.9% to udibonos.

3.6 References

  • BANXICO / SIE / CIF. [Retrieved from: www.banxico.org.mx]
  • Inter-American Development Bank (IADB). Los inversionistas institucionales y el mercado de deuda interna, vivir con deuda: Cómo contener los riesgos del endeudamiento público. Borensztein, Eduardo; Devoto, María Laura; Eichengreen, Barry; Fernández-Arias, Eduardo; Izquierdo, Alejandro; Levy Yeyati, Eduardo; Panizza, Ugo; Powell, Andrew; Zuccardi, Igor, and Giannoni, Gerardo. 2007.
  • BIS Quarterly Review. Reducing financial vulnerability: the development of the domestic government bond market in Mexico. Jeanneau, Serge and Pérez-Verdía, Carlos. 2005.
  • CNBV Disposiciones Aplicables a los Proveedores de Precios (CNBV Regulations Applicable to Price Vendors) [Retrieved from www.cnbv.gob.mx]
  • Tesouro Nacional (Brazil National Treasury) [Retrieved from www.tesouro.fazenda.gov.br]
  • Fondo de Cultura Económica (FCE). La Reforma y la Desincorporación Bancaria. Ortiz Martínez, G. 1994.
  • IBRD/World Bank, IMF. Developing government bond markets a handbook. 2001.
  • Swedish National Debt Office [Retrieved from: www.riksgalden.se]
  • Federal Reserve Bank of Atlanta. Nuevas tendencias de financiación en América. Tovar, Camilo E. and Quispe-Agnoli, Myriam. 2008.
  • www.amib.com.mx
  • www.cnsf.gob.mx
  • www.consar.gob.mx
  • www.shcp.gob.mx
  • www.sifma.org
  • www.treasurydirect.gov

3.7 Notes

[1] Claudia Tapia-Rangel has a Bachelor degree in actuarial science from the National University of Mexico (Universidad Nacional Autónoma de México, UNAM). She also holds a Master degree in operations research by the London School of Economics and Political Science (LSE). She began working at Banco de México in 1993. From the time she entered the central bank she has occupied several positions in the Central Bank Operations Department, in particular, being the head of Government Securities Auctions and Financial Programming. Currently, she is the head of the Securities Market Information and Analysis Department.

The author would like to thank Javier Duclaud, Jaime Cortina, Claudia Álvarez-Toca, Carlos Pérez-Verdía and Javier Pérez-Estrada for their valuable comments, as well as Ramón Figuerola, Germán Mirassou, Rodolfo Mitchell and Roberto Ramírez, for the excellent technical and research assistance.

[2] For more information, see Jeanneau and Pérez-Verdía “Reducing financial vulnerability: the development of the domestic government securities market in Mexico”, BIS Quarterly Review, December 2005.

[3] Statistics obtained from INEGI’s Economic Information Bank [Retrieved from http://www.inegi.org.mx/sistemas/bie/]

[4] Ministry of Finance (SHCP, for its acronym in Spanish) statistics from “Informe sobre la situación económica, las finanzas públicas y la deuda pública – Cuarto trimestre de 2012” [Retrieved from http://shcp.gob.mx/POLITICAFINANCIERA/FINANZASPUBLICAS/ITSSEFPDP/2012/cuarto_trimestre_2012/Informe%204o%20Trimestre%20de%202012.pdf]

[5] INSTITUTIONAL INVESTORS: Institutions having considerable investment resources as compared to the general public, such as banks, mutual funds and insurance companies, among others.

[6] BROADER GOVERNMENT SECURITIES: Securities issued by the Federal Government, the Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, IPAB) and Banco de México. The terms government securities or broader government securities will be used irrespectively henceforth.

[7] TO STRIP: To separate interest and principal payments of a security, thus generating several zero coupon bonds that mature on the same date in which interest and principal are paid. For more information, see the Rules for Stripping and Reconstituting Government Securities “Reglas para la Segregación y Reconstitución de Títulos Gubernamentales” (available only in Spanish) http://www.banxico.org.mx/disposiciones/circulares/%7BF8667E3E-2456-7DFD-6B32-2BA50647ECB8%7D.pdf

[8] SECURITIZATION: securitization of an asset (goods, mortgages and bank loans) means selling or assigning it to a special purpose vehicle. Trusts are commonly used in Mexico for this means.

[9] SIEFORE: Mutual funds specialized in pension funds. These are mutual funds on which Pension Fund Managing Companies (Administradoras de Fondos para el Retiro, Afores) invest workers’ resources to obtain a yield. There are four different types of Siefores based on worker’s age.

[10] According to the CNBV, mutual funds “are intended to purchase and sell investment assets using the resources obtained from the placement among general investors of stock representing their capital stock, as well as the procurement of services contracted and the activities set forth in the Mutual Funds Law (LSI, for its acronym in Spanish).” [Retrieved from http://www.cnbv.gob.mx/SECTORES-SUPERVISADOS/SOCIEDADES-DE-INVERSION/Paginas/Descripci%C3%B3n-del-Sector.aspx]

[11] PRICE VENDOR: According to CNBV, a price vendor is “a company whose sole purpose is to offer estimation, determination and provision of updated prices for valuing securities, financial documents and instruments.”

[12] The classification includes banks with total assets over 200 billion pesos in the balance sheet, adjusted by Repo operations. These include Banamex, Banorte, BBVA Bancomer, HSBC, Inbursa, Santander, and Scotiabank Inverlat.

[13] ABC Capital (formerly Amigo), Actinver, Afirme, Agrofinanzas, Autofin, Banca Mifel, Banco Base, Bancrea, Banco del Bajío, Banregio, Bansí, CIBanco, Compartamos, Consubanco, Dónde Banco, Forjadores, Inmobiliario Mexicano, Inter Banco, Interacciones, Invex, Ixe, Monex, Multiva, and Ve Por Más.

[14] Azteca, Bancoppel, Famsa, and Wal-Mart.

[15] American Express, Bank of America, Bank of New York, Barclays, Credit Suisse, Deutsche, ING, JP Morgan, RBS, Tokyo-Mitsubishi, UBS, and VW Bank.

[16] Figures and data from “Información Estadística de Banca Múltiple” by the CNBV [http://www.cnbv.gob.mx/SECTORES-SUPERVISADOS/BANCA-MULTIPLE/Paginas/Informaci%C3%B3n-Estad%C3%ADstica.aspx]

[17] MARKET MAKERS: Credit institutions and trading companies approved by the Ministry of Finance. Among their main duties are to offer minimum bids in each auction for cetes, bonos and udibonos as well as to list purchasing and selling prices for all terms of these securities through brokers.

[18] Bondes D are securities issued by the Federal Government denominated in pesos and with a $100-peso nominal value. They may be issued at 3, 5 and 7 years and pay a floating monthly rate.

[19] According to data and figures from CONSAR statistical information and the SAR overview [Retrieved from: http://www.consar.gob.mx/panorama_sar/panorama_sar.aspx y http://www.consar.gob.mx/SeriesTiempo/Series.aspx?cd=160&cdAlt=False]

[20] Instruments denominated in “Investment Units” (udis). Their value in pesos is revised by following the bi-weekly growth rate of the National Consumer Price Index (INPC).

[21] As published on June 1997 in the Federal Official Gazzette (Diario Oficial de la Federación), CONSAR 15-1 Regulatory Letter, Modifications to the General Rules determining the investment regime governing Specialized Mutual Funds for Retirement (Siefores), which portfolio must comprise mainly securities that preserve the purchasing power of workers’ savings.

[22] FIBRAs (Fideicomisos de Infraestructura en Bienes Raíces): Articles 223 and 224 of the Income Tax Law (Ley del Ingreso sobre la Renta, LISR) define FIBRAs as “trusts created for purchasing or building real estate intended for lease, or purchase of the right to receive income arising from lease of such property, as well as to provide financing for such purposes”.

[23] According to data from the National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas, CNSF [Retrieved from: http://www.cnsf.gob.mx/Estructura/Paginas/ASectorAsegurador2.aspx]

[24] The National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas, CNSF), in its “General Solvency Criteria”, defines technical reserves as “reserves linked directly to ongoing risks, including pending payments, provisions for contingencies and disaster funds”.

[25] STRUCTURED INSTRUMENT: A combination of financial instruments seeking to replicate a certain yield and schedule payments. Structured instruments offer payments based on stock prices, interest rates, commodity prices or foreign exchange rates (McDonald, Robert L.; Derivatives Markets; 2nd Ed.; Pearson International Edition).

[26] Repurchasee: The person purchasing the property of various debt instruments for a certain amount. The Repurchaser is the person selling the property of various debt instruments of the same type in an agreed term at the same price plus a premium. A box providing the definition of Repo is included in the chapter “Secondary market”.

[27] According to the National Banking and Securities Commission (CNBV, for its acronym in Spanish), Equity Investment Funds (SIRV) operate with securities and equities (shares and options) and debt instruments. Debt Investment Funds (SIID) operate only with public and private debt bonds and documents. Capital investment Funds (SIC) manage bonds and documents issued by companies promoted by the mutual fund and which need long-term resources. Finally, Special Purpose Investment Funds (SIOL) can invest only in assets defined in their bylaws and public information brochure.

[28] The General Rules Applicable to Mutual funds and their Service Providers (Disposiciones de Carácter General Aplicables a las Sociedades de Inversión y a las Personas que les Prestan Servicios) define operators as institutions operating the underlying assets of each mutual fund to which they provide asset management services.

[29] According to data published by the National Banking and Securities Commission (CNBV) [Retrieved from: http://portafoliodeinformacion.cnbv.gob.mx/si1/Paginas/default.aspx]

[30] According to the General Rules Applicable to Security Issuers and to Other Participants in the Securities Market (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores), published in the Federal Official Gazette of March 19, 2003, trust certificates are those that entail “…the right to participate in part of the earnings or yields of the assets or rights, or the sale of assets or rights, which are part of the equity incorporated in the trust (up to their residual value) for the purpose of investing in activities or projects of one or several firms or in the acquisition of certificates representing the capital.”

[31] See chapter “Types of instruments and their placement”.

[32] This program only considers government bonds issued by the Federal Government; it does not include IPAB or Banco de México bonds.

[33] Banco del Ahorro Nacional y Servicios Financieros, S.N.C.

[34] Treasury Direct and Securities Industry and Financial Markets Association (SIFMA).

[35] Tesouro Nacional (Brazil National Treasury).

[36] Office of the Swedish National Debt.