Post on 03-Jan-2022
Primary Dealer Systems in Government Securities
September, 2019Juan Rafael García Padilla, Director of Domestic Operations, Banco de México
INFORMACIÓN RESERVAD A2
Selected countries’ experience2
Definition, characteristics and advantages of a Primary Dealer System1
Primary Dealers System in Mexico3
INFORMACIÓN RESERVAD A3
What is a Primary Dealer System?
• A primary dealer system is an agreement between a debt management office and a group of institutions to pursue a commonstrategy in support of the functioning and development of primary and secondary markets for government securities.1
• Generally, with their status of Primary Dealers, institutions gain specific privileges and are subject to certain specialized functions orobligations within the government securities market.
Main objectives of a Primary Dealer System
1. Building a stable source of demand for securities in the primary and secondary markets.2. Providing liquidity in the secondary market, fostering efficient price formation.3. Building distribution channels and expanding the investor base, as primary dealers often act as intermediaries.4. Promote public confidence in the integrity of the government securities market.
Definition, characteristics and advantages of a Primary Dealer System
1/ “Primary dealers in government securities”, Marco Arnone and Piero Ugolini, Washington, D.C. , International Monetary Fund, 2004.
INFORMACIÓN RESERVAD A4
Potential advantages and disadvantages of implementing a Primary Dealer System
Disadvantages
1
2
3
Advantages
1
2
3
Increases and ensures coverage at primary auctions.
4
Improves secondary market conditions.
For markets in an early development stage, a PD system can help ensure the development and proper functioning of the secondary market.
In some cases, it facilitates the implementation of monetary policy.
5
Can improve government access to financing as it can foster efficient price formation in the secondary market.
Can potentially limit competition, as primary dealers acquire certain rights or advantages
over other institutions.
Requires regular measuring and monitoring to ensure compliance.
Possible misconception of debt manager guaranteeing creditworthiness.
INFORMACIÓN RESERVAD A5
Selected countries’ experience2
Definition, characteristics and advantages of a Primary Dealer System1
Primary Dealers System in Mexico3
INFORMACIÓN RESERVAD A6
Selected countries’ experience: Development of Primary Dealer SystemsYear of Establishment of a Primary Dealer System
Europe Asia North America South America
Source: Finance ministries, central banks and other national authorities.Note: If the country appears more than once it is because there were important changes in their primary dealer system. The size of the circle represents the number of primary dealers in each country.
United States (1960)
Sweden
United Kingdom
France
Austria
Finland
Portugal
Ireland
Norway
India
Hungary
Greece
Colombia
Canada
Spain
Korea
Netherlands
Portugal
Greece
Mexico
Hungary
Italy
Thailand
Norway
Japan
Iceland
Italy
Czech Republic
Spain
Belgium
Argentina
BrazilBrazil (1974)
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Before1980
INFORMACIÓN RESERVAD A7
• The selection criteria for primary dealers is related to their role in the primary and secondary markets for governmentsecurities, it also depends on the development of the country’s domestic financial market.
• Rights are arrangements that should allow the primary dealers to perform efficiently and obligations are the commitmentsthey make to perform certain activities.
Selected countries’ experience: Selection criteria, obligations and rights
Source: Finance ministries, central banks and other national authorities.
CountryMinimun
participation in every auction
Participate in every auction
Provide information
and data
Mantain a minimum
market share
To avoid distortion to
auction prices
Obligations
CountryPreferred
counterparty status
Consultation meetings
Securities lending facilities
Exclusive access to auctions
Access to exclusive
electronig trading systems
Rights
CountrySufficient
balance sheet capability
To be approved by a
regulatory agency
Minimum market share
Staff and technological
resources
Viable business plan
Selection Criteria
INFORMACIÓN RESERVAD A8
• The arrangement between primary dealers and authorities must be transparent and responsibilities clearlydefined. A continuous flow of communications among the ministry of finance, the central bank, and primarydealers is essential.2
Selected countries’ experience: Relationship with the authorities
CountryUnited Kingdom
United StatesIndiaJapanBrazil
Mexico Central Bank and Ministry of Finance
Ministry of FinanceNational Treasury
SupervisionDebt management agency
Central Bank Central Bank
Note: A survey questionnaire on primary dealers was sent by the IMF to 47 countries. Of the 39 respondents, 20 were advanced economies, 13 were emerging markets, and 6 were developing countries. Source: IMF staff survey of national authorities (2001).
Source: Finance ministries, central banks and other national authorities.
Institutions Responsible for Supervision and Enforcement Recommendation of a Primary Dealer System
Strongly recommended
55%
Recommended32%
Uncertain3%
Not recommended5%
Weakly recommended
5%
2/ “Primary dealers in government securities”, Marco Arnone and Piero Ugolini, Washington, D.C. , International Monetary Fund, 2004.
INFORMACIÓN RESERVAD A9
Selected countries’ experience2
Definition, characteristics and advantages of a Primary Dealer System1
Primary Dealers System in Mexico3
INFORMACIÓN RESERVAD A10
• As a further step to develop Mexico’s debt markets and promote the liquidity of the secondary market, the Mexican Ministry ofFinance established in 2000 a market-making program for government bonds.
• The program was initially established for MBonos and Cetes (nominal instruments). It was until 2008 that the program was alsoextended to Udibonos (Inflation-linked bonds).
• Throughout the program, 13 institutions have acquired a market-maker status. This number has diminished as some institutions havemerged and others left. The maximum amount of institutions with such status at the same time has been of 10 from 2007 to 2008,and the minimum has been 5 in 2001 and 2002.
• Currently, there are seven market-makers for Cetes and MBonos that represent around 75% of the total market share. There are alsofour market-makers for Udibonos that account for 55% of the total market share.
Primary Dealers System in Mexico
INFORMACIÓN RESERVAD A11
Primary Dealers System in Mexico: Characteristics
Primary Market Participation
Commitment to participate in
primary auctions.
Secondary Market Participation
Provide two-way quotes for each of the securities they
are market makers of, in all
their maturities.
Comply with the Code of Conduct
Comply with the Code of Conduct
for the money and fixed income
market.
Obligations
“Greenshoe” option
The right to buy up to an
additional 20% of the Fixed-rate
securities offered in the primary
auction.
Securities lending facility
Borrowing privileges with the
Central Bank.
Syndicated auctions
Exclusive access to syndicated
auctions where they act as
distributors.
Privileges
Selection Criteria
Declare their interest in participating in the program Active participation in primary and secondary markets
Market share ≥ 7%
INFORMACIÓN RESERVAD A12
Primary Dealers System in Mexico: Characteristics
Market Maker Index (MMI)
Activity Index(AI)
Zero Coupon bonds
3%
Primary Market100%
MBonos97%
Primary Market25%
Secondary Market with Institutional Clients
40%
Interbank Secondary Market
35%
Incentives and Penalizations
Diversification Index
Operations in Mexican
Derivatives Market
QuotesOperation Volumes
Two-way quotes in secondary market
Market Maker Index (MMI)
Activity Index(AI)
Primary Market35%
Secondary Market with Institutional Clients
40%
Interbank Secondary Market
25%
Incentives and Penalizations
Two-way quotes in secondary market
The Market Maker Indexes are calculated every month with a six month period.
Market Maker Index (Zero-coupon and MBonos) = Activity Index + Incentives - Penalizations
Market Maker Index (Inflation Linked Bonds) = Activity Index + Incentives - Penalizations
INFORMACIÓN RESERVAD A13
• Market makers are obligated to participate in primary auctions, by providing a minimum amount ofbids. By complying with this obligation, market makers gain access to a “greenshoe” option.
• In the “greenshoe” option, market makers have the option to buy, in total, up to 25% of every issueoffered in the primary auction a day before (depends of the type of instrument they are marketmakers of), at the same allocation price.
Primary Dealers System in Mexico: Characteristics“Greenshoe” Option
Advantages for market makers
1
2
Depending in market conditions, the market makers have the opportunity to buy an additional amount of instruments at a lower price than the one in the secondary market. Allows market makers to meet large demand from clients that could not be fulfilled through the primary auction.
Advantages for issuer
1
2
Allows the debt manager to increase the allotted amount of debt.
The additional debt is allotted at the same price of the primary auction, eliminating any risk related with less competitive pricing dynamics.
3 Makes the program more attractive.
INFORMACIÓN RESERVAD A14
For Zero-coupon bonds, 94.3% of the times the option is partially or completely exercised.*Data since 2001
For Mbonos, 60.3% of the times the option is partially or completely exercised.*Data since 2001
For Inflation-linked bonds, 49.6% of the times the option is partially or completely exercised.*Data since 2008
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
M Bonos Zero-coupon Inflation-linked bonds
Allocation in “greenshoe” option as percentage of amount offeredPercentage
Source: Banco de México.
Primary Dealers System in Mexico: Characteristics“Greenshoe” Option
0%
20%
40%
60%
80%
100%
Exercised Notexercised
Partiallyexercised
0%
10%
20%
30%
40%
50%
60%
Exercised Notexercised
Partiallyexercised
0%
10%
20%
30%
40%
50%
60%
Exercised Notexercised
Partiallyexercised
INFORMACIÓN RESERVAD A15
• Another obligation for market makers is being active in the secondary market by providing competitive two-way quotes through brokers.
• Market makers must present competitive quotes for each of the securities they are market makers of, in all their maturities.
• If market makers comply with a minimum amount of quoted amount, they are granted with a basis points incentive (maximum 90bp) which will be added to their market share. In the contrary , if they fail to comply with the minimum amount, they are penalized with basis points that will be subtracted from their market share (maximum 30pb).
Primary Dealers System in Mexico: CharacteristicsParticipation in the Secondary Market
Competitive quotes, measured by the difference between the quoted rate and the rate in the two adjacent trades, weighted by the time elapsed between the quote and the trades.
Quotes live for more than 1 minute.
More than 20 million pesos in quotes for every issuance of the instruments the institution is market maker of, in a daily basis.
Incentives are defined by the daily average of the percentage of issuances that comply with the 20 million pesos requirement, in a monthly period.
Competitiveness
Minimum Lifespan
Minimum amount
INFORMACIÓN RESERVAD A16
Primary Dealers System in Mexico: CharacteristicsParticipation in the Secondary Market
Source: Brokers Source: Brokers
Source: Banco de México.
Daily average of the quoted amount for Mbonos in 2019 by maturity
Millions of pesos
Intraday Quotes in August 19, 2019 for the Mbono maturing in Dec-24
Percentage
Note: The size of the sphere represents the amount quoted.Source: Brokers
Max: 1,000 million pesos
Min: 5 million pesos
6.79
6.81
6.83
6.85
6.87
6.89
6.91
6.93
6.95
6.97
6.99
7.01
07:1
2:00
07:4
0:48
08:0
9:36
08:3
8:24
09:0
7:12
09:3
6:00
10:0
4:48
10:3
3:36
11:0
2:24
11:3
1:12
12:0
0:00
12:2
8:48
12:5
7:36
13:2
6:24
13:5
5:12
14:2
4:00
Other Institutions Market Makers
Daily quoted amount for Mbonos by type of institution
Millions of pesos (Moving average 20 days)
0
5
10
15
20
25
30
35
40
45
50
55
Dec-
19Ju
n-20
Jun-
21De
c-21
Jun-
22De
c-23
Sep-
24De
c-24
Mar
-26
Jun-
27M
ay-2
9M
ay-3
1No
v-34
Nov-
36No
v-38
Nov-
42No
v-47
Market maker Other Institutions
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Market Makers Other Institutions
INFORMACIÓN RESERVAD A17
Primary Dealers System in Mexico: CharacteristicsParticipation in the Secondary Market
Source: BrokersSource: Brokers
Daily average of the quoted amount for Udibonos in 2019 by maturity
Millions of pesos
Intraday Quotes in August 19, 2019 for the Udibono maturing in Jun-22
Percentage
Note: The size of the sphere represents the amount quoted.Source: Brokers
Daily quoted amount for Udibonos by type of institution
Millions of pesos (Moving average 20 days)
0
5
10
15
20
25
30
35
40
45
50
55
Jun-
19
Dec-
20
Jun-
22
Dec-
25
Nov-
28
Nov-
35
Nov-
40
Nov-
46
Nov-
50
Market maker Other Institutions
0
2,000
4,000
6,000
8,000
10,000
12,000
Market Makers Other Institutions
Max: 50 million pesos
Min: 10 million pesos
3.30
3.32
3.34
3.36
3.38
3.40
3.42
3.44
3.46
3.48
3.50
3.52
3.54
06:5
7:36
07:2
6:24
07:5
5:12
08:2
4:00
08:5
2:48
09:2
1:36
09:5
0:24
10:1
9:12
10:4
8:00
11:1
6:48
11:4
5:36
12:1
4:24
12:4
3:12
13:1
2:00
13:4
0:48
14:0
9:36
Market Makers Other Institutions
INFORMACIÓN RESERVAD A18
• Market makers have borrowing privileges with the Central Bank. They have access to a Mbonos, zero-coupon bonds and inflation-linked bonds lending facility even if they act as market makers of that particular instrument or not.
• The right to the securities lending facility is suspended for those market makers with positions for a single issue of Bonos orUdibonos that exceed 35% of the amount placed in each issue.
• In order to foster the development of securities lending in the secondary market, in October 2007, the cost for the securitieslending facility was adjusted and stablished as a function of each market maker’s securities lending activity in the market, withdifferent participants than the Central Bank.
• The cost of Cetes and Bonos lending for market makers varies by participant: For a market maker in a particular instrument, the cost of lending is a percentage of the government funding rate. The cost represents between 3% and 7% of the
government funding rate. For an institution that is not a market maker of that particular instrument, the facility is also an option but the cost is 100% of the funding rate.
Securities lending facility
1
2
Immediate disposition of any government security.
Possibility of fulfilling a client’s demand for Mexican securities immediately.
Advantages for market makers
Ease in compliance with the duty of continuously quoting purchase and sale prices for fixed-rate government securities in the secondary market.
3
Primary Dealers System in Mexico: Characteristics
INFORMACIÓN RESERVAD A19
Securities lending facility
Securities lending facility as percentage of the limit by instrument (capacity)
Percent
Source: Banco de Mexico.
Foreign investors bond flows and securities lendings bond flows for MBonos
Millions of pesos (20-day moving average)
Source: Banco de Mexico.Source: Banco de México.
Government securities lending costsPercentage of funding rate
0
2
4
6
8
10
12
14
16
18
Aug-
18
Sep-
18
Oct
-18
Nov-
18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Apr-
19
May
-19
Jun-
19
Jul-1
9
Aug-
19
Bonos Udibonos
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-
18
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-
19
Aug-
19
Foreign investors bond flowsSecurity lending bond flows
Primary Dealers System in Mexico: Characteristics
INFORMACIÓN RESERVAD A20
• Within the eligibility criteria in the Market Maker Index for Mbonos and Cetes, is the operations in the Mexican Derivatives Markets (MexDer), which is the institution authorized by the Mexican Ministry of Finance in charge of providing the facilities and services needed so the derivative contracts are quoted and negotiated.
• The points for activity in the derivatives market are calculated as follow:
Points for competitive quotes + Points for operated contracts
Up to 70 basis points for competitive quotes in Mbonos and zero-coupon bonds future contracts. Up to 40 additional basis points if the institution operates 40,000 or more future contracts.
Primary Dealers System in Mexico: Characteristics
Incentives for operations in Mexican Derivatives Market
Market Maker Index (MMI)
Incentives and Penalizations
Operations in Mexican Derivatives
Market
INFORMACIÓN RESERVAD A21
• Market makers have contributed both to make the primary market of securities more efficient and sophisticated and to develop thesecurities’ secondary market. When the Market Maker Program was first implemented in 2000, the government domestic financingrevolved around short-term instruments and floating-rate coupon bonds. Likewise, the level of domestic debt placed through marketinstruments accounted for only 8% of GDP.
• At the beginning, the Market Maker Program considered only Cetes and 3-year fixed rate nominal bonds created in January of 2000.In May, a 5-year bono was placed. In tandem with the development of the Market Maker Program, the maturities of fixed rateplacements extended to 10, 20 and 30 years, respectively. At the end of 2013, and having the entire fixed rate yield curve developed,these instruments accounted for 53% of the total amount of government securities and 23% of GDP.
Primary Dealers System in Mexico: Development and ContributionsYield Curve development
Development of domestic government debt securitiesPercentage
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999
2000
2001
2003
2006
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Fixed Nominal Fixed Real Zero-CouponFloating Total as % of GDP
Evolution of Mexican yield curvePercentage
Average maturity of Government securitiesYears
Source: Banco de México.
0
1
2
3
4
5
6
7
8
9
1991 1995 1999 2003 2007 2011 2015 2019
Source: Banco de México.
5
10
15
20
25
30
35
40
45
50
1D 1M 3M 6M 1Y 3Y 5Y 10Y 20Y 30Y
1995
1998
2000
2003
20192006
Cetes MBonosSource: Banco de México.
INFORMACIÓN RESERVAD A22
• Market makers have reinforced the primary placement of securities. Ever since there are market makers for each type of instrument, no auction of Cetes, Bonos and Udibonos has been declared void.
Primary Dealers System in Mexico: Development and Contributions
Primary placement of securities (primary auctions)
Bonos
Times
Udibonos
Bid to Cover in Primary MarketTimes
Times
0
1
2
3
4
5
6
7
8
3Y 5Y 10Y 20Y 30YRange since 2001 Median
0
1
2
3
4
5
6
7
8
3A 10A 30ARange since2001 Median
Source: Banco de Mexico. Source: Banco de Mexico.
INFORMACIÓN RESERVAD A23
• Market makers have played a key role in the new way of placing domestic government debt.• Traditional primary auctions have an average amount of 5,000 million pesos (MoP) for Bonos and 500 million udis (MoU) for
Udibonos and take place at a staggered frequency (not less than every four weeks).• As of 2010, and with the purpose of increasing more rapidly the size and relative liquidity of the new issues of Bonos and Udibonos,
the Ministry of Finance began carrying out syndicated placements, where market makers acted as primary and secondaryunderwriters.
• In July 2011, this scheme was modified to a syndicated auction, where market makers act as distributors presenting their clients’bids. In any of the two modalities, in this novel way of placing new issues, such issues reach a higher outstanding amount (up to 30billion pesos in the case of Bonos and 3.5 billion udis in the case of Udibonos) in a single exhibition.
Source: Banco de México.
Primary Dealers System in Mexico: Development and ContributionsPrimary placement of securities (Syndicated Auctions)
Amount issued through syndicated auctions of government securitiesMillions of Mexican pesos
0
5,000
10,000
15,000
20,000
25,000
30,000Fe
b-10
Mar
-10
Jul-1
0
Feb-
11
Mar
-11
Jul-1
1
Sep-
11
Feb-
12
Apr-
12
Jul-1
2
Sep-
12
Aug-
13
Apr-
14
Jun-
14
Nov-
14
Oct
-15
Mar
-17
Apr-
17
Apr-
18
Mar
-19
Aug-
19
Bond Inflation-linked bond
INFORMACIÓN RESERVAD A24
Non-residents’ holdings of government bonds in local currency As percentage of total outstanding debt
Note: Average by region of the percentage of ownership of local bonds denominated in local currency by foreigners from the following countries: Mexico, Peru, Colombia, Brazil, Indonesia, Malaysia, Thailand, Poland, Turkey, Israel, Russia, Hungary, South Africa and South Korea(enters since December2009).The vertical black line represents the moment when Mexico became part of the WGBI.Source: Finance ministries, central banks and other national authorities.
Non-residents’ holdings of government bonds of selected countries in local currency
As percentage of total outstanding debt
Note: *Mexico enters the WGBI in October2010. **On October31,2018JP Morgan increases Colombia's participation in the GBI-EM index.Source: Finance ministries, central banks and other national authorities.
Broadening of the investor base
Primary Dealers System in Mexico: Development and Contributions
• Syndicated auctions favored the inclusion of Bonos in FTSE World Government Bonds Index (WGBI) as one of the conditions toparticipate in this index is that issues must have an outstanding amount equivalent to 10 billion pesos, at least.
• In October 2010, Mexico became the first Latin American country to be considered in this index.• This event, coupled with a more developed market, attracted a more diverse investor base, specifically non-resident investors.
0% 10% 20% 30% 40% 50% 60%
Israel
Turkey
Brazil
Thailand
South Korea
Hungary
Malaysia
Colombia**
Mexico*
Poland
Russia
Indonesia
South Africa
Peru
May 2019 January 2008
5%
10%
15%
20%
25%
30%
35%
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Jan-
13Ju
l-13
Jan-
14Ju
l-14
Jan-
15Ju
l-15
Jan-
16Ju
l-16
Jan-
17Ju
l-17
Jan-
18Ju
l-18
Jan-
19AsiaEmerging Europe and South AfricaLatin AmericaMexico
INFORMACIÓN RESERVAD A25
• Market makers have contributed both, to make the primary market of securities more efficient and sophisticated and to develop the securities’ secondary market.
Market makers share by instrument and market segmentPercentage; Average 2013-2019
Trading volume in the secondary market by instrumentMillions of Mexican pesos or UDIS
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Primary Market Interbank Trading Clientele TradingBonds Inflation-linked bonds
Source: Banco de México. Source: Banco de México.
Primary Dealers System in Mexico: Development and ContributionsTrading volumes
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Jan-
13Ju
l-13
Jan-
14Ju
l-14
Jan-
15Ju
l-15
Jan-
16Ju
l-16
Jan-
17Ju
l-17
Jan-
18Ju
l-18
Jan-
19Ju
l-19
Bonds Cetes Inflation-indexed bonds
INFORMACIÓN RESERVAD A26
• The program has contributed to building efficient and sound market conditions. A liquid and deep market, coupled with an increase in the number of market players, have fostered an efficient price formation.
Source: Banco de México. Source: Banco de México.
Primary Dealers System in Mexico: Development and ContributionsMarket operation conditions and price formation
Mexican government Bonos’ monthly turnoverMonthly operations/average outstanding amount
Source: Banco de México.
MBonos bid-ask spread for selected maturitiesBasis points (10 days moving average)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jun-
16Au
g-16
Oct
-16
Dec-
16Fe
b-17
Apr-
17Ju
n-17
Aug-
17O
ct-1
7De
c-17
Feb-
18Ap
r-18
Jun-
18Au
g-18
Oct
-18
Dec-
18Fe
b-19
Apr-
19Ju
n-19
Aug-
19
3y 10y 30y Dec-24
MBonos Amihud’s depth index for selected maturitiesBasis points (20 days moving average)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jun-
16Au
g-16
Oct
-16
Dec-
16Fe
b-17
Apr-
17Ju
n-17
Aug-
17O
ct-1
7De
c-17
Feb-
18Ap
r-18
Jun-
18Au
g-18
Oct
-18
Dec-
18Fe
b-19
Apr-
19Ju
n-19
Aug-
19
3y 10y 30y
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
3yr 5yr 10yr 20yr 30yrDec-11 Dec-12 Dec-13 Dec-14 Dec-15
Dec-16 Dec-17 Dec-18 Jul-19
INFORMACIÓN RESERVAD A27
Source: DTCC.
Traded Volume of Mexican interest rate swaps Millions of Mexican pesos
Traded Volume of Interest Rate Swaps (IRS) for selected countries
Millions of US dollars
Source: DTCC.
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19
1-year 2-year 5-year 10-year Other maturities
Derivatives market development
Primary Dealers System in Mexico: Development and Contributions
• The development of the fixed income market laid the groundwork for other markets, such as the derivative market.• The interest rate swap market in Mexico is one of the most traded compared to other emerging markets.
INFORMACIÓN RESERVAD A28
• A liquid and deep IRS market is paramount, as implied information regarding monetary policy can be obtained from these instruments.
Source: PIP with calculations from Banco de Mexico.
Primary Dealers System in Mexico: Development and ContributionsDerivatives market development
Implied target rate in TIIE interest rate swaps and Mexican pesoPesos per dollar and percent
Implied target rate in the TIIE swap curvePercent
17.45
17.90
18.35
18.80
19.25
19.70
20.15
20.60
21.05
21.50
6.50
6.75
7.00
7.25
7.50
7.75
8.00
8.25
8.50
8.75
Mar
-18
May
-18
Jul-1
8
Sep-
18
Nov-
18
Jan-
19
Mar
-19
May
-19
Aug-
19
Aug-19 →Sep-19 →Dec-19 →Jan-20 →← Mexican Peso
6.50
6.75
7.00
7.25
7.50
7.75
8.00
8.25
8.50
8.75
Jun-
18
Aug-
18
Oct
-18
Dec-
18
Feb-
19
Apr-
19
Jun-
19
Aug-
19
Oct
-19
Dec-
19
Feb-
20
Apr-
20
Jun-
20
Rest of periodReference rateLast monetary policy decisionLast data
Source: PIP with calculations from Banco de Mexico.
INFORMACIÓN RESERVAD A29
• With the purpose of having a more “complete picture” of market conditions, the Central Bank of Mexico maintains regular communication with market makers.
Primary Dealers System in Mexico: Development and ContributionsMarket intelligence
Daily
These consultations are usually done by telephone or
chat.
Face-to-face meetings that allow the Central Bank of Mexico to learn the practical and detailed experience of
the market makers.
Quarterly
Promote a direct information exchange with
market actors
The Central Bank of Mexico is kept informed about relevant
developments in the market
Market color provided by market makers complements Central Bank’s
analysis of the market dynamics.
Examples of the type of information provided by Market Makers• What types of counterparts the market makers have been dealing with• What kind of securities they have traded• The depth of market liquidity• Prices at which the investors are willing to subscribe• Volumes, the number of sellers and buyers.
The objective is to improve the structure of the program by discussing:
• Market structure and development• Enhancing transparency in the market• Protect investors • Reducing systemic risk• Design of the of obligations and privileges
INFORMACIÓN RESERVAD A30
• Securities lending operations are a key fundamental factor to develop the depth of fixed income and equity markets, and are commonlyused in developed markets around the world.
• Market makers in Mexico have access to a securities lending facility as a privilege.• As a result of implementing differentiated cost for the securities lending facility, from being practically inexistent at the beginning of
2008, the amount outstanding in securities lending has increased considerably.
Source: Banco de México.
Primary Dealers System in Mexico: ChallengesSecurities Lending
Amount outstanding in Securities Lending (Mbonos and Inflation-linked bonds)Millions of pesos
INFORMACIÓN RESERVAD A31
• However, data shows that securities lending activity is still on initial stages in the local market, as the outstanding amount of loans withgovernment securities represents only between 1% and 2% of the outstanding amount of government debt.
• Private market participants are still reluctant to engage in securities lending activity among each other, and they prefer to perform thisactivity with the Central Bank. Pension Funds are the most active participants, although their lending activity is far from what they arecapable of.
Source: Banco de México.
Primary Dealers System in Mexico: ChallengesSecurities Lending
Securities Lending Daily Volume among private participants (Mbonos and Inflation-linked bonds)
Millions of pesos
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
460,000
660,000
860,000
1,060,000
1,260,000
1,460,000
1,660,000
Jan-
15Ap
r-15
Jul-1
5
Oct
-15
Jan-
16
Apr-
16
Jul-1
6
Oct
-16
Jan-
17Ap
r-17
Jul-1
7
Oct
-17
Jan-
18Ap
r-18
Jul-1
8
Oct
-18
Jan-
19Ap
r-19
Jul-1
9
<-- Pension Funds' holdings in Bonos and UdibonosPension Funds' lending as a percentage of their holdings -->
Source: Banco de México.
Pension Fund’s Holdings and Securities Lending (Mbonos and Inflation-linked bonds)
Millions of pesos, percentage
INFORMACIÓN RESERVAD A32
• As mentioned before, inflation-linked bonds (Udibonos) were included to the Market Makers Program in 2008. For many years, the status of marketmaker of Udibonos was conditioned by being a market maker for Bonos. In 2018, this condition was removed, allowing different institutions toparticipate in the Udibonos program.
• Since inflation-linked bonds were included in the Market Makers Program, we have seen important improvements and development in this market.• However, trading volume, market conditions and investor base for inflation-linked bonds still have room for improvement compared to the nominal
bonds market.
Primary Dealers System in Mexico: ChallengesFurther development of the inflation-linked bonds market
7
Market Makers
Aspirants
8Number of Participants
14.8%
74.6%89.4%
Market ShareM BONOS
4
Market Makers Aspirants
3
Number of Participants
10.1%
66.1%76.2%
Market ShareUDIBONOS Bonds
PercentageInflation-linked bonds
Percentage
Daily Turnover of Bonos and UdibonosDaily operations/outstanding amount (20-day moving average)
Holdings of government securities by sector
0.00
0.01
0.02
0.03
0.04
0.05
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Bonos Udibonos
Foreing investors Other domestic residents Investment Funds Insurance companies Banks Pension funds Repo transactions with the Central Bank of Mexico Guarantees received by the Central Bank of Mexico Securities acquired by the Central Bank of Mexico
Source: Banco de México.