OTC Derivatives Project

October, 2011.

What is the status of the OTC Derivatives market?

The OTC Derivatives Market in México

Source :“ Interest rates operations (Futures, forwards and swaps) in domestic currency”.Bank of México

What is being done?

Services for OTC Derivatives

Why are services provided?

Markets must be automated, efficient and secure; unfortunately, the OTC market has weaknesses in its daily operations.

According to ISDA (International Swaps and Derivatives Association) studies the level of automation in the procedures is very low and numerous errors are made in both the Front and Back offices.

Source:2010 ISDA Operations Survey

What type of services shall be provided?

Electronic confirmation

One of the participants sends the information and the counterparty verifies the terms in a web site; and if they are found to be correct, the operation is considered to be completed.

Cash flow calculation and the settlement of payments

The data dealing with the operations is used to determine each participant’s payment obligations. Once the cash flows have been determined, the participant has the option of making the payments using the same platform..

What type of services shall be provided?

Management of events

An OTC derivative can undergo many changes during its lifetime. Said changes may be reflected in the economic terms, and/or in the parties involved. This service shall be responsible for managing these changes, confirming that the data contained in the electronic registration is always updated.

What types of services shall be provided?

Bilateral management of collateral

It is a service which provides for the mitigation of counterparty operations risk by using collateral.

This service automates the calculation processes for margin calls, as well as the transfer of securities in order to cover said calls; based on an approach of bilateral relationships, which are managed and structured independently.

What follows

Data Repository – Concept and registration

A SWAP data repository is an organization that receives and maintains data or filings with respect of transactions, positions, terms and conditions of swaps that have been traded by third parties in order to provide an up to date servicing of the filings and maintenance of the data for said instruments..

The repository shall give transparency to the market, and it shall provide sufficient and reliable data to the market, the regulatory authorities and to the public in general.

Any organization willing to provide SWAP data repository services must register with the CFTC as a SDR (SWAP Data Repository) before commencing operations.

•Guarantee uninterrupted, and on real time access to the itemized information (per transaction)

•They must maintain the data during 5 years, counting from the maturity of the transaction

•The filed data shall be protected by all confidentiality provisions (similar to the stock exchange secrecy)

•The organizations that must report to foreign repositories shall be able to do so, if the foreign repository has been approved by the Mexican regulators.

•Local data repositories shall be able to provide data to foreign authorities, if said authorities have a signed agreement with the Mexican regulators.

•The tariffs shall be dependent on the repositories’ operating costs with the regulators having the capacity to make recommendations and to order any modifications

•The authorities are currently evaluating weather they will grant authorizations or charters.

•In order to make the applications it is necessary to have a draft deed and the corporate purpose must be, “to be a data repository organization”, and once the authorization or charter is granted there will be a time limit of 180 calendar days for its incorporation.

•It must commence operations within six months after its incorporation

Data Repository

Responsibilities

Relationships with Foreign Data Repositories

Tariffs

Authorizations / Charter

Data Repository

• The repository shall perform the following activities:

A. Recording and maintenance of data (The minimum amount of information shall be determined by

the regulators)

B. Provide data to the regulators, the market and the general public

C. Issue certificates for confirmed transactions

•The following activities shall require approval (The regulators are evaluating the risk involved, and we should recommend that these activities be entrusted to other organizations, except with the confirmation of transactions

D. Reconciliation and confirmation

F. Management of bilateral collateral agreements

G. Cash flow calculations, settlement of payments and the management of rights or liabilities

•The Mexican financial and non financial institutions must file transaction by transaction (hedge and notional) performed in regular or OTC markets, as well as any amendments to the economic terms or counterparties which modify the risk exposure. It will be possible to file through a counterparty, exchange, electronic trading or another participant.

•The institutions that are bound by this requirement must file their standardized transactions and modifications in real time and those that are not standardized by the closing of the day when they were confirmed or modified.

Activities and Services

Who must file and how will it be done?

•Guarantee uninterrupted, and on real time access to the itemized information (per transaction)

•They must maintain the data during 5 years, counting from the maturity of the transaction

•The filed data shall be protected by all confidentiality provisions (similar to the stock exchange secrecy)

Relationships with Foreign Data Repositories

•The organizations that must report to foreign repositories shall be able to do so, if the foreign repository has been approved by the Mexican regulators.

•Local data repositories shall be able to provide data to foreign authorities, if said authorities have a signed agreement with the Mexican regulators.

•The tariffs shall be dependent on the repositories’ operating costs with the regulators having the capacity to make recommendations and to order any modifications

•The authorities are currently evaluating weather they will grant authorizations or charters.

•In order to make the applications it is necessary to have a draft deed and the corporate purpose must be, “to be a data repository organization”, and once the authorization or charter is granted there will be a time limit of 180 calendar days for its incorporation.

•It must commence operations within six months after its incorporation

Data Repository

Responsibilities

Tariffs

Authorizations / Charter

Clearing House – Concept and Registration

A Clearing House for derivatives is an organization which allows the parties to an agreement, contract or transaction to replace, through novation and other mechanisms, the credit at the Clearing House with a credit between the parties on a multilateral basis for the settlement or netting of liabilities, through a compensation that pools or transfers the risk among the participants.

Any Clearing House that intends to provide clearing services for futures contracts, options on futures contracts or swaps must register with the CFTC as a DCO (Derivatives Clearing Organization) before it commence operations.

Communications ModelSafe, confidential, reliable, complete

IDB and/or SEFs

Counterparty

Dealer / Customer

TR(Trade

Repository)

TR(Trade

Repository)

SEF(Swap Execution

Facility)

SEF(Swap Execution

Facility)

DCO(Derivative

Clearing Org)

DCO(Derivative

Clearing Org)

Dealer / Customer

ListedMarket

PTRC: Pre-Trade Risk Controls

API

API

CCPs

Repository Life Cycle

API

API