Emerging Markets Rates and Currencies Handbook

104 Citi | Emerging Markets Currencies Handbook 2021 Mexico Interest Rate Derivatives Overview Conventions Trading hours 7:30 AM to 2 PM (GMT -6:00). An IRS is the exchange of fixed interest payments vs. floating rate related to a notional amount. Referenced to the 28 day TIIE (Interbank equilibrium interest rate). This reference is published at 12:30 pm local time by the Central Bank on a daily basis and computed using quotes from seven commercial banks. Mexican IRS trade according to the number of 28-day coupons in the life of the swap from 3 months up to 30 years. The nomenclature used is the number of coupons followed by x1 (times one) or “n” (28-day period). Example: 3x1 or 3n for a 3-month swap. 130x1 or 130n for a 10y swap. Booking conventions are Act/360, following business day, Mexico holiday schedule. MXN IRS can be quoted as spot with t+1 start date, IMM start, forward starting, and also as spread and fly. Market Liquidity Drivers of the short end of the curve (3n to 13n tenors) are mainly monetary policy and inflation. Monetary policy is supervised by Central Bank whose primary objective is to keep inflation near a target rate of 3% with a +1/-1 range, their main instrument for this objective is the rate target for overnight funding operations between banks. Daily volume traded in average in SEF channels is 1.5mm dvo1. Standard size for a spot ticket is 15k dvo1. Most liquid tenors are 3m, 2y, 5y and 10y. Clearing houses: CME, LCH and Mexder (Mexican Derivatives Exchange). A typical Cross-Currency Basis Swaps (CCS) in the Mexican market involves the exchange of MXN for USD in a floating vs floating rate swap, where MXN leg is referenced to 28-day TIIE and the USD leg to 1-month LIBOR. This quote represents the basis points that are used as a spread over LIBOR. Main drivers are issuance of Mexican corporate and government bonds in USD, differences in funding sources, and movements in USD rates. Regulation Offshore restrictions The remittance of funds or payments and the repatriation of profits, dividends, interest payments, capital or any other service payment abroad are not subject to any restrictions. Local entities are allowed to trade the spot market offshore and foreign entities have full access of the onshore spot market although repatriation of dividends is subject to compliance with the Income Tax Law (Ley del Impuesto sobre la Renta). Local and foreign currency accounts are available to resident and non-resident entities, however, all non-resident entities are required to register local foreign currency accounts with the banking authorities. Circular 4/2012 issued by the Central Bank establishes the guidelines for derivatives trading that need to be followed by banks, development banks, brokerage dealers, and other Mexican regulated entities. Its guidelines include the type of derivative transactions, underlying assets, permitted counterparties, instruments,guarantes, settlement procedures, prohibitions, suspensions and sanctions. It also requires derivative transactions to be documented under master agreements or ISDAs. There is a liquid market for MXN plain vanilla and exotic options that can be either deliverable or non-deliverable, available both onshore and offshore. Deliverable options are settled in either MXN or USD. Greater liquidity can be found on tenors up to 3 years. Exchange traded MXN options are available at the CME and MEXDER. Other local regulations that must be observed, among others, when transacting with currencies onshore: • Circular 22/2017 (modified by Circular 23/2017) — Global FX Code. • Circular 3/2012 — among other regulates foreign exchange operations. • Ley del Sistema de Pagos — funds transfers. • Ley de Instituciones de Credito— Funds Transfers & AML. • Circular 25/2017 — Código LEI. • Circular 4/2016 — System of Interbank Payments in Dollars (SPID). Non-resident restrictions Similar to spot transactions, foreign entities are allowed to trade derivatives onshore, and local entities are permitted to trade offshore. Deal Management Rollover: Rollovers are possible with no restrictions and can be either gross settled or net settled. Unwinding: Unwinding is possible in all instruments. Early Maturity: Early maturity is possible and can be either gross settled or net settled. Documentation Requirements License requirements The Mexican Central Bank imposes no foreign exchange controls and no documentation requirements, allowing the free conversion and flow of funds.