conditions for the development of repos and securities lending markets

Conditions for the Conditions for the Development of Repos Development of Repos and Securities Lending and Securities Lending Markets Markets Alfonso Mendoza VelázquezAlfonso Mendoza VelázquezResearch and Economic Intelligence CentreResearch and Economic Intelligence CentreMexicoMexico

44th th Annual Meeting AC Debt GroupAnnual Meeting AC Debt GroupMay 14-16, 2008May 14-16, 2008Puerto España, Trinidad & TobagoPuerto España, Trinidad & Tobago

4th LAC Debt Group Meeting, Trinidad & Tobago

2

AgendaAgenda

IntroductionIntroduction Repurchase Agreements (Repo) and Repurchase Agreements (Repo) and

Securities Lending (SL) transactionsSecurities Lending (SL) transactions Recommendations & SuggestionsRecommendations & Suggestions

International ExperienceInternational Experience UK, Spain, USA, LatinoamericaUK, Spain, USA, Latinoamerica MexicoMexico

ConclusionsConclusions


3

IntroductionIntroduction Aims of the StudyAims of the Study Extensive Financial Reforms in LA with no Extensive Financial Reforms in LA with no

evident outcomesevident outcomes Low liquidity & high concentration, few Low liquidity & high concentration, few

investors and few secutiries available.investors and few secutiries available. ‘‘Short-termShort-termismism’’

Developed repo and SL markets promote Developed repo and SL markets promote successful capital markets and economic successful capital markets and economic growth.growth.

Implement sound Fiscal, Legal and Implement sound Fiscal, Legal and Regulatory measures & remove Regulatory measures & remove restrictionsrestrictions


4

Securities Lending & ReposSecurities Lending & Repos Securities Lending:Securities Lending:

The purchaser buys The purchaser buys specificspecific securities in securities in exchange of a commision (premium)exchange of a commision (premium)

The seller can make a profit on highly liquid The seller can make a profit on highly liquid and overdemanded securities.and overdemanded securities.

The property is transferred.The property is transferred. Repurchase Agreements:Repurchase Agreements:

Exchange of high credit quality securities for Exchange of high credit quality securities for funds.funds.

Securities serve as collateral for raising fundsSecurities serve as collateral for raising funds Funds act as collateral for borrowing Funds act as collateral for borrowing

securities.securities.


5

Repo AgreementRepo AgreementEsquema 1. Flujos en un contrato bilateral de reporto.

Fuente: Adaptado de Henrik & Tóth (1999).

Reportador Reportado

Reportador Reportado

Valores

Efectivo

Volumen Nominal Equivalente de Valores

Efectivo + Intereses

Flujos en el vencimiento del contrato

Flujos en la negociación del contrato


6

Securities LendingSecurities LendingEsquema 4. Préstamo de Valores con activos de colateral.

Inicio del Préstamo Fin del Préstamo Fuente: Adaptado de Faulkner (2006).

Prestamista

Agente Custodio

Prestatario

Préstamo

Colateral

Informe Informe

Prestamista

Agente

Custodio

Prestatario

Préstamo+Premio

Comisión

Colateral


7

What are the benefits?What are the benefits? Increases the general liquidity of the Increases the general liquidity of the

marketmarket Serves as a liquidity channel to other markets Serves as a liquidity channel to other markets

(i.e., derivatives and forex)(i.e., derivatives and forex) Contributes to the efficiency of the market Contributes to the efficiency of the market

and price formationand price formation Provides the market with longer maturitiesProvides the market with longer maturities Decreases the % of defaultDecreases the % of default Can be used in short sales, arbitrage, Can be used in short sales, arbitrage,

speculation, etc.speculation, etc. Can generate profits on securitiesCan generate profits on securities Increases the availability of instrumentsIncreases the availability of instruments


8

RisksRisks

Default is reduced significantlyDefault is reduced significantly Market RiskMarket Risk Mismatch RiskMismatch Risk Issuer RiskIssuer Risk Liquidity RiskLiquidity Risk


9

SL & Repos in Emerging SL & Repos in Emerging MarketsMarkets

Low liquidity and Concentration.Low liquidity and Concentration. Few transactions on corporate debt and Few transactions on corporate debt and

long term maturitieslong term maturities Specialization on government securitiesSpecialization on government securities

In some countries the securities market is In some countries the securities market is repo basedrepo based

Info on SL and repo market Info on SL and repo market dynamics, size, virtually unknown or dynamics, size, virtually unknown or unavailable.unavailable.


10

SL & Repos in Emerging SL & Repos in Emerging Markets: An eye bird viewMarkets: An eye bird view

Lack of monitoringLack of monitoring Half the authorities believe a Half the authorities believe a

regulatory and fiscal framework regulatory and fiscal framework existexist

40% considers they have the 40% considers they have the financial platform needed for the financial platform needed for the development of these marketsdevelopment of these markets

There is not reliable information on There is not reliable information on size of the market, composition, size of the market, composition, maturity or participants.maturity or participants.


11

General SuggestionsGeneral Suggestions A Latin American Repo & Securities Market Survey A Latin American Repo & Securities Market Survey

that identifies:that identifies: Participants (actual and potential), volumes & dynamics, Participants (actual and potential), volumes & dynamics,

maturities, instruments, fiscal & regulatory aspects, etc.maturities, instruments, fiscal & regulatory aspects, etc. Important for better monitoring and policy analysisImportant for better monitoring and policy analysis

Authorities should promote third party agreements Authorities should promote third party agreements to minimize risksto minimize risks

Comitee and Code of Conduct on Repo and SL with Comitee and Code of Conduct on Repo and SL with main actorsmain actors

Monitor unusual activities by institutional investors Monitor unusual activities by institutional investors and hedge fundsand hedge funds

Identify causes of low liquidity (market practices, Identify causes of low liquidity (market practices, regulatory framework, etc.)regulatory framework, etc.)

International transactions (beware of liquidity International transactions (beware of liquidity effects)effects)


12

Mexican ExperienceMexican Experience

Macroeconomic stability has Macroeconomic stability has prompted a capital market with prompted a capital market with greater maturitiesgreater maturities

Repo market is regarded as a source Repo market is regarded as a source of short term liquidityof short term liquidity

Repo transactions: Repo transactions: Maturity <1-month Maturity <1-month Mostly on government instruments.Mostly on government instruments.

SL transactions: SL transactions: Mostly on Stocks and few on government Mostly on Stocks and few on government

debt or capital market instruments.debt or capital market instruments.


13

Mexican ExperienceMexican Experience

Third PartiesThird Parties Custody and administration of securities Custody and administration of securities Electronic platform to engage in SL Electronic platform to engage in SL

transactionstransactions Risks ComiteeRisks Comitee Standard Repo AgreementStandard Repo Agreement

Identify more clearly market Identify more clearly market participants participants IncentivesIncentives ResistanceResistance


14

ConclusionsConclusions

Low liquidity & high concentration, Low liquidity & high concentration, short term view.short term view.

Benefits and some risksBenefits and some risks More studies needed:More studies needed:

SurveySurvey IncentivesIncentives Resistence Resistence Assymetric informationAssymetric information ComiteeComitee


15

UK Repo MarketUK Repo MarketGráfica 1. Colateral Emitido por Contrapartes Británicas (2003-2006)

Colateral Emitido por Contrapartes Británicas(2003-2006)

811.85

958.07

600.00

409.10

35.3%

18.0%

46.7%

€ 0

€ 100

€ 200

€ 300

€ 400

€ 500

€ 600

€ 700

€ 800

€ 900

€ 1,000

2003 2004 2005 2006

Mil

es

de

Mil

lon

es

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Cre

cim

ien

to A

nu

al

Colateral Crecimiento Fuente: International Capital Market Association.


16

UK Repo MarketUK Repo MarketGráfica 3. Número de Instituciones que negociaron Contratos de Recompra Gubernamentales Británicos

Número de Instituciones que negociaron Contratos de Recompra Gubernamentales

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

No

. d

e I

ns

titu

cio

ne

s

No Bancarias Bancarias

Fuente: Banco de Inglaterra.


17

Spain Repo MarketSpain Repo MarketGráfica 6. Colateral emitido por participantes Españoles, 2002-2006.

Colateral Emitido por Agentes Financieros de España(2003-2006)

229.44

270.00282.92

238.64 23.3%

-15.0%

13.1%

€ 0

€ 25

€ 50

€ 75

€ 100

€ 125

€ 150

€ 175

€ 200

€ 225

€ 250

€ 275

€ 300

2003 2004 2005 2006

Bil

lon

es

de

Eu

ros

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Cre

cim

ien

to A

nu

al

Colateral Crecimiento

Fuente: International Capital Market Association.


18

Spain and Europe Repo Spain and Europe Repo MktMkt

Gráfica 7. Volumen Total de Operaciones de Reporto en Europa y España.

Volúmen Total de Operaciones de Reporto

€ 0

€ 25

€ 50

€ 75

€ 100

€ 125

€ 150

€ 175

€ 200

€ 225

€ 250

€ 275

€ 300

Mil

es

de

Mil

lon

es

de

Eu

ros

Unión Europea España Fuente: Banco Central Europeo.


19

US Repo MarketUS Repo MarketGráfica 9. Total de Contratos de Reporto con Valores del Tesoro de EU

Total de Contratos Repo con Valores del Tesoro de EU

2.8%4.6%

-0.1%

-2.9%

-2.2%

-9.6%

0.0%

8.0%

11.5%

10.3%

5.6%

$0.000

$0.500

$1.000

$1.500

$2.000

$2.500

$3.000

$3.500

$4.000

$4.500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Billo

nes d

e D

óla

res

-15%

-10%

-5%

0%

5%

10%

15%

Cre

cim

ien

to

Total de Valores Crecimiento Anual

Fuente: Banco Federal de Reserva de Nueva York y Tesoro de EU.


20

US: Securities LendingUS: Securities Lending Gráfica 10. Valores Prestables y en Préstamo en EU, 1999 – 2007.

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1999 2000 2001 2002 2003 2004 2005 2006 2007

Mil

es d

e M

illo

nes

de

Dó

lare

s .

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

Valores PrestablesTotal de Valores en PréstamoTotal de Valores en Préstamo (%)

Fuente: Risk Management Association.


21

US: SL CompositionUS: SL CompositionGráfica 11. Composición Valores en Préstamo en Estados Unidos, 1999-2007.

Valores en Préstamo

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

1999 2000 2001 2002 2003 2004 2005 2006 2007

Mil

es

de

Mil

lon

es

de

Dó

lare

s

Acciones Bonos

Fuente: Risk Management Association.


22

Mexico: SL evolutionMexico: SL evolution

1996

Circular 10-195

1997

SistemaVALPRE

de Indeval

Se formaliza el mercado de préstamo de valores mediante la emisión de la circular y el inicio de operaciones en VALPREC 10-195:• Aforos fijos y muy altos• Plazo máximo 1 año

Proyecto de Modernización de Préstamo de Valores

Se inicia proyecto de nueva regulación por parte de Banco de México y CNBV con el apoyo de grupos de trabajo de las distintas asociaciones (AMIB, ABM, AMAFORE, AIFI)

2005

Circular 1/2004Mecanismos de Negociación

Con la entrada en vigor de la nueva circular y la operación de Mecanismos de Negociación se abren las puertas para tener un mercado más eficiente, dinámico y accesible para todosC 1/2004:• Aforos dinámicos• Plazo abierto• Fecha Valor• Operación de Mecanismos de Negociación

2000

Ventanilla Banxico

Los Formadores de Mercado pueden realizar operaciones de préstamo de valores sobre Valores Gubernamentales con Banco de México

2002-2003-2004

Esquema 6. Evolución del Préstamo de Valores en México

2006-2007

Misceláneas 2.1.6, 3.1.10, 3.3.6 yCircular S-11.3

Temas Fiscales y Seguros

Las misceláneas fiscales publicadas en marzo del 2007 proporcionan un tratamiento fiscal más claro, se hace referencia a la Circular de Reporto de Valores de Banxico y se establece la participación de los seguros en operaciones de préstamo de valores.


23

Mexico: SL stocksMexico: SL stocksGráfica 14. Importes Operados en Préstamo de Valores (acciones), 1998-2007* .

Importes Operados de Préstamo de Valores en el Mercado de Capitales, 1998-2007

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mil

lon

es d

e P

eso

s

Fuente: S.D. Indeval, S.A. de C.V.


24

Mexico: SLMexico: SLCuadro 7: Operaciones de Préstamo de Valores en Mercado de Capitales, 2004-2007.

Año 2004 2005 2006 2007* Número de préstamos 12,975 15,038 16,844 13,136 Número de títulos 1,936,867,495 2,507,871,715 934,518,478 2,118,018,695 Importe operadoa $35,960.6 $52,476.0 $61,392.4 $76,428.4 Tasa promedio (%) 8.59 10.85 12.50 8.56 Moda tasa (%) 3.00 7.30 5.00 4.00 Moda plazo 1 día 1 día 1 día 1 día Fuente: Indeval, S.A. de C.V. a Millones de Pesos. * Datos disponibles hasta la 1ª quincena de Octubre.


25

Mexico: Repo transactionsMexico: Repo transactionsGráfica 18. Número de Operaciones de Reporto por Plazo de Liquidación, (Enero 2007 – Agosto 2007)

Composición del número de Operaciones de Reporto Por Plazo de Liquidación

(1a. quincena Enero07 - 2a quincena Agosto07)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nú

me

ro d

e o

pe

rac

ion

es

re

ali

zad

as

0 días 1 día >2 días Fuente: Cálculos propios basándose en datos proporcionados por Banco de México.


26

Mexico: Repo by maturityMexico: Repo by maturityGráfica 20. Monto de operaciones de Reporto por plazo de Vencimiento en México (Enero 2007 – Agosto 2007).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% d

el

nú

me

ro t

ota

l d

e t

ran

sa

cc

ion

es

re

ali

zad

as

1D 2-7D 8D-1M 1-3M >3M

Fuente: Cálculos propios basándose en datos proporcionados por Banco de México.


27

Europe: Repo by MaturityEurope: Repo by MaturityGráfica 21. Monto de operaciones de Reporto por plazo de Vencimiento en Europa (J unio 2001 – J unio 2007).

Fuente: ICMA (2007). European Repo Market Survey, Zurich.

0

5

10

15

20

25

30

35

2-7D 8D-1M 1D 1-3M 3-6M 6-12M >12M Forward Open

conditions for the development of repos and securities lending markets

Documents

corporate debt

trinidad tobagorisksdefault

trinidad tobagowhat

trinidad tobagosl repos

borrowing securities

specific securities

repo market dynamics

overdemanded securities