Primary Dealer Systems in Government Securities

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


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.


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.






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


• 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


• 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.






• 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


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%



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


Activity Index(AI)

Primary Market35%

Secondary Market with Institutional Clients

40%

Interbank Secondary Market

25%


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


• 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.


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%


Partiallyexercised

0%

10%

20%

30%

40%

50%

60%


Partiallyexercised


• 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



Source: Brokers Source: Brokers


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



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


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 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.


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




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



• 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.


Incentives for operations in Mexican Derivatives Market



Operations in Mexican Derivatives

Market


• 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


0

1

2

3

4

5

6

7

8

9

1991 1995 1999 2003 2007 2011 2015 2019


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.


• 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.


• 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.


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


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


• 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


• 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


• 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


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


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


• 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.


• 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.


• 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


• 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.


Primary Dealers System in Mexico: ChallengesSecurities Lending

Amount outstanding in Securities Lending (Mbonos and Inflation-linked bonds)Millions of pesos


• 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.


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 -->


Pension Fund’s Holdings and Securities Lending (Mbonos and Inflation-linked bonds)

Millions of pesos, percentage


• 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


Documents

Primary Dealer Systems in Government Securities