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    FSB Reviews Implementation of OTC Derivatives Reforms in Mexico

    March 19, 2020

    FSB published a report on the peer review of implementation of the G20 commitments on over-the-counter (OTC) derivatives reforms in Mexico. The review finds that the financial authorities in Mexico have made good overall progress in the implementation of OTC derivatives reforms and offers certain recommendations. The report highlights that Mexico has implemented comprehensive requirements for trade reporting, central clearing, and platform trading. However, the final capital requirements, comprising the final standard on measuring counterparty credit risk exposures (SA-CCR) and the final standard for capital requirements for bank exposures to central counterparties, will be published and in force by the first half of 2020.

    The OTC derivatives market in Mexico is relatively small from a global perspective, but it is the largest in Latin America. The market has a substantial cross-border component, with foreign banks being important players. Interest rate derivatives are the predominant asset class as measured by notional amount outstanding, while foreign exchange trades dominate daily turnover. Mexico does not have a specific law dedicated to regulating OTC derivatives markets; however, in the recent years, the authorities undertook several initiatives to enhance rules and procedures in this area.

    Currently, no requirements exist in Mexico for the margin exchange for non-centrally cleared derivatives. However, Banxico has been working on a project to introduce margin requirements for financial institutions (credit institutions, brokerage firms, and investment funds). As proposed in a public consultation in the second quarter of 2019, Banxico would require financial institutions to exchange initial and variation margins for the non-centrally cleared derivatives for which they are counterparties. It would establish margin exchange obligations for entities for which the notional amount outstanding of derivative positions exceeds 25 billion Units of Investment or UDIs (nearly USD 8 billion), following a timetable similar to the one proposed by BCBS-IOSCO. The margin requirements would apply to all non-centrally cleared derivatives, with the exception of some physically settled foreign-exchange derivatives, as considered by international standards. A methodology has also been agreed by market participants, on valuation of interest rate derivatives based on the type of collateral used.

    In accordance with the Mexican regulatory framework, higher capital requirements are applied to non-centrally cleared derivatives by requiring a Credit Valuation Adjustment, or CVA, risk charge. This requirement only applies to transactions performed by banks with any counterparty, with the sole exception of derivatives traded with Banxico. National Banking and Securities Commission (CNBV) is working to implement the final capital requirements—comprising the final standard on SA-CCR and the final standard for capital requirements for bank exposures to central counterparties—which were due to be implemented by January 01, 2017. Mexico expects that the final rules will be published and in force by the first half of 2020. This is particularly important for derivatives, as it provides for improved netting benefit and recognition of margin for both centrally cleared and non-centrally cleared transactions. The report recommends that the Mexican financial authorities should:

    • Complete timely implementation of the remaining OTC derivatives reforms by adopting final capital requirements for non-centrally cleared derivatives and margin requirements for non-centrally cleared derivatives, including those for pension funds, insurance companies, and non-financial entities
    • Expand the scope and sharing of trade repository data, including by removing barriers to full reporting of Mexican trade repository data to foreign trade repositories
    • Expand the existing authority of the CNBV for aspects of the supervision and enforcement of conduct of market participants

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    Keywords: Americas, Mexico, Banking, Securities, Insurance, OTC Derivatives, CNBV, SA-CCR, CVA Risk, Basel, Initial Margin, Variable Margin, FSB

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