TW - Mexico’s New TIIE Benchmark – What Industry Leaders are Saying about the Conversion
(NewsDirect)
Mexico’s overnight funding ratebenchmark officially began to change on January 1, 2024. It was a datethe Banco de México had long made clear was “written in stone”and a message Gerardo Garcia, the central bank’s General Directorof Operations and the person responsible for leading the TIIEtransition, had conveyed at an event Tradeweb hosted in Mexico City inNovember last year.
To help othersbegin to prepare, Garcia also shared guidance on what marketparticipants can do to get themselves ready for the transition.Together with input from a group of industry leaders from Afore SURA,CME Group, Grupo BMV, BBVA and Tradeweb, who have all been workingbehind the scenes to support the transition, Garcia outlined key stepsfor compliance with both the recent January 1, 2024 deadline for91-day and 182-day tenor TIIEs, and the January 1, 2025 deadline forthe 28-day TIIEs.
Below are some ofthe key takeaways from the discussion.
Alignment with International Best Practices
Reference rate transitions are never easy.As we all experienced with the lengthy LIBOR transition, whentrillions of dollars were benchmarked to a single standard, it is nosmall feat to change the underlying benchmark. In the case ofMexico’s USD 4.9 trillion swaps market, converting all existingcontracts to the new standard will be a significant lift for banks,brokerage firms, trading venues and regulators alike. But, as Garciaexplained, the transition is critical because it brings Mexico in linewith international best practices and importantly moves the industryfrom a focus on an antiquated, survey-based methodology to a truerisk-free rate.
“It’s importantto note that our main benchmark rates – the TIIE-28, TIIE-91 andTIIE-182 – were not based on actual observation of transactions.While we did not face some of the problems some economies did, it wasan opportunity to bring our benchmark rate in line with internationalstandards,” Garcia explained. “Reference rates need to come fromreal transactions, and we are moving to the most important transactionin the Mexican money markets: 1-day repurchase agreements withgovernment securities.”
Understanding the Fundamental Building Blocks of the NewTIIE
Garcia then explained thedetails of how the new standard, the TIIE de Fondeo (F-TIIE), isconstructed and how clearing houses, market participants and thecentral bank will all work together to support the transition.
“To enable more liquidity for the newreference rate, clearing houses are planning a conversion of legacycontracts linked to 28-day TIIE, to overnight index swaps contractslinked to the funding TIIE on September 6, 2024. This conversion isfundamental to enable the transition process and make it smoother andmore robust,” Garcia explained. “To help enhance funding TIIE inthe derivatives markets, we are planning an implementation initiativethat is similar to the SOFR, first called TIIE de Fondeo Primero. Thisinitiative will help to increase liquidity in the funding in the TIIEde Fondeo derivatives market, encourage the creation of an OvernightIndexed Swap (OIS) market linked to this rate, promote conventions inthe standardizations derivatives markets and reduce the use of 28, 91and 182 TIIE rates as benchmarks.”
CME Group’s Head of Mexico and International MarketsDevelopment, LATAM, Jorge Alegria, then shared the clearing houseperspective, explaining the process his firm followed to convert allexisting swaps contracts to the new rate ahead of the January 1prohibition date. The process involved breaking each TIIE-28 swap intwo to create a short-dated swap for the remaining TIIE 28-day couponsuntil the prohibition, and a forward starting swap on F-TIIE OIS thatstarts when the last coupon of the TIIE-28 ends. If the process soundsfamiliar, it should. Alegria said CME Group followed a similar processfor LIBOR to SOFR in the US to SARON in Switzerland.
Lessons Learned in LIBOR
Tradeweb’s Daniel Flaim, ManagingDirector, North America Interest Rate Derivatives, shared a similarsentiment, explaining some of the lessons learned in the transitionfrom LIBOR to SOFR and how those apply to the Mexican swaps market. Henoted that having defined deadlines was the key to a large-scalebehavioral change on the part of market participants.
“The biggest catalyst that we sawcreating liquidity in the market as a whole during the LIBORtransition was the introduction of the SOFR First initiative.Effective as of July 26, 2021, the interdealer market had to move toSOFR as opposed to LIBOR. That caused interdealer liquidity to shiftovernight, which compressed bid/offer spreads to be more in line withLIBOR, and contributed to client activity picking up.”
BBVA’s Executive Director of StructuredSolutions, Ezequiel Agustin Marquez added to the discussion,explaining one notable difference in the TIIE conversion that sets itapart from what we saw in LIBOR: “One good decision that Banco deMéxico made was to change the methodology but keep the TIIE rate theywill be publishing largely the same in terms of the ticker and index.This is a good solution because what we saw with the SOFR transitionwere several issues around things like discussions with clients aboutthe new methodologies, reviewing and signing new documentation, and alot of administrative work involved with just changing the standard.By keeping the same rate and just changing the methodology, thetransition will really be a non-event for end users.”
Esteban Puente, Head of FI, FX & Macroat Afore SURA shared the institutional asset management perspective onthe TIIE conversion, noting that it’s critical to look to LIBOR forguidance on a smooth TIIE transition: “We must learn from whathappened in the LIBOR to SOFR transition. We need to look in themirror and go inside the best practices for a smooth transition: jointcollaboration, not only with authorities, but also with CME Group,banks, clients, Tradeweb, and others. We also have to note that thisis all supporting a movement towards a world where electronic tradingwill help us a lot. That is key.”
Proper Preparation Prevents Poor Performance
The shared message from all of theevent’s participants was that nothing about the TIIE shift should beleft to chance, and that a diverse group of stakeholders has beenworking hard to ensure the pieces are all in place for a smoothtransition.
Jiyouji Ueda, ExecutiveDirector for CCPs at Grupo BMV helped to put the collaboration themein perspective by discussing the work his team has been putting in onTIIE de Fondeo for the last three years.
“We’ve been taking action since February 2021 by clearingTIIE futures across multiple maturities. Now, the next step is tolaunch the new funding TIIE swap and forward swap so we’re ready forthe January 2025 deadline.”
Forour part at Tradeweb, we will continue to be watching closely as theTIIE de Fondeo transition continues and will be sharing insights onthe progress from our position at the center of electronic trading inMexico’s swaps market. In 2023, Tradeweb executed more than USD 660billion in TIIE-28 volume and we look forward to working closely withmarket participants to help grow that number considerably over thisyear.
About Tradeweb Markets
Tradeweb Markets Inc.(Nasdaq: TW) is a leading, global operator of electronic marketplacesfor rates, credit, equities and money markets. Founded in 1996,Tradeweb provides access to markets, data and analytics, electronictrading, straight-through-processing and reporting for more than 40products to clients in the institutional, wholesale and retailmarkets. Advanced technologies developed by Tradeweb enhance pricediscovery, order execution and trade workflows while allowing forgreater scale and helping to reduce risks in client tradingoperations. Tradeweb serves more than 2,500 clients in more than 65countries. On average, Tradeweb facilitated more than $1.4 trillion innotional value traded per day over the past four quarters. For moreinformation, please go to www.tradeweb.com.
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