TW - Preparing for Mexico’s TIIE Transition: Lessons from LIBOR
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The clock is ticking louder on thetransition to a new overnight funding rate benchmark for Mexico’s$4.9 trillion swaps market. As we shared in our recent post, Mexico’sTIIE-28 Benchmark is About to Go the Way of LIBOR; Are You Ready? ,the Tasa de Interés Interbancaria de Equilibrio, or InterbankEquilibrium Interest Rate (TIIE) will gradually move to a newstandard, the TIIE de Fondeo (F-TIIE), starting on January 1,2024.
While many market participantshave already begun making the transition and others are busy hammeringout their plans, there is still no discernable liquidity benchmarkedto the new standard and many questions remain about how, exactly, themarketplace will respond when the switch is flipped next year.Fortunately, we’ve been through this before, and many of the lessonslearned over the course of the recent LIBOR migration are alsoapplicable to F-TIIE.
BestPractices for a Smooth Transition
As a hub of swaps trading activity, Tradeweb played a centralrole in the transition from LIBOR to the Secured Overnight FinancingRate (SOFR). Now we are working with our clients and Banco de Méxicoto share insights and advice on how to navigate the challenges thatwill inevitably accompany the TIIE transition. We’ve identifiedseveral best practices for market participants to prepare for thefast-approaching deadlines, which are January 2024 and January2025.
- Collaboration is Key: LIBOR earned itsreputation as “the world’s most important number” over thecourse of a 30-year run, during which it became the interest ratebenchmark for hundreds of trillions of dollars of financialinstruments globally. Transitioning away from that standard createdcountless valuation, trade processing and settlement details thatneeded to be sorted. But it’s important to note that the transitionwas made possible through close collaboration, including betweenmarket participants and regulators who coordinated efforts ahead oftarget deadlines and communicated frequently. That same spirit ofcollaboration is already present in the F-TIIE transition, as variousstakeholders have been working together to drive a successfuloutcome.
- Expect Bumps in the Road: Tradewebconducted several analyses tracking liquidity in the swaps marketthroughout the LIBOR transition, monitoring trades benchmarked toLIBOR and those benchmarked to the new SOFR standard over severaldifferent time periods. One of our most interesting observationssurrounded the July 26, 2021 “SOFR First” phased initiative, wherewe saw the implied cost of liquidity—as measured by bid-offerspreads—gradually tighten in the weeks and months leading up to theJuly 26 announcement, then subsequently tighten further. The lessonlearned here was that while there was a premium on liquidity using thenew benchmark for a short time, but that premium soon faded once themarketplace migrated to the newstandard.
- Benchmark Transitions Happen Gradually,Then All at Once: Another lesson learned in the LIBOR transitionwas that, although many firms had already done the heavy lifting onpreparing themselves to use the new benchmark, the actual adoption wasgradual. In fact, the percentage of new U.S. dollar swaps tradesbenchmarked to SOFR and executed on the Tradeweb platform did notstart to trend upward until August of 2021. From there, SOFR adoptiongrew slowly but steadily until it surged in January 2022 aligned withthe regulatory deadline for no new LIBOR origination. The key takeawayhere is that even though it may look like many firms have not yet madethe conversion, most are in the process of getting ready and will beable to do so when the deadlinehits.
- Electronification Helps: As was the casewith LIBOR, the TIIE transition can be made easier for those tradingelectronically. Obvious benefits like direct integration with ordermanagement systems and built-in audit trail for clearing andsettlement help to streamline the process. In addition, more advancedcapabilities that are only available on electronic markets, such astrade compression tools -- which allow market participants to easilycollapse old positions and roll them into a new index in a singletransaction -- can ease the process of getting old positions onto thenew benchmark.
How We’reHelping
Fortunately there areplenty of resources and opportunities available to market participantsright now to prepare for the transition. One example is Tradeweb’scollaboration with the Banco de México who together in mid-Novemberwill convene stakeholders, including clearinghouses, dealers and theinvestor community to discuss key deadlines, transition strategies andnavigating challenges. As we continue to observe and learn bestpractices from these market participants, we will continue to provideupdates here to share what we’ve learned.
About TradewebMarkets
Tradeweb Markets Inc. (Nasdaq: TW) is a leading,global operator of electronic marketplaces for rates, credit, equitiesand money markets. Founded in 1996, Tradeweb provides access tomarkets, data and analytics, electronic trading,straight-through-processing and reporting for more than 40 products toclients in the institutional, wholesale and retail markets. Advancedtechnologies developed by Tradeweb enhance price discovery, orderexecution and trade workflows while allowing for greater scale andhelping to reduce risks in client trading operations. Tradeweb servesmore than 2,500 clients in more than 65 countries. On average,Tradeweb facilitated more than $1.2 trillion in notional value tradedper day over the past four quarters. For more information, please goto www.tradeweb.com .
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