II. Types of instruments and their placement

2.1 Types of instruments

In Mexico, the Federal Government issues and places four different instruments in the local debt market. These include cetes, bonos,[2] bondes, and udibonos. The Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario or IPAB, for its acronym in Spanish) also places bonds known as Bonos de Protección al Ahorro (Savings Protection Bonds, BPAs) which, although being issued by this Institute, are covered by a credit guarantee from the Federal Government[3] Banco de México acts as a financial broker in the placement of both Federal Government and IPAB securities. Below is a brief description of each of these instruments.[4]

Table 2.1
Current government debt instruments issued in Mexico
Instrument	Name	Face value	Term	Used term 2/	Interest period	Interest rate	Security id. 1/	First isuue
Cetes	Federal Treasury Certificates	10 pesos	Min: 7 days. Max: 728 days	28 and 91 days, and close to 6 months and 1 year	Zero-coupon bonds	Yield rate referenced to discount rate	BIAAMMDD	Jan-19-78
Bondes D	Federal Government Development Bonds	100 pesos	28 day-multiple	3, 5 and 7 years	28 days	Weighted bank funding rate for the interest period	LDAAMMDD	Aug-17-06
Bonos	Fixed-interest Federal Government Development  Bonds	100 pesos	182 day-multiple	3, 5, 10, 20 and 30 years	182 days	Fixed at issue by Federal Government	M AAMMDD	Jan-27-00
Udibonos	Federal Government Development Bonds denominated in Investment Units	100 udis	182 day-multiple	3, 10 and 30 years	182 days	Fixed at issue by Federal Government	S AAMMDD	May-30-96
BPA182	Savings Protection Bonds with interest payable at six months and inflation-hedged	100 pesos	182 day-multiple	5 and 7 years	182 days	182-day Cetes or change in UDI value during the period	ISAAMMDD	Apr-29-04
BPAG91	Savings Protection Bonds with interest payable at three months and additional reference rate	100 pesos	91-day multiple	5 years	91 days	Max [91-day Cetes, weighted government funding rate] effective at the beginning of the interest period	IQAAMMDD	Apr-26-12
BPAG28	Savings Potection Bonds with interest payable at one month and additional reference rate	100 pesos	28-day multiple	3 years	28 days	Max [28-day Cetes, weighted government funding rate] effective at the beginning of the interest period	IMAAMMDD	Apr-26-12
1/ The security ID is formed by 8 characters. The first two characters are for identifying the type of security and the remaining six to show the maturity date (year, month, day). 2/ Most frequently used. Source: Banco de México.

• Cetes: Federal Treasury Certificates (Certificados de la Tesorería de la Federación) are the oldest debt instruments issued by the Federal Government. They were first issued in January 1978 and, since then, have become a fundamental pillar in Mexico’s money market. These instruments belong to the family of zero-coupon bonds, i.e., they are discount traded (below their nominal value), pay no interest, and are settled at nominal value at maturity date. Currently, their maximum term is one year, although previously they were issued for up to two years. Cetes are fungible[5] among themselves as long as they mature on the same date, regardless of their issue date.[6]
• Bondes: Federal Government Development Bonds (Bonos de Desarrollo del Gobierno Federal) are floating-rate government securities, i.e., they pay interest and their rate is revised periodically (the terms at which the rate is periodically revised have changed along their history). They were first issued in October 1987. Since August 2006, the type of bondes that is placed in the market is known as bondes D, and pays monthly interest in pesos (every 28 days or the corresponding term that substitutes it in the event of holidays). Currently, these bonds are traded at 3-, 5- and 7-year terms. The interest rate paid by these securities is determined by compounding[7] on a daily basis the rate at which banks and brokerage firms carry out their overnight trades and repo transactions with banking instruments. This rate is known as “weighted bank-funding rate” (Tasa ponderada de fondeo bancario).[8] Bondes D are fungible among themselves as long as they mature on the same date, regardless of their issue date.[9]
• Bonos: Fixed-rate Federal Government Development Bonds (Bonos de Desarrollo del Gobierno Federal con Tasa de Interés Fija) were first issued in January 2000. Today, they are issued and placed at 3, 5, 10, 20 and 30 years. Bonos pay interest every six months and, contrary to bondes, their interest rate is determined on the issue date and remains fixed all along their term. Bonos are not fungible among themselves except if they pay the exact same interest rate.[10]

Bonos are susceptible to being stripped, i.e., the principal’s interest payment may be segregated in “stripped coupons” and, even when already stripped, they may be reconstituted by integrating again the “stripped coupons”, the accrued interest, and the corresponding principal, therefore returning it to the initial issue format.[11]

• Udibonos: Federal Government Development Bonds denominated in Investment Units (Bonos de Desarrollo del Gobierno Federal denominados en Unidades de Inversión) were created in 1996 and are inflation-hedged instruments. Udibonos are issued and placed at 3, 10 and 30 years and pay interest every six months at a real fixed interest rate determined at their issue date. They pay interest in udis that is payable in Mexican pesos (MXP).[12] Since each issue has the same real fixed interest rate from issuance to maturity date, udibonos are not fungible among themselves unless they pay the exact same interest rate.[13]

Udibonos are susceptible to being stripped (the principal’s interest payment may be segregated in “stripped coupons”). Like bonos, they may be reconstituted by integrating again the “stripped coupons”, the accrued interest, and the corresponding principal.[14]

• BPAs: The Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, IPAB) issues Savings Protection Bonds (Bonos de Protección al Ahorro, BPAs) using Banco de México as its financial agent. These instruments are issued at 3-, 5- and 7-year terms and pay interest on the same terms as cetes. The one that pays interest every month is identified as BPAG28, the one that pays interest every three months is identified as BPAG91, and the one paying interest every six months is identified as BPA182. These instruments pay interest in pesos (MXN). IPAB instruments are fungible among themselves as long as the mature on the same date and they are of the same type (BPAG28, BPAG91 and BPA182, respectively), regardless of the date they were issued.[15]

Although today the Federal Government and IPAB only issue and place the seven types of previously described securities, since 1978 a broad range of securities had been issued and placed in the market. Table 2.2 summarizes some characteristics of the different government instruments since they began to be issued up to now.

Table 2.2
Timetable of local government securities issues
(Federal Government, Banco de México and IPAB)
Instrument	First issued	Characteristics	Interest rate	Outstanding
Cetes Federal Treasury Certificates	Jan. 19, 1978	Zero-coupon bonds	Yield rate referenced to discount rate	Yes
Pagafes Federal Treasury Notes	Aug. 21, 1986	Zero-coupon bonds denominated in controlled USD and payable in MXP	Yield rate referenced to discount rate	No
Bondes Federal Government Development Bonds	Oct. 15, 1987	28-day coupon	The highest between 28-day Cetes and promissory notes with yield payable at maturity (PRLVs, for their acronym in Spanish)	No
Tesobonos Federal Treasury Bonds	Jul. 13, 1989	Zero-coupon bonds denominated in free USD and payable in MXP	Yield rate referenced to discount rate	No
Ajustabonos Federal Government Adjustable Bonds	Jul. 20, 1989	Adjustable nominal value (INPC, for its acronym in Spanish).	Fixed interest rate set at issue date	No
Udibonos Federal Government Development Bonds denominated in Investment Units	May 30, 1996	182-day coupon	Fixed interest rate set at issue date	Yes
Bondes 91 Government Development Bonds with interest payable at three months and inflation-hedged	Oct. 23, 1997	91-day coupon	91-day Cetes or the change in UDI value for the period	No
Bonos Fixed-interest Federal Government Development Bonds	Jan. 27, 2000	182-day coupon	Fixed interest rate set at issue date	Yes
BPAs Savings Protection Bonds	March 2, 2000	28-day coupon	28-day Cetes	No
Bondes 182 Government Development Bonds with interest payable at six months and inflation-hedged	Apr. 19, 2000	182-day coupon	182-day Cetes or the change in UDI value for the period	No
BREMS Banco de México’s Monetary Regulation Bonds	Aug. 3, 2000	28-day coupon	Daily “weighted overnight interbank rate”	No
Bondes T Government Development Bonds with interest payable at three months	Nov. 1, 2000	91-day coupon	91-day Cetes	No
BPATs Savings Protection Bonds with interest payable at six months	Jul. 4, 2002	91-day coupon	91-day Cetes	No
BPA182 Savings Protection Bonds with interest payable at six months and inflation-hedged	April 20, 2004	182-day coupon	182-day Cetes or the change in UDI value for the period	Yes
Bondes D Government Development Bonds	Aug. 17, 2006	28-day coupon	Daily “weighted overnight interbank rate”	Yes
BPAG28 Savings Protection Bonds with interest payable at one month and additional reference rate	Apr. 26, 2012	28-day coupon	Max [28-day Cetes, Weighted government funding rate] effective at the beginning of the period of interest]	Yes
BPAG91 Savings Protection Bonds with interest payable at three months and additional reference rate	Apr. 26, 2012	91-day coupon	Max [91-day Cetes, Weighted government funding rate] effective at the beginning of the period of interest]	Yes
Source: Banco de México.

2.2 Physical securities and their holdings[16]

Security holding is controlled by Indeval,[17] who keeps an accounting record of the instruments held by financial institutions. In turn, these financial institutions keep an accounting record of their customers’ holdings. By operating in this way, the control on the holding of securities is assured.

Nevertheless, in Mexico, for each government security there is physically a global note (multiple certificate) for the total of each issue. Government securities in Mexico are therefore not dematerialized (uncertified) but rather immobilized; that is, they are deposited exclusively in one location (entity). Global notes of government security issues are physically kept at Banco de México while IPAB securities, at Indeval.

By keeping all accounting records of its operations, Indeval prevents any inefficiencies or high costs that might derive from physically moving the government securities that are traded.

2.3 Reference issues and reopenings

In the last years, both the Federal Government and IPAB have adopted the policy of reopening outstanding issues of practically all types of securities issued in order to increase their size and thus promote the development of a more liquid secondary market.

Table 2.3
Government securities outstanding by type and term
Billion pesos at nominal value
	Months			Years
	1	3	6	1	3	5	7	10	20	30
Cetes	129	222	326	255	-	-	-	-	-	-
Bonos	-	68	-	117	476	450	88	307	450	278
Udibonos	-	-	-	118	148	64	145	111	44	355
Bondes D	26	28	27	126	432	371	78	-	-	-
BPAs	-	-	1	11	-	-	-	-	-	-
BPAT	2	-	-	-	5	-	-	-	-	-
BPA182	-	30	26	47	48	152	102	-	-	-
BPAG28	-	-	-	17	97	-	-	-	-	-
BPAG91	6	6	11	25	122	-	-	-	-	-
TOTAL	173	354	392	700	1,405	1,165	413	418	494	633
Source: Banco de México.

Table 2.4
Breakdown of government securities outstanding
Number of instruments and billion pesos at nominal value
	Number of  instruments	%	Amount outstanding	%
Bonos	22	11.8	2,234.2	36.3
Cetes	23	12.4	932.2	15.2
Udibonos	9	4.8	985.1	16.0
Bondes D	41	22.0	1,089.6	17.7
BPA182	27	14.5	404.3	6.6
BPAT	13	7.0	6.6	0.1
BPAs	7	3.8	12.3	0.2
BPAG28	18	9.7	170.3	2.8
BPAG91	26	14.0	313.1	5.1
TOTAL	186	100	6,147.7	100
Source: Banco de México.

2.4 Placement of government securities

In Mexico, government securities have been traditionally placed in the primary market through auctions.

2.4.1 Auctions[18]

An auction is the public sale of goods to the best bidder. Auctions are carried out at multiple, uniform, and fixed prices (see Box 2.1).[19]

Currently, Mexican government securities are placed through multiple and single price auctions (see Table 2.5 and Table 2.6). In both cases, these auctions are “closed” systems, i.e., the allocation price is only disclosed after the auction is closed.[20] Only Banco de México bondes D auctions use an “interactive” system in which the marginal allocated price for the entire issuance is disclosed in real time, allowing bidders to improve their bids as long as the pre-established time for such purpose has not ran out.

Box 2.1
Types of auctions

In a typical primary auction of government securities, bids received are assigned according to a descendent arrangement of the corresponding unit prices, without exceeding the maximum amount offered. In other words, the issuer orders bids according to price, from higher to lower, and starts accepting the ones less expensive for him until the amount auctioned is covered completely. The most common types of auctions used to place securities in financial markets are multiple price and single price auctions. However, fixed price auctions also exist.

Multiple price auctions: The winning bids are allotted at the price offered by each bidder. The advantages of this type of auctions include maximizing the profit to be received by the issuer by obtaining the maximum price each bidder is willing to pay.[21] The main disadvantage of this type of auctions for issuers, however, is that the incentives for bidders to collude are higher.

Single price auctions: All winning bids are allotted at the corresponding price of the last bid assigned. In the end, the price paid by the bidder may be lower than the price he is willing to pay, which represents a disadvantage for the issuer. An advantage of single price auctions for issuers is that the incentives for bidders to collude are lower.

When there are tied bids and the amount left to be assigned is insufficient to cover them completely, for both multiple price and single price auctions, these are prorated relative to the size of the bid (in order to determine the proportion of the amount to be allotted).

Fixed price auctions: This type of auctions has been used in Mexico for the Federal Government to buy its own securities. Bids are assigned at the price determined by the Federal Government and up to the amount stated in the bids.

Tabla 2.5
Instruments by type of auction
	Multiple rate/price	Single rate/price
Federal Government
Cetes	X
Bondes D	X
Bonos		X
Udibonos		X
Banxico (Monetary regulation)
Bondes D	X
Cetes		X
IPAB	X
Source: Banco de México.

Announcements of auctions of Federal Government and IPAB securities take place on a weekly basis. They are released on the last working day of the week prior to the auction.[22]

Government security auctions always take place two working days before the settlement date, which regularly falls on Thursdays, except on holidays, in which case, securities are settled on the closest previous or following working day (preferably the previous day).[23] For IPAB securities, auctions take place on the working day prior to their settlement date, which also regularly falls on Thursdays, except on holidays.

Box 2.2
Process through which Banco de México acquires Federal Government securities for monetary regulation purposes*

To achieve its monetary policy operational target (overnight interbank interest rate), Banco de México may use different instruments to manage the liquidity in Mexico’s financial system. These instruments may be classified according to the term used in the sterilization process:

Short-term instruments:

1. Open market operations
2. Credit and deposit facilities
3. Government securities sales

Medium- and long-term instruments:

1. Monetary regulation deposits
2. Direct sale and purchase of government securities

Sale of debt securities for monetary regulation purposes

One of the main instruments traditionally used by Banco de México to sterilize the surpluses of liquidity in the financial system is the sale of securities. These surpluses come mainly from the accumulation of international reserves. From 2000 to 2006, Banco de México used its own instruments to sterilize the accumulation of international reserves. Monetary regulation bonds (BREMs, for their acronym in Spanish) were instruments yielding an interest rate referenced to the daily weighted bank-funding rate. In 2006, the Federal Government and Banco de México agreed to substitute the central bank’s instruments for securities issued by the Federal Government (bondes D) with the same characteristics of BREMs. Since 2006, Banco de México has used bondes D for the long-term sterilization process. Banco de México currently conducts auctions of cetes for the short-term sterilization process. It is important to note that monetary regulation operations carried out by Banco de México are in no way related to other activities performed by the central bank on behalf of the Federal Government and the Instituto para la Protección al Ahorro Bancario (IPAB).

The process through which Banco de México acquires Federal Government securities for monetary regulation purposes is set forth in Articles 7 and 9 of Banco de México’s Law and in the Financial Broker Agreement between Banco de México and the Ministry of Finance (SHCP, for its acronym in Spanish). These legal principles establish that the central bank must reconcile the acquisition of these securities with cash deposits which cannot be withdrawn before their maturity date. These deposits should have the same size, terms and yield of to the securities of the respective operation.

Additionally, operations for monetary regulation purposes also comply with Article 11 of the aforementioned Law, which prohibits the central bank from granting financial support to the Federal Government through the acquisition of its securities.

From an accounting standpoint, once the Federal Government transfers instruments to Banco de México, a liability is entered in the central bank balance as a deposit on behalf of the Federal Government with the resources obtained from the sale of securities. This accounting procedure is defined in Article 38 of Banco de México’s Bylaws. Such deposit shall not be used or withdrawn by the Federal Government until the instrument backing such deposits matures. On the assets side, Banco de México enters the value of this holding. Deposits and instruments are valued on a daily basis at market prices. For instruments with coupons, the accrued interest is calculated and provisioned both on the assets side (government securities holdings) and the liabilities side (deposits on behalf of the Federal Government) in Banco de México’s balance sheet. At the time of settlement, Banco de México eliminates the securities from the assets side of the balance, but keeps them as a liability on behalf of the Federal Government.

* Prepared by García-Padilla, Juan Rafael with information from Sidaoui J., Santaella J., and J. Pérez. “Banco de México and recent developments in domestic public debt markets”. BIS Papers no. 67 (October 2012).

2.4.2 Syndications[24]

Another way to place securities is a “syndication”. In this type of placement, government securities are sold to a pool or syndicate of financial institutions which commit to purchase a certain amount of market-priced securities for a fee. These securities are then sold by the members of the syndicate to the other participants in the market.[25]

Since February 2010, syndicated placements of bonos and udibonos new issues are carried out in Mexico, where “distributors” are appointed from among “market makers”.[26] By adopting this placement mechanism, the Federal Government has access to a broader base of investors as compared to what it usually attains through a traditional primary auction. The advantages of using this placement method include the following:

• It insures that new issues have a considerable initial outstanding amount which, in turn, makes easier for those investors following global index principles to replicate them.[27]
• The global indexes include this type of issues from its syndication, without having to reach the minimum outstanding amount.
• A more diversified and broader distribution is achieved among domestic and foreign investors.
• Better liquidity conditions are achieved in the secondary market.

Table 2.7
Placements through syndication
Instrument	Interest rate (%)	Issue code	Maturity date	Placement date	Placement yield (%)	Amount placed 1/	Number of distributors
Bonos	8.00	M 200611	Jun-11-20	Feb-25-10	7.66	25,000	4
Udibonos	4.00	S 401115	Nov-15-40	Mar-25-10	4.27	3,500	4
Bonos	6.00	M 150618	Jun-18-15	Jul-08-10	6.13	25,000	4
Bonos	6.50	M 210610	Jun-10-21	Feb-01-11	7.44	25,000	4
Udibonos	2.50	S 201210	Dec-10-20	Mar-01-11	3.50	3,500	4
Bonos	6.25	M 160616	Jun-16-16	Jul-20-11	6.00	25,000	8*
Bonos	7.75	M 310529	May-29-31	Sep-09-11	7.11	25,000	8
Bonos	6.50	M 220609	Jun-09-22	Feb-17-12	6.30	25,000	8
Bonos	7.75	M 421113	Nov-13-42	Apr-20-12	7.46	15,000	8
Bonos	5.00	M 170615	Jun-15-17	Jul-20-12	4.88	30,000	8
Udibonos	2.00	S 220609	Jun-09-22	Sep-07-12	1.55	3,000	8
Bonos	4.75	M 180614	Jun-14-18	Aug-30-13	5.49	25,000	8
Bonos	7.75	M 341123	Nov-23-34	Apr-11-14	7.08	15,000	8
* It included all market makers for the first time. 1/ Million pesos/UDIs. Source: Banco de México.

2.4.3 Retail investors (Cetesdirecto)[28]

As of December 2010, the Federal Government started selling securities directly to the public through the Cetesdirecto program. This program provides small and middle investors access to all types of government securities besides cetes. Investors buy directly instead of purchasing such securities through brokerage firms or credit institutions (from 100 MXP and with no commission). To operate the program, the government granted a mandate to the development bank Nacional Financiera (Nafinsa). The public counter is the Bank for National Savings and Financial Services (Banco del Ahorro Nacional y Servicios Financieros, BANSEFI), but direct telephone and Internet trading is also available.

Since the launch of Cetesdirecto up to April 2014, 107,000 customers have registered of which 36.7% have signed a contract.

As Banco de México’s Governor, Agustín Carstens, stated: “Through the Cetesdirecto program, cetes are already considered a popular saving and investment tool, affordable by any person; [this program] provides housewives, low-income employees and workers access to very competitive interest rates in the money market,[29] with no further intermediation or burdensome fees or commissions”.[30]

The introduction of this mechanism is very useful for the Federal Government since it promotes middle and long term domestic saving as well as the use of financial services among the general population, while providing the country’s financial system with higher levels of competition, efficiency, and depth. By giving the general public access to purchase government securities, it fosters a better understanding of public debt and its management and contributes to expanding and making more heterogeneous the Federal Government’s investor base.

Up to April 30, 2014, holdings through the Cetesdirecto program amounted in nominal value to 1,122.872 million MXP in cetes, 74.550 million MXP in bonos, 14.001 million udis in udibonos, and 10.801 million MXP in bondes D.

Presently, 75.11% of the amount invested in cetes is at a 1-month term, 14.32% is at a 3-month term, 8.94% is at a 6-month term, and the remaining, at a 1-year term. In bonos, 27.40% is invested at a 3-year term, 20.19% at a 5-year term, 12.67% at a 10-year term, 13.59% at a 20-year term, and 26.15% at a 30-year term. Of the investors holding udibonos, 39.85% invest at a 3-year term, 23.93% at a 10-year term, and 36.22% at a 30-year term.

2.5 Other operations

2.5.1. Swaps[31]

The Federal Government also uses swaps as an additional instrument in the management of domestic debt. Government securities swaps are a financial operation through which the government exchanges certain government securities for other with different characteristics. Banco de México also acts as a financial broker for the Federal Government in these operations.

Swaps were adopted as a mechanism to improve the management of domestic debt (to improve the maturity profile of government securities and promote higher liquidity in the secondary market). Swaps took place for the first time in October 2005. These operations improve the level of efficiency in the price formation process, contribute to reduce the financial cost and risk of the Federal Government and favor the use of better international practices in the negotiation of securities. Swaps were originally intended only for bonos, but as of January 2008 they also started being used from time to time for udibonos. Finally, in 2011, cetes were included in swap operations and, by October 2011, IPAB carried out its first securities swap.

At the closing of April 2014, a total of 71 swaps had been carried out, of which 24 were for extending the maturity term and 47 for extending the outstanding amount of some issues.

1/ Negative figures represent a withdrawal; positive figures represent a placement.

1/ Negative figures represent a withdrawal; positive figures represent a placement.

2.5.2 Purchases

Another tool used by the Federal Government from time to time for managing domestic debt has been purchasing its own securities following transparent and clear programs aimed at withdrawing from the market insufficiently liquid issues or minimizing liquidity problems resulting from the financial crisis. In this regard, the operations conducted during the 2008 crisis, when purchases of debt government securities were announced, including fixed-rate bonos and middle- and long-term udibonos (that were not being placed through primary auctions) deserves mention.

Table 2.8
Bonos, udibonos, and IPAB instruments purchases
(Figures in million MXP or UDIs at nominal value)
Repurchase date	Instruments to be purchased			Purchased amount
	ID	Maturity (days)	Yield (%)	Objetive	Efffecive	Difference 2/
Apr-23-08	M 081224 1/	243	7.61	28,428	28,428	0
Jul-09-08	M 081224 1/	166	8.33	50	50	0
Nov-04-08	BPAs		0.22	49,880	23,976	25,904
	BPAT		0.21	38,837	20,066	18,771
	BPA182		0.32	30,182	2,824	27,358
Nov-11-08	BPAs		0.22	55,445	20,797	34,648
	BPAT		0.21	36,549	25,205	11,344
	BPA182		0.30	38,753	3,832	34,921
Nov-18-08	BPAT		0.26	55,684	55,684	0
	BPA182		0.30	49,407	49,407	0
Dec-03-08	M 131219	1,841	-	8,610	0	8,610
	M 141218	2,205	-	10,335	0	10,335
	M 151217	2,569	-	5,762	0	5,762
Dec-10-08	M 131219	1,834	8.36	2,792	1,792	1,000
	M 141218	2,198	8.39	4,200	2,000	2,200
	M 151217	2,562	-	0	0	0
	M 161215	2,926	-	2,400	0	2,400
	M 231207	5,474	8.56	50	50	0
	M 241205	5,838	8.61	3,181	500	2,681
Dec-17-08	S0131219	1,827	3.72	491	370	121
	S 141218	2,191	3.79	605	343	262
	S 160616	2,737	-	88	0	88
	S 251204	6,195	-	257	0	257
1/ The auction conducted with the purpose of purchasing the bond maturing December 24, 2008 was done through two fixed-rate auctions (see Box 2.1).  2/ In the column "Difference", a positive figure means that the authorities decided not to assign the total objective amount due to evident distortions in the prices of the bids as compared with the current market prices at the time.    Source: Banco de México.

2.5.3 Stripping of instruments[32]

As mentioned in the description of the different types of instruments in Mexico included in section 2.1., long-term fixed rate securities, both in MXP and in udis, can be stripped. This means that the payment of interest (coupon) and principal may be documented individually as zero-coupon securities. For instance, a five-year term bono paying interest at 10 different dates and paying principal at maturity may be segregated into 11 different zero-coupon bonds (each for 10 interest payments and one for the principal). When an instrument is stripped, its market risk profile is modified, although not its credit risk. The main advantage of stripping fixed-rate bonds is offering investors the possibility of having access to a broad range of short, medium and long term zero-coupon government securities. This segregation may be particularly useful for institutional investors, such as insurance companies, looking for investments that adjust to the market risk of their liabilities. The government’s discipline of creating instruments with the same coupon dates facilitates the payment of stripped interests to be later fungible.

In November 2012, “Banco de México, in its role of financial broker for the Federal Government, and with the purpose of fulfilling the need of various market investors to negotiate the interest and the principal of a security separately (to cover their long and middle-term liabilities for different amounts), as well as to strengthen the liquidity of Federal Government development bonds denominated in investment units, resolved celebrating auctions to place the stripped interest and principal payments of these securities.”[33] The first auction offered separately the principal and the interest of the 30-year udibono with a maturity date of November 2040.

Table 2.9
Auction of stripped principal and interest of udibonos
	Lots		Amount 1/
	Offered	Alloted	Offered	Alloted
Nov-14-12
Principal	2,500	2,500	225.00	225.00
Coupons	2,500	1,391	259.35	144.30
Feb-06-13
Principal	2,500	2,500	225.00	225.00
Coupons	2,500	398	254.80	40.56
Apr-30-13
Principal	2,500	2,500	225.00	225.00
Coupons	2,500	760	254.80	77.46
Jul-24-13
Principal	2,500	2,500	225.00	225.00
Coupons	2,500	296	250.25	29.63
Oct-16-13
Principal	2,500	2,339	225.00	210.51
Coupons	2,500	330	250.25	33.03
Jan-08-14
Principal	2,500	2,301	225.00	207.09
Coupons	2,500	600	245.70	58.97
Apr-02-14
Principal	2,500	2,500	225.00	225.00
Coupons	2,500	-	245.70	-
1/ Million UDIs. Source: Banco de México.

2.6 Transparency and predictability

To the extent that a government is predictable, transparent and organized in terms of debt securities placement, it will be likewise rewarded by investors (with a reduction in its financing costs and an extension of its debt maturity term). To achieve these goals, it is essential for the government to have a clear financing objective, to define auction calendars, and to have a consistent debt management that offers more liquidity to these securities.

Since 2002, the Federal Government stopped reserving its right to determine the minimum price at which it was willing to place its securities in auctions.[34] During the months of March, June, September and December, the Quarterly Program of Government Securities Auctions is announced for instruments to be placed in the local financial market, which must be consistent with the Economic Program of the current fiscal year and with the Annual Borrowing Plan presented in December (to be applied during the immediate following year).[35] For instance, on March 2014, the Ministry of Finance (SHCP), Banco de México (Banxico) and the Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, IPAB) jointly submitted their Government Security Auctions Program for the second quarter of 2014 (see Table 2.10).

Table 2.10
Auction of government securities for Q2 2014
Amounts offered per auction in million MXP
Instrument	Maturity date	Amount to place	Frequency
Federal Government 1/
Cetes	1 month	5,000 a 9,000	Weekly
	3 months	8,000 a 12,000	Weekly
	6 months	11,000	Weekly
	1 year	11,000	Every 4 weeks
Fixed interest rate bonos	3 years	11,000	Every 4 weeks
	5 years	10,500	Every 4 weeks
	10 years	8,500	Every 6 weeks
	20 years	3,500	Every 6 weeks
	30 years	3,000	Every 6 weeks
Udibonos 2/	3 years	950	Every 4 weeks
	10 years	800	Every 4 weeks
	30 years	550	Every 4 weeks
Bondes D	5 years	3,000	Every 2 weeks
Banxico
Bondes D	3 years	1,500	Weekly
	5 years	1,500	Weekly
Cetes	To be defined	To be defined	Extraordinary
IPAB
BPAG28	3 years	1,200	Weekly
BPAG91	5 years	1,200	Weekly
BPA182	7 years	1,000	Weekly
1/ The Ministry of Finance may carry out swap operations during Q2 which may involve fixed-rate bonos, udibonos, and cetes.  2/ Million UDIs. Source: Ministry of Finance (SHCP).

2.7 References

• BANCO DE MÉXICO. Annual Report. 2000.
• BANCO DE MÉXICO. Inflation Report, October-December 2008 and Monetary Program 2009. January 2009.
• BANCO DE MÉXICO. Financial System Report. 2006.
• BANCO DE MÉXICO. Financial System Report. 2008.
• CENTER FOR CENTRAL BANK STUDIES / BANK OF ENGLAND. Government securities: Primary issuance (Handbooks in Central Banking No. 11). Gray, Simon . July 1997.
• Australian University of Canberra. Central bank securities and government debt. Hawkins. April 2004.
• IBRD/World Bank, IMF. Developing government bond markets a handbook. 2001.
• SHCP. El crédito público en la historia hacendaria de México, sus protagonistas y su entorno. Rodríguez Regordosa, Gerardo. 2012.
• BIS Papers no. 67. Banco de México and recent developments in domestic public debt markets. Sidaoui J., Santaella J. and Pérez J. October 2012.
• www.bansefi.gob.mx
• www.banxico.org.mx
• www.cetesdirecto.com
• www.ipab.org.mx
• www.sat.gob.mx
• www.shcp.gob.mx

2.8 Appendices. Technical description of government securities

Download appendices here (available only in Spanish).

2.9 Notes

[1] María Rebeca Acosta-Arellano has a Bachelor degree in actuarial sciences from Universidad Anáhuac del Norte. She also has several postgraduate studies: in principles of economic analysis, by ITAM; in international finances and bond valuation, by IMERVAL; in risk management, fixed instrument valuation and in market risk management, by UIA; and in computer finances, by Universidad Anáhuac del Norte. She has worked in Banco de México since 1982, where she first held the position of market analyst in the Monetary and Credit Regulation Division and then she was appointed as researcher for markets, credit, legal deposit and stock market. She was later promoted to leader of the Primary Market Operations Office in today’s Domestic Operations Department, which is in charge of Banco de México’s activities as financial agent for the Federal Government and IPAB in connection with the issuance, placement and redemption of its securities, as well as of Banco de México’s securities.

Claudia Álvarez-Toca has a Bachelor degree in economics (summa cum laude) from Universidad Iberoamericana (UIA) and a Master degree in business administration (summa cum laude), with a major in finance from Instituto Panamericano de Alta Dirección de Empresas (IPADE). Since 2007 she has been senior economist at Banco de México, now reporting directly to the Directorate General of Central Bank Operations. Since she first started working at the central bank in 1993, she has held different positions, always in the Operations Department, among which stands out her position as head of the desk in charge of the implementation of currency exchange policies and later, as head of foreign reserves management. During a period where she worked outside Banco de México (2002-2007), she did so as an academic in Finance at IPADE, where she also held managerial positions and offered consulting services to corporations and individual investors.

The authors would like to thank Javier Duclaud, Jaime Cortina, Alfredo Sordo and Juan Rafael García-Padilla for their valuable comments, and Gilberto Montaño-Calvillo for the excellent technical and research assistance provided.

[2] Also known in the market as bonos M. The term used throughout the book to refer to these instruments is “bonos”.

[3] An explicit guarantee means that, in the event that IPAB is unable to fulfill its obligations, securities are to be paid directly from Mexico’s Federal Treasury account.

[4] For more information on the technical descriptions of the main types of government securities, including valuation methodologies and practical examples refer to http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html

[5] FUNGIBILITY: Instruments of the same type and sharing the same maturity date are not distinguishable for the security holder. In Mexico, fungible instruments are always issued by the Ministry of Finance and Public Credit (SHCP, for its acronym in Spanish) regardless if they are placed by the Ministry of Finance or by Banco de México. However, each of the placing authorities is independently liable to paying both interest and capital.

[6] http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html (cetes).

[7] The term “to compound” refers to reinvesting both capital and accrued interests. In this case, it refers to reinvesting every day the accrued interest of the previous day.

[8] The weighted bank funding rate is calculated and announced by Banco de México through its web page.

[9] http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html (bondes).

[10] http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html (bonos).

[11] Circular notice 2/2004 sets forth the Rules for securities’ stripping and reconstitution. http://www.banxico.org.mx/disposiciones/circulares/%7BF8667E3E-2456-7DFD-6B32-2BA50647ECB8%7D.pdf (available only in Spanish). For more information, see the chapter “Secondary market” which includes a section on instrument stripping.

[12] Investment units (udis) are updated every fifteen days on the basis of the National Consumer Price Index (INPC, for its acronym in Spanish), and according to the procedure determined by Banco de México and published in Mexico’s Federal Official Gazette on April 4, 1995.

[13] http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html (udibonos).

[14] Circular notice 2/2004 sets forth the Rules for securities’ stripping and reconstitution. http://www.banxico.org.mx/disposiciones/circulares/%7BF8667E3E-2456-7DFD-6B32-2BA50647ECB8%7D.pdf (available only in Spanish). For more information, see the chapter “Secondary market” which includes a section on instrument stripping.

[15] http://www.banxico.org.mx/sistema-financiero/material-educativo/intermedio/subastas-y-colocacion-de-valores/subastas-colocacion-valores.html (BPAs).

[16] For more information, see also the chapter “Instrument settlement”.

[17] INDEVAL: The Securities’ Deposit Institute (Instituto para el Depósito de Valores, Indeval) was created on April 28, 1978 as a government agency in charge of providing the service of custody, management, clearing, settlement and transfer of securities through book entries. It was privatized in 1987. For more information on this institution, see the chapter “Securities settlement”.

[18] The chapter “Legal and regulatory framework. Fiscal considerations” includes a table referring to the circular notice governing the primary placement of both government and IPAB securities.

[19] Regardless of the type of auction, the issuer may disclose the amount he is willing to place and ask bidders to compete according to the price. However, the issuer may also disclose the price he is willing to pay for placing its securities, and then, bidders indicate the amount they are willing to buy at that price.

[20] Currently, it is disclosed 30 minutes after the closing of the auction within the auction system designed by Banco de México.

[21] There are studies stating that in multiple price auctions bidders tend to offer lower bids for the same amount of assets, relative to what they would offer in a single price auction in order to prevent the “winner’s curse”, which refers to receiving allotment in an auction, but at a higher price than that paid by other bidders. The curse refers directly to the difficulties there will be when trying to later sell the securities since the other bidders have better prices to offer. On the contrary, single price auctions tend to minimize uncertainty because bidders are more willing to participate and raise their offered prices as compared to what they would have offered in multiple price auctions by not being threatened by the “winner’s curse”.

[22] In other words, on Friday. If the Friday falls on a holiday, the announcement is done on Thursday, and if the Friday and Thursday fall on a holiday, the announcement must be done on Wednesday, and so on.

[23] For instance, if the Thursday falls on a holiday, the settlement is done on the previous Wednesday; if this day also turns out to be a holiday, it is moved to the Friday of the same week. If the Wednesday, Thursday and Friday are also holidays, the settlement is done on the Tuesday of that same week.

[24] The chapter “Legal and regulatory framework. Fiscal considerations” includes a table referring to a circular notice that regulates syndicated primary placements.

[25] If the market were not deep enough (i.e. when there are no prices available at market levels), syndication participants could collude, hence inhibiting price formation. To prevent this from taking place, financial institutions may also act as underwriters for a fee, and such syndicate would ensure that all securities to be placed at a minimum price are purchased, only if no higher prices are offered during the auction.

[26] See also chapter “Market makers”.

[27] Investors replicating an investment index seek to invest in the securities included in the index. To the extent to which the amounts issued are higher, more securities tend to be available for such replication.

[28] The chapter “Investor base” also refers to the Cetesdirecto program. For more information, refer to www.cetesdirecto.com

[29] In September 2012, the Cetesdirecto Niños program was created for the purpose of teaching children about saving and investing.

[30] Remarks by Agustín Carstens, Governor of Banco de México, during the inauguration of the Cetesdirecto interactive module at the Interactive Museum of Economics (Museo Interactivo de Economía, MIDE), May 23, 2011.

[31] The chapter “Legal and regulatory framework. Fiscal considerations” includes a table that refers to the circular notice that regulates the swapping of government securities.

[32] The chapter “Secondary market” also includes references on the stripping of instruments.

[33] Circular notice 16/2012 auctions for the placement of stripped udibonos dated November 6, 2012.

[34] Previously, bids with prices lower to this “line” were disregarded. Currently, the Federal Government reserves its right to declare the auction as “completely deserted”.

[35] The chapter “Legal and regulatory framework. Fiscal considerations” makes reference to the legal framework the Federal Government must comply with when issuing securities.