Mexico’s New TIIE Benchmark – What Industry Leaders are Saying about the Conversion
By Kerim Acanal, Global Head of Emerging Markets, Tradeweb
This blog is the third in a series by Tradeweb focused on the TIIE transition
Mexico’s overnight funding rate benchmark officially began to change on January 1, 2024. It was a date the Banco de México had long made clear was “written in stone” and a message Gerardo Garcia, the central bank’s General Director of Operations and the person responsible for leading the TIIE transition, had conveyed at an event Tradeweb hosted in Mexico City in November last year.
To help others begin to prepare, Garcia also shared guidance on what market participants 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 working behind the scenes to support the transition, Garcia outlined key steps for compliance with both the recent January 1, 2024 deadline for 91-day and 182-day tenor TIIEs, and the January 1, 2025 deadline for the 28-day TIIEs.
Below are some of the 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, when trillions of dollars were benchmarked to a single standard, it is no small feat to change the underlying benchmark. In the case of Mexico’s USD 4.9 trillion swaps market, converting all existing contracts to the new standard will be a significant lift for banks, brokerage firms, trading venues and regulators alike. But, as Garcia explained, the transition is critical because it brings Mexico in line with international best practices and importantly moves the industry from a focus on an antiquated, survey-based methodology to a true risk-free rate.
“It’s important to note that our main benchmark rates – the TIIE-28, TIIE-91 and TIIE-182 – were not based on actual observation of transactions. While we did not face some of the problems some economies did, it was an opportunity to bring our benchmark rate in line with international standards,” Garcia explained. “Reference rates need to come from real transactions, and we are moving to the most important transaction in the Mexican money markets: 1-day repurchase agreements with government securities.”
Understanding the Fundamental Building Blocks of the New TIIE
Garcia then explained the details of how the new standard, the TIIE de Fondeo (F-TIIE), is constructed and how clearing houses, market participants and the central bank will all work together to support the transition.
“To enable more liquidity for the new reference rate, clearing houses are planning a conversion of legacy contracts linked to 28-day TIIE, to overnight index swaps contracts linked to the funding TIIE on September 6, 2024. This conversion is fundamental to enable the transition process and make it smoother and more robust,” Garcia explained. “To help enhance funding TIIE in the derivatives markets, we are planning an implementation initiative that is similar to the SOFR, first called TIIE de Fondeo Primero. This initiative will help to increase liquidity in the funding in the TIIE de Fondeo derivatives market, encourage the creation of an Overnight Indexed Swap (OIS) market linked to this rate, promote conventions in the standardizations derivatives markets and reduce the use of 28, 91 and 182 TIIE rates as benchmarks.”
CME Group’s Head of Mexico and International Markets Development, LATAM, Jorge Alegria, then shared the clearing house perspective, explaining the process his firm followed to convert all existing swaps contracts to the new rate ahead of the January 1 prohibition date. The process involved breaking each TIIE-28 swap in two to create a short-dated swap for the remaining TIIE 28-day coupons until the prohibition, and a forward starting swap on F-TIIE OIS that starts when the last coupon of the TIIE-28 ends. If the process sounds familiar, it should. Alegria said CME Group followed a similar process for LIBOR to SOFR in the US to SARON in Switzerland.
Lessons Learned in LIBOR
Tradeweb’s Daniel Flaim, Managing Director, North America Interest Rate Derivatives, shared a similar sentiment, explaining some of the lessons learned in the transition from LIBOR to SOFR and how those apply to the Mexican swaps market. He noted that having defined deadlines was the key to a large-scale behavioral change on the part of market participants.
“The biggest catalyst that we saw creating liquidity in the market as a whole during the LIBOR transition was the introduction of the SOFR First initiative. Effective as of July 26, 2021, the interdealer market had to move to SOFR as opposed to LIBOR. That caused interdealer liquidity to shift overnight, which compressed bid/offer spreads to be more in line with LIBOR, and contributed to client activity picking up.”
BBVA’s Executive Director of Structured Solutions, Ezequiel Agustin Marquez added to the discussion, explaining one notable difference in the TIIE conversion that sets it apart from what we saw in LIBOR: “One good decision that Banco de México made was to change the methodology but keep the TIIE rate they will be publishing largely the same in terms of the ticker and index. This is a good solution because what we saw with the SOFR transition were several issues around things like discussions with clients about the new methodologies, reviewing and signing new documentation, and a lot of administrative work involved with just changing the standard. By keeping the same rate and just changing the methodology, the transition will really be a non-event for end users.”
Esteban Puente, Head of FI, FX & Macro at Afore SURA shared the institutional asset management perspective on the TIIE conversion, noting that it’s critical to look to LIBOR for guidance on a smooth TIIE transition: “We must learn from what happened in the LIBOR to SOFR transition. We need to look in the mirror and go inside the best practices for a smooth transition: joint collaboration, not only with authorities, but also with CME Group, banks, clients, Tradeweb, and others. We also have to note that this is all supporting a movement towards a world where electronic trading will help us a lot. That is key.”
Proper Preparation Prevents Poor Performance
The shared message from all of the event’s participants was that nothing about the TIIE shift should be left to chance, and that a diverse group of stakeholders has been working hard to ensure the pieces are all in place for a smooth transition.
Jiyouji Ueda, Executive Director for CCPs at Grupo BMV helped to put the collaboration theme in perspective by discussing the work his team has been putting in on TIIE de Fondeo for the last three years.
“We’ve been taking action since February 2021 by clearing TIIE futures across multiple maturities. Now, the next step is to launch the new funding TIIE swap and forward swap so we’re ready for the January 2025 deadline.”
For our part at Tradeweb, we will continue to be watching closely as the TIIE de Fondeo transition continues and will be sharing insights on the progress from our position at the center of electronic trading in Mexico’s swaps market. In 2023, Tradeweb executed more than USD 660 billion in TIIE-28 volume and we look forward to working closely with market participants to help grow that number considerably over this year.