Mexico’s TIIE-28 Benchmark is About to Go the Way of LIBOR; Are You Ready?
By Kerim Acanal, Global Head of Emerging Markets, Tradeweb
While the transition away from the London Interbank Offered Rate (LIBOR) as the standard benchmark for U.S. dollar swaps transactions may have received a great deal of media attention recently, LIBOR isn’t the only benchmark out there. It’s also not the only benchmark set to go through a major transformation.
Next up to prepare for a transition are participants in Mexico’s $4.9 trillion swaps market (CCP volumes), the reference rate for peso-denominated interest rate swaps, known as the Tasa de Interés Interbancaria de Equilibrio, or Interbank Equilibrium Interest Rate (TIIE). Beginning early next year, TIIE will move to a new overnight funding rate called TIIE de Fondeo.
However, without the benefit of the global media attention and market analysis that followed the LIBOR transition, buy-side traders, dealers and even regulators who have not been closely involved with the Mexican interest rate swaps market transition may have questions about how the new changes to peso-denominated swaps will affect them. Having just come off the final phases of the LIBOR transition, Tradeweb has had a front row seat for how far-reaching and complicated a major benchmark rate change can be for all corners of the markets. We’ve also learned several lessons and established a core set of best practices over the course of the LIBOR migration to the Secured Overnight Financing Rate (SOFR), which are widely applicable to what’s happening now in Mexico.
This blog will be the first in a series to offer an overview of the key issues at play and delve deeper into the specific tactics market participants are deploying to ease the transition. With this first installment, we’re providing an overview of what’s happening now and a timeline of key milestones to expect in the future as outlined by Banco de México, Mexico’s central bank.
Most immediate, effective January 1, 2024, TIIE rates with maturities longer than one business day will start transitioning to this new overnight rate. The first reference rates to be affected will be the 91-day and 182-day tenor TIIEs. The 28-day TIIE, more commonly known as TIIE-28, which is the most liquid of the Mexican swap benchmarks, will transition to the new overnight benchmark a year later, on January 1, 2025.
For participants in the Mexican swaps market, this move to overnight TIIE will present its fair share of challenges and will require close collaboration between market participants, regulators and trading venues.
The first step in that process is understanding the new standard. One of the central differences of the new overnight TIIE de Fondeo is that it is calculated based solely on real transaction data, as opposed to the old survey-based methodology. The benchmark is determined based on wholesale overnight repurchase (repo) agreement transactions denominated in Mexican pesos that are settled by banks and brokerage firms. The TIIE rate is then expressed as a volume-weighted median of interest rates paid on these repo transactions. Banco de México has provided a detailed breakdown of the calculations here.
While the calculation itself is a relatively straightforward equation, the bigger challenge for market participants will be converting all existing contracts to the new standard within the compressed timeline offered by the Mexican central bank. As such, Mexican regulators have been encouraging market participants to start making the change sooner than later to ensure a smooth transition.
For our part at Tradeweb, we have the experience to help all stakeholders navigate this transition. Drawing on our recent experience with the LIBOR transition and leaning into our role as the largest trading platform in the Mexican swaps market, we’re incredibly confident that we have the expertise and tools to help our clients make a smooth transition to TIIE de Fondeo.
As we saw over the course of the evolution from LIBOR to SOFR, our role as the hub of swaps trading activity helped us connect key stakeholders, including dealers and clients, clearinghouses and operators of order management systems. Gradually, as we helped our clients start to offset their existing U.S. dollar LIBOR risk with new SOFR activity, we were able to help normalize trading on the new benchmark before critical regulatory deadlines were implemented.
Today, we’re taking the steps needed to collaborate with liquidity providers and central counterparty clearing houses (CCPs) to ensure clear lines of communication and help set the framework for an orderly transition. For example, Tradeweb is participating in Banco de México’s working group alongside our clients. We are also building direct connectivity to the Asigna clearinghouse, which handles clearing and settlement for the Mexican Derivatives Market (MexDer), making it seamless for our clients to seamlessly trade TIIE swaps.
We will continue to provide updates on the TIIE transition, along with best practices and guidance gleaned from our experience with market participants. Our next piece will dig deeper into the specific steps market participants must take to be ready for upcoming deadlines.