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Preparing for Mexico’s TIIE Transition: Lessons from LIBOR

| Emerging Markets

By Kerim Acanal, Global Head of Emerging Markets, Tradeweb

The clock is ticking louder on the transition to a new overnight funding rate benchmark for Mexico’s $4.9 trillion swaps market. As we shared in our recent post, Mexico’s TIIE-28 Benchmark is About to Go the Way of LIBOR; Are You Ready?, the Tasa de Interés Interbancaria de Equilibrio, or Interbank Equilibrium Interest Rate (TIIE) will gradually move to a new standard, the TIIE de Fondeo (F-TIIE), starting on January 1, 2024.

While many market participants have already begun making the transition and others are busy  hammering out their plans, there is still no discernable liquidity benchmarked to the new standard and many questions remain about how, exactly, the marketplace will respond when the switch is flipped next year. Fortunately, we’ve been through this before, and many of the lessons learned over the course of the recent LIBOR migration are also applicable to F-TIIE.

Best Practices for a Smooth Transition

As a hub of swaps trading activity, Tradeweb played a central role in the transition from LIBOR to the Secured Overnight Financing Rate (SOFR). Now we are working with our clients and Banco de México to share insights and advice on how to navigate the challenges that will inevitably accompany the TIIE transition. We’ve identified several best practices for market participants to prepare for the fast-approaching deadlines, which are January 2024 and January 2025.

  • Collaboration is Key: LIBOR earned its reputation as “the world’s most important number” over the course of a 30-year run, during which it became the interest rate benchmark for hundreds of trillions of dollars of financial instruments globally. Transitioning away from that standard created countless valuation, trade processing and settlement details that needed to be sorted. But it’s important to note that the transition was made possible through close collaboration, including between market participants and regulators who coordinated efforts ahead of target deadlines and communicated frequently. That same spirit of collaboration is already present in the F-TIIE transition, as various stakeholders have been working together to drive a successful outcome.

  • Expect Bumps in the Road: Tradeweb conducted several analyses tracking liquidity in the swaps market throughout the LIBOR transition, monitoring trades benchmarked to LIBOR and those benchmarked to the new SOFR standard over several different time periods. One of our most interesting observations surrounded the July 26, 2021 “SOFR First” phased initiative, where we saw the implied cost of liquidity—as measured by bid-offer spreads—gradually tighten in the weeks and months leading up to the July 26 announcement, then subsequently tighten further. The lesson learned here was that while there was a premium on liquidity using the new benchmark for a short time, but that premium soon faded once the marketplace migrated to the new standard.

  • Benchmark Transitions Happen Gradually, Then All at Once: Another lesson learned in the LIBOR transition was that, although many firms had already done the heavy lifting on preparing themselves to use the new benchmark, the actual adoption was gradual. In fact, the percentage of new U.S. dollar swaps trades benchmarked to SOFR and executed on the Tradeweb platform did not start to trend upward until August of 2021. From there, SOFR adoption grew slowly but steadily until it surged in January 2022 aligned with the regulatory deadline for no new LIBOR origination. The key takeaway here is that even though it may look like many firms have not yet made the conversion, most are in the process of getting ready and will be able to do so when the deadline hits.

  • Electronification Helps: As was the case with LIBOR, the TIIE transition can be made easier for those trading electronically. Obvious benefits like direct integration with order management systems and built-in audit trail for clearing and settlement help to streamline the process. In addition, more advanced capabilities that are only available on electronic markets, such as trade compression tools -- which allow market participants to easily collapse old positions and roll them into a new index in a single transaction -- can ease the process of getting old positions onto the new benchmark.

How We’re Helping

Fortunately there are plenty of resources and opportunities available to market participants right now to prepare for the transition. One example is Tradeweb’s collaboration with the Banco de México who together in mid-November will convene stakeholders, including clearinghouses, dealers and the investor community to discuss key deadlines, transition strategies and navigating challenges. As we continue to observe and learn best practices from these market participants, we will continue.

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Mexico’s TIIE-28 Benchmark is About to Go the Way of LIBOR; Are You Ready?