HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN MEXICO

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HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN
MEXICO
MA. TERESA VARGAS, BBVA CAROLINA MACHADO, JP
MORGAN
ISDA - NAFINSA CONFERENCE MAY 7, 2001 MEXICO CITY
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HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN
MEXICO

• AGENDA
• 1. INTRODUCTION
• 2. FIRST STEPS
• 3. HOW TO DEVELOP A MASTER AGREEMENT
• NATURE OF AGREEMENT
• OBJECTIVE OF AGREEMENT
• PROPOSED STRUCTURE OF AGREEMENT
• 4. CONCLUSIONS

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INTRODUCTION
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INTRODUCTION

• 1.1 INTERNATIONAL STANDARD AGREEMENTS
• (i) ISDA Master Agreement
• (ii) IFEMA
• (iii) ISMA (repos and buy sellbacks)

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INTRODUCTION

• 1.2 MASTER AGREEMENTS EXISTING IN
• MEXICO

• Currently in Mexico, the local master derivative
  agreements are specific by product
• (i) Fx Forwards
• (ii) Fras
• (iii) Ois
• (iv) INPC

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FIRST STEPS
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FIRST STEPS

• 2.1 IMPORTANCE OF DEVELOPING A LOCAL MASTER

• The need arises to develop a standard local
  agreement
• that governs all over the counter markets,
• but that is in accordance with local market
  practices
• A contractual structure compatible with Mexican
• legislation and courts
• Use of the native language for clarity
• But to the extent possible, with the minimum
  discrepancies of the internationally used
  agreements such as ISDA

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FIRST STEPS

• 2.2 KEY PLAYERS
• (i) Financial Intermediaries (including
  banks and
• broker dealers)
• (ii) Mexican Regulators
• (iii) With the participation and intervention
  of ABM,
• AMIB and ISDA
• (iv) Other potential players are financial
  intermediaries
• such as insurance companies, pension funds
  and mutual funds

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FIRST STEPS

• 2.3 EXPECTED USERS
• The local Master Agreement to be developed
  should be
• used between

• Mexican Financial Intermediaries
• Financial Intermediaries and Corporates
• Financial Intermediaries and Governmental
  entities
• Mainly Mexican players

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• HOW TO DEVELOP A MASTER AGREEMENT

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HOW TO DEVELOP A MASTER AGREEMENT

• Nature of Agreement
• Objective of Agreement
• Proposed Structure of Agreement

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HOW TO DEVELOP A MASTER AGREEMENT

• 3.1 NATURE OF AGREEMENT

• Only one contractual relationship to negotiate
• The local master agreement will act as a frame
  for
• the execution of derivative trades, without
  imposing
• an obligation to execute trades.
• If a trade is executed, the terms of the master
  agreement come into play.

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HOW TO DEVELOP A MASTER AGREEMENT
3.1 NATURE OF AGREEMENT

• Should be mainly influenced by ISDA Master
  Agreement, since it is recognized by
  international community.
• The Master, the schedule, plus the corresponding
  confirmation make one same agreement.

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HOW TO DEVELOP A MASTER AGREEMENT

• 3.2 OBJECTIVE OF AGREEMENT
• To regulate different types of transactions of
  the same nature, under one same umbrella.
• Contractual framework for the same type of trades
• Netting of trades
• Reduction of credit exposure
• Better use of credit line
• Avoiding credit risk during a bankruptcy
  situation
• Legislation has been put in place to apply this
  in Mexico

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HOW TO DEVELOP A MASTER AGREEMENT

• 3.3 PROPOSED STRUCTURE OF AGREEMENT
• 3.3.1 Sections of document
• Main form
• Schedule
• Confirmation

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HOW TO DEVELOP A MASTER AGREEMENT

• 3.3.2 Transactions that should be covered

• Swaps
• Forwards
• Options
• Foreign Exchange

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HOW TO DEVELOP A MASTER AGREEMENT

• Swaps
• Interest Rate Swaps (IRS)
• Cross Currency Swaps
• Cross Currency Rate Swaps
• Equity Swaps / Equity Index Swaps
• Any other type of derivatives that may be
  negotiated in the Financial Markets

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HOW TO DEVELOP A MASTER AGREEMENT

• Forwards and Options
• Interest Rate
• Caps, collars and floors
• Currency
• Fixed Rate Securities
• Variable Rate Securities
• Any other type

Subject to changes in the corresponding
regulations
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HOW TO DEVELOP A MASTER AGREEMENT

• Foreign Exchange
• FX spot
• FX Forward

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• CONCLUSIONS

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CONCLUSIONS

• Contractual Uniformity in local markets
• Better legal and credit protection
• Facilitates the negotiation of agreements
• Can assist in amending and issuing new regulations