Grupo Bursatil Mexicano (GBM)
Irais Vargas, head of securities lending and global operations at Grupo Bursatil Mexicano (GBM), speaks to SFT about the expansion of securities lending opportunities in the Mexican market
Could you please tell SFT readers more about your organisation?
GBM is the leading financial institution in the investment sector in Mexico, with more than 37 years of experience in the market. We currently offer service to over 6 million investment accounts, providing service to institutional clients, individual investors and financial advisors with a range of different products and services. Over the last decade, GBM has invested in digital solutions and alliances that have helped to democratise access to investment for all Mexicans.
What is your role within the organisation and what function does your department play within the securities finance market?
I am vice president of the cash management team and head the securities lending department.
We strive to provide the best investment solutions ecosystem to deliver return on users’ assets, with securities lending being a fundamental component in delivering this objective. The experience, talent and integrity that we offer has enabled our firm to become the largest investment company in Mexico.
Our company is also one of the few firms promoting securities lending and short selling services in Mexico. Through our GBM app, we enable retail clients to engage in short selling within minutes, with appropriate risk controls in place. GBM is currently a leader in equities lending in Mexico and we are constantly working to increase local and foreign inventories and to enhance the experience and service quality for our institutional and retail clients.
A wide range of brokerage houses and banks are active in the securities lending market as lenders and borrowers, with institutional investors and investment funds offering a primary source of loan supply. The Mexican Stock Exchange, Bolsa Mexicana de Valores (BMV) and Bolsa Institucional de Valores (BIVA), may facilitate securities lending transactions, with lending activity supervised principally by the Comisión Nacional Bancaria y de Valores (CNBV), the Mexican securities market regulator.
There are three platforms in Mexico which trade and manage securities lending. One of these, owned by GBM, was established more than 10 years ago and we have continued to invest and improve this platform. This is audited regularly by the Mexican financial authorities to ensure that this protects the best interests of our clients.
What types of securities are commonly lent in the Mexican market. Are there any restrictions on eligible securities?
Brokerage firms may lend shares that are registered in the National Securities Registry or listed in the International Quotation System — including ordinary participation certificates in these securities — as well as equity contribution certificates representing the share capital of development banking institutions which appear in the National Securities Register.
Securities lending and borrowing is also permitted in securities including Banco de Mexico bonds (BREMS) and other government securities, bank securities, foreign securities and savings protection bonds.
SIC names — those registered in the International Quotations System (SIC) for equities — are typically hard to borrow, given that the core holders of these securities, namely mutual funds and retirement fund administrators (AFORES), are still awaiting regulatory authorisation to be able to lend equities in the Mexican market.
How does the legal framework in Mexico address issues such as collateral, fees and terms in securities lending agreements?
When entering into a securities loan, the parties enter into a contract approved by the trade union and may draft certain specific clauses. The collateral must always be deposited in a securities depository and the parties may freely agree on the term. However, this must expire no later than the business day prior to the maturity date of the loan securities. Transfer of the loan securities may be no later than four business days from the date on which the loan was agreed.
The securities lending may be terminated early according to the conditions specified in the contract.
Are there specific tax implications associated with securities lending transactions in Mexico?
Under Mexican law, securities lending transactions do not trigger a sale event if the borrower returns the securities at the end of the agreed loan period. The borrowing fee is taxed as interest and is therefore subject to withholding tax. Mexico has double taxation treaties in place with more than 40 jurisdictions.
The lender retains all ownership rights of the security during the loan period and the borrower is obliged to pass through to the lender any dividends or interest payments that accrue from the issuer during the loan period. These entitlements are characterised as interest payments for tax purposes.
What risk management practices are commonly employed in Mexican securities lending, particularly related to counterparty and market risks?
Risk management practices in Mexican securities lending are crucial to ensure the integrity and stability of the financial system. Common risk management practices, particularly related to counterparty and market risks, include due diligence on lender and borrower counterparties and on market intermediaries.
Collateral eligibility screening and haircuts are applied on securities delivered as collateral, depending on the liquidity and market risk of those securities. Collateral concentration limits are applied, depending on the asset class, mark-to-market valuations and closing position policy relating to uncovered margin calls. Our risk management department constantly checks all micro and macro variables.
We have invested extensively in our technology over the past 10 years to extend automation and to reduce operational risk across the loan transaction lifecycle.
Are there any recent developments or trends in the Mexican securities lending market that market participants should be aware of?
In 2022, Congress ratified a decision to enable regulated hedge funds (that is mutual funds that are permitted to engage in short selling). The initiative is already approved and is pending publication. This long-awaited change will be a significant driver for the growth of the securities lending business.
The Mexican Stock Exchange will move to T+1 securities settlement from late May 2024 for Canadian and US securities. Our expectation is that this change will increase securities lending volumes as some cross-border transactions could take longer than expected.
What does 2024 hold for your organisation?
We look forward to sustaining the growth we have seen over the past decade as we continue to make Mexico a market that is truly attractive to investors. We recently launched a revamped app that will offer the best investor experience that is available in Mexico. This will provide an effective springboard, enabling our company to add further features and new financial services in times ahead.
