The Mexican securities regulatory framework is divided between general commercial laws governing the securities market and specific securities market laws. There are two basic groups of specific securities market regulatory bodies. The first includes the Securities Market Law and the Mutual Funds Law (formerly known as the Investment Companies Law and amended on 13 June 2014), which provides the general operational framework for securities, commercial acts and mutual funds; the second group comprises several general regulations issued by the National Banking and Securities Commission (the Commission).
As in other jurisdictions, the securities regulation authority is divided among various institutions and organisations, among them some private entities as well as governmental agencies. The main regulator for the sector in Mexico is the Ministry of Treasury and Public Credit (the Ministry), which performs most duties in this sector through a semi-independent agency: the Commission. The Commission is responsible for the supervision and regulation of financial entities, natural persons and other entities when they perform specific activities regulated under the corresponding laws of the financial sector; its purpose is to protect the interests of the general public.
The Commission is entrusted with important powers, some of which are shared or require coordination with other agencies or departments of government. One of the most important duties includes the issuance of regulations, mainly in the form of circulars regulating different sectors and entities. Circulars provide detail for general laws and regulations in various areas of financial activity. The Commission regulates the securities market by issuing general regulations and by authorising public and private offerings. It also oversees the general activities of participants in the securities market and has monitoring and enforcement powers and the legal authority to conduct investigations, request information and issue advice, warnings and sanctions. These can be directed at firms as well as individuals.
The Commission’s authorisation of registration of securities before the National Securities and Brokers Registry is a prerequisite in the process of a public offering or the registration of brokerage firms. The Commission also participates in the approval of certain aspects regarding the internal operation of Bolsa Mexicana de Valores, the Mexican Stock Exchange (MSE).
The Banco de México is the autonomous government agency responsible for monetary policy, and is defined as Mexico’s Central Bank by a constitutional provision. Most of this authority is exercised in conjunction with the Commission, the Ministry and other agencies such as the National Insurance and Bonding Commission (NIBC) and the National Pension Fund System Commission, which are also of relevance.
Aside from its main monetary policy powers, the Central Bank issues regulations that apply to financial institutions and persons in the banking and securities industries. It also has veto powers over certain regulations issued by the Commission under determined causes. The Central Bank is also responsible for the placement and issuance of governmental securities.
II THE YEAR IN REVIEW
On 10 January 2014, a major financial reform was published in the Mexican Official Gazette, which included 13 initiatives that sought to amend, add and repeal various provisions of certain regulations of the financial sector.
The financial reform established the bases for a new era in the Mexican financial sector, amending a total of 34 statutes, with the purposes of:
- a encouraging healthy competition;
- b promoting lending activities by development banks and commercial banks;
- c maintaining a solid and prudent financial sector; and
- d promoting increased efficiency for financial institutions and related entities.
Particularly in terms of the securities market, the reform’s purpose includes making the operations of the securities market more efficient and improving the performance of its players in a framework that provides clarity and transparency for investors, authorities, intermediaries and other participants.
Part of its objective is to get a larger number of investors to participate in the debt and capital markets and establish solid sale practices by credit institutions and brokerage firms in securities transactions, and to apply such provisions to mutual funds operating companies. The Commission also plays an important role with increased authority to provide discipline in the markets that it regulates, supervises and penalises, with specific authorities regarding control and regulation, and publicity of information. With respect to mutual funds, the reform provided important changes to update the corporate regime that governs mutual funds and its operating companies, simplifying some of the formalities, costs and time frames applicable to their incorporation and operations. Thus, the reform provides increased legal certainty to the financial sector, which is expected to benefit users and financial institutions with the offer of better financial products, and access to credit lines and competitive rates, and the creation of an improved and more sophisticated financial culture in Mexico.
i Developments affecting debt and equity offerings
In the wake of this financial reform, several amendments entered into force immediately, and consequently, several provisions were developed for their early implementation.2 Regarding the securities market, the financial reform intends to streamline the operation of the domestic stock market and improve the dynamic performance of the entities that comprise it, in an environment of greater clarity for users, intermediaries, officials, regulators and other members of the securities market.
With the purpose of safeguarding the interests of public investors, the Securities Market Law empowered the Commission to issue general provisions that regulate activities of brokerage firms and credit institutions regarding, inter alia, limits to the placement of securities, investment services and analysis of financial products.
With such empowerment, the Commission issued the General Provisions Applicable to Securities Depository Institutions, which were published in the Federal Official Gazette on 12 January 2017, with the purpose of establishing the following:
- a measures to prevent conflicts of interest;
- b corporate and audit practices, transparency and fairness regarding the services that securities depository institutions offer; and
- c measures that securities depository institutions must implement in order to ensure the continuity of their critical operations in situations of contingency.
With the reform of the Securities Market Law, a system was established that allows issuers the possibility of making public offerings addressed to certain types of investors, such as institutional investors or investors qualified to give instructions to the board. In this regard, the Commission was attributed the issuance of general provisions providing the characteristics that these kinds of offerings must comply with, the requirements that must be met by the issuers for their implementation, as well as the creation of more flexible arrangements for the disclosure of information and placement, among other related matters.
The financial reform aimed to include multiple purpose financial corporations that issue debt securities registered in the National Securities and Brokers Registry under the Securities Market Law in the scope of regulation and supervision of the Commission; or, in respect of trust securities also registered in that Registry, when the fulfilment of obligations relating to the securities issued under the trust depend in whole or in part on those corporations acting as settlors, assignors or administrators of the trust property or as guarantors of such securities.
It was essential to adapt the provisions of the General Regulations applicable to Securities Issuers (CUE) issued by the Commission that govern issuers in matters relating to accounting and auditing principles, resulting in a legal framework that gives those companies certainty in their operation on the enforcement of those provisions.
To ensure the integrity of the securities market and to avoid alterations that compromise the interests of the investors and other participants, it was necessary to abrogate the General Provisions Applicable to the Stock Exchange and publish new ones. The new provisions were published in the Federal Official Gazette on 15 May 2017 and include, among others, the obligation for stock exchanges to have a permanent audit area of conduct and operations, which will have the function of detecting possible non-compliance with the Securities Market Law or other applicable legal provisions.
Refinements to the accounting criteria applicable to the financial statements of issuers that, through their subsidiaries, engage in financial activities subject to the supervision of Mexican financial authorities were made in order to benefit the investing public and the securities market in general by making the financial information of such issuers comparable to others.
Provisions were established to allow the Commission the recognition of public offerings of securities issued in markets with which the stock exchanges have entered into agreements to facilitate access to their negotiating systems. The recognition of such public offerings by the Commission so that they can be carried out in national territory aim to provide a better understanding of the market and expand the range of investment options available for public investors.
Considering the global aspect of the stock market, the regime applicable to stock exchanges to execute agreements with foreign stock exchanges and establish systems for channelling orders to that effect was included. In this matter, the Commission is empowered to issue the applicable authorisations, and not only public offerings but all offerings made outside national territory must be notified to the Commission, accompanied by all their relevant information.
ii Developments affecting derivatives, securitisations and other structured products
On 31 December 2015, an amendment to the CUE was published on the Federal Official Gazette to include investment project securitisation certificates (CERPIS). Through the creation of CERPIS, financial system players hope to attract investment on projects that belong to different economic sectors, encouraging a substantial increase in national productive investment.
CERPIS are instruments similar to development equity certificates (CKDes). CKDes were created in 2009 as an instrument under the stock exchange that allows investors to obtain profits by funding several development projects. However, as explained below, CERPIS offer attractive schemes for investors.3
This instrument represents an investment vehicle (usually a trust, which is the most commonly used investment vehicle) in which domestic and foreign investors may invest in a broad range of projects that belong to a number of economic sectors, under similar conditions of private equity.
As defined under the amendment to the CUE, CERPIS are certificates whose issuance proceeds are used for the financing of projects and investment in stock, business interests or corporate financing, whether directly or indirectly, by means of one or more investment vehicles.4
The distinction between CKDes and CERPIS relies on two fundamental aspects: under CERPIS, no approval is required from the vehicle’s technical committee or the certificate holders’ meeting; however, holders of at least 25 per cent of the outstanding CERPIS are entitled to appoint technical committee members, instead of the 10 per cent set forth under the CKDes framework.5
CERPIS are issued by means of restricted public offerings, in which issuers address the issuance to a specific group of investors. In addition, the issuance of CERPIS may be carried out in several public offerings within a one-year period from the first offering.6
iii Cases and dispute settlement
In Mexico, certain administrative agencies, such as the Commission and the NIBC, are taking the lead in the sector and currently have broad authority to regulate the financial sector and maintain jurisdiction over disputes on securities and banking matters.
The resolutions of the agencies may be appealed within the administrative courts. Administrative courts in Mexico may also create binding precedents for inferior courts. Administrative courts may create this binding precedent by adhering to specific procedures similar to those followed by the Supreme Court or the circuit courts. Even so, this type of binding precedent does not oblige judicial courts and may, in any case, be challenged by writ for amparo with federal courts, which are subject to the jurisprudence set by the Supreme Court and circuit courts.
The Commission is the authority empowered to inspect and oversee the performance of brokerage firms and affiliates. In this regard, the Commission is able to order preventive or corrective measures that brokerage firms must comply with.7 The Commission may order, under certain cases, the partial suspension of the performance of one or more activities of a brokerage firm.8 It also has the authority to revoke the authorisation granted to a brokerage firm under certain cases listed in a limited manner.9 When a foreign authority intends to inspect an affiliate, it should submit its request to the Commission in accordance with Article 358 of the Securities Market Law.10 On the other hand, brokerage firms are subject to periodic reports to be provided to the Commission in accordance with general guidelines issued by the Commission.11
iv Relevant tax and insolvency law
Since 1993, Mexico has gradually but consistently entered into a full network of international agreements for trade and investments designed to avoid double taxation, thereby creating the largest number of these agreements of almost any country in the world. There are some significant exceptions to the limitations set forth by the Foreign Investment Law allowing investors from the treaty countries to enjoy benefits not otherwise available to companies or persons of other nations.
For example, under the North American Free Trade Agreement as it is currently effected, it is possible for companies located in the US or Canada to establish affiliates in Mexico that can operate as national investors in the areas of, inter alia, banks, insurance, bonding, currency exchange, warehouse deposits, leasing, invoicing and non-bank financial institutions. Based on the availability of these benefits, it is necessary for the relevant investors to perform the required research to analyse whether they are eligible for any specific benefits under applicable treaties.
In Mexico, the most common form of special purpose vehicle is the fideicomiso (trust). In a Mexican securitisation, there is no risk that the financial assets transferred by the originator to a trust form part of the originator’s bankruptcy estate. The Bankruptcy Law expressly provides that the assets transferred to a trust are to be separated from the bankruptcy estate through the filing of a ‘separation action’.
Nevertheless, the law is not clear whether a trust can be subject to bankruptcy. The Bankruptcy Law only applies to insolvency of ‘merchants’, which are defined as individuals or entities that perform ‘business activities’, including trusts when the property transferred to them is for the purpose of performing ‘business activities’. The broadness of this definition creates a conflict of interpretation of whether a trust’s activities in the securitisation will be considered as ‘business activities’.
Commercial law defines merchants as persons that are legally capable of performing commercial acts and such performance is their ordinary occupation. The issuance of securities is considered a business activity; thus, it could be argued that a trust is a ‘merchant’, and hence whether it would be subject to the Bankruptcy Law. To mitigate this risk, the trust has to be created for the specific purpose of issuing securities under the express instructions of the originator. Thus, courts will likely construe that, even though the trust performs acts of commerce, it does not do it as an ordinary occupation. In such case, the trust would not be considered a ‘merchant’.
The aforementioned will be achieved if the document through which the trust is created does not include any business activities in its purpose and expressly states that it will only issue securities under the express instructions of the trustor. Furthermore, it is very important to establish the liquidation process that will regulate in the event that the trust becomes insolvent in compliance with the applicable legislation.
v Role of exchanges, central counterparties (CCPs) and rating agencies
While in theory many stock exchanges could operate in Mexico, to date the MSE is the only stock exchange in operation in Mexico. The MSE’s trading floor is located in Mexico City with an information centre in the city of Monterrey, Nuevo León, Mexico. Transactions in the money and capital markets are carried out through electronic means.
Nevertheless, on 29 August 2017 the Ministry granted to Bolsa Institucional de Valores, SA de CV (BIVA) a concession to operate as a stock exchange under the observation of the Commission, becoming the only competitor to the MSE in four decades. It is expected for BIVA to start operations in the second trimester of 2018, since the Commission has the authority to revoke the concession if it does not start operations in the six months following granting it.
BIVA will seek to compete in the stock exchange market by applying NASDAQ technology though their system known as Nasdaq X-stream Trading, used by more than 70 markets across the world.12
The MSE provides the technology and regulatory rules under which the Mexican securities market operates. The primary purpose of the exchange is the listing, trading and recording of trades in stocks, participation certificates, fixed-income instruments and warrants. The process for the offering, maintenance and delisting of securities requires the participation of the Commission and the National Securities and Brokers Registry. The MSE may suspend trading of securities under the requisite circumstances and is entitled to sanction its own members.
Although almost all trading of securities registered with the MSE is carried out by brokerage firms, banks also play a role as issuers, purchasers and, sometimes, traders of securities. Under certain circumstances, operating companies of investment companies may also trade registered securities.
Subject to the approval of the Commission, the exchange issues its own internal regulations and establishes its own procedures, but it is subject to the inspection and surveillance of the Commission. Its internal regulations include rules regarding the registration of securities for trading, terms and conditions for trading, rights and obligations of issuers, and record-keeping duties of brokerage firms and investors.
The centralised service of deposit, storage, administration, compensation, liquidation and transfer of securities is considered a public service and may only be developed by securities depository firms and the Bank of Mexico. The service of compensation may be rendered by central counterparties of securities. The brokerage firms and the central counterparties of securities, via the Securities Market Law, will have the capacity of self-regulatory bodies.
In order to be organised and operate as a central counterparty of securities, the concession of the federal government is required. This consent is discretionarily granted by the Ministry, after it has obtained the opinion of the Commission and the Bank of Mexico, to the corporations organised pursuant to the special provisions contained under the Securities Market Law and, to the extent not provided therein, by the General Law of Business Organisations.
Activities whose purpose is the regular and professional rendering of services consisting in the study, analysis, opinion, evaluation and reporting regarding the credit quality of securities must be reserved to securities rating institutions.
The Commission’s authorisation upon prior resolution of its governing board is required in order to be organised and operate as a securities rating institution. Said authorisation will be granted to the corporations organised pursuant to the general provisions contained in the Securities Market Law and, to the extent not provided therein, by the General Law of Business Organisations. Owing to their nature, these authorisations are not transferable.
The securities rating institutions must disclose to the public the rating they grant regarding securities registered before the National Securities and Brokers Registry or to be registered in the same, as well as their modifications and cancellations, through the methods established by the Commission by means of general provisions. Said ratings must be granted pursuant to the rating process included in the Securities Market Law.
Likewise, the Commission will establish in the mentioned provisions the financial, administrative and operative information that the securities rating institutions must provide.
vi Other strategic considerations
Financial Discipline Law for the States and Municipalities (LDF)
On 27 April 2016 the decree of the LDF was published in the Federal Official Gazette. The LDF establishes the foundations for the incurrence of sub-sovereign state and municipal public debt in order to regulate access to the sources of payment and the federal securities for the subnational debt, with the purpose of avoiding future instabilities in connection with the public finances of the states and municipalities, and to control their excessive debt patterns.
The LDF also establishes general criteria of tax and financial responsibility that will apply to the states and municipalities, and their respective public entities, to ensure a sustainable handling of their public finances by means of the effective management of resources. The governing principles for the handling of public finances are legality, honesty, effectiveness, efficiency, economy, rationality, austerity, transparency, control and accountability.13
Sustainable budgetary balance and tax responsibility of the states
As a consequence of the publication of the LDF, the state legislatures amended their legal frameworks pursuant to the terms of the LDF. Therefore, the respective state bills of Income Laws and Budget of Expenditures shall contain at least the following requirements:14
- a annual targets, strategies and goals;
- b projections for their public finances for a five-year term, in addition to the corresponding fiscal year;
- c descriptions of relevant risks to their finances and their proposed action plan to face such threats;
- d results of the public finances for the past five years and the corresponding fiscal year;
- e current evaluations of the pension rights of their workers, which are updated every three years;
- f consistency with the General Criteria of Economic Policy; and
- g estimations of defined federal contributions and transfers that do not exceed the terms as provided in the Income Laws and Budget of Expenditures.
The states shall aim to obtain sustainable budgetary balances, which implies that the budgetary balance and the budgetary balance of available funds at the end of the fiscal year and under the accrued accounting moment is more than or equal to zero. However, the LDF provides certain exceptions under which the budgetary balance of available funds could be negative where there is: a decrease in federal contributions owing to a decrease in the gross domestic product; a need to cover the reconstruction cost owing to natural disasters; and a need to cover a cost that is greater than 2 per cent of non-categorised expenses in connection with the previous fiscal year.15
Sustainable budgetary balance and tax responsibility of the municipalities
As another consequence of the publication of the LDF, the municipalities amended their respective legal framework pursuant to the terms of the LDF; therefore, the bills of the Income Laws and Budget of Expenditures for the municipalities shall contain at least the following requirements:
- a projections for their public finances;
- b a description of their relevant risks for their finances;
- c results of the public finances for the past three years; and
- d current evaluation of the pension rights of their workers, which shall be updated every four years.16
On 3 March 2017, the Alert System Regulation was published in the Mexican Official Gazette. This Regulation establishes the provisions for classifying public entities into levels of indebtedness. If an entity is located in a high level of indebtedness, the net financial ceiling for that entity will be equal to zero, and it will be restricted from acquiring more debt. Nevertheless, the alert system will be fully enforced until the fiscal year of 2019.
The net financing issued by the municipality shall be under the ceiling of the net financing resulting from the application of the alert system. The treasurer of the corresponding municipality may approve a negative budgetary balance under the same conditions as the states.17
Public entities may only issue financings and enter obligations (other than those required for the short-term) when they are used towards productive public investment, refinancing and restructure. The proceeds of public-private partnerships may be used to enter into agreements for the provision of services in which the payment component includes the productive public investment that has been carried out. Such obligations shall be agreed under the best market conditions.18
The public entity that enters into financings or other obligations within the stock exchange shall provide the reasons that make the stock exchange a better source of financing than the banking market.19
The Single Public Registry
On 1 November 2016, the Single Public Registry went into operations. The Single Public Registry is under the Ministry’s responsibility. Transactions regarding financings and obligations, such as credits, stock issuance, leasing, factoring transactions, securities, instruments derived from obligations with a payment period greater than a year, and agreements entered in connection with public-private partnerships, are recorded in the Single Public Registry.20
The green bond is an instrument through which resources are obtained exclusively for financing or refinancing projects whose purpose is the mitigation of, or adaptation to, climate change, and that are part of the following eligible sectors:
- a renewable energy;
- b sustainable energy;
- c energy efficiency;
- d clean transport;
- e water-related projects, such as purification and distribution of drinking water, conservation of water resources and revitalisation of rivers and habitat restoration;
- f waste management; and
- g agriculture, bioenergy, forestry and the food supply chain, among others.21
Green bonds issued in Mexico
In 2016 alone, three green bonds were issued including the first green bond denominated in Mexican pesos, issued by Nacional Financiera, which was listed in the MSE in October 2016. In December 2016, Mexico City became the first city in Latin America to issue a green bond. The issuance achieved successful placements in the debt market, reflecting the growing interest of institutional investors in low-carbon assets.
Listing of green bonds on the MSE
The same regulatory and operational framework that applies to debt instruments will be maintained and will be issued through the usual channels. To incorporate a green bond, the issuer must publicly present to the MSE:
- a certification or an opinion (or both) that gives certainty about the nature of the green bond, granted by an authorised certifier that will follow up on the delivery of information and submit it to the Climate Bonds Initiative Secretariat for consideration. Such opinions are granted under the Green Bonds Principles issued by The International Capital Markets Association with the support of the World Bank; and
- b information on the use of resources in the offering memorandum or in other forms of registration.22
The MSE monitors and reports throughout the life of the bond. The green label may apply to various types of assets and will be identified within the emission series: V (green).
III OUTLOOK AND CONCLUSIONS
Legal structures around the world are mainly designed with the objective of mitigating the main risk that concerns all investors: the protection of their investment. Even though different jurisdictions provide investors with different levels of risks depending on their particular legal frameworks, experienced lawyers and bankers strive to find a way to structure securitisations in a way that minimises risks for investors.
Furthermore, seeing the advantages that securitisations pose to the economy, lawmakers are becoming more aware of the necessity of providing a legal system that provides a balance between the feasibility of securitisations, the protection of investors and the protection of the financial system.
The recent financial reform exemplifies Mexico’s commitment towards the protection of its financial system and to foster economic growth, increased employment and competitiveness. Through the modernisation of its securities regulatory framework, lawmakers aspire to create a fertile ground for investment by providing enhanced certainty conditions that are attractive to investors. To accomplish this goal, the Mexican legal framework has been in constant transformation over recent years. Such continuing adaptation should encourage investment in all economic sectors, where both the public and private sectors can access banking services and funding resources under fair and stable terms.
1 René Arce Lozano is a partner, Mayuca Salazar Canales is a counsel and Mariana Hernández Villarreal is an associate at Hogan Lovells BSTL, SC.
2 Instituto Mexicano para la Competitividad, AC: imco.org.mx/wp-content/uploads/2013/09/LaReformaFinancierayLosRiesgosdelCredito.pdf.
3 Deloitte. Basila Abogados. ‘Creation of value through alternative financing sources: CERPIs and CKDes’. http://www2.deloitte.com/mx/es/pages/real-estate/articles/cerpis-ckdes.html.
4 Article 1, Section IV, CUE.
5 Article 7, Section IX, Subsection 3.1, CUE.
6 Article 7, Section IX, Subsection 7.4, CUE.
7 Articles 135–136, Securities Market Law.
8 Articles 137–138, Securities Market Law.
9 Articles 153–154, Securities Market Law.
10 Article 170, Securities Market Law.
11 Article 212, Securities Market Law.
12 Investment Technology Group, Inc, ‘To BIVA or to BMV: That Is the Question’. http://www.itg.com/assets/ITG-To-BIVA-or-to-BMV.pdf.
13 Article 1, LDF.
14 Article 5, LDF.
15 Article 7, LDF.
16 Article 18, LDF.
17 Article 19, LDF.
18 Article 22, LDF.
19 Article 28, LDF.
20 Articles 49 and 50, LDF.
21 Article 4.006.03, Internal Regulations of the MSE.
22 Bolsa Mexicana de Valores: www.bmv.com.mx/docspub/MI_EMPRESA_EN_BOLSA/CTEN_MINGE/BONOS%20VERDES.PDF.