ISDA - NAFINSA CONFERENCEMAY 7, 2001MEXICO CITY

MA. TERESA VARGAS, BBVA

CAROLINA MACHADO, JP MORGAN

HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN

MEXICO

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AGENDA

1. INTRODUCTION2. FIRST STEPS3. HOW TO DEVELOP A MASTER AGREEMENT

NATURE OF AGREEMENT OBJECTIVE OF AGREEMENT PROPOSED STRUCTURE OF AGREEMENT

4. CONCLUSIONS

HOW TO DEVELOP A MASTER DERIVATIVES AGREEMENT IN MEXICO

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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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• 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.

HOW TO DEVELOP A MASTER AGREEMENT

3.1 NATURE OF 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